-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IWRouIEpPqsOpAghfgNlPB7MbDN98c5HkY3nrcM9FwHDaAuOG7s8VwxgbinnY7r/ la7PUDad/9IbUxT8Y/bqeg== 0000950159-05-000366.txt : 20050330 0000950159-05-000366.hdr.sgml : 20050330 20050330130531 ACCESSION NUMBER: 0000950159-05-000366 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050330 DATE AS OF CHANGE: 20050330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REPUBLIC FIRST BANCORP INC CENTRAL INDEX KEY: 0000834285 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232486815 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17007 FILM NUMBER: 05712909 BUSINESS ADDRESS: STREET 1: 1608 WALNUT ST STREET 2: STE 1000 CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2157354422 MAIL ADDRESS: STREET 1: 1608 WALNUT ST STREET 2: STE 1000 CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: FIRST REPUBLIC BANCORP INC /DE/ DATE OF NAME CHANGE: 19960617 FORMER COMPANY: FORMER CONFORMED NAME: EXECUFIRST BANCORP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST EXECUTIVE BANCORP INC DATE OF NAME CHANGE: 19881113 10-K 1 repfirst10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 2004 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______________ to ___________________ Commission file number: 0-17007 ------- REPUBLIC FIRST BANCORP, INC. ----------------------------- (Exact name of registrant as specified in charter) Pennsylvania 23-2486815 - ----------------------------------- ------------------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 1608 Walnut Street, Suite 1000, Philadelphia, PA 19103 - ----------------------------------------------------- ------------ (Address of Principal Executive offices) (Zip Code) Issuer's telephone number, including area code: (215) 735-4422 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value ----------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K [ X ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES _____ NO X ------ State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average of the bid and asked prices of such stock, as of June 30, 2004. The aggregate market value of $63,047,004 was based on the average of the bid and asked prices on the National Association of Securities Dealers Automated Quotation System on June 30, 2004. APPLICABLE ONLY TO CORPORATE REGISTRANTS Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Common Stock $0.01 Par Value 7,428,681 - ------------------------------------- ------------------------------ Title of Class Number of Shares Outstanding as of February 16, 2005 Documents incorporated by reference Part III incorporates certain information by reference from the Registrant's Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on April 26, 2005. REPUBLIC FIRST BANCORP | 3
REPUBLIC FIRST BANCORP, INC. Form 10-K INDEX PART I Page Item 1 Description of Business.............................................................................. 5 Item 2 Description of Properties............................................................................ 12 Item 3 Legal Proceedings.................................................................................... 13 Item 4 Submission of Matters to a Vote of Security Holders ................................................. 13 Item 4A Executive Officers .................................................................................. 13 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ............................... 14 Item 6 Selected Financial Data.............................................................................. 15 Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition................ 16 Item 7A Quantitative and Qualitative Disclosure about Market Risk (Item 305 of Reg S-K)...................... 40 Item 8 Financial Statements and Supplementary Data.......................................................... 40 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 40 Item 9A Controls and Procedures.............................................................................. 40 Item 9B Other Information Not Applicable..................................................................... 40 PART III Item 10 Directors, Executive Officers, Promoters and Control Persons of the Registrant ...................... 41 Item 11 Executive Compensation .............................................................................. 41 Item 12 Security Ownership of Certain Beneficial Owners and Management ...................................... 41 Item 13 Certain Relationships and Related Transactions ...................................................... 41 Item 14 Principal Accounting Fees and Services .............................................................. 41 PART IV Item 15 Exhibits, Certifications, Financial Statement Schedules and Reports on Form 8-K ..................... 42
REPUBLIC FIRST BANCORP | 4 PART I Item 1: Description of Business Republic First Bancorp, Inc. Recent Development The First Bank of Delaware was spun off by Republic First Bancorp, Inc. (the "Company"), on January 31, 2005. All assets, liabilities and equity of First Bank of Delaware were spun off as an independent company, trading on the OTC market under FBOD. Shareholders received one share of stock in First Bank of Delaware, for every share owned of the Company. After that date, the Company became a one bank holding company. The Company was established in 1987. At December 31, 2004, the Company was a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiaries, Republic First Bank (the "PA Bank"), and First Bank of Delaware (the "DE Bank") (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 the DE Bank. As of December 31, 2004, the Company had total assets of approximately $720.4 million, total shareholder's equity of approximately $65.2 million, total deposits of approximately $545.4 million and net loans receivable outstanding of approximately $582.9 million. The majority of such loans were made for commercial purposes. The Company provides banking services through the Banks and does not presently engage in any activities other than banking activities. The principal executive office of the Company is located at 1608 Walnut Street, Suite 1000, Philadelphia, PA 19103, telephone number (215) 735-4422. At December 31, 2004 the Company and the Banks had a total of 166 full-time equivalent employees. Republic First Bank 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. Subsequent to December 31, 2004, an additional branch was opened in Media, Pennsylvania in Delaware County. As of December 31, 2004, the PA Bank had total assets of approximately $661.8 million, total shareholder's equity of approximately $57.9 million, total deposits of approximately $507.7 million and net loans receivable of approximately $549.7 million. The majority of such loans were made for commercial purposes. First Bank of Delaware The DE Bank is a commercial bank chartered pursuant to the laws of the State of Delaware with its principal office located at Brandywine Commons II, Concord Pike in Wilmington. The DE Bank is subject to examination and comprehensive regulation by the FDIC and the Delaware Bank Commissioner. (As noted above, the DE Bank was spun off as of January 31, 2005 and is no longer owned by the Company.) The deposits held by the DE Bank are insured up to applicable limits by the Bank Insurance Fund of the FDIC. The DE Bank presently conducts its principal business banking activities primarily through its two offices in Wilmington, Delaware but also makes substantial numbers of short-term loans in Arizona, Michigan, California, Ohio, Texas and other states and via the internet, and tax refund anticipation loans in numerous other states. As of December 31, 2004, the DE Bank had total assets of approximately $58.6 million, total shareholders' equity of approximately $11.4 million, total deposits of approximately $37.7 million and net loans receivable of approximately $41.0 million. In addition to loans made for commercial purposes, the DE Bank also offers short-term consumer loans and tax refund anticipation loans not offered by the PA Bank. REPUBLIC FIRST BANCORP | 5 Services Offered 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, commercial real estate and construction loans, residential mortgages, automobile loans, home improvement loans, home equity and overdraft lines of credit, and other products. The DE Bank also nationally offers short-term consumer loans, which are considered to be sub-prime, and tax refund anticipation loans to the under banked markets. 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 in compliance with 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, 2004 and 2003, approximately 68% and 72%, 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 Federal Home Loan Bank (FHLB) securities. 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 and Delaware Counties in Pennsylvania and northern Delaware. The Banks also serve the surrounding counties of Bucks, Chester and Delaware in Pennsylvania, southern New Jersey and southern Delaware. Additionally, the DE Bank makes short-term loans in Arizona, California, Ohio, Texas and other states. Tax refund loans are made by the DE Bank in numerous additional 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 approximately $10.0 million at December 31, 2004. After the spin off, the legal lending limit for the Company will be approximately $8.7 million. The DE Bank will have a non-secured lending limit of approximately $1.7 million and a secured lending limit of approximately $2.9 million. Loans above these amounts may be made if the excess over the lending limit is participated to other institutions. After the spin off, the Banks may continue to sell each other such participations. 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 REPUBLIC FIRST BANCORP | 6 area. Several new 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. Only a limited number of banks currently compete for the short-term and tax refund anticipation loans offered nationally by the DE Bank. However, 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 courtesy overdraft products which may compete with short-term loans. Operating Strategy for Business Banking Following the spin off of the DE Bank, the Company's business banking objective is for the PA Bank to become the primary alternative to the large banks that dominate the Greater Philadelphia market. The Company's management team has developed a business strategy consisting of the following key elements to achieve this objective: Providing Attentive and Personalized Service The Company believes that a very attractive niche exists serving small to medium-sized business customers not adequately served by the Banks' larger competitors. The Company believes this segment of the market responds very positively to the attentive and highly personalized service provided by the Banks. The Banks offer individuals and small to medium-sized businesses a wide array of banking products, informed and professional service, extended operating hours, consistently applied credit policies, and local, timely decision making. The banking industry is experiencing a period of rapid consolidation, and many local branches have been acquired by large out-of-market institutions. The Company is positioned to respond to these dynamics by offering a community banking alternative and tailoring its product offering to fill voids created as larger competitors increase the price of products and services or de-emphasize such products and services. Attracting and Retaining Highly Experienced Personnel The Banks' officers and other personnel have substantial experience acquired at larger banks in the region. Additionally, the Banks extensively screen and train their staffs to instill a sales and service oriented culture and maximize cross-selling opportunities and business relationships. The Company offers meaningful sales-based incentives to certain customer contact employees. Capitalizing on Market Dynamics In recent years, banks controlling large amounts of the deposits in 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 changes in their product offerings and in the degree of personal attention they provide. The Company has sought to capitalize on these changes by offering a community banking alternative. As a result of continuing consolidations and its marketing efforts, the Company believes it has a continuing opportunity to increase its market share. Products and Services 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 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 $5.0 million but customers may borrow significantly larger amounts up to the Banks' combined legal lending limit of approximately $10.0 million. After the spin off, the PA Bank will continue making loans in that typical range. The DE Bank's loans will typically range from $250,000 to $3.0 million. Individual customers may have several loans, often secured by different collateral. Relationships in excess of $6.5 million at December 31, 2004, amounted to $82.8 million. The $6.5 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) automated teller ("ATM") networks in order to provide customers with access to ATMs worldwide. The Banks currently have eight proprietary ATMs at branch locations. REPUBLIC FIRST BANCORP | 7 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 95% of total loans outstanding at December 31, 2004. 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. Tax Refund Anticipation Products As described under "Description of Business - Recent Development" the DE Bank was spun off on January 31, 2005. The DE Bank 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 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"). While the DE Bank is attempting to increase market penetration of these products, there can be no assurance that revenue levels associated with them will increase significantly in 2005 or thereafter. Short-Term Consumer Loans As described under "Description of Business - Recent Development" the DE Bank was spun off on January 31, 2005. In continuing efforts to expand and diversify fee income, the DE Bank began to offer short-term consumer loans, also known as payday loans. Similar in some respects to the tax refund products previously discussed, payday loan terms are relatively short (approximately 2 weeks) and have principal amounts of $1,500 or less. At December 31, 2004, there were approximately $1.6 million of short-term consumer loans outstanding, which the DE Bank originated in Texas. The DE Bank also originates payday loans in Michigan, California, Arizona and Ohio and other states, and via the internet, which are sold to third parties. At December 31, 2004, there were approximately $26.0 million of such loans outstanding. Legislation eliminating, or limiting interest rates and other terms of payday loans has from time to time been proposed, primarily as a result of interest rate and 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. Branch Expansion Plans and Growth Strategy A branch was opened by the PA Bank in Media, Pennsylvania in first quarter 2005. Another branch is planned for 2005, but no lease has been signed. Additional locations may also be pursued. Supervision and Regulation Various requirements and restrictions under the laws of the United States, the Commonwealth of Pennsylvania and the State of Delaware affect the Company and the Banks. General The Banks are subject to regulation by the FDIC. The Company is a bank holding company subject to supervision and regulation by the Federal Reserve Bank of Philadelphia ("FRB") under the federal Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the Company's activities and those of the Banks are limited to the business of banking and activities closely related or incidental to banking, and the Company may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the FRB. The PA Bank is a Pennsylvania-chartered bank subject to supervision and regulation by the FDIC and the Pennsylvania Department of Banking. The DE Bank is a Delaware-chartered bank subject to supervision and regulation by the FDIC and the Delaware Bank Commissioner. REPUBLIC FIRST BANCORP | 8 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 market interest rates and the national economy. Holding Company Structure The Banks are subject to restrictions under federal law which limits their ability to transfer funds to the Company, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by the Banks to the Company 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 loans or extensions of credit to the Company or purchased any assets from the Company. Under regulatory policy, the Company is expected to serve as a source of financial strength to the Banks and to commit resources to support the Banks. This support may be required at times when, absent such policy, the Company might not otherwise provide such support. Any capital loans by the Company to the Banks are subordinate in right of payment to deposits and to certain other indebtedness of the Banks. In the event of the Company's bankruptcy, any commitment by the Company 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 federal Gramm-Leach-Bliley Act (the "GLB Act") was enacted. The GLB Act did three fundamental things: (a) repealed the key provisions of the Glass Steagall Act so as to permit commercial banks to affiliate with investment banks (securities firms); (b) amended the BHC Act to permit qualifying bank holding companies to engage in any type of financial activities that were not permitted for banks themselves; and (c) permitted subsidiaries of banks to engage in a broad range of financial activities that were not permitted for banks themselves. The result was that banking companies would generally be able to offer a wider range of financial products and services and would be more readily able to combine with other types of financial companies, such as securities and insurance companies. The GLB Act created a new kind of bank holding company called a "financial holding company" (an "FHC"). An FHC is authorized to engage in any activity that is "financial in nature or incidental to financial activities" and any activity that the Federal Reserve determines is "complementary to financial activities" and does not pose undue risks to the financial system. Among other things, "financial in nature" activities include securities underwriting and dealing, insurance underwriting and sales, and certain merchant banking activities. A bank holding company qualifies to become an FHC if each of its depository institution subsidiaries is "well capitalized," "well managed," and CRA-rated "satisfactory" or better. A qualifying bank holding company becomes an FHC by filing with the Board of Governors of the Federal Reserve System (the "Federal Reserve") an election to become an FHC. If an FHC at any time fails to remain "well capitalized" or "well managed," the consequences can be severe. Such an FHC must enter into a written agreement with the Federal Reserve to restore compliance. If compliance is not restored within 180 days, the Federal Reserve can require the FHC to cease all its newly authorized activities or even to divest itself of its depository institutions. On the other hand, a failure to maintain a CR rating of "satisfactory" will not jeopardize any then existing newly authorized activities; rather, the FHC cannot engage in any additional newly authorized activities until a "satisfactory" CRA rating is restored. In addition to activities currently permitted by law and regulation for bank holding companies, an FHC may engage in virtually any other kind of financial activity. Under limited circumstances, an FHC may even be authorized to engage in certain non-financial activities. The most important of these authorized activities are as follows: (a) Securities underwriting and dealing; (b) Insurance underwriting and sales; REPUBLIC FIRST BANCORP | 9 (c) Merchant banking activities; (d) Activities determined by the Federal Reserve to be "financial in nature" and incidental activities; and (e) Activities determined by the Federal Reserve to be "complementary" to financial activities. Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities to those previously permitted by law and regulation. The Company has not elected to become a FHC but has not precluded the possibility of doing so in the future. The GLB Act also authorized national banks to create "financial subsidiaries." This is in addition to the present authority of national banks to create "operating subsidiaries". A "financial subsidiary" is a direct subsidiary of a national bank that satisfies the same conditions as an FHC, plus certain other conditions, and is approved in advance by the Office of the Comptroller of the Currency (the "OCC"). A national bank's "financial subsidiary" can engage in most, but not all, of the newly authorized activities. In addition, the GLB Act provided significant new protections for the privacy of customer information. These provisions apply to any company the business of which is engaging in activities permitted for an FHC, even if it is not itself an FHC. The GLB Act subjected a financial institution to four new requirements regarding non-public information about a customer. The financial institution must (1) adopt and disclose a privacy policy; (2) give customers the right to "opt out" of disclosures to non-affiliated parties; (3) not disclose any information to third party marketers; and (4) follow regulatory standards (to be adopted in the future) to protect the security and confidentiality of customer information. Although the long-range effects of the GLB Act cannot be predicted with certainty, it will probably further narrow the differences and intensify competition between and among commercial banks, investment banks, insurance firms and other financial service companies. Sarbanes-Oxley Act of 2002 The following is a brief summary of some of the provisions of the Sarbanes-Oxley Act of 2002 ("SOX") that affect the Company. It is not intended as an exhaustive description of SOX or its impact on the Company. SOX instituted or increased various requirements for corporate governance, board of director and audit committee composition and membership, board duties, auditing standards, external audit firm standards, additional disclosure requirements, including CEO and CFO certification of financial statements and related controls, and other new requirements. Boards of directors are now required to have a majority of independent directors, and the audit committees are required to be wholly independent, with greater financial expertise. Such independent directors are not allowed to receive compensation from the company on whose board they serve except for directors' fees. Additionally, requirements for auditing standards and independence of external auditors were increased and included independent audit partner review, audit partner rotation, and limitations over non-audit services. Penalties for non-compliance with existing and new requirements were established or increased. In addition, Section 404 of SOX requires that by the end of 2006, our management perform a detailed assessment of internal controls and report thereon as follows: 1. We must state that we accept the responsibility for maintaining an adequate internal control structure and procedures for financial reporting; 2. We must present an assessment, as of the end of the December 31, 2006 fiscal year, of the effectiveness of the internal control structure and procedure for our financial reporting; and 3. We must have our auditors attest to, and report on, the assessment made by management. The attestation must be made in accordance with standards for attestation engagements issued or adopted by the Public Company Accounting Oversight Board. We have taken necessary steps with respect to achieving compliance. Section 404, requiring the expanded assessment of internal control, is not required to be completed until December 31, 2006, unless the market cap test at June 30, 2005 requires adoption by December 31, 2005. However, due to the great detail and additional documentation required in performing the internal control assessment, management's efforts in this regard have already begun. REPUBLIC FIRST BANCORP | 10 Regulatory Restrictions on Dividends Dividend payments by the PA Bank to the Company are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code") and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, the PA Bank would be limited to $32.2 million of dividends payable plus an additional amount equal to its net profit for 2005, up to the date of any such dividend declaration. Dividend payments by the DE Bank are similarly limited by the FDIC and also the Delaware Bank Commissioner. Dividends for the DE Bank would be limited to $6.2 million plus an additional amount equal to its net profit for 2005. However, dividends would be further limited in order to maintain capital ratios as discussed in "Regulatory Capital Requirements". The Company may consider dividend payments in 2005. 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 the Company. Dividend Policy The Company has not paid any cash dividends on its Common Stock. The Company may consider dividend payments in 2005. FDIC Insurance Assessments The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures. Under the risk-related premium schedule, the FDIC, on a semiannual basis, assigns each institution to one of three capital groups (well capitalized, adequately capitalized or under capitalized) and further assigns such institution to one of three subgroups within a capital group corresponding to the FDIC's judgment of the institution's strength based on supervisory evaluations, including examination reports, statistical analysis and other information relevant to gauging the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10.00% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6.00% or greater and a Tier 1 leverage ratio of 5.00% or greater, are assigned to the well capitalized group. Capital Adequacy The FRB has adopted risk-based capital guidelines for bank holding companies, such as the Company. The required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8.0%. At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders' equity, non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder, Tier 2 capital, may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the FRB has established minimum leverage ratio (Tier 1 capital to average total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company is in compliance with these guidelines. The FDIC subjects the Banks to similar capital requirements. The risk-based capital standards are required to take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. Interstate Banking The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995 (the "Interstate Banking Law") amended various federal banking laws to provide for nationwide interstate banking, interstate bank mergers and interstate branching. The interstate banking provisions allow for the acquisition by a bank holding company of a bank located in another state. Interstate bank mergers and branch purchase and assumption transactions were allowed effective September 1, 1998; however, states may "opt-out" of the merger and purchase and assumption provisions by enacting a law that specifically prohibits REPUBLIC FIRST BANCORP | 11 such interstate transactions. States could, in the alternative, enact legislation to allow interstate merger and purchase and assumption transactions prior to September 1, 1999. States could also enact legislation to allow for de novo interstate branching by out of state banks. In July 1997, Pennsylvania adopted "opt-in" legislation that allows interstate merger and purchase and assumption transactions. Profitability, Monetary Policy and Economic Conditions In addition to being affected by general economic conditions, the earnings and growth of the Banks will be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking, the Delaware Bank Commissioner, the FRB and the FDIC. An important function of the FRB is to regulate the supply of money and other credit conditions in order to manage interest rates. The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of the Bank cannot be determined. See "Management's Discussion and Analysis of Financial Condition - Results of Operations". Item 2: Description of Properties The PA Bank leases approximately 34,086 square feet on the second, fourth, tenth and eleventh floors of 1608 Walnut Street, Philadelphia, Pennsylvania, as its headquarter facilities. The space is occupied by the Company and the executive offices of the Banks. Back office operations of the Banks and commercial bank lending of the PA Bank are located therein. Management believes that future staffing needs may require the PA Bank to secure additional space. The current term of the lease on it's headquarter facilities expires on July 31, 2007 with annual rent expense of $458,772 payable monthly. In addition to the base rent and building operation expenses, the Company is required to pay its proportional share of all real estate taxes, assessments, and sewer costs, water charges, excess levies, and license and permit fees under its lease and to maintain insurance on the premises. The PA Bank leases approximately 1,829 square feet on the ground floor at 1601 Market Street in Center City, Philadelphia. This space contains a banking area and vault and represents the PA Bank's main office. The initial ten year term of the lease expired March 2003 and contains a five year renewal option that has been exercised. The annual rent for such location is $94,680 payable in monthly installments. The PA Bank leases approximately 1,743 square feet of space on the ground floor at 1601 Walnut Street, Center City Philadelphia, PA. This space contains a banking area and vault. The initial ten-year term of the lease expires August 2006 and contains one renewal option of five years. The annual rent for such location is $49,848, payable in monthly installments. The PA Bank leases approximately 972 square feet in the lower level of Pepper Pavilion at Graduate Hospital, 19th and Lombard Streets, Philadelphia, Pennsylvania. The space contains a banking area, lobby, office, and vault. The current lease has an initial five year term and a one year renewal option which expires June 2007. The annual rental at such location is $26,580 payable in monthly installments. The PA Bank leases approximately 798 square feet of space on the ground floor and 903 square feet on the 2nd floor at 233 East Lancaster Avenue, Ardmore, PA. The space contains a banking area and business development office. The initial ten-year term of the lease expires in August 2005, and contains one renewal option for five years. The annual rental at such location is $49,212, payable in monthly installments. The PA Bank leases approximately 2,143 square foot building at 4190 City Line Avenue, Philadelphia, Pennsylvania. The space contains a retail banking facility. The initial ten-year term of the lease expires January 2007 and contains a five year renewal option. The annual rent for such location is $71,436, payable in monthly installments. The PA Bank leases approximately 4,500 square foot building at 75 East Germantown Avenue, East Norriton, Pennsylvania. The space contains a banking area and business development office. The initial ten-year term contains two five- year renewal options and the initial lease term expires in December 2006. The annual rent for such location is $74,532, payable in monthly installments. The PA Bank purchased an approximately 2,800 square foot facility for its Abington, Montgomery County office at 1480 York Road, Abington, Pennsylvania. This space contains a banking area and a business development office. The PA Bank leases approximately 1,850 square feet on the ground floor at 1818 Market St. Philadelphia, Pennsylvania. The space contains a banking area and a vault. The initial ten-year term of the lease expires in December 2008 and contains two five-year renewal options. The annual rent for such location is $72,972, payable in monthly installments. REPUBLIC FIRST BANCORP | 12 The PA Bank leases approximately 2,200 square feet of space on the ground floor at 436 East Baltimore Avenue, Media, Pennsylvania. The space contains a banking area and office space. The initial five-year term of the lease expires October 2009 with one renewal option for five years. The annual rent is $31,200 payable in monthly installments. The DE Bank has a land lease on approximately 2,000 sq. feet of ground at Concord Pike and Rocky Run Parkway, Brandywine Hundred, Delaware for its branch operations and headquarters. The DE Bank opened for business on June 1, 1999. The initial ten-year term of the lease expires June 2008 and contains two five-year options to renew the lease. The annual rent for such location is $76,884, payable in monthly installments. The DE Bank leases approximately 3,092 square feet on the ground floor at 5301 Limestone Road, New Castle, Delaware. The space contains a banking area and office space. The initial seven-year term of the lease expires September 2011 with one five-year renewal option. The annual rent for such location is $66,480, payable in monthly installments. Item 3: Legal Proceedings The Company and the Banks are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and the Banks, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Banks. Item 4: Submission of Matters to a Vote of Security Holders Not applicable. Item 4A: Executive Officers The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2005 annual meeting of shareholders scheduled for April 26, 2005. REPUBLIC FIRST BANCORP | 13 PART II Item 5: Market for Registrant's for Common Equity and Related Stockholder Matters Market Information Shares of the Common Stock are quoted on Nasdaq under the symbol "FRBK." The table below presents the range of high and low trade prices reported for the Common Stock on Nasdaq for the periods indicated. Market quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not necessarily reflect actual transactions. As of December 31, 2004, there were approximately 1,903 holders of record of the Common Stock. On March 4, 2005, the closing price of a share of Common Stock on Nasdaq was $14.26. That price was adjusted for the spin-off of First Bank of Delaware, which trades under the symbol "FBOD" which closed at $4.11 on March 4, 2005. Year Quarter High Low ------ ---------- -------- -------- 2004........................ 4th $15.50 $12.75 3rd 14.13 12.00 2nd 13.10 11.42 1st 13.02 11.35 2003..................... 4th $14.00 $10.25 3rd 11.81 7.96 2nd 8.39 7.56 1st 7.83 6.34 Dividend Policy The Company has not paid any cash dividends on its Common Stock. The Company may consider dividend payments in 2005. The payment of dividends in the future, if any, will depend upon earnings, capital levels, cash requirements, the financial condition of the Company and the Banks, applicable government regulations and policies and other factors deemed relevant by the Company's Board of Directors, including the amount of cash dividends payable to the Company by the Banks. The principal source of income and cash flow for the Company, including cash flow to pay cash dividends on the Common Stock, is dividends from the Banks. Various federal and state laws, regulations and policies limit the ability of the Banks to pay cash dividends to the Company. For certain limitations on the Banks' ability to pay cash dividends to the Company, see "Description of Business - Supervision and Regulation". REPUBLIC FIRST BANCORP | 14
Item 6: Selected Financial Data As of or for the Years Ended December 31, ------------------------------------------------------------------ (Dollars in thousands, except per share data) 2004 2003 2002 2001 2000 INCOME STATEMENT DATA: Total interest income ........................................... $ 37,730 $ 42,404 $ 44,123 $ 49,014 $ 46,887 Total interest expense .......................................... 15,131 16,653 20,162 28,659 29,792 --------- ----------- ----------- ----------- ----------- Net interest income ............................................. 22,599 25,751 23,961 20,355 17,095 Provision for loan losses ....................................... 1,149 6,764 5,303 3,964 666 Non-interest income ............................................. 12,194 7,136 3,282 2,944 1,724 Non-interest expenses ........................................... 20,299 18,725 18,586 16,180 13,132 Federal income taxes ............................................ 4,405 2,484 1,154 1,041 1,657 --------- ----------- ----------- ----------- ----------- Net income ...................................................... $ 8,940 $ 4,914 $ 2,200 $ 2,114 $ 3,364 ========= =========== =========== =========== =========== PER SHARE DATA (1) Basic earnings per share ........................................ $ 1.24 $ 0.69 $ 0.32 $ 0.31 $ 0.50 Diluted earnings per share ...................................... 1.18 0.66 0.31 0.30 0.49 Book value per share ............................................ 9.01 7.85 7.48 6.89 6.33 BALANCE SHEET DATA Total assets .................................................... $ 720,412 $ 654,792 $ 647,692 $ 652,329 $ 655,637 Total loans, net (2) ............................................ 582,919 479,523 457,047 463,888 418,313 Total investment securities ..................................... 50,368 69,946 96,561 125,442 169,841 Total deposits .................................................. 545,396 453,605 456,302 447,217 425,551 FHLB & overnight advances ....................................... 86,090 127,852 125,000 142,500 176,442 Subordinated debt ............................................... 6,186 6,000 6,000 6,000 -- Total shareholders' equity ...................................... 65,224 56,376 51,276 46,843 43,030 PERFORMANCE RATIOS Return on average assets ........................................ 1.30% 0.75% 0.34% 0.33% 0.55% Return on average shareholders' equity .......................... 14.64 9.20 4.52 4.59 7.73 Net interest margin ............................................. 3.53 4.24 3.85 3.25 2.91 Total non-interest expenses as a percentage of average assets (3) 2.94 2.86 2.63 2.49 2.16 ASSET QUALITY RATIOS Allowance for loan losses as a percentage of loans (2) .......... 1.31% 1.78% 1.43% 1.16% 0.96% Allowance for loan losses as a percentage of non-performing loans 154.44 101.00 94.57 124.89 118.96 Non-performing loans as a percentage of total loans (2) ......... 0.85 1.76 1.51 0.93 0.81 Non-performing assets as a percentage of total assets ........... 0.71 1.35 1.24 0.95 0.52 Net charge-offs (recoveries) as a percentage of average loans, 0.40 1.00 0.87 0.58 (0.05) net (2) LIQUIDITY AND CAPITAL RATIOS Average equity to average assets ................................ 8.85% 8.16% 7.57% 7.02% 6.12% Leverage ratio .................................................. 10.43 9.64 8.56 8.07 6.91 Tier 1 capital to risk-weighted assets .......................... 12.28 12.66 13.24 12.73 11.99 Total capital to risk-weighted assets ........................... 13.53 13.92 14.49 13.98 13.08
(1) Restated for 10% stock dividend (2) Includes loans held for sale. (3) Excluding other real estate owned expenses of $1.5 million in 2002. REPUBLIC FIRST BANCORP | 15 Item 7: Management's Discussion and Analysis of Results of Operations and Financial Condition The following is management's discussion and analysis of the significant changes in the Company's results of operations, financial condition and capital resources presented in the accompanying consolidated financial statements of Republic First Bancorp, Inc. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements. Certain statements in this document may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words "may", "believes", "expect", "estimate", "project", "anticipate", "should", "would", "intend", "probability", "risk", "target", "objective" and similar expressions or variations on such expressions. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; business conditions in the financial services industry; the regulatory environment, including evolving banking industry standards; rapidly changing technology and competition with community, regional and national financial institutions; new service and product offerings by competitors, price pressures; and similar items. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2004, Quarterly Reports on Form 10-Q filed by the Company in 2004 and any Current Reports on Form 8-K filed by the Company, as well as similar filings in 2004. Critical Accounting Policies In accordance with FAS No. 144, the Company will present the operations of First Bank of Delaware as discontinued operations starting with the first quarter 2005. On January 31, 2005 the First Bank of Delaware was spun off. All assets, liabilities and equity of First Bank of Delaware were spun off as an independent company, trading on the OTC market under FBOD. Shareholders received one share of stock in First Bank of Delaware, for every share owned of the Company. The short-term loan and tax refund lines of business were accordingly transferred after that date. However, the PA Bank may continue to purchase tax refund anticipation loans from the DE Bank. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amounts outstanding. The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loan. This results in an adjustment of the related loans yield. 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 collectibles 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 Company accounts for income taxes under the liability method of accounting. Deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at the tax rates expected to be in effect when the temporary differences are realized or settled. In addition, a deferred tax asset is recorded to reflect the future benefit of net operating loss carry forwards. 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 REPUBLIC FIRST BANCORP | 16 Fees earned on short-term loans which are not sold, are recorded as interest income. At December 31, 2004, there were approximately $1.6 million of these loans outstanding. The majority of short-term loans are now sold to third parties effective in the third quarter of 2003. The DE Bank records fees on sold loans as non-interest income. The DE Bank had total short-term loan participations sold of $26.0 million at December 31, 2004. The Company evaluated these sales and determined that they qualified as such under FASB 140. Results of Operations for the years ended December 31, 2004 and 2003 Overview The Company's net income increased $4.0 million, or 81.9%, to $8.9 million or $1.18 per diluted share for the year ended December 31, 2004, compared to $4.9 million, or $0.66 per diluted share for the prior year. While net interest income decreased $3.2 million in 2004 primarily because fewer short-term loans were retained but were instead sold, related loan loss provisions were reduced by $3.8 million, more than offsetting that decrease. Increased volumes of such sales were the primary factor in a $2.6 million increase in short-term loan fee income from $4.0 million in 2003 to $6.6 million in 2004. In addition to the $3.8 million reduction in the provision for loan losses due to fewer short-term loan charge-offs, a $1.4 million third quarter recovery on a charged-off loan resulted in an excess in the allowance for loan losses. That excess, in conjunction with our customary credit analysis, also served to reduce the provision for loan losses in 2004. A favorable judgment on a lawsuit related to that charged-off loan resulted in $1.3 million of other income in 2004. Increases in service fees on deposit accounts, tax refund products and other income amounted to $1.4 million. The increased net income resulted in a return on average assets and average equity of 1.30% and 14.64%, respectively, in 2004 compared to .75% and 9.20%, respectively, for the same period in 2003. REPUBLIC FIRST BANCORP | 17 Analysis of Net Interest Income Historically, the Company's earnings have depended primarily upon the Banks' net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods (i) average assets, liabilities, and shareholders' equity, (ii) interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, (iii) average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and (iv) the Banks' net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are not adjusted for tax equivalency, as the Banks had no tax-exempt income. However, the PA Bank may have such income in the future.
Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (1) Balance Expense Rate (1) Balance IExpense Rate (1) ----------------------------- ----------- --------- --------- ----------- ---------- --------- (Dollars in thousands) For the Year For the Year For the Year Ended Ended Ended December 31, 2004 December 31, 2003 December 31, 2002 ----------------------------- ------------------------------- -------------------------------- Interest-earning assets: Federal funds sold and other interest-earning assets....... $ 49,431 $ 682 1.37% $ 72,761 $ 895 1.23% $ 42,835 $ 759 1.77% Investment securities.......... 61,273 2,054 3.35% 64,590 2,858 4.42% 111,486 6,284 5.64% Loans receivable .............. 527,723 34,994 6.63% 470,237 38,651 8.22% 468,239 37,080 7.92% ----------------------------- ----------- --------- --------- ----------- ---------- --------- Total interest-earning assets..... 638,427 37,730 607,588 42,404 622,560 44,123 7.09% 5.90% 6.98% Other assets................... 51,054 46,909 29,180 ---------- ----------- ----------- Total assets...................... $689,481 $654,497 $651,740 ========== =========== =========== Interest-bearing liabilities: Demand - non-interest Bearing....................... $96,565 $ -- N/A $ 75,469 $ -- N/A $ 58,338 $ -- N/A Demand - interest-bearing...... 57,541 352 0.61% 59,274 448 0.76% 47,019 497 1.06% Money market & savings......... 156,106 2,425 1.55% 127,685 1,708 1.34% 112,321 1,907 1.70% Time deposits.................. 185,336 5,153 2.78% 192,735 6,243 3.24% 240,230 9,290 3.87% ----------------------------- ----------- --------- --------- ----------- ---------- --------- Total deposits ................... 495,548 7,930 1.60% 455,163 8,399 1.85% 457,908 11,694 2.55% -------------------- ----------- --------- ----------- ---------- Total interest- bearing deposits............... 398,983 7,930 1.99% 379,694 8,399 2.21% 399,570 11,694 2.93% -------------------- ----------- --------- ----------- ---------- Other borrowings.................. 118,115 7,201 6.10% 134,057 8,254 6.16% 135,505 8,468 6.25% -------------------- ----------- --------- ----------- ---------- Total interest-bearing liabilities ................... 517,098 15,131 2.93% 513,751 16,653 3.24% 535,075 20,162 3.77% ----------------------------- ----------- --------- --------- ----------- ---------- --------- Total deposits and other borrowings............... 613,663 15,131 2.47% 589,220 16,653 2.83% 593,413 20,162 3.40% ----------------------------- ----------- --------- --------- ----------- ---------- --------- Non-interest-bearing Other liabilities.............. 14,770 11,890 8,958 Shareholders' equity.............. 61,048 53,387 49,369 ---------- ----------- ----------- Total liabilities and Shareholders' equity........... $689,481 $654,497 $651,740 ========== =========== =========== Net interest income............... $22,599 $25,751 $23,961 ========== ========= ========== Net interest spread............... 2.97% 3.74% 3.32% ========= ========= ========= Net interest margin (2)........... 3.53% 4.24% 3.85% ========= ========= =========
- ---------- (1) Yields on investments are calculated based on amortized cost. (2) The net interest margin is calculated by dividing net interest income by average total interest earning assets. REPUBLIC FIRST BANCORP | 18 Rate/Volume Analysis of Changes in Net Interest Income Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates.
Year ended December 31, Year ended December 31, 2004 vs. 2003 2003 vs. 2002 ------------------------------------ ------------------------------------ Change due to Change due to Average Average Average Average (Dollars in thousands) Volume Rate Total Volume Rate Total ---------- --------- --------- ---------- ---------- --------- Interest earned on: Federal funds sold and other interest-earning assets ......... $ (321) $ 108 $ (213) $ 368 $ (232) $ 136 Securities ...................... (111) (693) (804) (2,075) (1,351) (3,426) Loans ........................... 3,812 (7,469) (3,657) 163 1,408 1,571 ------- ------- ------- ------- ------- ------- Total interest earning assets ...... $ 3,380 $(8,054) $(4,674) $(1,544) $ (175) $(1,719) ------- ------- ------- ------- ------- ------- Interest expense of Deposits Interest-bearing demand deposits $ 11 $ 85 $ 96 $ (92) $ 141 $ 49 Money market and savings ....... (442) (275) (717) (205) 404 199 Time deposits .................. 206 884 1,090 1,539 1,508 3,047 ------- ------- ------- ------- ------- ------- Total deposit interest expense ..... (225) 694 469 1,242 2,053 3,295 ------- ------- ------- ------- ------- ------- Other borrowings ................ 971 82 1,053 88 126 214 ------- ------- ------- ------- ------- ------- Total interest expense ............. 746 776 1,522 1,330 2,179 3,509 ------- ------- ------- ------- ------- ------- Net interest income ............. $ 4,126 $(7,278) $(3,152) $ (214) $ 2,004 $ 1,790 ======= ======= ======= ======= ======= =======
Net Interest Income The Company's net interest margin decreased 71 basis points to 3.53% for the year ended December 31, 2004 versus the prior year. The decline reflected the decision to sell a majority of the short-term loan outstandings to third parties beginning in the third quarter of 2003, thereby reducing interest income and increasing non-interest income. Interest on short-term consumer loans contributed approximately $1.9 million to net interest income in 2004 and 29 basis points to the margin, versus $8.1 million and 1.32% in 2003. Excluding the impact of those loans, margins increased to 3.24% in 2004 from 2.92% in the prior year. That 32 basis point increase reflected a reduction in the yield paid on interest bearing deposits and other borrowings, which decreased 31 basis points from 2003 to 2004. Growth in non-interest bearing demand balances and reductions in rates paid on time deposits (certificates of deposits) were significant factors in that reduction. Excluding short-term loan income, yields on interest earning assets were comparable in 2004 and 2003, amounting to 5.61% and 5.66%, respectively, in those years. Additionally, maturities of higher rate FHLB advances, which represent the highest cost liabilities on the balance sheet, were also reflected in a lower cost of funds. A total of $125.0 million of FHLB advances which carry an average interest rate of 6.19% began maturing in the third quarter of 2004. Of the $125 million, all but $25 million had matured by December 31, 2004. That remaining $25 million advance matured in February 2005. These advances are repriceable to a significantly lower rate in the current interest rate environment. Excluding short term loan income, loan yields decreased to 6.26% from 6.40%. While the prime rate increased 1.25% in 2004, most of the impact was experienced in the fourth quarter, minimizing its impact on the full year. Thus, lower commercial loan rates were experienced for most of the year, contributing to the decrease. Notwithstanding that 1.25% increase in the prime rate, yields on certificates of deposit continued to decrease as renewal rates were lower than previous rates. The impact of such re-pricings and a 28.0% increase in average non-interest bearing deposits were the primary factors in the lower rate paid on interest-bearing liabilities. Increases in non-interest bearing deposits allow the Company to lower rates on other accounts. The average rate paid on interest-bearing liabilities decreased 36 basis points to 2.47% for 2004, from 2.83% in the prior year. The Company's net interest income decreased $3.2 million, or 12.2%, to $22.6 million for year ended December 31, 2004, from $25.8 million for the prior year. As shown in the Rate/Volume table above, the decrease in net interest income reflected the impact of participating the majority of short-term consumer loans to third parties, beginning in the third quarter of REPUBLIC FIRST BANCORP | 19 2003. Reductions in these relatively higher rate loans were reflected in the $7.5 million decrease in interest due to average rate. Interest income on short term loans decreased $6.5 million, accounting for the majority of that $7.5 million reduction. The Company's total interest income decreased $4.7 million, or 11.02%, to $37.7 million for the year ended December 31, 2004, from $42.4 million for the prior year. Interest and fees on loans decreased $3.7 million, or 9.5%, to $35.0 million for 2004, from $38.7 million for 2003. Both of these decreases reflect the $6.5 million decrease in consumer short-term loan interest, which was partially offset by the impact of net average loan growth of $57.5 million. The vast majority of such growth was in commercial loans. The decrease in interest income for short-term loans is the principal factor in the decrease in yield on loans of 1.59% to 6.63%. Interest and dividend income on securities decreased $804,000, or 28.1%, to $2.1 million for 2004, from $2.9 million for the prior year. This decline was due principally to a lower average rate earned on investment securities, which declined 1.07% to 3.35% as higher coupon investments prepaid more rapidly than lower coupon investments and the rates earned on variable rate securities declined due to the lower interest rate environment. Interest income on federal funds sold and other interest-earning assets decreased $213,000 primarily because average federal funds sold outstanding decreased $23.3 million to $49.4 million. Federal funds sold balances were decreased to fund commercial loan growth and the impact of the resulting decreased average balances more than offset the slightly higher market rates available for such investments. The Company's total interest expense decreased $1.5 million, or 9.1%, to $15.1 million for the year ended December 31, 2004, from $16.7 million for the prior year, as the Company reduced the interest rates on certificates of deposit. The decrease also reflected the 28.0% growth in 2004 of non-interest bearing demand deposits. Additionally, average other borrowings decreased $15.9 million in 2004 compared to 2003. That reduction was the primary factor resulting in a $1.1 million decrease in interest expense for other borrowings. Interest-bearing liabilities averaged $517.1 million for the year ended December 31, 2004, versus $513.8 million for the prior year, reflecting higher amounts of lower cost non-interest bearing demand and money market and savings accounts. The average rate paid on interest-bearing liabilities decreased 31 basis points to 2.93% for 2004, due to the decrease in average rates paid on certificates of deposit, and the reduction in higher cost other borrowings (primarily FHLB advances) which were replaced by lower cost non-interest bearing demand and money market and savings accounts. Interest expense on time deposits (certificates of deposit) decreased $1.1 million, or 17.5%, to $5.2 million for 2004, from $6.2 million for the prior year. This decline reflected the repricing of such certificates to lower rates as the average rate declined 46 basis points to 2.78%. In addition, average certificates of deposit outstanding decreased $7.4 million, or 3.8%, to $185.3 million, for 2004, from $192.7 million in the prior year, as higher cost time deposits matured and were not replaced due to the growth in core deposits. Interest expense on other borrowings, primarily FHLB advances, decreased $1.1 million, or 12.8%, to $7.2 million for 2004, compared to $8.3 million for the prior year. This decrease resulted from a $15.9 million decline in average other borrowings to $118.1 million at December 31, 2004, versus $134.1 million for 2003. The decline in average other borrowings reflected increased non-interest bearing demand and savings and money market balances, which replaced higher cost borrowings. The Company issued $6.0 million of trust preferred securities in November 2001, the expense for which is included in other borrowings expense. That expense was $324,000 for 2004 versus $372,000 for 2003. Provision for Loan Losses The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that reflects the known and estimated inherent losses in the portfolio. The provision for loan losses decreased $5.6 million to $1.1 million for the year ended December 31, 2004, from $6.8 million for the prior year. This decrease reflected a $3.8 million decrease in provisions primarily related to lower short-term loan charge-offs which resulted from the sale of such loans to third parties beginning in the third quarter of 2003. The reduction in the provision also reflected a $1.4 million charge-off recovery in 2004, which resulted in an excess in the allowance for loan losses. That excess was recognized as a negative provision for loan losses in the third quarter. The reduction also reflected a $559,000 decrease relating to tax refund loan net charge-offs. Non-Interest Income Total non-interest income increased $5.1 million, or 70.9%, to $12.2 million for the year ended December 31, 2004, versus $7.1 million for the prior year due primarily to fees earned when short-term loans are sold to third parties. In the third quarter of 2003, the DE Bank began selling an increased volume of such loans volume generated in Texas, Michigan, Arizona, California, Ohio and other states, and via the internet. Such fees increased $2.6 million, or 63.9%, to $6.6 million in 2004 primarily due to the increased volume of such sales. Additionally, 2004 non-interest income reflects a $1.3 million favorable judgment and related lawsuit damage award, received for damages previously incurred in connection with a loan charge off and subsequent recovery. Fees on tax refund products increased $687,000, or 141.1% in 2004, primarily due to increases in volume. Service fees on deposit accounts increased $381,000, or 26.3%, primarily reflecting increases in the customer base on which REPUBLIC FIRST BANCORP | 20 charges are assessed. Other income increased $345,000, or 93.8%, to $713,000 in 2004. That increase reflected a $158,000 increase in bank owned life insurance income, as related balances were outstanding for the full year of 2004, but for only a portion of the prior year. The balance of the increase resulted primarily from one time charges for special services to a bank customer. The Company also sold one other real estate owned (OREO) property at a gain of $224,000 in the fourth quarter of 2003. Non-Interest Expenses Total non-interest expenses increased $1.6 million, or 8.4%, to $20.3 million for the year ended December 31, 2004, from $18.7 million for the prior year. Salaries and employee benefits increased $294,000, or 3.0%, to $10.1 million for the year ended December 31, 2004, from $9.8 million for the prior year comparable period. The increase reflected normal merit and promotional increases which averaged approximately 3%. Occupancy expense increased $91,000, or 5.9%, to $1.6 million for the year ended December 31, 2004, due primarily to increased rent expense which reflected increased space leased at the main office. Depreciation expense was comparable in both years and amounted to $1.3 million in 2004. Legal fees increased $266,000, or 27.0% to $1.3 million for the year ended December 31, 2004, from $986,000 for the prior year. The increase primarily reflected legal expense related to the spin-off of First Bank of Delaware. Advertising expense was comparable in both years and amounted to $178,000 in 2004. Other real estate owned expense amounted to $81,000 in 2004, reflecting the write down of the sole property owned at December 31, 2004. Other expense increased $1.2 million to $5.7 million in 2004, from $4.6 million in the prior year. Of that increase, $197,000 reflected higher correspondent bank fees, primarily due to price increases. State taxes increased by $150,000 as a result of a sales tax audit. Directors' fees increased $156,000, as a result of the increased number of meetings and rate increases reflecting changes in regulations. Audit fees increased $135,000, reflecting both increases in price and audit services, including those related to the spin-off. Provision for Income Taxes The provision for income taxes increased $1.9 million to $4.4 million for 2004, from $2.5 million for the prior year. This increase was primarily the result of the increase in pre-tax income. The effective tax rate of 33.0% for the year ended December 31, 2004 was comparable to the prior year. Results of Operations for the years ended December 31, 2003 and 2002 Overview The Company's net income increased $2.7 million, or 123%, to $4.9 million or $0.66 per diluted share for the year ended December 31, 2003, compared to $2.2 million, or $0.31 per diluted share for the prior year. The prior year reflected an after tax write down of one other real estate owned property of $909,000, or $0.13 per diluted share. The improvement in earnings reflected increases in net interest income and non-interest income, a lower commercial loan loss provision and the absence of the OREO write down. In 2003, net interest income increased $1.8 million, or 7%, compared to the prior year period. Interest margins in that year continued to be significantly impacted by continued prepayments of the residential real estate and mortgage backed securities portfolios which lowered net interest income. However, continued reductions in deposit rates and increased short-term loan and tax refund product fees more than offset the impact of those prepayments. The increase in net interest income also reflected the impact of a 21% increase in lower cost average core deposits in 2003 compared to the prior year. The provision for loan losses increased $1.5 million between those periods primarily reflecting higher charge-offs of short-term and tax refund loans. Increased net interest income and non- interest income from the short-term loan and tax refund products more than offset that increase. In 2003 non-interest income increased $3.9 million primarily reflecting increased revenue from the short-term loan product resulting from the sale of short-term loans to third parties. Non-interest expenses net of OREO expense increased 7.9% reflecting increased depreciation and incentive expenses. The increased net income resulted in a return on average assets and average equity of .75% and 9.20% respectively, compared to .34% and 4.52% respectively for the same period in 2002. Analysis of Net Interest Income Historically, the Company's earnings have depended primarily upon the Banks' net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected REPUBLIC FIRST BANCORP | 21 by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods (i) average assets, liabilities, and shareholders' equity, (ii) interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, (iii) average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and (iv) the Banks' net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are not adjusted for tax equivalency, as the Banks had no tax-exempt income, but may have such income in the future. Financial Condition December 31, 2004 Compared to December 31, 2003 Total assets increased $65.6 million to $720.4 million at December 31, 2004, versus $654.8 million at December 31, 2003. This net increase reflected higher commercial loans outstanding, partially offset by reduced residential mortgage and mortgage backed securities balances. Loans: The loan portfolio, which represents the Company's largest asset, is its most significant source of interest income. The Company's lending strategy is to focus on small and medium sized businesses and professionals that seek highly personalized banking services. Total loans increased $102.4 million, or 21.0%, to $590.7 million at December 31, 2004, versus $488.2 million at December 31, 2003. The increase reflected $106.3 million, or 23.3%, of growth in commercial and construction loans versus a $6.7 million, or 44.7%, decline in residential mortgage loans resulting primarily from historically high prepayments reflecting the decline in long-term mortgage rates. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, automobile loans, home improvement loans, short-term consumer loans, home equity loans and lines of credit, overdraft lines of credit and others. The Banks' commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to the Banks' combined legal lending limit of approximately $10 million at December 31, 2004. Individual customers may have several loans that are secured by different collateral. The aggregate amount of those relationships that exceeded $6.5 million at December 31, 2004, was $82.8 million. The $6.5 million threshold approximates 10% of total capital and reserves and reflects an additional internal monitoring guideline. At December 31, 2004, the Company through the DE Bank had $1.6 million in short-term consumer loans outstanding versus $1.4 million at December 31, 2003. Investment Securities: Investment securities available-for-sale are investments which may be sold in response to changing market and interest rate conditions and for liquidity and other purposes. The Company's investment securities available-for-sale consist primarily of U.S Government debt securities, U.S. Government agency issued mortgage backed securities, and debt securities, which include corporate bonds and trust preferred securities. Available-for-sale securities totaled $44.9 million at December 31, 2004, a decrease of $16.7 million, or, 27.1%, from year-end 2003. This decrease resulted primarily from historically high principal repayments on mortgage backed securities. At December 31, 2004 and December 31, 2003, the portfolio had net unrealized gains of $502,000 and $1.2 million, respectively. Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of FHLB securities. At December 31, 2004, securities held to maturity totaled $5.4 million, a decrease of $2.8 million, or 34.3%, from $8.3 million at year-end 2003. The decline reflected a reduction in the amount of FHLB stock held. At both dates, respective carrying values approximated market values. Cash and Due From Banks: Cash and due from banks, interest bearing deposits and federal funds sold comprise this category which consists of the Company's most liquid assets. The aggregate amount in these three categories decreased by $25.6 million, to $45.0 million at December 31, 2004, from $70.6 million at December 31, 2003. Federal funds sold decreased by $15.9 million to $23.0 million from $39.0 million, respectively, reflecting the net increase in commercial loan growth. Other Interest-Earning Restricted Cash: REPUBLIC FIRST BANCORP | 22 Other interest-earning restricted cash represents funds provided to fund an offsite ATM network for which the Company is compensated. At December 31, 2004, the balance was $2.9 million versus $3.5 million at December 31, 2003. Fixed Assets: Bank premises and equipment, net of accumulated depreciation, increased $614,000, or 13.9%, to $5.0 million at December 31, 2004, from $4.4 million at December 31, 2003. The increase reflected investments in telephone and computer equipment, as well as expenditures for new locations. Other Real Estate Owned: The OREO property represents retail stores in a strip mall. The original loan balance was $357,000 of which $150,000 was charged to the allowance for loan losses in the fourth quarter of 2003 resulting in a $207,000 balance in other real estate owned. In 2004 the property was additionally written down $70,000 for a balance at December 31, 2004 of $137,000. Business Owned Life Insurance: In the second quarter of 2003, the Company purchased $11.5 million of business owned life insurance. The income earned on these policies is reflected in non-interest income. At December 31, 2004, the value of the insurance was $12.2 million. Deposits: Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits including some brokered deposits, are the Banks' major source of funding. Deposits are generally solicited from the Company's market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships. Total deposits increased by $91.8 million to $545.4 million at December 31, 2004, from $453.6 million at December 31, 2003. Average core deposits increased 18.2% or $47.8 million more than the prior year end to $310.2 million in 2004. Time deposits increased $3.4 million, or 1.8%, to $191.0 million at December 31, 2004, versus $187.6 million at the prior year-end. Core deposit growth benefited from the Company's business development efforts and bank consolidations in the Philadelphia market that continue to leave some customers underserved. FHLB Borrowings and Overnight Advances: FHLB borrowings and overnight advances are used to supplement deposit generation. FHLB term borrowing by the PA Bank totaled $25.0 million and $125 million at December 31, 2004 and December 31, 2003, respectively. The Company's remaining term borrowing matures in the first quarter of 2005. The PA Bank also had short-term borrowings (overnight) of $61.1 million at December 31, 2004 versus $2.8 million at the prior year-end. Shareholders' Equity: Total shareholders' equity increased $8.8 million to $65.2 million at December 31, 2004, versus $56.4 million at December 31, 2003. This increase was primarily the result of 2004 net income of $8.9 million. Risks and Uncertainties and Certain Significant Estimates The earnings of the Company depend on the earnings of the Banks. The Banks are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the operations of the Banks are subject to risks and uncertainties surrounding their exposure to change in the interest rate environment. Prepayments on residential real estate mortgages and other fixed rate loans and mortgage backed securities vary significantly and may cause significant fluctuations in interest margins. Short-term consumer loans were first offered through the DE Bank in 2001. At December 31, 2004, there was approximately $1.6 million of short-term consumer loans outstanding, which were originated in Texas. The DE Bank also originates loans in Michigan, California, Arizona, Ohio, and via the internet, which are sold to third parties. The participations sold at December 31, 2004 were $26.0 million. 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 REPUBLIC FIRST BANCORP | 23 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. The DE Bank began offering two tax refund products in 2001 with Liberty Tax Service. Liberty Tax Service is a nationwide professional tax service provider which 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 require management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, and income taxes. Consideration is given to a variety of factors in establishing these estimates. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the allowance for loan losses and carrying value of real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Banks' control, it is at least reasonably possible that the estimates of the allowance for loan losses and the carrying values of the real estate owned could differ materially in the near term. The Company and its subsidiaries are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends, and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition. Commitments, Contingencies and Concentrations The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $156.6 million and $94.8 million and standby letters of credit of approximately $8.0 million and $4.0 million at December 31, 2004 and 2003, respectively. The increase in commitments reflects an increase in commercial lending. However, commitments often expire without being drawn upon. The $156.6 million of commitments to extend credit at December 31, 2004, were substantially all variable rate commitments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. REPUBLIC FIRST BANCORP | 24 Contractual obligations and other commitments The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2004:
One to Three to After Less than Three Five Five (Dollars in thousands) Total One Year Years Years Years ----- -------- ----- ----- ----- Minimum annual rentals or noncancellable $ 3,252 $ 1,056 $ 1,953 $ 106 $ 137 operating leases Remaining contractual maturities of time 190,989 86,838 73,212 26,917 4,022 deposits Contingent liabilities on equipment 15 15 -- -- -- Benefit plans 1,376 527 849 -- -- Loan commitments 156,636 120,558 35,378 -- 700 Long-term borrowed funds 25,000 25,000 -- -- -- Standby letters of credit 7,963 6,586 1,337 -- 40 -------- -------- -------- -------- -------- Total $385,231 $240,580 $112,729 $ 27,023 $ 4,899 ======== ======== ======== ======== ========
As of December 31, 2004, the Company had entered into non-cancelable lease agreements for its main office and operations center, nine PA Bank retail branch facilities and two DE Bank retail branches, expiring through September 30, 2011. The leases are accounted for as operating leases. The minimum annual rental payments required under these leases are $3.3 million through the year 2011. Prior to 2001, the Company participated in a joint venture with the MBM/ATM Group Ltd. Although the Company's participation in the venture was terminated, the Company remains contingently liable on repayments totaling $15,000 through 2005. The Company has entered into employment agreements with the President of the Company and the President of the PA Bank. The aggregate commitment for future salaries and benefits under these employment agreements at December 31, 2004 is approximately $1.4 million. The Company and the Banks are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and the Banks, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Banks. At December 31, 2004, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans except for credits extended to real estate operators and lessors in the aggregate amount of $163.5 million, which represented 27.7% of gross loans receivable at December 31, 2004. Various types of real estate are included in this category, including industrial, retail shopping centers, office space, residential multi-family and others. Loan concentrations are considered to exist when there is amounts loaned to a multiple number of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. Interest Rate Risk Management Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. The Company attempts to optimize net interest income while managing period-to-period fluctuations therein. The Company typically defines interest-sensitive assets and interest-sensitive liabilities as those that reprice within one year or less. The difference between interest-sensitive assets and interest-sensitive liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP occurs when interest-sensitive assets exceed interest-sensitive liabilities repricing in the same time periods, and a negative GAP occurs when interest-sensitive liabilities exceed interest-sensitive assets repricing in the same time periods. A negative GAP ratio suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a positive GAP ratio suggests the converse. REPUBLIC FIRST BANCORP | 25 Static GAP analysis describes interest rate sensitivity at a point in time. However, it alone does not accurately measure the magnitude of changes in net interest income since changes in interest rates do not impact all categories of assets and liabilities equally or simultaneously. Interest rate sensitivity analysis also requires assumptions about repricing certain categories of assets and liabilities. For purposes of interest rate sensitivity analysis, assets and liabilities are stated at either their contractual maturity, estimated likely call date, or earliest repricing opportunity. Mortgage backed securities and amortizing loans are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. Savings, money market and interest-bearing demand accounts do not have a stated maturity or repricing term and can be withdrawn or repriced at any time. Management estimates the repricing characteristics of these accounts based on historical performance and other deposit behavior assumptions. These deposits are not considered to reprice simultaneously and, accordingly, a portion of the deposits are moved into time brackets exceeding one year. However, management may choose not to reprice liabilities proportionally to changes in market interest rates, for competitive or other reasons. Shortcomings, inherent in a simplified and static GAP analysis, may result in an institution with a negative GAP having interest rate behavior associated with an asset-sensitive balance sheet. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Furthermore, repricing characteristics of certain assets and liabilities may vary substantially within a given time period. In the event of a change in interest rates, prepayments and other cash flows could also deviate significantly from those assumed in calculating GAP in the manner presented in the table below. The Company attempts to manage its assets and liabilities in a manner that optimizes net interest income in a range of interest rate environments. Management uses GAP analysis and simulation models to monitor behavior of its interest sensitive assets and liabilities. Adjustments to the mix of assets and liabilities are made periodically in an effort to provide steady growth in net interest income. Management presently believes that the effect on the Banks of any future fall in interest rates, reflected in lower yielding assets, would be detrimental since the Banks do not have the immediate ability to commensurately decrease rates on its interest bearing liabilities, primarily time deposits, other borrowings and certain transaction accounts. An increase in interest rates could have a positive effect on the Banks, due to repricing of certain assets, primarily adjustable rate loans and federal funds sold, and a possible lag in the repricing of core deposits not assumed in the model. The following tables present a summary of the Company's interest rate sensitivity GAP at December 31, 2004. For purposes of these tables, the Company has used assumptions based on industry data and historical experience to calculate the expected maturity of loans because, statistically, certain categories of loans are prepaid before their maturity date, even without regard to interest rate fluctuations. Additionally, certain prepayment assumptions were made with regard to investment securities based upon the expected prepayment of the underlying collateral of the mortgage-backed securities. The interest rate on the trust preferred securities is variable and adjusts semi-annually. REPUBLIC FIRST BANCORP | 26
Interest Sensitivity Gap At December 31, 2004 (Dollars in thousands) More Financial 0-90 91-180 181-365 1-2 2-3 3-4 4-5 than 5 Statement Fair Days Days Days Years Years Years Years Years Total Value ------------------------------ ------------------------------------------------------------------------ Interest Sensitive Assets: Investment securities and other interest-bearing balances.............. $ 43,138 $ 474 $ 25,823 $ 3,622 $ 1,804 $ 918 $ 476 $ 729 $ 76,984 $ 77,005 Average interest rate. 2.94% 5.40% 2.75% 5.64% 5.66% 5.67% 5.67% 5.68% Loans receivable...... 310,368 20,310 31,850 62,647 51,063 51,058 37,190 18,433 582,919 584,010 Average interest rate. 5.85% 6.55% 6.63% 6.51% 6.56% 6.27% 6.33% 6.16% ------------------------------ ------------------------------------------------------------------------ Total................. 353,506 20,784 57,673 66,269 52,867 51,976 37,666 19,162 659,903 661,015 ------------------------------ ------------------------------------------------------------------------ Cumulative Totals..... $ 353,506 $374,290 $ 431,963 $ 498,232 $551,099 $603,075 $640,741 $659,903 ============================== ==================================================== Interest Sensitive Liabilities: Demand Interest $ 27,609 $ - $ - $ 27,610 $ - $ - $ - $ - $55,219 $55,219 Bearing(1)............ Savings Accounts (1).. 32,353 - - 32,352 - - - - 64,705 64,705 Average interest rate. 2.40% - - 2.40% - - - - Money Market Accounts(1) 64,780 - - 64,780 - - - - 129,560 129,560 Average interest rate. 1.50% - - 1.50% - - - - Time Deposits......... 48,327 20,560 17,951 38,495 27,171 7,546 26,917 4,022 190,989 187,708 Average interest rate. 2.2% 2.75% 2.69% 2.93% 3.15% 3.12% 3.42% 2.91% - - FHLB and Short Term Advances (2).......... 86,090 - - - - - - - 86,090 86,255 Average interest rate. 3.72% - - - - - - - - - Subordinated Debt..... - 6,186 - - - - - - 6,186 6,186 Average interest rate. 5.61% ------------------------------ ------------------------------------------------------------------------ Total................. 259,159 26,746 17,951 163,237 27,171 7,546 26,917 4,022 532,749 529,633 ------------------------------ ------------------------------------------------------------------------ Cumulative Totals..... $ 259,159 $285,905 $ 303,856 $ 467,093 $494,264 $501,810 $528,727 $532,749 ============================== ==================================================== Interest Rate Sensitivity GAP....... $ 94,347 $(5,962) $ 39,722 $ (96,968) $ 25,696 $44,430 $ 10,749 $ 15,140 Cumulative GAP........ $ 94,347 $ 88,385 $ 128,107 $ 31,139 $ 56,835 $101,265 $112,014 $127,154 Interest Sensitive Assets/ Interest Sensitive Liabilities........... 136.41% 130.91% 142.16% 106.67% 111.50% 120.18% 121.19% 123.87% Cumulative GAP/ Total Earning Assets.. 14% 13% 19% 5% 9% 15% 17% 19%
(1) Demand, savings and money market accounts are shown to reprice based upon management's estimate of when rates would have to be increased to retain balances in response to competition. Such estimates are necessarily arbitrary and wholly judgmental. (2) FHLB has the option of calling advances prior to the scheduled maturity shown in the table, whereupon they might be replaced by borrowings at then current market rates. In addition to the GAP analysis, the Company utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. Income simulation considers not only the impact of changing market interest rates on forecasted net interest income, but also other factors such a yield curve relationships, the volume and mix of assets and liabilities and general market conditions. REPUBLIC FIRST BANCORP | 27 Through the use of income simulation modeling the Company has estimated net interest income for the year ending December 31, 2005, based upon the assets, liabilities and off-balance sheet financial instruments at December 31, 2004. The Company has also estimated changes to that estimated net interest income based upon immediate and sustained changes in interest rates ("rate shocks"). Rate shocks assume that all of the interest rate increases or decreases occur on the first day of the period modeled and remain at that level for the entire period. The following table reflects the estimated percentage change in estimated net interest income for the years ending December 31, excluding the impact of short-term and tax refund loans. Note the spin off of First Bank of Delaware is not expected to have a significant impact on the following table. Percent change --------------------------- Rate shocks to interest rates 2005 2004 ----------------------------- ----------- ----------- +2% -% 17.3% +1% 0.1 9.3 -1% (2.1) (7.4) -2% (11.1) (18.7) The Company's management believes that the assumptions utilized in evaluating the Company's estimated net interest income are reasonable; however, the interest rate sensitivity of the Company's assets, liabilities and off-balance sheet financial instruments as well as the estimated effect of changes in interest rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. Periodically, the Company may and does make significant changes to underlying assumptions, which are wholly judgmental. Prepayments on residential mortgage loans and mortgage backed securities have increased over historical levels due to the lower interest rate environment, and may result in reductions in margins. Capital Resources The Company is required to comply with certain "risk-based" capital adequacy guidelines issued by the FRB and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the "credit-equivalent" amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts. Under these guidelines, banks are expected to meet a minimum target ratio for "qualifying total capital" to weighted risk assets of 8%, at least one-half of which is to be in the form of "Tier 1 capital". Qualifying total capital is divided into two separate categories or "tiers". "Tier 1 capital" includes common stockholders' equity, certain qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, "Tier 2 capital" components (limited in the aggregate to one-half of total qualifying capital) includes allowances for credit losses (within limits), certain excess levels of perpetual preferred stock and certain types of "hybrid" capital instruments, subordinated debt and other preferred stock. Applying the federal guidelines, the ratio of qualifying total capital to weighted-risk assets, was 13.53% and 13.92% at December 31, 2004 and 2003, respectively, and as required by the guidelines, at least one-half of the qualifying total capital consisted of Tier l capital elements. Tier l risk-based capital ratios on December 31, 2004 and 2003 were 12.28% and 12.66%, respectively. At December 31, 2004 and 2003, the Company exceeded the requirements for risk-based capital adequacy under both federal and Pennsylvania state guidelines. Under FRB and FDIC regulations, a bank and a holding company are deemed to be "well capitalized" when it has a "leverage ratio" ("Tier l capital to total assets") of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%, and a total capital to weighted-risk assets ratio of at least 10%. At December 31, 2004 and 2003, the Company's leverage ratio was 10.43% and 9.64%, respectively. Accordingly, at December 31, 2004 and 2003, the Company was considered "well capitalized" under FRB and FDIC regulations. On November 28, 2001, Republic First Bancorp, Inc., through a pooled offering with Sandler O'Neill & Partners, issued $6.0 million of corporation-obligated mandatorily redeemable capital securities of the subsidiary trust holding solely junior subordinated debentures of the corporation more commonly known as trust preferred securities. The purpose of the issuance was to increase capital as a result of the Company's continued loan and core deposit growth. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital. The Company may call the securities on any interest payment date after five years, without a prepayment penalty, notwithstanding their final 30 year maturity. The interest rate is variable and adjustable semi-annually at 3.75% over the 6 month London Interbank Offered Rate ("Libor"). The shareholders' equity of the Company as of December 31, 2004, totaled approximately $65.2 million compared to approximately $56.4 million as of December 31, 2003. This increase of $8.8 million reflected 2004 net income of $8.9 million. REPUBLIC FIRST BANCORP | 28 That net income increased the book value per share of the Company's common stock from $7.85 as of December 31, 2003, based upon 7,367,426 shares outstanding, to $9.01 as of December 31, 2004, based upon 7,428,681 shares outstanding at December 31, 2004. Regulatory Capital Requirements Federal banking agencies impose three minimum capital requirements on the Company's risk-based capital ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks. The following table presents the Company's regulatory capital ratios at December 31, 2004 and 2003:
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, 2004 Total risk based capital Republic First Bank.......... $64,251 12.09% $42,526 8.00% $53,158 10.00% First Bank of DE............. 11,948 26.27% 3,638 8.00% 4,548 10.00% Republic First Bancorp, Inc.. 78,120 13.53% 46,203 8.00% - - Tier one risk based capital Republic First Bank.......... 57,606 10.84% 21,263 4.00% 31,895 6.00% First Bank of DE............. 11,374 25.01% 1,819 4.00% 2,729 6.00% Republic First Bancorp, Inc.. 70,894 12.28% 23,102 4.00% - - Tier one leverage capital Republic First Bank.......... 57,606 9.25% 31,143 5.00% 31,143 5.00% First Bank of DE............. 11,374 20.56% 2,766 5.00% 2,766 5.00% Republic First Bancorp, Inc.. 70,894 10.43% 33,982 5.00% - - At December 31, 2003 Total risk based capital Republic First Bank.......... $57,417 12.57% $36,534 8.00% $45,667 10.00% First Bank of DE............. 8,399 29.06% 2,312 8.00% 2,891 10.00% Republic First Bancorp, Inc.. 67,436 13.92% 38,765 8.00% - - Tier one risk based capital Republic First Bank.......... 51,689 11.32% 18,267 4.00% 27,475 6.00% First Bank of DE............. 8,025 27.76% 1,156 4.00% 1,734 6.00% Republic First Bancorp, Inc.. 61,346 12.66% 19,382 4.00% - - Tier one leverage capital Republic First Bank.......... 51,689 8.77% 29,475 5.00% 29,475 5.00% First Bank of DE............. 8,025 16.55% 2,410 5.00% 2,410 5.00% Republic First Bancorp, Inc.. 61,346 9.64% 31,817 5.00% - -
Management believes that the Company and Banks met, as of December 31, 2004 and 2003, all capital adequacy requirements to which they are subject. As of December 31, 2004, the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification, which management believes would have changed the Banks' category. After the spin off of First Bank of Delaware, the Company's capital levels will approximate those of the PA Bank. REPUBLIC FIRST BANCORP | 29 The Company and the Banks' ability to maintain the required levels of capital is substantially dependent upon the success of their capital and business plans, the impact of future economic events on the Banks' loan customers and the Banks' ability to manage their interest rate risk, growth and other operating expenses. In addition to the above minimum capital requirements, the Federal Reserve Bank approved a rule that became effective on December 19, 1992, implementing a statutory requirement that federal banking regulators take specified "prompt corrective action" when an insured institution's capital level falls below certain levels. The rule defines five capital categories based on several of the above capital ratios. The Banks currently exceed the levels required for a bank to be classified as "well capitalized". However, the Federal Reserve Bank may consider other criteria when determining such classifications, which criteria could result in a downgrading in such classifications. The Company's equity to assets ratio increased from 8.61% as of December 31, 2003, to 9.05% as of December 31, 2004. The increase at year-end 2004 was a result of the improvement in net income. The Company's average equity to assets ratio for 2004, 2003 and 2002 was 8.85%, 8.16% and 7.57%, respectively. The Company's average return on equity for 2004, 2003 and 2002 was 14.64%, 9.20% and 4.52%, respectively; and its average return on assets for 2004, 2003 and 2002, was 1.30%, 0.75% and 0.34%, respectively. Liquidity Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, time investment purchases to market conditions and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. The most liquid assets consist of cash, amounts due from banks and federal funds sold. Regulatory authorities require the Company to maintain certain liquidity ratios such that the Banks maintain available funds, or can obtain available funds at reasonable rates, in order to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, the Company has formed an Asset/Liability Committee (ALCO), comprised of certain members of the Banks' board of directors and senior management, which monitors such ratios. The purpose of the committee is, in part, to monitor the Banks' liquidity and adherence to the ratios in addition to managing relative interest rate risk. The ALCO meets at least quarterly. The Company's most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $45.0 million at December 31, 2004, compared to $70.6 million at December 31, 2003. Loan maturities and repayments are another source of asset liquidity. At December 31, 2004, the PA Bank estimated that in excess of $50.0 million of loans would mature or repay in the six-month period ended June 30, 2005. Additionally, the majority of its securities are available to satisfy liquidity requirements through pledges to the FHLB to access the PA Banks' line of credit. Funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds or utilizing the facilities of the Federal Home Loan Bank System ("FHLB"). At December 31, 2004, the PA Bank had $100.6 million in unused lines of credit available under arrangements with the FHLB and with correspondent banks, compared to $67.0 million at December 31, 2003. The reduction in available lines resulted from prepayments of the PA Bank's mortgage backed securities and residential mortgage loan portfolio pledged as collateral against those lines. Notwithstanding these reductions, management believes it satisfactorily exceeds regulatory liquidity guidelines. These lines of credit enable the PA Bank to purchase funds for short to long-term needs at rates often lower than other sources and require pledging of securities or loan collateral. At December 31, 2004, the Company had outstanding commitments (including unused lines of credit and letters of credit) of $156.6 million. Certificates of deposit scheduled to mature in one year totaled $86.8 million at December 31, 2004. The PA Bank has $25.0 million in term FHLB borrowings at December 31, 2004. This amount will mature in 2005. These term borrowings are expected to be replaced by overnight borrowings. The Company anticipates that it will have sufficient funds available to meet its current commitments. In addition, the Company can use term borrowings to replace these borrowed funds. The Banks' target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of the Banks' interest-earning assets with projected future outflows of deposits and other liabilities. The PA Bank has established a line of credit with a correspondent bank to assist in managing the PA Banks' liquidity position. That line of credit totaled $10.0 million at December 31, 2004. The PA Bank had drawn down $0 on this line at December 31, 2004. Additionally, the PA Bank has established a line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $186.7 million. That $186.7 million capacity is reduced by advances outstanding to arrive at the unused line of credit available. As of December 31, 2004 and 2003, the PA Bank had borrowed $86.1 million and $125.0 million, respectively REPUBLIC FIRST BANCORP | 30 from the FHLB. Investment securities represent a primary source of liquidity for the PA Bank. Accordingly, investment decisions generally reflect liquidity over other considerations. Operating cash flows are primarily derived from cash provided from net income during the year and are another source of liquidity. In 2003, significant cash flows were provided from the maturities and principal paydowns of securities. The Company's primary short-term funding sources are certificates of deposit and its securities portfolio. The circumstances that are reasonably likely to affect those sources are as follows. The PA Bank has historically been able to generate certificates of deposit by matching Philadelphia market rates or paying a premium rate of 25 to 50 basis points over those market rates. It is anticipated that this source of liquidity will continue to be available; however, the incremental cost may vary depending on market conditions. The Company's securities portfolio is also available for liquidity, most likely as collateral for FHLB advances. Because of the FHLB's AAA rating, it is unlikely those advances would not be available. But even if they are not, numerous investment companies would likely provide repurchase agreements up to the amount of the market value of the securities. The ALCO committee is responsible for managing the liquidity position and interest sensitivity of the Banks. That committee's primary objective is to maximize net interest income while configuring the Banks' interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity for projected needs. Investment Securities Portfolio The Banks' investment securities portfolio is intended to provide liquidity and contribute to earnings while diversifying credit risk. The Company attempts to maximize earnings while minimizing its exposure to interest rate risk. The securities portfolio consists primarily of U.S. Government agency securities, mortgage backed securities, corporate bonds, trust preferred securities and FHLB stock. The Company's ALCO monitors and approves all security purchases. The decline in securities in 2003 and 2004 was a result of the Company's strategy to reduce the amount of the investment securities by not replacing mortgage backed securities prepayments in the lower interest rate environment. The Company instead was able to increase its commercial loan balances, through increased loan production. A summary of investment securities available-for-sale and investment securities held-to-maturity at December 31, 2004, 2003 and 2002 follows.
Investment Securities Available for Sale at December 31, ----------------------------------------------- (Dollars in thousands) 2004 2003 2002 ----------- ----------- ------------ U.S. Government Agencies............................ $ 20,258 $24,425 $ 5,759 Mortgage backed Securities/CMOs (1)................. 13,675 24,235 71,623 Other debt securities (3)........................... 10,506 11,843 7,352 ----------- ----------- ------------ Total amortized cost of securities.................. $ 44,439 $60,503 $84,734 ----------- ----------- ------------ Total fair value of investment securities........... $ 44,941 $61,686 $87,291 ----------- ----------- ------------ Investment Securities Held to Maturity at December 31, ----------------------------------------------- (Dollars in thousands) 2004 2003 2002 ----------- ----------- ------------ U.S. Government Agencies............................ $ 3 $ 68 $ 122 Mortgage backed Securities/CMOs (1)................. 108 265 760 Other securities (2)................................ 5,316 7,927 8,388 ----------- ----------- ------------ Total amortized cost of investment securities....... $ 5,427 $ 8,260 $ 9,270 ----------- ----------- ------------ Total fair value of investment securities........... $ 5,448 $ 8,300 $ 9,297 ----------- ----------- ------------
- ---------- (1) Substantially all of these obligations consist of U.S. Government Agency issued securities. (2) Comprised primarily of FHLB stock. (3) Comprised primarily of corporate bonds and trust preferred securities. REPUBLIC FIRST BANCORP | 31 The following table presents the contractual maturity distribution and weighted average yield of the securities portfolio of the Company at December 31, 2004 Mortgage backed securities are presented without consideration of amortization or prepayments.
Investment Securities Available for Sale at December 31, 2004 --------------------------------------------------------------------------------------------------------- Within One Year One to Five Years Five to Ten Years Past 10 Years Total ----------------------------------- -------------------- ------------------------------------------------ Amount Yield Amount Yield Amount Yield Amount Yield Fair value Cost Yield ------ ----- ------ ----- ------ ----- ------ ----- ---------- ---- ------ (Dollars in thousands) U.S. Government Agencies $19,950 2.19% $152 2.67% $ - - $ - - $20,102 $20,258 2.19% Other debt securities - - - - - - 10,573 3.95% 10,573 10,506 3.95% (1)..................... Mortgage backed securities.............. - - - - 825 6.24% 13,441 5.86% 14,266 13,675 5.88% ------ ----- ------ ----- ------ ----- ------ ----- ---------- ---- ------ Total AFS securities.... $19,950 2.19% $152 2.67% $825 6.24% $24,014 5.02% $44,941 $44,439 3.78% ========= =============== ======== ==================== =========== ================ ========= ======== Investment Securities Held to Maturity at December 31, 2004 --------------------------------------------------------------------------------------------- Within One Year One to Five Years Five to Ten Years Past 10 Years Total ------------------------------------ -------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield --------- ------------------------- ---------------------------- ----------------- -------- (Dollars in thousands) U.S. Government Agencies $ - - $ - - $ - - $ 3 2.12% $ 3 2.12% Mortgage backed - - - - - - 108 7.35% 108 7.35% securities.............. Other securities........ 150 7.17% 155 6.39% 103 6.33% 4,908(2) 2.09% 5,316 2.49% --------- ------------------------- ---------------------------- ---------------- -------- Total HTM securities.... $ 150 7.17% $155 6.39% $103 6.33% $5,019 2.30% $5,427 2.62% ========= ========================= ============================ ================ ========
(1) Variable rate instruments (2) Primarily comprised of FHLB stock, which is targeted by the FHLB to yield a variable rate tied to market indices; however, the yield is wholly dependent on dividends actually paid Loan Portfolio The Company's loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, loans secured by one-to-four family residential property, commercial construction and residential construction loans as well as residential mortgages, home equity loans, short-term consumer and other consumer loans. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. The Banks' commercial loans typically range between $250,000 and $5.0 million but customers may borrow significantly larger amounts up to the Banks' combined legal lending limit of approximately $10.0 million at December 31, 2004. Individual customers may have several loans often secured by different collateral. Such relationships in excess of $6.5 million (an internal monitoring guideline which approximates 10% of capital and reserves) at December 31, 2004, amounted to $82.8 million. There were no loans in excess of the combined legal lending limit at December 31, 2004. The Company's total loans increased $102.5 million, or 21.0%, to $590.7 million at December 31, 2004, from $488.2 million at December 31, 2003. That increase reflected a $72.6 million, or 24.0%, increase in real estate secured loans, which represents the Company's largest loan portfolio. The increase also reflected a $28.5 million, or 32.1%, increase in construction loans, a category which the Company had targeted for growth. The following table sets forth the Company's gross loans by major categories for the periods indicated:
At December 31, --------------------------------------------------------------------- (Dollars in thousands) 2004 2003 2002 2001 2000 ----------- ------------ ------------ ------------ ------------ Commercial: Real estate secured (1).................... $375,241 $302,618 $297,193 $286,583 $271,222 Construction and land development.......... 117,388 88,850 32,377 34,996 12,860 Non real estate secured.................... 61,891 52,041 54,163 53,388 39,016 Non real estate unsecured.................. 9,023 13,688 8,513 7,229 10,543 ----------- ------------ ------------ ------------ ------------ Total commercial......................... 563,543 457,197 392,246 382,196 333,641 Residential real estate (2)................... 8,219 14,875 51,265 67,821 74,825 Consumer and other............................ 18,890 16,147 20,178 19,302 13,919 ----------- ------------ ------------ ------------ ------------ Total loans, net of unearned income...... $590,652 $488,219 $463,689 $469,319 $422,385 =========== ============ ============ ============ ============
- ---------- (1) Includes loans held for sale. (2) Residential real estate secured is comprised of jumbo residential first mortgage loans for all years presented. REPUBLIC FIRST BANCORP | 32 Loan Maturity and Interest Rate Sensitivity The amount of loans outstanding by category as of the dates indicated, which are due in (i) one year or less, (ii) more than one year through five years and (iii) over five years, is shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates:
At December 31, 2004 ------------------------------------------------------------------ (Dollars in thousands) One Year More Than One Year Over Total or Less Through Five Years Five Years Loans ----------- ---------------------- ------------ -------------- Commercial and Commercial Real Estate................ $53,021 $274,804 $118,330 $446,155 Construction and Land Development.................... 69,507 41,985 5,896 117,388 Residential Real Estate.............................. - - 8,219 8,219 Consumer and Other................................... 2,976 2,237 13,677 18,890 ----------- ----------- ------------ -------------- Total........................................... $125,504 $319,026 $146,122 $590,652 =========== =========== ============ ============== Loans with Fixed Rates............................... 25,453 219,845 70,752 316,050 Loans with Floating Rates............................ 100,051 99,181 75,370 274,602 ----------- ----------- ------------ -------------- Total........................................... $125,504 $319,026 $146,122 $590,652 =========== =========== ============ ============== Percent Composition by Maturity...................... 21.2% 54.1% 24.7% 100.0% Fixed Rate Loans as Percent of Total................. 20.3 68.9 48.4 53.5 Floating Rate Loans as Percent of Total.............. 79.7 31.1 51.6 46.5
In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount, at interest rates prevailing at the date of renewal. At December 31, 2004, 53.5% of total loans were fixed rate compared to 50.8% at December 31, 2003. Credit Quality The Banks' written lending policies require specified underwriting, loan documentation and credit analysis standards to be met prior to funding, with independent credit department approval for the majority of new loan balances. A committee of the Board of Directors oversees the loan approval process to monitor that proper standards are maintained, while approving the majority of commercial loans. Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms. While a loan is classified as non-accrual or as an impaired loan and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. For non-accrual loans which have been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. REPUBLIC FIRST BANCORP | 33 The following summary shows information concerning loan delinquency and non-performing assets at the dates indicated.
At December 31, ---------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ----------- ----------- ----------- ---------- (Dollars in thousands) Loans accruing, but past due 90 days or more.................. $ - $3,084 $4,051 $ 518 $ 91 Restructured loans............................................ - - - 1,982 - Non-accrual loans............................................. 5,007 5,527 2,972 3,830 1,350 ---------- ----------- ----------- ----------- ---------- Total non-performing loans.................................... 5,007 8,611 7,023 4,348 3,423 Other real estate owned....................................... 137 207 1,015 1,858 - ---------- ----------- ----------- ----------- ---------- Total non-performing assets(1)................................ $5,144 $8,818 $8,038 $6,206 $3,423 ========== =========== =========== =========== ========== Non-performing loans as a percentage of total loans, net of unearned income (1)(2)....................... 0.85% 1.76% 1.51% 0.93% 0.81% Non-performing assets as a percentage of total assets......... 0.71% 1.35% 1.24% 0.95% 0.52%
(1) Non-performing loans are comprised of (i) loans that are on a non-accrual basis, (ii) accruing loans that are 90 days or more past due and (iii) restructured loans. Non-performing assets are composed of non-performing loans and other real estate owned. (2) Includes loans held for sale. Total non-performing loans decreased $3.6 million to $5.0 million at December 31, 2004, from $8.6 million at the prior year-end. The $3.6 million decrease in 2004 non-performing loans compared to 2003 reflected the resolution of two loans totaling $3.1 million. The first loan amounted to $1.2 million and was secured by a single residential property. That loan was collected in full including $170,000 of non-accrual income which is reflected in the following table. The second loan amounted to $1.9 million, of which $427,000 was charged off and $1.5 million was transferred to OREO and sold for that amount. Problem loans consist of loans that are included in performing loans, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms. At December 31, 2004, all identified problem loans are included in the preceding table, or are classified as substandard or doubtful, with a reserve allocation in the allowance for loan losses (see "Allowance For Loan Losses"). Management believes that the appraisals and other estimates of the value of the collateral pledged against the non-accrual loans generally exceed the amount of related balances. The following summary shows the impact on interest income of non-accrual loans for the periods indicated:
For the Year Ended December 31, --------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------- ----------- ----------- ------------ ----------- Interest income that would have been recorded Had the loans been in accordance with their original terms................................... $399,000 $285,000 $241,000 $203,000 $125,000 Interest income included in net income............. $170,000 $ -- $ -- $ -- $171,000\
At December 31, 2004, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans except for credits extended to non-residential building operators and real estate agents and managers in the aggregate amount of $163.5 million, which represented 27.7% of gross loans receivable at December 31, 2004. Various types of real estate are included in this category, including industrial, retail shopping centers, office space, residential multi-family and others. Loan concentrations are considered to exist when multiple number of borrowers are engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. The Banks had no credit exposure to "highly leveraged transactions" at December 31, 2004 as defined by the FRB. REPUBLIC FIRST BANCORP | 34
Allowance for Loan Losses A detailed analysis of the Company's allowance for loan losses for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 is as follows: (Dollars in thousands) For the Year Ended December 31, ------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ------------ ------------ ------------ ------------ ------------ Balance at beginning of period.............. $ 8,696 $ 6,642 $ 5,431 $ 4,072 $ 3,208 Charge-offs: Commercial................................ 1,412 365 2,542 2,077 66 Tax refund loans.......................... 700 1,393 - - - Consumer.................................. 210 53 3 - 90 Short-term loans.......................... 1,381 4,299 1,670 802 - ------------ ------------ ------------ ------------ ------------ Total charge-offs....................... 3,703 6,110 4,215 2,879 156 ------------ ------------ ------------ ------------ ------------ Recoveries: Commercial................................ 1,383 1,066 123 257 340 Tax refund loans.......................... 200 334 - - - Consumer.................................. 8 - - 17 14 ------------ ------------ ------------ ------------ ------------ Total recoveries........................ 1,591 1,400 123 274 354 ------------ ------------ ------------ ------------ ------------ Net charge-offs (recoveries)................ 2,112 4,710 4,092 2,605 (198) ------------ ------------ ------------ ------------ ------------ Provision for loan losses................... 1,149 6,764 5,303 3,964 666 ------------ ------------ ------------ ------------ ------------ Balance at end of period.................. $ 7,733 $ 8,696 $ 6,642 $ 5,431 $ 4,072 ============ ============ ============ ============ ============ Average loans outstanding (1)............. $527,723 $470,237 $468,239 $448,397 $389,156 As a percent of average loans (1): Net charge-offs (recoveries) (2).......... 0.40% 1.00% 0.87% 0.58% (0.05)% Provision for loan losses................. 0.22 1.44 1.13 0.88 0.17 Allowance for loan losses................. 1.47 1.85 1.42 1.21 1.05 Allowance for loan losses to: Total loans, net of unearned income....... 1.31% 1.78% 1.43% 1.16% 0.96% Total non-performing loans................ 154.44% 101.00% 94.57% 124.89% 118.96% - ---------- (1) Includes non-accruing loans. (2) Excluding short-term and tax refund loan charge-offs, ratios were 0.04%, (.14%) and 0.52% in 2004, 2003 and 2002, respectively.
The Company experienced a $1.4 million loan loss recovery on a single commercial loan in 2004. In 2003, approximately $700,000 was collected on that loan, the majority of which was charged-off in 2002. The Company also recovered $268,000 in 2003 related to another borrower, the majority of whose loan was charged-off in 2001. In 2004, commercial loan charge-offs increased approximately $1.0 million over 2003. The single largest charge-off reflected in the increase totaled $427,000 as previously discussed under "Credit Quality." Additionally, a total of $248,000 of Community Reinvestment Act loans were charged-off in 2004. The significant increase in short-term loan charge-offs in 2003 reflected greater amounts of loans generated in that year. However, since the vast majority of such loans are now sold, lower levels of charge-offs occurred in 2004. Charge-offs on tax refund loans decreased to $700,000 in 2004, from $1.4 million in 2003, as a result of increased underwriting and other controls. Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan losses that is management's best estimate of known and inherent losses. The Company's Board of Directors periodically reviews the status of all non-accrual and impaired loans and loans classified by the Banks' regulators or internal loan review officer, who reviews both the loan portfolio and overall adequacy of the allowance for loan losses. The Board of Directors also considers specific loans, pools of similar loans, historical charge-off activity, economic conditions and other relevant factors in reviewing the adequacy of the loan loss reserve. Any additions deemed necessary to the allowance for loan losses are charged to operating expenses. REPUBLIC FIRST BANCORP | 35 The Company has an existing loan review program, which monitors the loan portfolio on an ongoing basis. Loan review is conducted by a loan review officer who reports quarterly, directly to the Board of Directors. Estimating the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. In Management's opinion, the allowance for loan losses was appropriate at December 31, 2004. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required. The Banks' management is unable to determine in which loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The allocation is accordingly based upon historical experience. The entire allowance for loan losses is available to absorb loan losses in any loan category:
At December 31, ----------------------------------------------------------------------------------------------------- (Dollars in thousands) 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Allocation of the % of % of % of % of % of allowance for loan Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- losses (1), (2): Commercial............ $5,324 75.5% $5,531 75.5% $5,336 77.5% $4,540 73.9% $3,048 76.0% Construction.......... 861 19.9 1,133 18.1 359 7.0 274 7.5 96 3.0 Residential real 33 1.4 60 3.1 205 11.1 203 14.5 224 17.7 estate................ Consumer and other.... 115 2.9 96 3.2 104 3.3 104 2.6 110 3.3 Short-term loans...... 563 0.3 883 0.1 97 1.1 78 1.5 47 - Unallocated........... 837 - 993 - 541 - 232 - 547 - --------------------- -------------------- ------------------- ------------------- ------------------ Total.............. $7,733 100% $8,696 100% $6,642 100% $5,431 100% $4,072 100% ===================== ==================== =================== =================== ==================
- ---------- (1) Gross loans net of unearned income. (2) Includes loans held for sale. The methodology utilized to estimate the amount of the allowance for loan losses is as follows: The Company first applies an estimated loss percentage against all loan categories outstanding. In 2004, excluding short-term and tax refund loans, the Company experienced net charge-offs to average loans of approximately .04%. Net recoveries and net charge-offs, respectively, excluding short-term and tax refund loans, to average loans were (.14%) and .52% in 2003 and 2002. While in 2001 that ratio was .40%, substantially all of the charge-offs in 2002 and 2001, related to two borrowers. However, of total charge-offs resulting in the .52% and .40% ratios in 2002 and 2001, subsequent collections amounted to 45.5% of such charge-offs. In the previous three years, the charge-off ratio did not exceed .21%. In the absence of sustained charge-off history, management estimates loss percentages based upon the purpose and/or collateral of various commercial loan categories. While such loss percentages exceed the percentages suggested by historical experience, the Company maintained those percentages in 2004. The Company applied historical loss percentages for short-term consumer loans and added additional reserves based on industry experience, which in some cases is greater than the Company's experience. The Company will continue to evaluate these percentages and may adjust these estimates on the basis of charge-off history, economic conditions or other relevant factors. The Company also provides specific reserves for impaired loans to the extent the estimated realizable value of the underlying collateral is less than the loan balance, when the collateral is the only source of repayment. Further, the Company attempts to classify any applicable loans according to regulatory definitions, for loans that may have characteristics that may decrease the probability of full compliance with original loan terms. Consistent with regulatory reserve allocations the classifications and percentage of principal which are allocated to the allowance for loan losses are as follows: special mention-3%, substandard-15%, and doubtful-50%. Also, the Company may estimate and recognize reserve allocations above these regulatory reserve percentages based upon any factor that might impact the loss estimates. Those factors include but are not limited to the impact of economic conditions on the borrower and management's potential alternative strategies for loan or collateral disposition. In 2003, the unallocated component increased $452,000 to $993,000, primarily for economic reasons. At December 31, 2004, based upon some sustained stabilization and improvement in certain economic trends, the unallocated component decreased to $837,000 from $993,000 at the prior year-end. That decrease resulted notwithstanding that total loans at December 31, 2004, increased to $590.7 million from $488.2 million at the prior year-end. The unallocated allowance is established for losses that have not been identified through the formulaic and other specific components of the allowance as described above. The unallocated portion is more subjective and requires a high degree of management judgment and experience. Management has identified several factors that impact credit losses that are not considered in either the formula or the specific allowance segments. These factors consist of macro and micro economic conditions, industry and geographic loan concentrations, changes in the composition of the loan portfolio, changes in REPUBLIC FIRST BANCORP | 36 underwriting processes and trends in problem loan and loss recovery rates. The impact of the above is considered in light of management's conclusions as to the overall adequacy of underlying collateral and other factors. The majority of the Company's loan portfolio represents loans made for commercial purposes, while significant amounts of residential property may serve as collateral for such loans. The Company attempts to evaluate larger loans individually, on the basis of its loan review process, which scrutinizes loans on a selective basis; and other available information. Even if all commercial purpose loans could be reviewed, there is no assurance that information on potential problems would be available. The Company's portfolios of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. At December 31, 2004, loans made for commercial and construction, residential mortgage and consumer purposes, respectively, amounted to $563.5 million, $8.2 million and $18.9 million. The recorded investment in loans that are impaired in accordance with SFAS 114 totaled $5.0 million, $5.5 million and $3.0 million at December 31, 2004, 2003 and 2002 respectively. The amounts of related valuation allowances were $1.2 million, $1.4 million and $665,000 respectively at those dates. For the years ended December 31, 2004, 2003 and 2002 the average recorded investment in impaired loans was approximately $5.3 million, $3.6 million, and $3.4 million, respectively. The Company did not recognize any interest income on impaired loans during 2004 or 2003. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein. At December 31, 2004 and 2003, accruing substandard loans totaled approximately $10.8 million and $11.2 million respectively; and doubtful loans totaled approximately $386,000 and $895,000, respectively. The Banks had delinquent loans as follows: (i) 30 to 59 days past due, at December 31, 2004 and 2003, in the aggregate principal amount of $1.6 million and $2.6 million respectively; and (ii) 60 to 89 days past due, at December 31, 2004 and 2003 in the aggregate principal amount of $137,294 and $2.1 million respectively. The following table is an analysis of the change in Other Real Estate Owned for the years ended December 31, 2004 and 2003. Dollars in thousands 2004 2003 ------------- ------------- Balance at January 1,................ $207 $1,015 Additions, net....................... 1,500 207 Sales................................ 1,500 1,015 Write downs.......................... 70 - ------------- ------------- Balance at December 31,.............. $137 $ 207 ============= ============= Deposit Structure Of the total daily average deposits of approximately $495.5 million held by the Banks during the year ended December 31, 2004, approximately $96.6 million, or 19.5%, represented non-interest bearing demand deposits, compared to approximately $75.5 million, or 16.6%, of total daily average deposits during 2003. Total deposits at December 31, 2004, consisted of $104.9 million in non-interest-bearing demand deposits, $55.2 million in interest-bearing demand deposits, $194.3 million in savings and money market accounts, $102.0 million in time deposits under $100,000 and $89.0 million in time deposits greater than $100,000. In general, the Banks pay higher interest rates on time deposits compared to other deposit categories. The Banks various deposit liabilities may fluctuate from period-to-period, reflecting customer behavior and strategies to optimize net interest income. The following table is a distribution of the average balances of the Banks' deposits and the average rates paid thereon, for the twelve months periods ended December 31, 2004, 2003 and 2002. REPUBLIC FIRST BANCORP | 37
For the Years Ended December 31, ------------------------------------------------------------------------------------ (Dollars in thousands) 2004 2003 2002 ------------------------- ------------------------- ---------------------------- Average Average Average Balance Rate Balance Rate Balance Rate ------------- ---------- ------------- ---------- -------------- ------------ Demand deposits, non-interest-bearing................ $ 96,565 -% $ 75,469 -% $ 58,338 -% Demand deposits, interest-bearing... 57,541 0.61% 59,274 0.76% 47,019 1.06% Money market & savings deposits..... 156,106 1.55% 127,685 1.34% 112,321 1.70% Time deposits....................... 185,336 2.78% 192,735 3.24% 240,230 3.87% ------------- ---------- ------------- ---------- -------------- ------------ Total deposits...................... $495,548 1.60% $455,163 1.85% $457,908 2.55% ============= ========== ============= ========== ============== ============
The following is a breakdown by contractual maturity, of the Company's time certificates of deposit issued in denominations of $100,000 or more as of December 31, 2004. Certificates of Deposit ------------------------ (Dollars in thousands) 2004 --------------------- Maturing in: Three months or less........................ $52,745 Over three months through six months........ 4,970 Over six months through twelve months....... 2,691 Over twelve months.......................... 28,571 --------------------- Total..................................... $88,977 ===================== The following is a breakdown, by contractual maturities of the Company's time certificates of deposit for the years 2005 through 2009 and beyond:
2005 2006 2007 2008 2009 Thereafter Totals ------- ------- ------- ------ ------- ---------- -------- (Dollars in thousands) Time certificates of deposit.. $86,838 $38,495 $27,170 $7,547 $26,917 $4,022 $190,989 ======= ======= ======= ====== ======= ====== ========
Variable Interest Entities In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, to certain entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under FIN 46 if the investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity's activities, or are not exposed to the entity's losses or entitled to its residual returns ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. Management has determined that Republic First Capital Trust I, utilized for the Company's $6,000,000 of pooled trust preferred securities issuance, qualifies as a variable interest entity under FIN 46. Republic First Capital Trust I issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. Republic First Capital Trust I holds, as its sole asset, subordinated debentures issued by the Company in 2001. Republic First Capital Trust I is currently included in the Company's consolidated balance sheet and statements of income. The Company has evaluated the impact of FIN 46 and concluded it should continue to consolidate Republic First Capital Trust I as of December 31, 2003, in part due to its ability to call the preferred stock prior to the mandatory redemption date and thereby benefit from a decline in required dividend yields. The Company adopted the provisions under the revised interpretation in the first quarter of 2004. Accordingly, the Company no longer consolidates RFCT as of March 31, 2004. FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the Company has the right to a majority of RFCT's expected residual returns. The deconsolidation resulted in the investment in the common stock of RFCT to be included in other assets as of September 30, 2004 REPUBLIC FIRST BANCORP | 38 and the corresponding increase in outstanding debt of $186,000. In addition, the income received on the Company's common stock investment is included in other income. The adoption of FIN 46R did not have a material impact on the financial position or results of operations. The Federal Reserve has issued final guidance on the regulatory capital treatment for the trust-preferred securities issued by RFCT as a result of the adoption of FIN 46(R). The final rule would retain the current maximum percentage of total capital permitted for trust preferred securities at 25%, but would enact other changes to the rules governing trust preferred securities that affect their use as part of the collection of entities known as "restricted core capital elements". The rule would take effect March 31, 2009; however, a five-year transition period starting March 31, 2004 and leading up to that date would allow bank holding companies to continue to count trust preferred securities as Tier 1 Capital after applying FIN-46(R). Management has evaluated the effects of the final rule and does not anticipate a material impact on its capital ratios. Recent Accounting Pronouncements 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 the evidence of deterioration of credit quality since origination acquired by completion of a transfer for which it is probable at acquisition, that the Company will be unable to collect all contractually required payments receivable. SOP 03-3 required that the Company 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 (nonaccretable 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 is currently evaluating the provisions of SOP 03-3. The Company 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. In September 2004, the FASB issued a proposed Staff Position, EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of EITF 03-1. In September 2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments delays the effective date of certain provisions of EITF Issue 03-1, including steps two and three of the Issue's three-step approach for determining whether an investment is other-than-temporarily impaired. However, step one of that approach must still be initially applied for impairment evaluations in reporting periods beginning after June 15, 2004. The delay of the effective date for paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, `'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Company is in the process of determining the impact that this EITF will have on its financial statements. Effects of Inflation The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is the Company's need and ability to react to changes in interest rates. As discussed previously, Management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations. REPUBLIC FIRST BANCORP | 39 Item 7A: Quantitative and Qualitative Disclosure about Market Risk (Item 305 of Reg S-K) See "Management Discussion and Analysis of Results of Operations and Financial Condition - Interest Rate Risk Management". Item 8: Financial Statements and Supplementary Data The financial statements of the Company begin on Page 46. Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable Item 9A: Controls and Procedures An evaluation of the effectiveness of our "disclosure controls and procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried out by us under the supervision and with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There has been no change in our internal control over financial reporting identified in connection with that evaluation that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B: Other Information Not Applicable REPUBLIC FIRST BANCORP | 40 PART III Item 10: Directors and Executive Officers of the Registrant The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2005 annual meeting of shareholders scheduled for April 26, 2005. Item 11: Executive Compensation The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2005 annual meeting of shareholders scheduled for April 26, 2005. Item 12: Security Ownership of Certain Beneficial Owners and Management Equity Compensation Plan Information
(a) (b) (c) Plan category Number of securities to Weighted-average Number of securities remaining be issued upon exercise exercise price of available for future issuance under of outstanding options, outstanding options, equity compensation plans (excluding warrants and rights warrants and rights securities reflected in column (a)) Equity compensation plans approved by security holders 768,498 $5.07 0 Equity compensation plans not approved by security holders: Incentives to acquire new employees 58,300 9.90 0 --------------------------------------------------------------------------------------- Total 826,798 $5.77 0 ======= ====== ==
Item 13: Certain Relationships and Related Transactions Certain of the directors of the Company and/or their affiliates have loans outstanding from the Banks. All such loans were made in the ordinary course of the Banks' business; were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons; and, in the opinion of management, do not involve more than the normal risk of collectibility or present other unfavorable features. Harry D. Madonna is of counsel to Spector Gadon and Rosen effective January 2, 2002. In 2004, the Company paid $1,250,432 in legal fees to that firm, primarily for loan workout and collection matters. Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2005 annual meeting of shareholders scheduled for April 26, 2005. REPUBLIC FIRST BANCORP | 41 PART IV Item 15: Exhibits and Financial Statements A. Financial Statements (1) Report of Independent Registered Accounting Firm (2) Consolidated Balance Sheets as of December 31, 2004 and 2003 (3) Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 (4) Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 (5) Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002 (6) Notes to Consolidated Financial Statements B. Exhibits The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for an annual report on Form 10-K) All other schedules and exhibits are omitted because they are not applicable or because the required information is set out in the financial statements or the notes thereto.
Exhibit Number Description Manner of Filing ------- ----------- ---------------- 3.1 Amended and Restated Articles of Incorporation of Republic Filed Herewith First Bancorp, Inc. 3.2 Amended and Restated By-Laws of Republic First Bancorp, Inc. Filed Herewith 10.1 Employment Contract Between the Company and Harry D. Incorporated by reference to Form Madonna* 10-Q/A Filed February 7, 2005 10.2 Employment Contract Between the Company and Robert D. Davis* Incorporated by reference to Form 10-Q/A Filed February 7, 2005 10.3 Amended and Restated Stock Option Plan and Restricted Stock Incorporated by reference to Form Plan* S-8 Filed March 26, 2001 10.4 Deferred Compensation Plan* Incorporated by reference to Form 10-Q Filed November 15, 2004 10.5 Human Resources and Payroll Services Agreement between Filed Herewith Republic First Bank and BSC Services Corp. dated January 1, 2005 10.6 Operation and Data Processing Services Agreement between Filed Herewith Republic First Bank and BSC Services Corp. dated January 1, 2005 REPUBLIC FIRST BANCORP | 42 10.7 Compliance Services Agreement between Republic First Bank Filed Herewith and BSC Services Corp. dated January 1, 2005 10.8 Financial Accounting and Reporting Services Agreement Filed Herewith between Republic First bank and BSC Services Corp. dated January 1, 2005 21.1 Subsidiaries of the Company Filed Herewith 23.1 Consent of Independent Registered Public Accounting Firm Filed Herewith 31.1 Certification of Chairman and Chief Executive Officer of Filed herewith Republic First Bancorp, Inc. pursuant to Commission Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Vice President and Chief Financial Officer Filed herewith of Republic First Bancorp, Inc. pursuant to Commission Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification under Section 906 of the Sarbanes Oxley Act Filed Herewith of Harry D. Madonna. 32.2 Certification under Section 906 of the Sarbanes Oxley Act Filed Herewith of Paul Frenkiel. * Constitutes a compensation agreement or arrangement. REPUBLIC FIRST BANCORP | 43
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania. REPUBLIC FIRST BANCORP, INC. [registrant] Date: March 18, 2005 By:/s/ Harry D. Madonna ---------------------------------- Harry D. Madonna President and Chief Executive Officer Date: March 18, 2005 By:/s/ Paul Frenkiel ---------------------------------- Paul Frenkiel, Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Date: March 18, 2005 /s/ Harris Wildstein, Esq. ----------------------------------- Harris Wildstein, Esq., Director /s/ Neal I. Rodin ----------------------------------- Neal I. Rodin, Director /s/ Steven J. Shotz ----------------------------------- Steven J. Shotz, Director /s/ Harry D. Madonna ----------------------------------- Harry D. Madonna, Director and Chairman of the Board /s/ Kenneth Adelberg ----------------------------------- Kenneth Adelberg, Director /s/ William Batoff ----------------------------------- William Batoff, Director /s/ Robert Coleman ----------------------------------- Robert Coleman, Director /s/ Barry L. Spevak ----------------------------------- Barry L. Spevak, Director /s/ Lyle W. Hall ----------------------------------- Lyle W. Hall, Director REPUBLIC FIRST BANCORP | 44 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF REPUBLIC FIRST BANCORP, INC. Page Report of Independent Registered Accounting Firm 46 Consolidated Balance Sheets as of December 31, 2004 and 2003 47 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 48 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 49 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002 50 Notes to Consolidated Financial Statements 51 REPUBLIC FIRST BANCORP | 45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- Board of Directors and Shareholders of Republic First Bancorp, Inc. We have audited the accompanying consolidated statements of financial position of Republic First Bancorp, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Republic First Bancorp, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the interim standards adopted by the Public Company Accounting Oversight Board (United States), the effectiveness of Republic First Bank's (a subsidiary of Republic First Bancorp, Inc.) internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 24, 2005 expressed an unqualified opinion on management's assertion that Republic First Bancorp, Inc. maintained effective internal control over financial reporting. /s/ Grant Thornton LLP Philadelphia, Pennsylvania March 24, 2005 REPUBLIC FIRST BANCORP | 46
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2004 and 2003 (Dollars in thousands, except per share data) 2004 2003 -------- -------- ASSETS: Cash and due from banks ........................................................... $ 21,313 $ 28,103 Interest bearing deposits with banks .............................................. 663 3,547 Federal funds sold ................................................................ 23,030 38,952 -------- -------- Total cash and cash equivalents .............................................. 45,006 70,602 Other interest-earning restricted cash ............................................ 2,923 3,483 Investment securities available for sale, at fair value ........................... 44,941 61,686 Investment securities held to maturity, at amortized cost (fair value of $5,448 and $8,300 respectively) .............................. 5,427 8,260 Loans receivable, (net of allowance for loan losses of $7,733 and $8,696 respectively) ............................................................. 582,919 479,523 Premises and equipment, net ....................................................... 5,026 4,412 Other real estate owned, net ...................................................... 137 207 Accrued interest receivable ....................................................... 3,587 3,710 Bank owned life insurance ......................................................... 12,185 11,763 Other assets ...................................................................... 18,261 11,146 -------- -------- Total Assets ................................................................. $720,412 $654,792 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Deposits: Demand -- non-interest-bearing .................................................... $104,923 $ 82,311 Demand -- interest-bearing ........................................................ 55,219 73,315 Money market and savings .......................................................... 194,265 110,389 Time less than $100,000 ........................................................... 102,012 102,508 Time over $100,000 ................................................................ 88,977 85,082 -------- -------- Total Deposits ............................................................... 545,396 453,605 Short-term borrowings ............................................................. 61,090 2,852 FHLB advances ..................................................................... 25,000 125,000 Accrued interest payable .......................................................... 2,146 2,841 Other liabilities ................................................................. 15,370 8,118 Subordinated debt ................................................................. 6,186 -- Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior obligations of the corporation ......................... -- 6,000 -------- -------- Total Liabilities ............................................................ $655,188 $598,416 -------- -------- Commitments and contingencies Shareholders' Equity: Common stock, par value $0.01 per share; 20,000,000 shares authorized; shares issued 7,428,681 as of December 31, 2004 and 7,367,426 as of December 31, 2003............................................ 74 67 Additional paid in capital........................................................ 42,494 33,396 Retained earnings................................................................. 23,867 23,674 Treasury stock at cost (192,689 shares)........................................... (1,541) (1,541) Accumulated other comprehensive income............................................ 330 780 -------- -------- Total Shareholders' Equity................................................... 65,224 56,376 -------- -------- Total Liabilities and Shareholders' Equity................................... $720,412 $654,792 ======== ======== (See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 47
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except per share data) 2004 2003 2002 ----------- ----------- ----------- Interest income: Interest and fees on loans................................................. $34,994 $38,651 $37,080 Interest on federal funds sold and other interest-earning assets........... 682 895 759 Interest and dividends on investment securities............................ 2,054 2,858 6,284 ----------- ----------- ----------- 37,730 42,404 44,123 ----------- ----------- ----------- Interest expense: Demand - interest bearing.................................................. 352 448 497 Money market and savings................................................... 2,425 1,708 1,907 Time less than $100,000.................................................... 3,074 4,088 5,963 Time over $100,000......................................................... 2,079 2,155 3,327 Other borrowings........................................................... 7,201 8,254 8,468 ----------- ----------- ----------- 15,131 16,653 20,162 ----------- ----------- ----------- Net interest income............................................................. 22,599 25,751 23,961 Provision for loan losses....................................................... 1,149 6,764 5,303 ----------- ----------- ----------- Net interest income after provision for loan losses............................. 21,450 18,987 18,658 ----------- ----------- ----------- Non-interest income: Loan advisory and servicing fees........................................... 541 585 1,218 Service fees on deposit accounts........................................... 1,827 1,446 1,227 Gains on investment securities sold........................................ 5 - - Gain on sale of other real estate owned.................................... - 224 - Short-term loan fee income................................................. 6,597 4,026 - Tax refund products........................................................ 1,174 487 761 Lawsuit damage award.................................................... 1,337 - - Other income............................................................... 713 368 76 ----------- ----------- ----------- 12,194 7,136 3,282 ----------- ----------- ----------- Non-interest expenses: Salaries and employee benefits............................................. 10,092 9,798 8,483 Occupancy ................................................................. 1,627 1,536 1,429 Depreciation............................................................... 1,338 1,416 1,045 Legal...................................................................... 1,252 986 1,721 Other real estate ......................................................... 81 240 1,452 Advertising ............................................................... 178 190 413 Other operating expenses................................................... 5,731 4,559 4,043 ----------- ----------- ----------- 20,299 18,725 18,586 ----------- ----------- ----------- Income before income taxes...................................................... 13,345 7,398 3,354 ----------- ----------- ----------- Provision for income taxes...................................................... 4,405 2,484 1,154 ----------- ----------- ----------- Net Income...................................................................... $ 8,940 $ 4,914 $ 2,200 =========== =========== =========== Net income per share: Basic .......................................................................... $ 1.24 $0.69 $ 0.32 ----------- ----------- ----------- Diluted......................................................................... $ 1.18 $0.66 $ 0.31 =========== =========== =========== (See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 48
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS For the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands) 2004 2003 2002 ---------- ---------- ----------- Cash flows from operating activities: Net income............................................................. $ 8,940 $ 4,914 $ 2,200 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.......................................... 1,149 6,764 5,303 Write down or loss of other real estate owned...................... 70 56 1,358 Gain on sale of other real estate owned............................ (224) - Depreciation ...................................................... 1,338 1,416 1,045 Gains on sales of securities sold.................................. (5) - - Amortization of securities......................................... 252 192 317 Increase in value of business owned life insurance................. (422) (263) - Increase in accrued interest receivable and other assets........... (6,505) (3,190) (2,487) Increase (decrease) in accrued expenses and other liabilities...... 6,764 1,845 (655) ---------- ---------- ----------- Net cash provided by operating activities.............................. 11,581 11,510 7,081 ---------- ---------- ----------- Cash flows from investing activities: Purchase of securities: Available for sale................................................. (7,500) (31,894) (17,507) Held to maturity................................................... - (2,571) (1,273) Proceeds from maturities and calls of securities: Available for sale................................................. 11,500 6,500 4,500 Held to maturity................................................... 2,583 35 2,765 Proceeds from sale of securities: Available for sale................................................. 1,500 1,003 - Principal collected on MBS's and CMO's: Available for sale................................................. 10,039 48,429 42,364 Held to maturity................................................... 251 3,546 812 Net decrease (increase) in loans....................................... (104,545) (29,447) 1,023 Net proceeds from sale of real estate owned............................ - 1,015 - Purchase of bank owned life insurance.................................. - (11,500) - Decrease in other interest-earning restricted cash..................... 560 745 685 Premises and equipment expenditures.................................... (1,952) (828) (834) ---------- ---------- ----------- Net cash provided by (used in) investing activities.................... (87,564) (14,967) 32,535 ---------- ---------- ----------- Cash flows from financing activities: Net proceeds from exercise of stock options............................ 358 1,094 189 Net increase in demand, money market and savings....................... 88,392 32,955 36,113 Net increase (decrease) in time deposits............................... 3,399 (35,652) (27,028) Net increase in short term borrowings.................................. 58,238 2,852 - Repayment of long term borrowings...................................... (100,000) - (17,500) ---------- ---------- ----------- Net cash provided by (used in) financing activities.................... 50,387 1,249 (8,226) ---------- ---------- ----------- Increase (decrease) in cash and cash equivalents........................... (25,596) (2,208) 31,390 Cash and cash equivalents, beginning of year............................... 70,602 72,810 41,420 ---------- ---------- ----------- Cash and cash equivalents, end of year..................................... $45,006 $70,602 $72,810 ========== ========== =========== Supplemental disclosures: Interest paid.......................................................... 15,826 17,408 20,913 Income taxes paid...................................................... 3,300 2,650 4,025 Non-monetary transfers from loans to other real estate owned........... $ 1,500 $ 207 $ 515 (See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 49
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands) Accumulated Additional Other Total Comprehensive Common Paid in Retained Treasury Comprehensive Shareholders' Income/(loss) Stock Capital Earnings Stock Income (loss) Equity ----------------------------------------------------------------------------------------- Balance January 1, 2002................ $63 $32,117 $16,560 $(1,541) $(356) $46,843 --------------------------------------------- ----------- ------------ Total other comprehensive income, net of reclassification adjustments and 2,044 - - - - 2,044 2,044 taxes Net income for the year................ 2,200 - - 2,200 - - 2,200 ----------- Total comprehensive income............. $ 4,244 - - - - - - =========== Options exercised 1 188 - - - 189 --------------------------------------------- ----------- ------------ Balance December 31, 2002.............. 64 32,305 18,760 (1,541) 1,688 51,276 - ----------------------------------------------------------------------------------------------------------------------------- Total other comprehensive loss, net of reclassification adjustments and taxes. (908) - - - - (908) (908) Net income for the year................ 4,914 - - 4,914 - - 4,914 ----------- Total comprehensive income............. $ 4,006 - - - - - - =========== Options exercised...................... 3 1,091 - - - 1,094 --------------------------------------------- ----------- ------------ Balance December 31, 2003.............. 67 33,396 23,674 (1,541) 780 56,376 - ----------------------------------------------------------------------------------------------------------------------------- Total other comprehensive loss, net of reclassification adjustments and taxes. (450) - - - - (450) (450) Net income for the year................ 8,940 - - 8,940 - - 8,940 ----------- Total comprehensive income............. $ 8,490 - - - - - - =========== Stock dividend......................... 7 8,740 (8,747) - - - Options exercised...................... - 358 - - - 358 --------------------------------------------- ----------- ------------ Balance December 31, 2004.............. $74 $42,494 $23,867 $(1,541) $ 330 $65,224 --------------------------------------------- ----------- ------------
(See notes to consolidated financial statements) REPUBLIC FIRST BANCORP | 50 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization: The First Bank of Delaware was spun off by Republic First Bancorp, Inc. (the "Company"), effective January 31, 2005. After that date, the Company became a one-bank holding company. At December 31, 2004, the Company was a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiary, Republic First Bank (the PA Bank"), offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and branches in Philadelphia and Montgomery Counties. Its other wholly-owned subsidiary, until the January 31, 2005 spin off, was First Bank of Delaware ("DE Bank"); a Delaware State chartered Bank, located at Brandywine Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County, Delaware. The DE Bank offers many of the same services and financial products as the PA Bank, and additionally offers nationally, short-term consumer loans and other loan products not offered by the PA Bank. The Company and the Banks encounter vigorous competition for market share from bank holding companies, other community banks, thrift institutions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies. The Company and the Banks are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and its subsidiaries for adherence to laws and regulations. As a consequence, the cost of doing business may be affected. Subsequent Events On January 31, 2005, the Board if Directors of the Company declared a pro rata distribution payable to the holders of record of outstanding Company common stock at the close of business on January 31, 2005, the record date of distribution, of one share of First Bank of Delaware (DE Bank) for every share of the Company's common stock outstanding on the record date. As a result of the distribution, all of the outstanding shares of DE Bank common stock were distributed to the Company's shareholders. Immediately following the distribution, the Company and its subsidiaries did not own any shares of DE Bank common stock and DE Bank became an independent public company. DE Bank's common stock is listed Over the Counter (OTC) under the symbol FBOD. The Company and DE Bank have certain agreements in place so that DE Bank can provide certain back office services. A fee will be charged by DE Bank for these services. In accordance with FAS no. 144, the Company will present the operations of DE Bank as discontinued operations for the first quarter 2005. 2. Summary of Significant Accounting Policies: Basis of Presentation: The consolidated financial statements of the Company include the accounts of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, Republic First Bank and First Bank of Delaware, (together, the "Banks"). Such statements have been presented in accordance with accounting principles generally accepted in the United States of America or applicable to the banking industry. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. Risks and Uncertainties and Certain Significant Estimates: The earnings of the Company depend on the earnings of the Banks. The Banks are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the operations of the Banks are subject to risks and uncertainties surrounding their exposure to change in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage backed securities vary significantly and may cause significant fluctuations in interest margins. Short-term consumer loans were first offered through the DE Bank in 2001. At December 31, 2004, there was approximately $1.6 million of short-term consumer loans outstanding, which were originated in Texas. The DE Bank also originates loans in Michigan, California, Arizona, Ohio and other states, and via the internet, which are sold to third parties. Legislation eliminating, REPUBLIC FIRST BANCORP | 51 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. The DE Bank offers 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned and income taxes. Consideration is given to a variety of factors in establishing these estimates. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Banks' control, it is at least reasonably possible that the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term. The Company and its subsidiaries are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends, and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition. Cash and Cash Equivalents: For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold 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, 2004 and 2003 were $11.4 million and $7.8 million, respectively. These requirements were satisfied through the restriction of vault cash and a balance at the Federal Reserve Bank of Philadelphia. Other Interest-Earning Restricted Cash: Other interest-earning restricted cash represents funds provided to fund an offsite ATM network for which the Company is compensated. These funds are not considered cash equivalents because the Company is contractually obligated to provide these funds and is not immediately able to withdraw the funds. Investment Securities: Debt and equity investment securities are classified in one of three categories, as applicable, and accounted for as follows: debt securities which the Company 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 market value with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held to maturity and/or trading securities are classified as "investment securities available for sale" and are reported at fair market value with net unrealized gains and losses, net of tax, reported as a separate component of shareholders' 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. The Company does not have any investment securities designated as trading as of December 31, 2004 and 2003. REPUBLIC FIRST BANCORP | 52 Loans and Allowance for Loan Losses: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amounts outstanding. The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loan. This results in an adjustment of the related loans yield. The Company accounts for amortization of premiums and accretion of discounts related to loans purchased and investment securities based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest income. Loans are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual loans, cash received is applied to reduce the principal outstanding. The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. The allowance is an amount that represents management's best estimate of known and inherent loan losses. Management's evaluations of the allowance for loan losses consider such factors as an examination of the portfolio, past loss experience, the results of the most recent regulatory examination, current economic conditions and other relevant factors. The Company 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. The Company considers residential mortgage loans with balances less than $250,000 and consumer loans, including home equity lines of credit, to be small balance homogeneous loans. These loan categories are collectively evaluated for impairment. Jumbo mortgage loans, those with balances greater than $250,000, commercial business loans and commercial 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 Company accounts for the transfers and servicing financial assets in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 140 revises the standards for accounting for the securitizations and other transfers of financial assets and collateral. Fees earned on short-term loans which are not sold are recorded as interest income. At December 31, 2004, there were approximately $1.6 million of these loans outstanding. The majority of short-term loans are now sold to third parties effective in the third quarter of 2003. The DE Bank records fees for on sold loans as non-interest income. The DE Bank had total short-term loan participations sold of $26.0 million at December 31, 2004. The Company evaluated these sales and determined that they qualified as such under FASB 140. The Company 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 Company has financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligation. The Company previously did not record a liability, except for the initial fees received, when guaranteeing obligations unless it REPUBLIC FIRST BANCORP | 53 became probable that the Company would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Company 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, 2004 are $8.0 million and they expire as follows $6.6 million in 2005, $1.3 million in 2006 and $40,000 after 2008. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. The Company adopted 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. The Company 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 the Company's financial statements. 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. The Company 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 Companies 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 market 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. There is no valuation allowance associated with the Company's other real estate portfolio for the periods presented. At December 31, 2004, the Company had retail stores classified as other real estate owned with a value of $137,000. Bank Owned Life Insurance: The Company utilizes bank owned life insurance (BOLI) to purchase life insurance on certain employees. The Company is the owner of the policies, which provide certain tax benefits. At December 31, 2004 and 2003, the Company owned $12.2 million and $11.8 million, respectively in BOLI. In 2004 and 2003, the Company respectively recognized $421,000 and $263,000 in related income. Advertising Costs: It is the Company's policy to expense advertising costs in the period in which they are incurred. Income Taxes: The Company accounts for income taxes under the liability method of accounting. Deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at the tax rates expected to be in effect when the temporary differences are realized or settled. In addition, a deferred tax asset is recorded to reflect the future benefit of net operating loss carryforwards. The deferred tax assets may be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. REPUBLIC FIRST BANCORP | 54 Earnings Per Share: Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents ("CSE"). Common stock equivalents consist of dilutive stock options granted through the Company's stock option plan. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. Common stock equivalents, which are antidilutive are not included for purposes of this calculation. At December 31, 2004, 2003 and 2002, there were 0, 0, and 75,724 at $6.02 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) 2004 2003 2002 -------- --------- --------- Income (numerator for basic and diluted earnings per share) $8,940 $4,914 $2,200 ======== ========= ========= 2004 2003 2002 ------------------------ ---------------------- --------------------- Per Per Per Shares Share Shares Share Shares Share ------------------------ ---------------------- --------------------- Weighted average shares outstanding for the period (denominator for basic earnings per share)... 7,216,067 7,075,849 6,825,860 Earnings per share -- basic....................... $1.24 $0.69 $0.32 Effect of dilutive stock options................. 356,431 325,645 280,367 --------------- ------------ ------------ Effect on basic earnings per share of CSE........ (0.06) (0.03) (0.01) --------- ---------- --------- Weighted average shares outstanding- diluted 7,572,498 7,401,494 7,106,227 =============== ============ ============ Earnings per share -- diluted..................... $1.18 $0.66 $0.31 ========= ========== =========
REPUBLIC FIRST BANCORP | 55 Stock Based Compensation: The company accounts for stock options under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair valued-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The FASB recently published SFAS 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R, which is effective from the first interim period that begins after June 15, 2005, will require that compensation cost related to share-based payment transactions, including stock options, be recognized in the financial statements. Management is currently evaluating the provisions of SFAS 123R. At December 31, 2004, the Company had a stock-based employee compensation plan, which is more fully described in note 16. The Company accounts for that plan under the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. Stock-based employee compensation costs are not reflected in net income, as all options granted under the plan had an exercise price equal to the market vale of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share amounts).
Stock Based Compensation ---------------------------------------- (Dollars in thousands) 2004 2003 2002 ------------ ------------ -------------- Net income as reported.............................. $8,940 $4,914 $2,200 Less : Stock based compensation costs determined under fair value based method for all awards...................... 210 366 418 ------------ ------------ -------------- Net income, pro-forma............................... $8,730 $4,548 $1,782 ------------ ------------ -------------- Earnings per common share- basic: As reported $ 1.24 $ 0.69 $ 0.32 ============ ============ ============== Pro-forma $ 1.21 $ 0.64 $ 0.26 ------------ ------------ -------------- Earnings per common share- diluted: As reported $ 1.18 $ 0.66 $ 0.31 ------------ ------------ -------------- Pro-forma $ 1.16 $ 0.61 $ 0.25 ============ ============ ==============
The proforma compensation expense is based upon the fair value of the option at grant date. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2004, 2003 and 2002, respectively; dividend yields of 0% for all three periods; expected volatility of 35% for 2004, 34% for 2003, and 31% for 2002; risk-free interest rates of 3.48%, 3.48% and 4.0% respectively and an expected life of 5.0 years for all periods. Reclassifications and Restatement for 10% Stock Dividend: Certain items in the 2003 and 2002 financial statements and accompanying notes have been reclassified to conform to the 2004 presentation format. There was no effect on net income for the periods presented herein as a result of reclassifications. All applicable amounts in these financial statements have been restated for a 10% stock dividend paid on August 24, 2004. REPUBLIC FIRST BANCORP | 56 Comprehensive Income: The tax effects allocated to each component of "Comprehensive Income" are as follows:
For the year ended December 31, 2004 (Dollars in thousands) Before Tax Net of Unrealized losses on securities: Tax Amount Expense Tax Amount Unrealized holding losses arising during ------- ------- ------- the period .......................................................... $ (676) $ 229 $ (447) Less: Reclassification adjustment for gains Included in net income .............................................. (5) 2 (3) ------- ------- ------- Other comprehensive losses ................................................... $ (681) $ 231 $ (450) ======= ======= ======= For the year ended December 31, 2003 (Dollars in thousands) Unrealized losses on securities: Unrealized holding losses arising during the period .......................................................... $(1,374) $ 466 $ (908) Less: Reclassification adjustment for gains Included in net income .............................................. -- -- -- ------- ------- ------- Other comprehensive loss ..................................................... $(1,374) $ 466 $ (908) ======= ======= ======= 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 .......................................................... $ 3,097 $(1,053) $ 2,044 Less: Reclassification adjustment for gains Included in net income .............................................. -- -- -- ------- ------- ------- Other comprehensive income ................................................... $ 3,097 $(1,053) $ 2,044 ======= ======= =======
Variable Interest Entity: Management has determined that Republic First Capital Trust I ("RFCT"), utilized for the Company's $6,000,000 of pooled preferred securities issuance, qualifies as a variable interest entity under FIN 46, as revised RFCT issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. RFCT is included in the Company's consolidated balance sheet and statements of income as of and for the year ended December 31, 2003. Subsequent to the issuance of FIN 46 in January 2003, the FASB issued a revised interpretation, FIN 46(R) Consolidation of Variable Interest Entities, the provisions of which were required to be applied to certain variable interest entities by March 31, 2004. The Company adopted the provisions under the revised interpretation in the first quarter of 2004. Accordingly, the Company no longer consolidates RFCT as of March 31, 2004. FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the Company has the right to a majority of RFCT's expected residual returns. The deconsolidation resulted in the investment in the common stock of RFCT to be included in other assets as of September 30, 2004 and the corresponding increase in outstanding debt of $186,000. In addition, the income received on the Company's common stock investment is included in other income. The adoption of FIN 46R did not have a material impact on the financial position REPUBLIC FIRST BANCORP | 57 or results of operations. The Federal Reserve has issued final guidance on the regulatory capital treatment for the trust-preferred securities issued by RFCT as a result of the adoption of FIN 46(R). The final rule would retain the current maximum percentage of total capital permitted for trust preferred securities at 25%, but would enact other changes to the rules governing trust preferred securities that affect their use as part of the collection of entities known as "restricted core capital elements". The rule would take effect March 31, 2009; however, a five-year transition period starting March 31, 2004 and leading up to that date would allow bank holding companies to continue to count trust preferred securities as Tier 1 Capital after applying FIN-46(R). Management has evaluated the effects of the final rule and does not anticipate a material impact on its capital ratios. Recent Accounting Pronouncements: 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, the Company will be unable to collect all contractually required payments receivable. SOP 03-3 requires that the Company 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 (nonaccretable 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 is currently evaluating the provisions of SOP 03-3. The SEC recently released Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance about the measurement of loan commitments recognized at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after September 30, 2004. The adoption of SAB 105 is not expected to have a material effect on the Company's financial statements. In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1). The quantitative and qualitative disclosure provisions of EITF 03-1 were effective for years ending after December 15, 2003 and were included in the Company's 2003 Form 10-K. In March 2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a three-step approach for determining whether an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. The Company 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. In September 2004, the FASB issued a proposed Staff Position, EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of EITF 03-1. In September 2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments delays the effective date of certain provisions of EITF Issue 03-1, including steps two and three of the Issue's three-step approach for determining whether an investment is other-than-temporarily impaired. However, step one of that approach must still be initially applied for impairment evaluations in reporting periods beginning after June 15, 2004. The delay of the effective date for paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, `'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Company is in the process of determining the impact that this EITF will have on its financial statements. The company accounts for stock options under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair valued-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro REPUBLIC FIRST BANCORP | 58 forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The FASB recently published SFAS 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R, which is effective from the first interim period that begins after June 15, 2005, will require that compensation cost related to share-based payment transactions, including stock options, be recognized in the financial statements. Management is currently evaluating the provisions of SFAS 123R. 3. Investment Securities: Investment securities available for sale as of December 31, 2004 are as follows:
Gross Gross (Dollars in thousands) Amortized Cost Unrealized Unrealized Fair Gains Losses Value ----------------- -------------- ------------ ----------- U.S. Government Agencies.................................. $ 20,258 $ - $ - $20,102 (156) Mortgage Backed Securities................................ 13,675 600 (9) 14,266 Other Debt Securities.................................... 10,506 101 (34) 10,573 ---------------- -------------- ------------ ----------- Total................................................ $ 44,439 $ 701 $(199) $44,941 ================ ============== ============ =========== Investment securities held to maturity as of December 31, 2004 are as follows: (Dollars in thousands) Gross Gross Amortized Cost Unrealized Unrealized Fair Gains Losses Value ----------------- -------------- ------------ ----------- U.S. Government Agencies.................................. $ 3 $ - $ - $ 3 Mortgage Backed Securities................................ 108 7 - 115 Other Securities.......................................... 5,316 14 - 5,330 ---------------- -------------- ------------ ----------- Total................................................ $ 5,427 $ 21 $ - $ 5,448 ================ ============== ============ =========== Investment securities available for sale as of December 31, 2003 are as follows: Gross Gross (Dollars in thousands) Amortized Cost Unrealized Unrealized Fair Gains Losses Value ----------------- -------------- ------------ ----------- U.S. Government Agencies.................................. $ 24,425 $ 10 $ - $24,435 Mortgage Backed Securities and CMOs....................... 24,235 1,067 (16) 25,286 Other Debt Securities.................................... 11,843 142 (20) 11,965 ---------------- -------------- ------------ ----------- Total................................................ $ 60,503 $1,219 $ (36) $61,686 ================ ============== ============ =========== Investment securities held to maturity as of December 31, 2003 are as follows: Gross Gross (Dollars in thousands) Amortized Cost Unrealized Unrealized Fair Gains Losses Value ----------------- -------------- ------------ ----------- U.S. Government Agencies.................................. $ 68 $ - $ - $ 68 Mortgage Backed Securities and CMOs....................... 265 18 - 283 Other Securities.......................................... 7,927 22 - 7,949 ---------------- -------------- ------------ ----------- Total................................................ $ 8,260 $ 40 $ - $ 8,300 ================ ============== ============ ===========
The securities portfolio consists primarily of U.S government agency securities, mortgage backed securities, corporate bonds, trust preferred securities and FHLB stock. The Company's ALCO reviews all security purchases to ensure compliance with security policy guidelines. Included in other securities are investments in the stock of the Federal Home Loan Bank of Pittsburgh of $4.6 million and $7.2 million at December 31, 2004 and 2003, respectively. The Federal Home Loan Bank stocks are recorded at cost, which approximates liquidation value. REPUBLIC FIRST BANCORP | 59 The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at December 31, 2004, is as follows:
Available for Sale Held to Maturity ---------------------------------- ------------------------- Amortized Estimated Amortized Estimated (Dollars in thousands) Cost Fair Value Cost Fair Value ---------------- ---------------- ------------ ----------- Due in 1 year or less..................................... $20,107 $19,950 $ 150 $ 150 After 1 year to 5 years................................... 151 152 155 155 After 5 years to 10 years................................. 781 825 103 103 After 10 years............................................ 23,400 24,014 201 222 No stated maturity........................................ - - 4,818 4,818 ---------------- ---------------- ------------ ----------- Total................................................ $44,439 $44,941 $5,427 $5,448 ================ ================ ============ ===========
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties. The Company did not realize any material gains or losses on the sale of securities during 2004 or 2003. At December 31, 2004 and 2003, investment securities in the amount of approximately $ 4.0 million and $21.6 million respectively, were pledged as collateral for public deposits and certain other deposits as required by law. Temporarily impaired securities as of December 31, 2004 are as follows:
(Dollars in thousands) Less than 12 months 12 Months or more Total ------------------------- -------------------- --------------------- Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------- ------- ------- ------- ------- ------- US Government Agencies $ 3,086 $ 24 $16,864 $ 132 $19,950 $ 156 Mortgage Backed Securities 993 7 2,996 27 3,989 34 Other Debt Securities 132 1 268 8 400 9 ------- ------- ------- ------- ------- ------- Total Temporarily Impaired Securities $ 4,211 $ 32 $20,128 $ 167 $24,339 $ 199 ======= ======= ======= ======= ======= =======
The impairment of the investment portfolio at December 31, 2004 totaled $199,000 in 13 securities totaling $24.3 million at December 31, 2004. The unrealized loss is due to changes in market value resulting from changes in market interest rates and is considered temporary.
Temporarily impaired securities as of December 31, 2003 are as follows: (Dollars in thousands) Less than 12 months 12 Months or more Total ------------------------ -------------------------- -- ------------------------- Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses --------- ----------- ----------- ----------- -- ---------- ----------- Mortgage Backed Securities $- $- $3,290 $36 $3,290 $36 --------- ----------- ----------- ----------- ---------- ----------- Total Temporarily Impaired Securities $- $- $3,290 $36 $3,290 $36 ========= =========== =========== =========== ========== ===========
The impairment of the investment portfolio at December 31, 2003 totaled $36,000 in 6 securities totaling $3.3 million at December 31, 2003. The unrealized loss is due to changes in market value resulting from changes in market interest rates and is considered temporary. REPUBLIC FIRST BANCORP | 60 4. Loans Receivable:
Loans receivable consist of the following at December 31, (Dollars in thousands) 2004 2003 ----------------- ---------------- Commercial and Industrial................................. $ 70,914 $ 65,729 Real Estate - commercial.................................. 375,861 303,603 Construction and land development......................... 117,388 88,850 Real Estate - residential (1)............................. 8,219 14,875 Consumer and other........................................ 18,890 16,147 ----------------- ---------------- Loans receivable.......................................... 591,272 489,204 Less deferred loan fees................................... (620) (985) Less allowance for loan losses............................ (7,733) (8,696) ----------------- ---------------- Total loans receivable, net .............................. $582,919 $479,523 ================= ================
- ---------- (1) Real estate - residential is comprised of jumbo residential first mortgage loans for both years presented. The recorded investment in loans which are impaired in accordance with SFAS 114, totaled $5.0 million, $5.5 million and $3.0 million at December 31, 2004, 2003 and 2002 respectively. The amounts of related valuation allowances were $ 1.2 million, $1.4 million and $665,000 respectively at those dates. For the years ended December 31, 2004, 2003 and 2002, the average recorded investment in impaired loans was approximately $5.3 million, $3.6 million and $3.4 million respectively. The Banks did not realize any interest on impaired loans during 2004, 2003 or 2002. 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, 2004, 2003 and 2002, there were loans of approximately $5.0 million, $5.5 million and $3.0 million respectively, which were classified as non-accrual. If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $399,000, $285,000 and $241,000 for 2004, 2003 and 2002 respectively. Loans past due 90 days and accruing totaled $0, and $3.1 million, respectively, at December 31, 2004 and December 31, 2003. The majority of loans outstanding are with borrowers in the Company's marketplace, Philadelphia and surrounding suburbs, including southern New Jersey. In addition the Company has loans to customers whose assets and businesses are concentrated in real estate. Repayment of the Company's loans is in part dependent upon general economic conditions affecting the Company's market place and specific industries. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral varies but primarily includes residential, commercial and income-producing properties. At December 31, 2004, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans except for credits extended to real estate operators and lessors in the aggregate amount of $163.5 million, which represented 27.7% of gross loans receivable at December 31, 2004. Various types of real estate are included in this category, including industrial, retail shopping centers, office space, residential multi-family and others. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. Included in loans are loans due from directors and other related parties of $20.8 million and $8.0 million at December 31, 2004 and 2003, respectively. All loans made to directors have substantially the same terms and interest rates as other bank borrowers. The Board of Directors approves loans to individual directors to confirm that collateral requirements, terms and rates are comparable to other borrowers and are in compliance with underwriting policies. The following presents the activity in amounts due from directors and other related parties for the year ended December 31, 2004. (Dollars in thousands) 2004 2003 ---- ---- Balance at beginning of year.................... $ 8,013 $ 4,395 Additions....................................... 13,760 4,510 Repayments...................................... (956) (892) ---------- ----------- Balance at end of year.......................... $ 20,817 $ 8,013 ========== =========== REPUBLIC FIRST BANCORP | 61 Harry D. Madonna is of counsel to Spector Gadon and Rosen effective January 2, 2002. In 2004, 2003 and 2002 the Company paid $1,250,432, $1,044,000 and $1,338,000, respectively, in legal fees to that firm which were primarily for loan workout and collection matters. 5. Allowance for Loan Losses: Changes in the allowance for loan losses for the years ended December 31, are as follows:
(Dollars in thousands) 2004 2003 2002 ------------ ----------- ----------- Balance at beginning of year...................................... $8,696 $6,642 $5,431 Charge-offs....................................................... (3,703) (6,110) (4,215) Recoveries........................................................ 1,591 1,400 123 Provision for loan losses......................................... 1,149 6,764 5,303 ------------ ----------- ----------- Balance at end of year............................................ $7,733 $8,696 $6,642 ============ =========== =========== 6. Premises and Equipment: A summary of premises and equipment is as follows: (Dollars in thousands) Useful lives 2004 2003 ------------ --------------------------- Furniture and equipment......................................... 3 to 10 years $7,895 $6,810 Bank building................................................... 40 years 1,926 1,921 Leasehold improvements.......................................... 20 years 2,786 1,924 --------------------------- 12,607 10,655 Less accumulated depreciation................................... (7,581) (6,243) --------------------------- Net premises and equipment...................................... $5,026 $4,412 ===========================
Depreciation expense on premises, equipment and leasehold improvements amounted to $1.3 million, $1.4 million and $1.0 million in 2004, 2003 and 2002 respectively. 7. Borrowings: The PA Bank has a line of credit for $10.0 million available for the purchase of federal funds from a correspondent bank. At December 31, 2004, the PA Bank had $0 outstanding on this line. The PA Bank has a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of $186.7 million as of December 31, 2004. This maximum borrowing capacity is subject to change on a monthly basis. As of December 31, 2004 and 2003, there were $25.0 million and $125.0 million respectively of term advances, outstanding on these lines of credit. As of December 31, 2004 and 2003, there were $61.1 million and $2.8 million of overnight advances outstanding against these lines. The remaining $25.0 million borrowing matures February 2005. The Federal Home Loan Bank has the option to convert terms borrowings from a fixed rate to a variable rate. The contractual maturity of the Company's borrowings at December 31, 2004, is as follows: Weighted (Dollars in thousands) Amount Average Rate ------------- --------------- Maturing in: 2005................................. $25,000 6.71% ------------- ------------ Subordinated debt and corporation-obligated-mandatorily redeemable capital securities of subsidiary trust holding solely junior obligations of the corporation: On November 28, 2001, Republic First Bancorp, Inc., through a pooled offering, issued $6.0 million of corporation-obligated mandatorily redeemable capital securities of the subsidiary trust holding solely junior subordinated debentures of the corporation more commonly known as Trust Preferred Securities. The purpose of the issuance was to increase capital as a result of the Company's continued loan and core deposit growth. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital. The Company may call the securities on any interest payment date after REPUBLIC FIRST BANCORP | 62 five years, without a prepayment penalty, notwithstanding their final 30 year maturity. The interest rate is variable and adjustable semi-annually at 3.75% over the 6 month London Interbank Offered Rate ("Libor"). The interest rates at December 31, 2004 and 2003 were 5.61% and 4.81%, respectively. The interest rate cap of 11% is effective through the initial 5-year call date. 8. Deposits: The following is a breakdown, by contractual maturities of the Company's time certificate of deposits for the years 2005 through 2009 and beyond, which includes brokered certificates of deposit of approximately $45.0 million with original terms of three months.
(Dollars in thousands) 2005 2006 2007 2008 2009 Thereafter Total ---------------------- ---------- -------- ----------- ------------ ------------ Time Certificates of Deposit....... $86,838 $38,495 $27,170 $7,547 $26,917 $4,022 $190,989 ====================== ========== ======== =========== ============ ============ 9. Income Taxes: The following represents the components of income tax expense (benefit) for the years ended December 31, 2004, 2003 and 2002, respectively. (Dollars in thousands) 2004 2003 2002 ---------- ----------- ----------- Current provision Federal: Current....................................................... $4,082 $3,063 $1,675 Deferred ..................................................... 323 (579) (521) ---------- ----------- ----------- Total provision for income taxes................................... $4,405 $2,484 $1,154 ========== =========== =========== 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, 2004, 2003 and 2002. (Dollars in thousands) 2004 2003 2002 ------------ ------------ ------------ Tax provision computed at statutory rate.......................... $4,538 $2,515 $1,143 Amortization of negative goodwill................................. - - - State tax, net of federal benefit................................. - - - Other............................................................. (133) (31) 11 ------------ ------------ ------------ Total provision for income taxes............................. $4,405 $2,484 $1,154 ============ ============ ============
The approximate tax effect of each type of temporary difference and carry-forward that gives rise to net deferred tax assets included in the accrued income and other assets in the accompanying consolidated balance sheets at December 31, 2004 and 2003 are as follows:
2004 2003 ------------ ------------ Allowance for loan losses......................................... $2,630 $2,958 Deferred compensation............................................. 642 606 Unrealized gain on securities available for sale ................. (172) (403) Depreciation...................................................... (45) (61) Deferred loan costs............................................... (589) (541) Prepaid expenses.................................................. (17) (18) ------------ ------------ Net deferred tax asset............................................ $2,449 $2,541 ============ ============
The realizability of the deferred tax asset is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes that it is more likely than not that the Company will realize the benefits of these deferred tax assets. REPUBLIC FIRST BANCORP | 63 10. Financial Instruments with Off-Balance Sheet Risk: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $156.6 million and $94.8 million and standby letters of credit of approximately $8.0 million and $4.0 million at December 31, 2004 and 2003, respectively. The increase in commitments reflects increases in commercial lending. However, commitments may often expire without being drawn upon. Of the $156.6 million of commitments to extend credit at December 31, 2004, substantially all were variable rate commitments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. 11. Commitments: Lease Arrangements: As of December 31, 2004, the Company 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 ------------ ---------- 2005.............................................. $ 1,056 2006.............................................. 1,010 2007.............................................. 636 2008.............................................. 307 2009 ............................................. 106 thereafter ....................................... 137 ---------- Total............................................. $ 3,252 ========== The Company incurred rent expense of $1,029,000, $968,000 and $936,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Prior to 2001, the Company participated in a joint venture with the MBM/ATM Group Ltd. Although the Company's participation in the venture was terminated, the Company remains contingently liable on the following repayments: (Dollars in thousands) Year Ended Amount ------------ --------- 2005............................................... $ 15 ========= REPUBLIC FIRST BANCORP | 64 The Company did not incur rent and expense on these machines during 2004, 2003 and 2002, respectively. Employment Agreements: The Company has entered into employment agreements with the President of the Company and the President of the Bank, which provide for the payment of base salary and certain benefits through the year 2007. The aggregate commitment for future salaries and benefits under these employment agreements at December 31, 2004, is approximately $ 1.4 million. Other: The Company and the Banks are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and the Banks, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Banks. 12. Regulatory Capital: Dividend payments by the PA Bank to the Company are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, the PA Bank would be limited to $32.2 million of dividends plus an additional amount equal to its net profit for 2005, up to the date of any such dividend declaration. Dividend payments by the DE Bank are similarly limited by the FDIC and the Delaware Bank Commissioner to $6.2 million plus an additional amount equal to its net profit for 2005. However, dividends would be further limited in order to maintain capital ratios. The Company may consider dividend payments in 2005. During 2003 the Boards of Directors of the Banks filed applications with the Federal Reserve Board to withdraw their memberships in the Federal Reserve Bank System and filed applications with the FDIC to continue deposit insurance. The applications were accepted by both regulators, such that the Banks are 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. As of December 31, 2004 the Memoranda of Understanding was still in effect. 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 the Company's risk-based capital ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit; quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks. Management believes that the Banks meet, as of December 31, 2004, all capital adequacy requirements to which it is subject. As of December 31, 2004, the FDIC categorized the Banks 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 Banks' category. REPUBLIC FIRST BANCORP | 65 The following table presents the Company's capital regulatory ratios at December 31, 2004 and 2003:
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, 2004 Total risk based capital Republic First Bank............................. $64,251 12.09% $42,526 8.00% $53,158 10.00% First Bank of DE................................ 11,948 26.27% 3,638 8.00% 4,548 10.00% Republic First Bancorp, Inc..................... 78,120 13.53% 46,203 8.00% - - Tier one risk based capital Republic First Bank............................. 57,606 10.84% 21,263 4.00% 31,895 6.00% First Bank of DE................................ 11,374 25.01% 1,819 4.00% 2,729 6.00% Republic First Bancorp, Inc..................... 70,894 12.28% 23,102 4.00% - - Tier one leverage capital Republic First Bank............................. 57,606 9.25% 31,143 5.00% 31,143 5.00% First Bank of DE................................ 11,374 20.56% 2,766 5.00% 2,766 5.00% Republic First Bancorp, Inc..................... 70,894 10.43% 33,982 5.00% - - At December 31, 2003 Total risk based capital Republic First Bank............................. $57,417 12.57% $36,534 8.00% $45,667 10.00% First Bank of DE................................ 8,399 29.06% 2,312 8.00% 2,891 10.00% Republic First Bancorp, Inc..................... 67,436 13.92% 38,765 8.00% - - Tier one risk based capital Republic First Bank............................. 51,689 11.32% 18,267 4.00% 27,475 6.00% First Bank of DE................................ 8,025 27.76% 1,156 4.00% 1,734 6.00% Republic First Bancorp, Inc..................... 61,346 12.66% 19,382 4.00% - - Tier one leverage capital Republic First Bank............................. 51,689 8.77% 29,475 5.00% 29,475 5.00% First Bank of DE................................ 8,025 16.55% 2,410 5.00% 2,410 5.00% Republic First Bancorp, Inc..................... 61,346 9.64% 31,817 5.00% - -
REPUBLIC FIRST BANCORP | 66 13. Benefit Plans: Supplemental Retirement Plan: The Company maintains a Supplemental Retirement Plan for its former Chief Executive Officer which provides for payments of approximately $100,000 a year. At December 31, 2004, approximately $400,000 remained to be paid. A life insurance contract has been purchased to insure against all of the payments, which may be required prior to the originally anticipated retirement date of the officer. Defined Contribution Plan: The Company has a defined contribution plan pursuant to the provision of 401(k) of the Internal Revenue Code. The Plan covers all full-time employees who meet age and service requirements. The plan provides for elective employee contributions with a matching contribution from the Banks limited to 4%. The total expense relating to the plan was $168,000 in 2004 and $169,000 in 2003 and 2002. Directors' and Officers' Plans: The Company has an agreement with an insurance company to provide for an annuity payment upon the retirement or death of certain of the Banks' Directors and officers, ranging from $15,000 to $25,000 per year for ten years. The plan was modified for most participants in 2001, to establish a minimum age of 65 to qualify for the payments. All participants are fully vested. The accrued benefits under the plan at December 31, 2004, 2004, and 2002 totaled $942,000, $886,000, and $834,000, respectively. The expense for the years ended December 31, 2004, 2003 and 2002, was $172,000 in each of those years. The Company funded the plan through the purchase of certain life insurance contracts. The cash surrender value of these contracts (owned by the Company) aggregated $1.9 million, $1.8 million, and $1.7 million at December 31, 2004, 2003 and 2002, respectively, which is included in other assets. In 2004, the Company adopted a deferred compensation plan for certain officers, which provided for deferral of 20% of base salary. For 2004, the Company accrued $313,000 for that plan. 14. Fair Value of Financial Instruments: The disclosure of the fair value of all financial instruments is required, whether or not recognized on the balance sheet, for which it is practical to estimate fair value. In cases where quoted market prices are not available, fair values are based on assumptions including future cash flows and discount rates. Accordingly, the fair value estimates cannot be substantiated, may not be realized, and do not represent the underlying value of the Company. The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash, Cash Equivalents and Other Interest-Earning Restricted Cash: 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 reprice frequently and with no significant change in credit risk, fair value is the carrying value. For other categories of loans such as commercial and industrial loans, real estate mortgage and consumer loans, fair value is estimated based on the present value of the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar collateral and credit ratings and for similar remaining maturities. Bank Owned Life insurance: The fair value of bank owned life insurance is based on the estimated realizable market value of the underlying investments and insurance reserves. REPUBLIC FIRST BANCORP | 67 Deposit Liabilities: For checking, savings and money market accounts, fair value is the amount payable on demand at the reporting date. For time deposits, fair value is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings: Fair values of borrowings are based on the present value of estimated cash flows, using current rates, at which similar borrowings could be obtained by the Banks with similar maturities. Commitments to Extend Credit and Standby Letters of Credit: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar arrangements. At December 31, 2004 and December 31, 2003, the carrying amount and the estimated fair value of the Company's financial instruments are as follows:
December 31, 2004 December 31, 2003 ------------------------------- --------------------------- Carrying Fair Carrying Fair (Dollars in Thousands) Amount Value Amount Value -------------- ---------------- --------------------------- Balance Sheet Data: Financial Assets: Cash and cash equivalents............................ $ 45,006 $ 45,006 $ 70,602 $ 70,602 Other interest-earning restricted cash............... 2,923 2,923 3,483 3,483 Investment securities available for sale............. 44,941 44,941 61,686 61,686 Investment securities held to maturity............... 5,427 5,448 8,260 8,300 Loans receivable, net................................ 582,919 584,010 479,523 483,300 Bank owned life insurance............................ 12,185 12,185 11,763 11,763 Accrued interest receivable.......................... 3,587 3,587 3,710 3,710 Financial Liabilities: Deposits: Demand, savings and money market.................. $354,407 $354,407 $266,015 $266,015 Time.............................................. 190,989 187,708 187,590 188,005 Subordinated debt.................................... 6,186 6,186 - - Corporation-obligated mandatorily redeemable capital securities of Subsidiary trust company solely junior Obligations of the corporation....................... - - 6,000 6,000 Short-term borrowings................................ 61,090 61,090 2,852 2,852 FHLB advances........................................ 25,000 25,165 125,000 128,883 Accrued interest payable............................. 2,146 2,146 2,841 2,841 December 31, 2004 December 31, 2003 ------------------------------- --------------------------- Notional Fair Notional Fair (Dollars in Thousands) Amount Value Amount Value -------------- ---------------- --------------------------- Off Balance Sheet Data: Commitments to extend credit $156,636 $ 1,566 $ 94,781 $ 947 Letters of credit 7,963 80 3,962 40
REPUBLIC FIRST BANCORP | 68 15. Parent Company Financial Information The following financial statements for Republic First Bancorp, Inc. should be read in conjunction with the consolidated financial statements and the other notes related to the consolidated financial statements.
BALANCE SHEETS December 31, 2004 and 2003 (Dollars in thousands) 2004 2003 ----------- ---------- ASSETS: Cash................................................................................ $ 962 $ 837 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding junior obligations of the corporation................................................. 186 - Investment in subsidiaries.......................................................... 69,311 60,744 Other assets........................................................................ 973 962 ----------- ---------- Total Assets..................................................................... $71,432 $62,543 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Accrued expenses.................................................................... $ 22 $ 167 Corporation-obligated mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the corporation...................................... 6,186 6,000 ----------- ---------- Total Liabilities................................................................ 6,208 6,167 ----------- ---------- Shareholders' Equity: Common stock........................................................................ 74 67 Additional paid in capital.......................................................... 42,494 33,396 Retained earnings................................................................... 23,867 23,674 Treasury stock at cost (192,689 shares)............................................. (1,541) (1,541) Accumulated other comprehensive income.............................................. 330 780 ----------- ---------- Total Shareholders' Equity....................................................... 65,224 56,376 ----------- ---------- Total Liabilities and Shareholders' Equity....................................... $71,432 $62,543 =========== ==========
REPUBLIC FIRST BANCORP | 69
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands) 2004 2003 2002 -------- -------- -------- Interest income ................................................. $ 12 $ 3 $ 3 Dividend income from subsidiaries ............................... 324 372 392 -------- -------- -------- Total income .................................................... 336 375 395 Trust preferred interest expense ................................ 324 372 392 Expenses ........................................................ 128 11 220 -------- -------- -------- Total expenses .................................................. 452 383 612 -------- -------- -------- Net income (loss) before taxes .................................. (116) (8) (217) -------- -------- -------- Federal income tax benefit ...................................... (39) (3) (201) -------- -------- -------- Net income (loss) before undistributed income of subsidiary ..... (77) (5) (16) -------- -------- -------- Equity in undistributed income of subsidiary .................... 9,017 4,919 2,216 -------- -------- -------- Net income ...................................................... $ 8,940 $ 4,914 $ 2,200 ======== ======== ======== Shareholders' equity, beginning of year ......................... $ 56,376 $ 51,276 $ 46,843 Exercise of stock options ....................................... 358 1,094 189 Net income ...................................................... 8,940 4,914 2,200 Change in unrealized gain (loss) on securities available for sale (450) (908) 2,044 -------- -------- -------- Shareholders' equity, end of year ............................... $ 65,224 $ 56,376 $ 51,276 ======== ======== ======== STATEMENTS OF CASH FLOWS For the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands) 2004 2003 2002 ------- ------- ------- Cash flows from operating activities: Net income ................................................. $ 8,940 $ 4,914 $ 2,200 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Increase in other assets ............................... (11) 61 6 Decrease in other liabilities .......................... (145) 106 26 Equity in undistributed income of subsidiaries ......... (9,017) (4,919) (2,216) ------- ------- ------- Net cash provided by (used in) operating activities (233) 162 16 ------- ------- ------- Cash flows from investing activities: Purchase of subsidiary common stock ........................ -- (1,500) -- ------- ------- ------- Net cash used in investing activities ............. -- (1,500) -- ------- ------- ------- Cash from Financing Activities: Exercise of stock options .................................. 358 1,094 189 Proceeds from issuance of trust preferred securities ....... -- -- -- ------- ------- ------- Net cash provided by financing activities ......... 358 1,094 189 ------- ------- ------- Increase/(decrease) in cash ..................................... 125 (244) 205 Cash, beginning of period ....................................... 837 1,081 876 ------- ------- ------- Cash, end of period ............................................. $ 962 $ 837 $ 1,081 ======= ======= =======
REPUBLIC FIRST BANCORP | 70 16. Stock Based Compensation: The Company maintains a Stock Option Plan (the "Plan") under which the Company grants options to its employees and directors. Under the terms of the plan, 1.5 million shares of common stock are reserved for such options. The Plan provides that the exercise price of each option granted equals the market price of the Company's stock on the date of grant. Any option granted vests within one to five years and has a maximum term of ten years. All options are granted upon approval of the Stock Option Committee of the Board of Directors, consisting of three disinterested members (as defined under Rule 16b-3 of the Securities Exchange Act of 1934, as amended). Stock Options are issued to promote the interests of the Company by providing incentives to (i) designated officers and other employees of the Company or a Subsidiary Corporation (as defined herein), (ii) non-employee members of the Company's Board of Directors and (iii) independent contractors and consultants who may perform services for the Company. The Company believes that the Plan causes participants to contribute materially to the growth of the Company, thereby benefiting the Company's shareholders.
For the Years Ended December 31, ------------------------------------------------------------------------------------- (Dollars in thousands) 2004 2003 2002 -------------------------- ---------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------- ------------ -------------- ------------ ------------- ------------ Outstanding, beginning of year 869,148 $ 5.45 988,145 $ 4.02 854,273 $ 3.68 Granted 30,800 11.03 199,833 9.40 204,784 5.32 Exercised (59,125) 5.35 (315,179) 3.47 (51,662) 2.72 Forfeited (14,025) 5.88 (3,651) 5.46 (19,250) 6.70 ------------- ------------ -------------- ------------ ------------- ------------ Outstanding, end of year 826,798 5.77 869,148 5.45 988,145 4.02 ------------- ------------ -------------- ------------ ------------- ------------ Options exercisable at year-end 793,293 5.55 828,174 5.28 951,249 3.98 ------------ ------------ ------------ Weighted average fair value of options granted during the year $ 4.02 $ 3.38 $ 1.84 ------------ ------------ ------------ The following table summarizes information about options outstanding at December 31, 2004. ------------------------------------------------------------------------------------------- Options outstanding Options exercisable ------------------------------------------ ---------------------------- Weighted Number Average Weighted Weighted Range of exercise Prices outstanding remaining Average Average at December contractual exercise Exercise 31, 2004 life (years) price Shares Price -------------- --------------------------- ------------- -------------- 3.24 to 3.86 356,587 4.0 $ 3.49 356,587 $ 3.49 4.41 to 6.02 248,813 5.9 5.01 246,200 5.01 6.36 to 8.25 42,152 5.9 7.04 42,152 7.04 8.26 to 12.05 179,246 9.0 11.09 148,354 10.98 -------------- ------------ ------------- -------------- 826,798 $ 5.77 793,293 $ 5.55 -------------- ------------ ------------- --------------
REPUBLIC FIRST BANCORP | 71 17. Segment Reporting: The Company's reportable segments represent strategic businesses that offer different products and services. The segments are managed separately because each segment has unique operating characteristics, management requirements and marketing strategies. The Company has four reportable segments: two community banking segments; tax refund products; and short-term consumer loans. The community banking segments are primarily comprised of the results of operations and financial condition of the Banks. The Company 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 $1,000 or less and terms of approximately two weeks. These loans typically are made in states that are outside of the Company's normal market area through a small number of marketers and involve rates and fees significantly different from other loan products offered by either of the banks. As a result of the spin off, the First Bank of Delaware and short-term consumer loan segments will be eliminated from the Company's operations, and accordingly, segment reporting. With respect to the tax refund products, the Company plans to continue to purchase tax refund anticipation loans if such loans are available for purchase. However, net interest income and provision for loan losses on such loans, which the Company recognized in 2004 and 2003, if any, cannot be predicted for future periods. Segment information for the years ended December 31, 2004, 2003 and 2002 is as follows:
December 31, 2004 (Dollars in thousands) Republic Short-term First First Bank of Tax Refund Consumer Bank Delaware Products Loans Total ------------ --------------- ------------ ------------- ----------- Net interest income.............................. $ 17,910 $ 1,779 $ 1,026 $ 1,884 $ 22,599 Provision for loan losses........................ (1,014) 70 700 1,393 1,149 Non-interest income.............................. 4,231 192 1,174 6,597 12,194 Non-interest expenses............................ 15,088 1,614 894 2,703 20,299 Net income ...................................... $ 5,405 $ 192 $ 406 $ 2,937 $ 8,940 ============ ============ ============ =========== =========== Selected Balance Sheet Amounts: Total assets..................................... $661,804 $ 55,081 $ - $ 3,527 $720,412 Total loans, net................................. 549,688 39,355 - 1,609 590,652 Total deposits................................... 507,684 37,712 - - 545,396 REPUBLIC FIRST BANCORP | 72 December 31, 2003 (Dollars in thousands) Republic First Bank of Tax Refund Short-term First Delaware Products Consumer Total Bank Loans ------------ --------------- -------------------------- ----------- Net interest income ............................. $ 14,996 $ 1,499 $ 1,191 $ 8,065 $ 25,751 Provision for loan losses........................ 360 121 1,042 5,241 6,764 Non-interest income.............................. 2,359 264 487 4,026 7,136 Non-interest expenses............................ 14,264 1,572 633 2,256 18,725 Net income....................................... $ 1,931 $ 46 $ 2 $ 2,935 $ 4,914 ============ ============ ============ =========== =========== Selected Balance Sheet Amounts: Total assets..................................... $610,255 $ 38,564 $ - $ 5,973 $654,792 Total loans, net................................. 452,491 26,357 - 675 479,523 Total deposits................................... 420,358 33,247 - - 453,605 December 31, 2002 (Dollars in thousands) Republic First Bank of Tax Refund Short-term First Delaware Products Consumer Total Bank Loans ------------ --------------- -------------------------- ----------- Net interest income (loss)....................... $ 17,972 $ 1,468 $ (21) $ 4,542 $ 23,961 Provision for loan losses........................ 3,490 260 - 1,553 5,303 Non-interest income.............................. 2,009 512 761 - 3,282 Non-interest expenses............................ 15,528 1,536 545 977 18,586 Net income....................................... $ 645 $ 120 $ 130 $ 1,305 $ 2,200 ============ ============ ============ =========== =========== Selected Balance Sheet Amounts: Total assets..................................... $598,853 $42,260 $ - $ 6,579 $647,692 Total loans, net................................. 424,010 28,169 - 4,868 457,047 Total deposits................................... 421,575 34,727 - - 456,302
REPUBLIC FIRST BANCORP | 73 18. Quarterly Financial Data (Unaudited): The following tables are summary unaudited income statement information for each of the quarters ended during 2004 and 2003. Summary of Selected Quarterly Consolidated Financial Data For the Quarter Ended, 2004 -------------------------------------- Fourth Third Second First ------- ------- ------- ------- (Dollars in thousands, except per share data) Income Statement Data: Total interest income .... $10,520 $ 9,377 $ 8,536 $ 9,297 Total interest expense ... 3,366 3,863 3,929 3,973 ------- ------- ------- ------- Net interest income ...... 7,154 5,514 4,607 5,324 Provision for loan losses 887 (611) 62 811 Non-interest income ...... 2,775 3,842 2,830 2,747 Non-interest expense ..... 5,141 5,346 4,827 4,985 Federal income tax expense 1,238 1,538 865 764 ------- ------- ------- ------- Net income ............... $ 2,663 $ 3,083 $ 1,683 $ 1,511 ======= ======= ======= ======= Per Share Data: Basic: Net income ........... $ 0.37 $ 0.43 $ 0.23 $ 0.21 ======= ======= ======= ======= Diluted: Net income ........... $ 0.35 $ 0.41 $ 0.22 $ 0.20 ======= ======= ======= ======= For the Quarter Ended, 2003 -------------------------------------- (Dollars in thousands, except per share data) Fourth Third Second First ------- ------- ------- ------- Income Statement Data: Total interest income .... $ 8,124 $ 8,167 $12,554 $13,559 Total interest expense ... 3,847 4,086 4,260 4,460 ------- ------- ------- ------- Net interest income ...... 4,277 4,081 8,294 9,099 Provision for loan losses 419 647 2,286 3,412 Non-interest income ...... 2,918 2,826 497 895 Non-interest expense ..... 4,928 4,421 4,771 4,605 Federal income tax expense 611 606 583 684 ------- ------- ------- ------- Net income ............... $ 1,237 $ 1,233 $ 1,151 $ 1,293 ======= ======= ======= ======= Per Share Data: Basic: Net income ........... $ 0.18 $ 0.16 $ 0.16 $ 0.19 ======= ======= ======= ======= Diluted: Net income ........... $ 0.18 $ 0.15 $ 0.15 $ 0.18 ======= ======= ======= ======= REPUBLIC FIRST BANCORP | 74 EX-3 2 ex3-1.txt EXHIBIT 3.1 Exhibit 3.1 AMENDED AND RESTATED -------------------- ARTICLES OF INCORPORATION ------------------------- OF REPUBLIC FIRST BANCORP, INC. ------------------------------- REPUBLIC FIRST BANCORP, Inc., incorporated as a business corporation pursuant to the Business Corporation Law of the Commonwealth of Pennsylvania (Act of May 5, 1933, P.L. 364, as amended) on November 16, 1987 (the "Corporation"), wishing to amend and restate its Articles of Incorporation, does hereby certify as follows: ARTICLE I - NAME ----------------- The name of the Corporation is REPUBLIC FIRST BANCORP, INC. ARTICLE II - REGISTERED OFFICE ------------------------------ The location and post office address of its registered office in the Commonwealth of Pennsylvania is 1608 Walnut Street, Philadelphia, Pennsylvania 19103. ARTICLE III - PURPOSE --------------------- The purpose for which the Corporation is incorporated is to have unlimited power to engage in and to do any lawful act concerning any or all lawful business for which a corporation may be incorporated under the provisions of the Business Corporation Law of the Commonwealth of Pennsylvania. The Corporation is incorporated pursuant to the provisions of the Business Corporation Law of the Commonwealth of Pennsylvania (Act of May 5, 1933, P.L. 364, as amended). ARTICLE IV - TERM ----------------- The term for which the Corporation is to exist is perpetual. ARTICLE V - CAPITAL STOCK ------------------------- The aggregate number of capital shares, which the Corporation shall have authority to issue, shall be as follows: A. 20,000,000 shares of Common Stock with a par value of $.01 per share. B. 10,000,000 shares of Preferred Stock with a par value of $.01 per share. The Board of Directors of the Corporation may authorize and issue the unissued shares of Preferred Stock in one or more series by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption of the Preferred Stock. The Board may reclassify unissued shares of any series. The authority of the Board of Directors shall include the authority to determine the following provisions of the shares of each series: (1) the designation of such series and the number of shares to constitute such series; (2) whether the shares of such series shall have voting rights, and, if so, the terms of such voting rights; REPUBLIC FIRST BANCORP | 75 (3) the annual dividend rate, if any, payable on such series, the conditions and dates upon which such dividends shall be payable, the preference or relation which such dividends shall bear to the dividends payable on any other class or classes or any other series of the capital stock of the Corporation and whether such dividends shall be cumulative or noncumulative; (4) whether the shares of such series shall be redeemable at the option of the Corporation or the holder thereof and, if redeemable, the times, prices and other terms of such redemption; (5) the amounts payable upon shares of such series and the rights of the holders of such series upon liquidation, dissolution or winding up of the Corporation; (6) whether or not the shares of such series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent to and manner in which any such retirement or sinking funds shall be applied to the purchase or redemption of the shares of such series for retirement or to other corporate purposes and the terms and provisions relative to the operation thereof; (7) whether or not the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes or of any other series of the same class, and, if so convertible or exchangeable, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; (8) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation, of the Common Stock or any other class or classes of stock of the Corporation ranking on a parity with or junior to the shares of such series either as to dividends or upon liquidation; and (9) any other preferences, relative, participating, optional or other rights and qualifications, limitations or restrictions. Except as otherwise provided by the Board of Directors, all shares of Preferred Stock shall be of equal rank and all shares of any one series shall be identical in all of respects with all of the other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative. Prior to issuance of a series of Preferred Stock, the Board of Directors may provide that the holders of the shares of the series of Preferred Stock voting as a separate class may elect that number of directors as determined by the Board of Directors at each annual meeting of shareholders of the Corporation, whether upon default in the payment of any dividends payable thereon or otherwise, and shall have the right to approve any amendment to the charter which adversely affects the series of Preferred Stock. C. All shares of Common Stock shall be identical with each other in every respect. The Common Stock is subject to all the powers, rights, privileges, preferences and priorities of the Preferred Stock as adopted by the Board of Directors of the Corporation pursuant to authority granted to and vested in it by the provisions of this Article FIVE. The shares of Common Stock shall entitle the holders thereof to one vote for each share upon all matters upon which shareholders REPUBLIC FIRST BANCORP | 76 have the right to vote. Subject to the provisions of this Article FIVE and any further provisions prescribed in accordance herewith, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for that purpose, dividends payable either in cash, stock or otherwise. D. Shares of stock may be issued in fractional shares. Any fractional share shall carry proportionately the rights of a whole share including, without limitation, the right to vote and the right to receive dividends. A fractional share shall not, however, have the right to receive a certificate evidencing it. E. All persons who shall acquire stock in the Corporation shall acquire same subject to the provisions of the Articles of Incorporation and By-Laws of the Corporation. F. The Board of Directors is expressly authorized, without the assent or vote of the shareholders, to authorize the issuance from time to time of shares of the stock of any class of the Corporation, whether now or hereafter authorized, and securities convertible into shares of stock of the Corporation of any class or classes, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable. ARTICLE VI - NO PREEMPTIVE RIGHTS, NO CUMULATIVE VOTING ------------------------------------------------------- A. No holder of shares of the Common Stock of the Corporation shall have any preemptive or preferential right to subscribe for, purchase or otherwise acquire or receive any shares of any class of stock hereafter issued by the Corporation, whether now or hereafter authorized, or any shares of any class of stock of the Corporation now or hereafter acquired and held by the Corporation as treasury stock and subsequently reissued and sold or otherwise disposed of, or any bonds, certificates of indebtedness, notes or any other securities convertible into or exchangeable for, or any warrants or rights to purchase or otherwise acquire, any shares of any class of stock of the Corporation, whether now or hereafter authorized. B. At each election of directors every shareholder entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote. Cumulative voting shall not be allowed. ARTICLE VII - BOARD OF DIRECTORS -------------------------------- A. At all Annual Meetings of shareholders commencing after the Annual Meeting of Shareholders to be held in 1996, if any, any stockholder who desires to propose nominees to the Board of Directors must provide for the receipt of a written notice of the intention to nominate a person or persons for election as directors by the Secretary of the Corporation: (i) with respect to an election to be held at any annual meeting of shareholders in accordance with the provision of Rule 14a-8, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh (7th) day following the day on which notice of such meeting is first given to shareholders. The notice is required to contain: (i) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the shareholder is a holder of record of stock entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations REPUBLIC FIRST BANCORP | 77 are to be made by the shareholder; (iv) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated or intended to be nominated, by the Board of Directors of the Corporation; and (v) the consent of each nominee to serve as a director of the company if so elected. The chairman of any meeting of shareholders to elect directors and the Board of Directors may refuse to recognize the nomination of any person not made in compliance with the foregoing. ARTICLE VIII - BUSINESS COMBINATION ----------------------------------- A. Section 910 of the Pennsylvania Business Corporation Law shall not be applicable to the Corporation. B. The affirmative vote of the holders of not less than 75% of the outstanding shares of "Voting Stock" held by the shareholders other than a "Related Person" shall be required for the approval or authorization of any "Business Combination" of the Corporation with any Related Person; provided, however, that the 75% voting requirement shall not be applicable if: (1) The "Continuing Directors" of the Corporation by at least a two-thirds vote of such Continuing Directors have expressly approved such Business Combination either in advance of or subsequent to such Related Person having become a Related Person; or (2) The cash or fair market value (as determined by at least two-thirds of the Continuing Directors) of the property, securities or other consideration to be received per share by holders of Voting Stock of the Corporation in the Business Combination is not less than the "Highest Per Share Price" or the "Highest Equivalent Price" paid by the Related Person in acquiring any of its holdings of the Corporation's Voting Stock. C. For the purposes of this Article EIGHT: (1) The term "Business Combination" shall mean (i) any merger or consolidation of the Corporation or a subsidiary of the Corporation with or into a Related Person, (ii) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device, or all or any "Substantial Part" of the assets either of the Corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary of the Corporation to a Related Person, (iii) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation, (iv) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device, of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation, (v) the issuance of any securities of the Corporation or a subsidiary of the Corporation to a Related Person other than the issuance on a pro rata basis to all holders of shares of the same class pursuant to a stock split or a stock dividend, or a distribution of warrants or rights, (vi) any recapitalization that would have the effect of increasing the voting power of a Related Person, and (vii) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination. REPUBLIC FIRST BANCORP | 78 (2) The term "Related Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with its "Affiliates" and "Associates," becomes the "Beneficial Owner" of an aggregate of 10% or more of the outstanding Voting Stock of the Corporation, and any Affiliates or Associate of any such individual, corporation, partnership or other person or entity; provided, however, that the term "Related Person" shall not include (i) a person or entity whose acquisition of such aggregate percentage of Voting Stock was approved in advance by two-third of the Continuing Directors or (ii) any trustee or fiduciary when acting in such capacity with respect to any employee benefit plan of the Corporation or a wholly owned subsidiary of the Corporation. (3) The term "Substantial Part" shall mean an amount equal to 10% or more of the fair market value as determined by two-thirds of the Continuing Directors of the total consolidated assets of the Corporation and its subsidiaries taken as a whole as of the end of its most recent fiscal year ended prior to the time the determination is being made. (4) The term "Beneficial Owner" shall mean any person (i) who beneficially owns shares of Voting Stock within the meaning ascribed in Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on the date of adoption of this Article EIGHT by the shareholders of the Corporation, or (ii) who has the right to acquire Voting Shares (whether or not such right is exercisable immediately) pursuant to any agreement, contract, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise. (5) For purposes of subparagraph B(2) of this Article EIGHT, the term "other consideration to be received" shall include, without limitation, the value per share of Common Stock or other capital stock of the Corporation retained by its existing shareholders as adjusted to give effect to the proposed Business Combination in the event of any Business Combination in which the Corporation is a surviving corporation. (6) The term "Voting Stock" shall mean all of the outstanding shares of Common Stock and the outstanding shares of Preferred Stock entitled to vote on each matter on which the holders of record of Common Stock shall be entitled to vote, and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares. (7) The term "Continuing Director" shall mean a Director who was a member of the Board of Directors of the Corporation immediately prior to the time that the Related Person involved in a Business Combination became a Related Person. As to any person who became a Related Person prior to April 30, 1988, a Continuing Director shall mean a Director who was a member of the Board of Directors on April 30, 1988. (8) A Related Person shall be deemed to have acquired a share of the Voting Stock of the Corporation at the time when such Related Person became the Beneficial Owner thereof. With respect to the shares owned by Affiliates, Associates or other persons whose ownership is attributed to a Related Person under the foregoing definition of Related Person, if the price paid by such Related Person for such shares is not determinable by two-thirds of the Continuing Directors, the price so paid shall be deemed to REPUBLIC FIRST BANCORP | 79 be the higher of (i) the price paid upon the acquisition thereof by the Affiliate, Associate or other person or (ii) the market price of the shares in question at the time when the Related Person became the Beneficial Owner thereof. (9) The terms "Highest Per Share Price" and "Highest Equivalent Price" as used in this Article NINE shall mean the following: If there is only one class of capital stock of the Corporation issued and outstanding, the Highest Per Share Price shall mean the highest price that can be determined to have been paid at any time by the Related Person for any shares or shares of that class of capital stock. If there is more than one class of capital stock of the Corporation issued and outstanding, the Highest Equivalent Price shall mean, with respect to each class and series of capital stock of the Corporation, the amount determined by two-thirds of the Continuing Directors, on whatever basis they believe is appropriate, to be the highest per share price equivalent of the highest price that can be determined to have been paid at any time by the Related Person for any share or shares of any class or series of capital stock of the Corporation. In determining the Highest Per Share Price and Highest Equivalent Price, all purchases by the Related Person shall be taken into account regardless of whether the shares were purchased before or after the Related Person becomes a Related Person. Also, the Highest Per Share Price and the Highest Equivalent Price shall include any brokerage commissions, transfer taxes and soliciting dealers' fees or other value paid by the Related Person with respect to the shares of capital stock of the Corporation acquired by the Related Person. (10) The terms "Affiliate" and "Associate" shall have the same meaning as in Rule 12b-2 under the Securities Exchange Act of 1934 as in effect on the date of the adoption of this Article EIGHT by the shareholders of the Corporation. D. This Article EIGHT and any of the provisions thereof may not be amended, altered, changed or repealed in any respect unless such action is approved by the affirmative vote of the holders of not less than 75% of the outstanding shares of Voting Stock of the Corporation at a meeting of the shareholders duly called for the consideration of such amendment, alteration, change or repeal; provided, however, that if there is a Related Person, such action must also be approved by the affirmative vote of the holders of not less than 75% of the outstanding shares of Voting Stock not held by any Related Person. ARTICLE IX - CONSTITUENCIES ---------------------------- A. The Board of Directors may, if it deems it advisable, oppose a tender, or other offer for the Corporation's securities, whether the offer is in cash or in the securities of a corporation or otherwise. When considering whether to oppose an offer, the Board of Directors may, but is not legally obligated to, consider any pertinent issues; by way of illustration, but not of limitation, the Board of Directors may, but shall not be legally obligated to, consider any or all of the following: (1) whether the offer price is acceptable based on the historical and present operating results or financial condition of the Corporation; REPUBLIC FIRST BANCORP | 80 (2) whether a more favorable price could be obtained for the Corporation's securities in the future; (3) the impact which an acquisition of the Corporation would have on the employees, depositors and customers of the Corporation and its subsidiaries and the community which they serve; (4) the reputation and business practices of the offeror and its management and affiliates as they would affect the employees, depositors and customers of the Corporation and its subsidiaries and the future value of the Corporation's stock; (5) the value of the securities (if any) which the offeror is offering in exchange for the Corporation's securities, based on an analysis of the worth of the Corporation as compared to the corporation or other entity whose securities are being offered; (6) any antitrust or other legal and regulatory issues that are raised by the offer. B. If the Board of Directors determines that an offer should be rejected, it may take any lawful action to accomplish its purpose including, but not limited to, any or all of the following: advising shareholders not to accept the offer; litigation against the offeror; filing complaints with all governmental and regulatory authorities; acquiring the Corporation's securities; selling or otherwise issuing authorized but unissued securities or treasury stock or granting options with respect thereto; acquiring a company to create an antitrust or other regulatory problem for the offeror; and obtaining a more favorable offer from another individual or entity. ARTICLE X - INDEMNIFICATION AND INSURANCE ----------------------------------------- A. The corporation shall indemnify an indemnified representative against any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise by reason of the act that such person is or was serving in an indemnified capacity, including, without limitation, liabilities resulting from any actual or alleged breach or neglect of duty, error, misstatement or misleading statement, negligence, gross negligence or act giving rise to strict or products liability, except: (1) where such indemnification is expressly prohibited by applicable law; (2) where the conduct of the indemnified representative has been finally determined pursuant to paragraph F or otherwise: (i) to constitute willful misconduct or recklessness within the meaning of 15 Pa.C.S. 513(b) and 1746(b) or any superseding provision of law sufficient in the circumstances to bar indemnification against liabilities arising from the conduct; or (ii) to be based upon or attributable to the receipt by the indemnified representative from the corporation of a personal benefit to which the indemnified representative is not legally entitled; or REPUBLIC FIRST BANCORP | 81 (iii) to the extent such indemnification has been finally determined in a final adjudication pursuant to paragraph F to be otherwise unlawful. (3) with respect to expenses or the payment of profits arising from the purchase or sale of securities of the corporation in violation of Section 16(b) of the Securities Exchange Act of 1934; (4) expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines and amounts paid in settlement) which have been paid directly to or for the benefit of, such person by directors' liability insurance whose premiums are paid for by the corporation or by an individual or entity other than such director or officer; (5) amounts paid in settlement of any proceeding without the written consent of the corporation or; The Board of Directors of the corporation is hereby authorized, at any time by resolution, to add to the above list of exceptions from the right of indemnification, but any such additional exception shall not apply with respect to any event, act or omission which has occurred prior to the date that the Board of Directors in fact adopts such resolution. Any such additional exception may, at any time after its adoption, be amended, supplemented, waived or terminated by further resolution of the Board of Directors of the corporation. If an indemnified representative is entitled to indemnification in respect of a portion, but not all, of any liabilities to which such person may be subject, the corporation shall indemnify such indemnified representative to the maximum extent for such portion of the liabilities. The termination of a proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the indemnified representative is not entitled to indemnification. For purposes of this Article X: (1) "indemnified capacity" means any and all past, present and future service by an indemnified representative in one or more capacities as a director, officer, employee or agent of the corporation, or, at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise; (2) "indemnified representative" means any and all directors and officers of the corporation and any other person designated as an indemnified representative by the Board of Directors of the corporation (which may, but not, include any person serving at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise); (3) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or cost or expense, of any nature (including, without limitation attorneys' fees and disbursements); and (4) "proceeding" means any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or REPUBLIC FIRST BANCORP | 82 informal, and whether brought by or in the right of the corporation, a class of its security holders or otherwise. (5) "to the fullest extent permitted by applicable law" means the maximum extent permitted by the public policy, common law or statute. Any person covered by this Article X may, to the fullest extent permitted by applicable law, elect to have the right to indemnification or to advancement or reimbursement of expenses, interpreted, at such person's option (i) on the basis of the applicable law on the date this Article X was approved by shareholders, or (ii) on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the proceeding, or (iii) on the basis of the applicable law in effect at the time indemnification or advancement or reimbursement of expenses is sought. (6) The corporation shall have the right to appoint the attorney for an indemnified representative provided such appointment is not unreasonable under the circumstances. B. Notwithstanding any other provision of this Article X, the corporation shall not indemnify under this Article X an indemnified representative for any liability incurred in a proceeding initiated (which shall not be deemed to include counterclaims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless such initiation of or participation in the proceeding is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors in office. This section does not apply to a reimbursement of expenses incurred in successfully prosecuting or defending an arbitration under paragraph F or otherwise successfully prosecuting or defending the rights of an indemnified representative granted by or pursuant to this Article X. C. The corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in paragraph A or the initiation of or participation in which is authorized pursuant to paragraph B upon receipt of an undertaking by or on behalf of the indemnified representative to repay the amount if it is ultimately determined pursuant to paragraph F that such person is not entitled to be indemnified by the corporation pursuant to this Article X. The financial ability of an indemnified representative to repay an advance shall not be a prerequisite to making of such advance. D. To further effect, satisfy or secure the indemnification obligation provided herein or otherwise, the corporation may maintain insurance, obtain a letter of credit, act as self-insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the Board of Directors shall deem appropriate. Absent fraud, the determination of the Board of Directors with respect to such amounts, costs, terms and conditions shall be conclusive against all security holders, officers and directors and shall not be subject to void ability. E. An indemnified representative shall be entitled to indemnification within thirty (30) days after a written request for indemnification has been delivered to the Secretary of the corporation. REPUBLIC FIRST BANCORP | 83 F. Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Article X, except with respect to indemnification for liabilities arising under the Securities Act of 1933 that the corporation has undertaken to submit to a court for adjudication, shall be decided only by arbitration in the metropolitan area in which the principal executive offices of the corporation are located at the time, in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the corporation, the second of whom shall be selected by the indemnified representative and third of whom shall be selected by the other two arbitrators. In the absence of the American Arbitration Association, or if for any reason arbitration under the arbitration rules of the American Arbitration Association cannot be initiated, or if one of the parties fails or refuses to select an arbitrator or if the arbitrators selected by the corporation and the indemnified representative cannot agree on the selection of the third arbitrator within thirty (30) days after such time as the corporation and the indemnified representative have each been notified of the selection of the other's arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such metropolitan area. The party or parties challenging the right of an indemnified representative to the benefits of this Article X shall have the burden of proof. The corporation shall reimburse an indemnified representative for the expenses (including attorneys' fees and disbursements) incurred unsuccessfully prosecuting or defending such arbitration. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction, except that the corporation shall be entitled to interpose as a defense in any such judicial enforcement proceeding any prior final judicial determination adverse to the indemnified representative in a proceeding not directly involving indemnification under this Article X. This arbitration provision shall be specifically enforceable. G. If the indemnification provided for in this Article X or otherwise is unavailable for any reason in respect of any liability or portion thereof, the corporation shall contribute to the liabilities to which the indemnified representative may be subject in such proportion as is appropriate to reflect the intent of this Article X or otherwise. H. To the extent that an authorized representative of the corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in 15 Pa.C.S. 1741 or 1742 or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees and disbursement) actually and reasonably incurred by such person in connection therewith. I. The corporation may, to the fullest extent permitted by applicable law, indemnify and advance or reimburse expenses for, persons in all situations other than that covered by this Article X. J. All rights under this Article X shall be deemed a contract between the corporation and the indemnified representative pursuant to which the corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing. K. The rights granted by this Article X shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution or advancement of expenses may be entitled under any statute, agreement, vote REPUBLIC FIRST BANCORP | 84 of shareholders or disinterested directors or otherwise both as to action in an indemnified capacity and as to action in any other capacity. The indemnification, contribution and advancement of expenses provided by or granted pursuant to this Article X shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time, and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. L. Each person who shall act as an indemnified representative of the corporation shall be deemed to be doing so in reliance upon the rights provided in this Article X. ARTICLE XI - AMENDMENTS ----------------------- These Articles of Incorporation may be amended, subject to the provisions of the laws of the Commonwealth of Pennsylvania, at any regular or special meeting of the shareholders for which adequate notice has been given, by the affirmative vote of the holders of outstanding shares of stock of the Corporation representing a majority of the votes entitled to be cast; provided, however, that Article V through Article XII, including this Article XI, may be amended only by the affirmative vote of holders of outstanding shares representing at least sixty percent (60%) of the votes entitled to be cast for that purpose. ARTICLE XII - OWNERSHIP LIMITATION ---------------------------------- A. Except as provided in paragraph B, no shareholder may have Holdings (as defined in paragraph D of this Article) that exceed ten percent (10%) of the issued and outstanding shares of common stock. B. Upon the resolution of at least two-thirds of the Board of Directors, the restriction imposed by paragraph A may be waived with respect to the Holdings of any shareholders. C. If any shareholder acquires Holdings which cause the violation of the restriction contained in paragraph A, the Board of Directors may (i) terminate all voting rights attributable to the Holdings of such shareholder during the time that paragraph A is being violated; (ii) commence litigation to require divestiture of such amount of the Holdings so that after such divestiture the shareholder would no longer be in violation of the restriction contained in paragraph A; or (iii) take such other action as is appropriate under the circumstances. D. Holdings mean (i) the common stock the shareholder owns of record; (ii) the common stock to which the shareholder has direct or indirect beneficial ownership (as such term is defined in Section 13(d) of the Securities Exchange Act of 1934 and the regulations thereunder in effect on the date hereof, "Section 13(d)"); and (iii) the common stock owned of record or beneficially by other shareholder(s) acting together with the shareholder as a group (as such term is defined in Section 13(d)) for the purpose of acquiring, holding or disposing of common stock (a "Shareholder Group"). The Board of Directors' determination of the existence and membership of a Shareholder Group, of a shareholder's Holdings and of the record and beneficial ownership of common stock shall be final and conclusive, absent proof of bad faith. REPUBLIC FIRST BANCORP | 85 EX-3.(II) 3 ex3-2.txt EXHIBIT 3.2 Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF REPUBLIC FIRST BANCORP, INC. A Pennsylvania Corporation ARTICLE I --------- SHAREHOLDERS ------------ Section 1. Annual Meetings. The annual meeting of the shareholders of the Corporation shall be held on a date fixed from time to time by the Board of Directors. An annual meeting may be held at any place in or out of the Commonwealth of Pennsylvania as may be determined by the Board of Directors and as shall be designated in the notice of the meeting and at the time specified by the Board of Directors. Any business of the Corporation may be transacted at an annual meeting without being specifically designated in the notice unless otherwise provided by statute, the Corporation's Amended and Restated Articles of Incorporation (the "Articles of Incorporation") or these By-Laws, as they may be amended from time to time. Section 2. Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by statute or by the Corporation's Articles of Incorporation, may be held at any place within the United States, and may be called at any time (a) by the Chairman of the Board, (b) by the Board of Directors or (c) at the request in writing of shareholders entitled to cast at least twenty (20%) percent of the votes entitled to be cast at the meeting upon payment by such shareholders to the Corporation of the reasonably estimated cost of preparing and mailing a notice of the meeting (which estimated cost shall be provided to such shareholders by the Secretary of the Corporation); provided, however, that special meetings of shareholders of the Corporation which have as their purpose a change in control of the Corporation, amendment to these By-Laws or an amendment of the Corporation's Articles of Incorporation may only be called by a majority of the Board of Directors of the Corporation. Notwithstanding the foregoing, unless requested by shareholders entitled to cast a majority of the votes entitled to be cast at the meeting, a special meeting of the shareholders need not be called at the request of shareholders to consider any matter that is substantially the same as a matter voted on at any meeting of the shareholders held during the preceding twelve (12) months. A written request shall state the purpose or purposes of the proposed meeting. Section 3. Notice of Meetings. Written or printed notice stating the time and place of every meeting of the shareholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by the Secretary of the Corporation to each shareholder of record entitled to vote at the meeting, by placing the notice in the mail at least ten (10) days, but not more than sixty (60) days, prior to the date designated for the meeting addressed to each shareholder at his address appearing on the books of the Corporation or supplied by the shareholder to the Corporation for the purpose of notice. The notice of any meeting of shareholders may be accompanied by a form of proxy approved by the Board of Directors in favor of the actions or persons as the Board of Directors may select. Notice of any meeting of shareholders shall be deemed waived by any shareholder who attends the meeting in person or by proxy, or who before or after the meeting submits a signed waiver of notice that is filed with the records of the meeting. Section 4. Quorum. Except as otherwise provided by statute or by the Corporation's Articles of Incorporation, the presence at a meeting in person or by proxy of shareholders of the Corporation entitled to cast at least a majority of the votes entitled to be cast at such meeting shall constitute a quorum at a meeting of the shareholders. Except as otherwise provided by statute or by the Corporation's Articles of Incorporation, all questions to be decided at any meeting shall be decided by majority vote of the shares so represented in person or by proxy at the annual meeting and entitled to vote. In the absence of a quorum, the shareholders present in person or by proxy at the meeting, by majority vote and without notice other than by announcement at the meeting, may adjourn the meeting from time to time as provided in Section 5 of this Article I until a quorum shall be present in person or by proxy. The shareholders present at any duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum present and voting at such meeting. The absence from a meeting of shareholders representing such number of shares making it impossible to meet any greater quorum requirement imposed by the laws of the Commonwealth of Pennsylvania or other applicable statute, the Corporation's Articles of Incorporation or these By-Laws for action upon any given matter shall not prevent action at the meeting on any other matter or matters that may properly come before the meeting, so long as there are present, in person or by proxy, holders of the number of shares of stock of the Corporation required for action upon the other matter or matters. REPUBLIC FIRST BANCORP | 86 Section 5. Adjournment. Any meeting of the shareholders may be adjourned from time to time and for such period as the shareholders present and entitled to vote shall direct, without notice other than by announcement at the meeting at which the adjournment is taken. At any adjourned meeting at which a quorum shall be present, any action may be taken that could have been taken at the meeting originally called. Section 6. Organization. At every annual meeting of the shareholders, the Chairman of the Board, or in his absence or inability to act or at the request of the Chairman, the President, or in his absence or inability to act, a Vice President, or in the absence or inability to act of the Chairman of the Board, the President and all the Vice Presidents, a chairman chosen by the shareholders, shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, a person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes of the meeting. Section 7. Order of Business. The order of business at all meetings of the shareholders shall be as determined by the chairman of the meeting. Section 8. Voting. Except as otherwise provided by statute or the Corporation's Articles of Incorporation, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the shareholders to one (1) vote for every share of stock standing in his name on the records of the Corporation as of the record date determined pursuant to Section 9 of this Article I. Each shareholder entitled to vote at any meeting of shareholders may authorize another person or persons to act for him by a proxy signed by the shareholder or his attorney-in-fact. Such proxy shall be authorized by an instrument in writing, or by a transmission permitted by law, filed in accordance with the procedure established for the meetings. Any copy, facsimile, telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used provided that such copy, facsimile, telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. No proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except in those cases in which the proxy states that it is irrevocable and in which an irrevocable proxy is permitted by law. A proxy shall not re revoked by the death or incapacity of the maker unless, before the authority is exercised or the vote counted, written notice of the death or incapacity is given to the secretary of the corporation. (R) Proxies solicited on behalf of management shall be voted as directed by the shareholders or, in the absence of such direction, as determined by the Board of Directors. Section 9. Fixing Record Date of Voting. The Board of Directors may set a record date for the purpose of determining shareholders entitled to vote at any meeting of the shareholders or any adjournment thereof or, (subject to the provisions of Article IV, Section 6 of these By-Laws) for any other proper purpose. Such record date in any case shall be not more than ninety (90) nor fewer than ten (10) days before the date of the particular action to be taken. All persons who were holders of record of shares as of the record date of a meeting, and no others, shall be entitled to vote at such meeting and any adjournment thereof. Section 10. Inspectors. The Board of Directors may, in advance of any meeting of shareholders, point one (1) or three (3) inspectors to act at the meeting or at any adjournment of the meeting. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may appoint inspectors prior to the convening of the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at the meeting with strict impartiality and according to the best of his ability. Unless otherwise prescribed by the Board, the inspectors shall: determine the number of shares outstanding and the voting power of each share; the number of shares represented at the meeting; the existence of a quorum and the validity and effect of proxies; receive votes, ballots or consents; hear and determine all challenges and questions arising in connection with the right to vote; count and tabulate all votes, ballots or consents; determine the result thereof, and, do those acts as are proper to conduct the election of vote with fairness to all shareholders. Upon request of the chairman of the meeting or any shareholder entitled to vote at the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. Inspectors need not be shareholders of the Corporation. Section 11. Shareholder Proposals. At all Annual Meetings of shareholders commencing after the Annual Meeting of Shareholders to be held in 1996, if any, shareholder proposals with respect to an annual meeting shall be made in compliance with the provisions of Rule 14a-8 of the Securities Exchange Act of 1934, as amended ("Rule 14a-8"). With respect to a Special Meeting of shareholders, shareholder proposals must be stated in writing and filed with the secretary of the Corporation not later than the close of business on the seventh (7th) day following the day on which notice of REPUBLIC FIRST BANCORP | 87 such Special Meeting is first given to shareholders. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees; but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. Section 12. Action By Unanimous Consent. At all Annual Meetings of shareholders commencing after the Annual Meeting of Shareholders to be held in 1996, if any, shareholders of the Corporation shall not be entitled to take action by means of a unanimous written consent. ARTICLE II ---------- BOARD OF DIRECTORS ------------------ Section 1. General Powers. Except as otherwise provided in the Corporation's Articles of Incorporation, the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors except as conferred on or reserved to the shareholders by law, by the Corporation's Articles of Incorporation or by these By-Laws. Section 2. Number and Term. The number of directors shall be fixed from time to time by resolution of the Board of Directors adopted by a majority of the directors then in office; provided, however, that the number of directors shall in no event be fewer than five (5) nor more than twenty-five (25). The Board of Directors shall be divided into three classes as nearly equal as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. Any vacancy created by an increase in directors may be filled in accordance with Section 6 of this Article II. No reduction in the number of directors shall have the effect of moving any director from office prior to the expiration of his term unless the director is specifically removed pursuant to Section 5 of this Article II at the time of the decrease. A director need not be a citizen of the United States or a resident of the Commonwealth of Pennsylvania but must be a shareholder of the Corporation at the commencement of his term. Section 3. Standard of Care; Justifiable Reliance. A director shall stand in a fiduciary relation to the corporation and shall perform his or her duties as a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner the director reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his or her duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: (a) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented. (b) Counsel, public accountants or other persons as to matters, which the director reasonably believes to be within the professional or expert competence of such person. (c) A committee of the board upon which the directors does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. A director shall not be considered to be acting in good faith if the director has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted. Section 4. Nomination by Shareholders. At all Annual Meetings of shareholders commencing after the Annual Meeting of Shareholders to be held in 1996, if any, any stockholder who desires to propose nominees to the Board of Directors must provide for the receipt of a written notice of the intention to nominate a person or persons for election as directors by the Secretary of the Corporation: (i) with respect to an election to be held at any annual meeting of shareholders in accordance with the provision of Rule 14a-8, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh (7th) day following the day on which notice of such meetings is first given to shareholders. The notice is required to contain: (i) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the shareholder is a holder of record of stock entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by REPUBLIC FIRST BANCORP | 88 the shareholder; (iv) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated or intended to be nominated, by the Board of Directors of the Corporation; and (v) the consent of each nominee to serve as a director of the Company if so elected. The chairman of any meeting of shareholders to elect directors and the Board of Directors may refuse to recognize the nomination of any person not made in compliance with the foregoing. Section 5. Resignation. A director of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors or the Chairman of the Board or the Secretary of the Corporation. Any resignation shall take effect at the time specified in it or, should the time when it is to become effective not be specified in it, upon its formal acceptance by the Board of Directors. Other than as provided herein, acceptance of a resignation shall not be necessary to make it effective unless the resignation states otherwise. When one or more directors resign from the board effective at a future date, the directors then in office, including those who have so resigned, shall have power by the applicable vote to fill the vacancies, the vote thereon to take effect when the resignations become effective. Section 6. Removal of Directors. Subject to the rights of the holders of any class separately entitled to elect one or more directors, any director, or the entire Board of Directors, may be removed from office for cause by the affirmative vote of the holders of at least 75% of the combined voting power of all classes of capital stock entitled to vote in the election of directors. The Board of Directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or if, within sixty (60) days after notice of his or her selection, the director does not accept the office either in writing or by attending a meeting of the Board of Directors. Section 7. Vacancies. Any vacancies in the Board of Directors, whether arising from death, resignation, removal or any other cause except an increase in the number of directors, shall be filled by a vote of the majority of the Board of Directors then in office even though that majority is less than a quorum. A majority of the entire Board may fill a vacancy that results from an increase in the number of directors. In the event that at any time a vacancy exists in any office of a director that may not be filled by the remaining directors, a special meeting of the shareholders shall be held as promptly as possible and in any event within sixty (60) days, for the purpose of filling the vacancy or vacancies. Any director elected or appointed to fill a vacancy shall hold office for the balance of the term then remaining and until a successor has been chosen and qualifies or until his earlier resignation or removal. Section 8. Place of Meetings. Meetings of the Board may be held at any place that the Board of Directors may from time to time determine or that is specified in the notice of the meeting. Section 9. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at the time and place determined by the Board of Directors. Section 10. Special Meetings. Special meetings of the Board of Directors may be called by a majority of the Board or by the Chairman of the Board. Section 11. Organizational Meeting. The organizational meeting of each newly elected Board of Directors shall be held as soon as practicable after the meeting of shareholders at which the directors were elected. No notice of such annual meeting shall be necessary if held immediately after the adjournment, and at the site, of the meeting of shareholders. If not so held, notice shall be given as hereinafter provided for special meeting of the Board of Directors. Section 12. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors, unless otherwise provided herein. Subject to the control of the Board of Directors, the Chairman of the Board shall have general charge of the business and affairs of the Corporation. In the absence or inability of the Chairman of the Board to act, a majority of the Board of Directors shall designate the person or persons to preside at meetings of Shareholders and the Board of Directors. Section 13. Notice of Special Meetings. Notice of each special meeting of the Board of Directors shall be given by the Secretary as hereinafter provided. Each notice shall state the time and place of the meeting and shall be delivered to each director, either personally, by courier or by telephone or other standard form of telecommunication, at least twenty-four (24) hours before the time at which the meeting is to be held, or by first-class mail, postage prepaid, addressed to the director at his residence or usual place of business, and mailed at least two (2) days before the day on which the meeting is to be held. REPUBLIC FIRST BANCORP | 89 Section 14. Waiver of Notice of Meetings. Notice of any special meeting need not be given to any director who shall, either before or after the meeting, sign a written waiver or notice that is filed with the records of the meeting or who shall attend the meeting. Section 15. Quorum and Voting. A majority of the members or the entire Board of Directors shall be present in person at any meeting of the Board so as to constitute a quorum for the transaction of business at the meeting, and except as otherwise expressly required by statute, the Corporation's Articles of Incorporation, these By-Laws, or any applicable statute, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present may adjourn the meeting to another time and place until a quorum shall be present. Notice of the time and place of any adjourned meeting shall be given to the directors who were not present at the time of the adjournment and, unless the time and place were announced at the meeting at which the adjournment was taken, to the other directors. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called. Section 16. Organization. The Board of Directors shall designate a Chairman of the Board, who shall preside at each meeting of the Board. In the absence or inability of the Chairman of the Board to act, or at the Chairman's request, the President, or, in his absence or inability to act, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside at the meeting. The Secretary (or, in his absence or inability to act, any person appointed by the chairman) shall act as secretary of the meeting and keep the minutes of the meeting. Section 17. Committees. The Board of Directors may designate one (1) or more committees of the Board of Directors including, but not limited to, an Executive Committee, Audit Committee, Compensation Committee and Nominating Committee, each consisting of two (2) or more directors. To the extent provided in the resolution creating such committees, and permitted by law, the committee or committees shall have and may exercise the powers of the Board of Directors in the management and conduct of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it. Any committee or committees shall have the name or names determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and provide those minutes to the Board of Directors when required. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of the absent member. Section 18. Written Consent of Directors in Lieu of Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board or committee. Section 19. Telephone Conference. Members of the Board of Directors or any committee of the Board may participate in any Board or committee meeting by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. Section 20. Compensation. Each director shall be entitled to receive compensation, if any, as may from time to time be fixed by the Board of Directors, including a fee for each meeting of the Board or any committee thereof, regular or special, he attends. Directors may also be reimbursed by the Corporation for all reasonable expenses incurred in traveling to and from the place of a Board or committee meeting. Directors who are also officers of the Corporation and/or any of its subsidiaries shall not receive compensation in consideration of their services as a director. ARTICLE III OFFICERS, AGENTS AND EMPLOYEES ------------------------------ Section 1. Number and Qualifications. The officers of the Corporation shall be a Chief Executive Officer or Officers, a President, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint one (1) or more Vice Presidents and may also appoint any other officers, offices, agents and employees as it deems necessary or proper. Any two (2) or more offices may be held by the same person, except the offices of President and Vice President, but, unless otherwise authorized by the Board of Directors or an executive committee thereof, no officer shall execute, acknowledge or verify any instrument in more than one (1) capacity. Officers shall be elected by the Board of Directors each year at its organizational meeting held after the annual meeting of shareholders and until his successor shall have been duly elected and shall have qualified, or until his death, or until he shall have resigned or have been removed, as provided in these By-Laws. The Board of Directors may from time to time elect, or delegate to the Chairman of the Board or the President the power to appoint, such officers (including, but not limited to, one or more Assistant Vice Presidents, one or more Assistant Treasurers and one or more Assistant Secretaries) and such agents REPUBLIC FIRST BANCORP | 90 as may be necessary or desirable for the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as may be prescribed by the Board or by the appointing authority. Section 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors, the Chairman of the Board, the President or the Secretary. Any resignation shall take effect at the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its formal acceptance by the Board of Directors. Other than as specifically provided herein, the acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Section 3. Removal of Officer, Agent or Employee. Any officer, agent or employee of the Corporation may be removed by the Board of Directors with or without cause at any time, and the Board may delegate the power of removal as to agents and employees not elected or appointed by the Board of Directors. Removal shall be without prejudice to the person's contract rights, if any, but the appointment of any person as an officer, agent or employee of the Corporation shall not of itself create contract rights. Section 4. Vacancies. A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of the office that shall be vacant, in the manner prescribed in these By-Laws, for the regular election or appointment to the office. Section 5. Compensation. The compensation of the officers of the Corporation shall be fixed by the Board of Directors or a designated committee thereof, but this power may be delegated to any officer with respect to other officers under his control. Section 6. Bonds or Other Security. If required by the Board, any officer, agent or employee of the Corporation shall give a bond or other security for the faithful performance of his duties, in an amount and with any surety or sureties as the Board may require. Section 7. President. The President shall have the powers and perform the duties that the Board or the Chairman of the Board may from time to time prescribe. Section 8. Vice President. Each Vice President shall have the powers and perform the duties that the Board of Directors, the Chairman of the Board or the President may from time to time prescribe. Section 9. Treasurer. Unless otherwise designated by the Board of Directors or an executive committee thereof, the Treasurer shall be the Chief Financial Officer and Chief Accounting Officer of the Corporation. Subject to the provisions of any contract that may be entered into with any custodian pursuant to authority granted by the Board of Directors, the Treasurer shall have charge of all receipts and disbursements of the Corporation and shall have or provide for the custody of the Corporation's funds and securities; he shall have full authority to receive and give receipts for all money due and payable to the Corporation, and to endorse checks, drafts, and warrants, in its name and on its behalf and to give full discharge for the same; he shall deposit all funds of the Corporation, except those that may be required for current use, in such banks or other places of deposit as the Board of Directors may from time to time designate; and, in general, he shall perform all duties incident to the office of Treasurer and such other duties as may from time to time be assigned to him by the Board of Directors, the Chairman of the Board or the President. Section 10. Secretary. The Secretary shall: (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, the committees of the Board and the shareholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board or the President. REPUBLIC FIRST BANCORP | 91 Section 11. Delegation of Duties. In case of the absence of any officer of the Corporation, or for any other reason that the Board of Directors may deem sufficient, the Board of Directors may provisionally confer the powers or duties, or any of them, of such officer upon any other officer or upon any director. ARTICLE IV ----------- STOCK ----- Section 1. Stock Certificates. Each holder of stock of the Corporation shall be entitled, upon specific written request to such person as may be designated by the Corporation, to have a certificate or certificates, in a form approved by the Board, representing the number of shares of stock of the Corporation owned by him; provided, however, that certificates for fractional shares will not be delivered in any case. The certificates representing shares of stock shall be signed by or in the name of the Corporation by the Chairman of the Board, the President or a Vice President and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer and sealed with the seal of the Corporation. Any or all of the signatures or the seal on the certificate may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer, transfer agent or registrar was still in office at the date of issue. Section 2. Books of Account and Record of Shareholders. There shall be kept at the principal executive office of the Corporation correct and complete books and records of account of all the business and transactions of the Corporation. There shall be made available, upon the request of any shareholder, in accordance with Pennsylvania law, a record containing the number of shares of stock issued during a specified period not to exceed twelve (12) months and the consideration received by the Corporation for each such share. Section 3. Transfers of Shares. Transfers of shares of stock of the Corporation shall be made on the stock records of the Corporation only by the registered holder of the shares, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates, if issued, for the shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of shareholders as the owner of the share or shares for all purposes, including, with limitation, the rights to receive dividends or other distributions and to vote as the owner, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person. Section 4. Regulations. The Board of Directors may make any additional rules and regulations, not consistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any Certificate representing shares of stock of the Corporation shall immediately notify the Corporation of its loss, destruction or mutilation and the Corporation may issue a new certificate of stock in the place of any certificate issued by it that has been alleged to have been lost or destroyed or that shall have been mutilated. The Board may, in its discretion, require the owner (or his legal representative) of a lost, destroyed or mutilated certificate to give to the Corporation a bond in a sum, limited or unlimited, and in a form and with any surety or sureties, as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or issuance of a new certificate. Anything herein to the contrary notwithstanding, the Board of Directors, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the Commonwealth of Pennsylvania. Section 6. Fixing of Record Date for Dividends, Distributions, etc. The Board may set, in advance, a date for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of common stock or other securities, as the record date for the determination of the shareholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the shareholders of record at the time so set shall be entitled to receive such dividend, distribution, allotment, rights or interests. Such record date shall not be more than ninety (90) days or fewer than ten (10) days before the date of the particular action to be taken. REPUBLIC FIRST BANCORP | 92 Section 7. Information to Shareholders and Others. Any shareholder of the Corporation or his agent may inspect, during the Corporation's usual business hours, the Corporation's By-Laws, minutes of the proceedings of its shareholders, annual statements of its affairs and voting trust agreements on file at its principal office. ARTICLE V --------- INDEMNIFICATION AND INSURANCE ----------------------------- Section 1. Scope of Indemnification. The corporation shall indemnify an indemnified representative against any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise by reason of the act that such person is or was serving in an indemnified capacity, including, without limitation, liabilities resulting from any actual or alleged breach or neglect of duty, error, misstatement or misleading statement, negligence, gross negligence or act giving rise to strict or products liability, except: (1) where such indemnification is expressly prohibited by applicable law; (2) where the conduct of the indemnified representative has been finally determined pursuant to Section 6 or otherwise: (i) to constitute willful misconduct or recklessness within the meaning of 15 Pa.C.S. 513(b) and 1746(b) or any superseding provision of law sufficient in the circumstances to bar indemnification against liabilities arising from the conduct; or (ii) to be based upon or attributable to the receipt by the indemnified representative from the corporation of a personal benefit to which the indemnified representative is not legally entitled; or (iii) to the extent such indemnification has been finally determined in a final adjudication pursuant to Section 6 to be otherwise unlawful. (3) with respect to expenses or the payment of profits arising from the purchase or sale of securities of the corporation in violation of Section 16(b) of the Securities Exchange Act of 1934; (4) expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines and amounts paid in settlement) which have been paid directly to, or for the benefit of, such person by directors' liability insurance whose premiums are paid for by the corporation or by an individual or entity other than such director or officer; (5) amounts paid in settlement of any proceeding without the written consent of the corporation or; The Board of Directors of the corporation is hereby authorized, at any time by resolution, to add to the above list of exceptions from the right of indemnification, but any such additional exception shall not apply with respect to any event, act or omission which has occurred prior to the date that the Board of Directors in fact adopts such resolution. Any such additional exception may, at any time after its adoption, be amended, supplemented, waived or terminated by further resolution of the Board of Directors of the corporation. If an indemnified representative is entitled to indemnification in respect of a portion, but not all, of any liabilities to which such person may be subject, the corporation shall indemnify such indemnified representative to the maximum extent for such portion of the liabilities. The termination of a proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the indemnified representative is not entitled to indemnification. For purposes of this Article: (1) "indemnified capacity" means any and all past, present and future service by an indemnified representative in one or more capacities as a director, officer, employee, or agent of the corporation, or at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise; (2) "indemnified representative" means any and all directors and officers of the corporation and any other person designated as an indemnified representative by the Board of Directors of the corporation (which may, but not, include any person serving at the request of the corporation, as a director, officer, employee, agent, REPUBLIC FIRST BANCORP | 93 fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise): (3) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or cost or expense, of any nature (including, without limitation, attorneys' fees and disbursements); and (4) "proceeding" means any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the corporation, a class of its security holders or otherwise. (5) "to the fullest extent permitted by applicable law" means the maximum extent permitted by public policy, common law or statute. Any person covered by this Article may, to the fullest extent permitted by applicable law, elect to have the right to indemnification or to advancement or reimbursement of expenses, interpreted, at such person's option (i) on the basis of the applicable law on the date this Article was approved by shareholders, or (ii) on the basis of the applicable law in effect at the time of the occurrence of event or events giving rise to the proceeding, or (iii) on the basis of the applicable law in effect at the time indemnification or advancement or reimbursement of expenses is sought. (6) The corporation shall have the right to appoint the attorney for an indemnified representative provided such appointment is not unreasonable under the circumstances. Section 2. Proceedings Initiated By Indemnified Representatives. Notwithstanding any other provision of this Article, the corporation shall not indemnify under this Article an indemnified representative for any liability incurred in a proceeding initiated (which shall not be deemed to include counterclaims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless such initiation of or participation in the proceeding is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors in office. This section does not apply to a reimbursement of expenses incurred in successfully prosecuting or defending an arbitration under Section 6 or otherwise successfully prosecuting or defending the rights of an indemnified representative granted by or pursuant to this Article. Section 3. Advancing Expenses. The corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 1 or the initiation of or participation in which is authorized pursuant to Section 2 upon receipt of an undertaking by or on behalf of the indemnified representative to repay the amount if it is ultimately determined pursuant to Section 6 that such person is not entitled to be indemnified by the corporation pursuant to this Article. The financial ability of an indemnified representative to repay an advance shall not be a prerequisite to the making of such advance. Section 4. Securing of Indemnification Obligations. To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the corporation may maintain insurance, obtain a letter of credit, act as self-insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the Board of Directors shall deem appropriate. Absent fraud, the determination of the Board of Directors with respect to such amounts, costs, terms and conditions shall be conclusive against all security holders, officers and directors and shall not be subject to void ability. Section 5. Payment of Indemnification. An indemnified representative shall be entitled to indemnification within thirty (30) days after a written request for indemnification has been delivered to the Secretary of the corporation. Section 6. Arbitration. Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Article, except with respect to indemnification for liabilities arising under the Securities Act of 1933 that the corporation has undertaken to submit to a court for adjudication, shall be decided only by arbitration in the metropolitan area in which the principal executive offices of the corporation are located at the time, in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the corporation, the second of whom shall be selected by the indemnified representative and third of whom shall be selected by the other two arbitrators. In the absence of the American Arbitration Association, or if for any reason arbitration under the arbitration rules of the American Arbitration Association cannot be initiated, or if one of the parties fails or refuses to select an arbitrator or if the arbitrators selected by the corporation and the indemnified representative cannot agree on the selection of the third arbitrator with thirty (30) days after such time as the REPUBLIC FIRST BANCORP | 94 corporation and the indemnified representative have each been notified of the selection of the other's arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such metropolitan area. The party or parties challenging the right of an indemnified representative to the benefits of this Article shall have the burden of proof. The corporation shall reimburse an indemnified representative for the expenses (including attorneys' fees and disbursements) incurred unsuccessfully prosecuting or defending such arbitration. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction, except that the corporation shall be entitled to interpose as a defense in any such judicial enforcement proceeding any prior final judicial determination adverse to the indemnified representative under Section 7.01(a)(2) in a proceeding not directly involving indemnification under this Article. This arbitration provision shall be specifically enforceable. Section 7. Contribution. If the indemnification provided for in this Article or otherwise is unavailable for any reason in respect of any liability or portion thereof, the corporation shall contribute to the liabilities to which the indemnified representative may be subject in such proportion as is appropriate to reflect the intent of this Article or otherwise. Section 8. Mandatory Indemnification of Directors, Officers, Etc. To the extent that an authorized representative of the corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in 15 Pa.C.S. 1741 or 1742 or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees and disbursements) actually and reasonably incurred by such person in connection therewith. Section 9. Optional Indemnification. The corporation may, to the fullest extent permitted by applicable law, indemnify and advance or reimburse expenses for, persons in all situations other than that covered by this Article. Section 10. Contract Rights; Amendment or Repeal. All rights under this Article shall be deemed a contract between the corporation and the indemnified representative pursuant to which the corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing. Section 11. Scope of Article. The rights granted by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise both as to action in an indemnified capacity and as to action in any other capacity. The indemnification, contribution and advancement of expenses provided by or granted pursuant to this Article shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time, and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. Section 12. Reliance of Provisions. Each person who shall act as an indemnified representative of the corporation shall be deemed to be doing so in reliance upon the rights provided in this Article. Section 13. Interpretation. The provisions of this Article are intended to constitute By-Laws authorized by 15 Pa.C.S. 513 and 1746. ARTICLE VI ---------- SEAL ----- The seal of the Corporation shall be circular in form and shall bear the name of the Corporation, the year of its incorporation, the words "Corporate Seal" and "Commonwealth of Pennsylvania" and any emblem or device approved by the Board of Directors. The seal may be used by causing it or a facsimile to be impressed or affixed or in any other manner reproduced, or by placing the word "(seal)" adjacent to the signature of the authorized officer of the Corporation. ARTICLE VII ----------- FISCAL YEAR ----------- REPUBLIC FIRST BANCORP | 95 Section 1. Fiscal Year. The Corporation's fiscal year shall be fixed by the Board of Directors from time to time. ARTICLE VIII ------------ DIVIDENDS --------- Dividends upon any class of shares of the capital stock of the Corporation may be declared as provided by and subject to the restrictions contained in the laws of the Commonwealth of Pennsylvania and the Articles of Incorporation of the corporation, as the same or either of them may be amended from time to time, but only as and when and of the character and to the amount that the Board of Directors of the Corporation may from time to time deem advisable and only in the manner contemplated herein. ARTICLE IX ---------- EMERGENCY BY-LAW ---------------- In the event of an emergency declared by the President of the United States or the person performing his functions, the officers and employees of this Corporation will continue to conduct the affairs of the Corporation under such guidance from the directors as may be available except as to matters which by statute require specific approval of the Board and subject to conformance with any governmental directives during the emergency. The Board shall have the power, in the absence of disability of any officer, or upon the refusal of any officer to act, to delegate and prescribe such office's power and duties to any other officer, or to any director, for the time being. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of this Corporation by its directors and officers as contemplated by these By-Laws, any three or more available members of the then incumbent Executive Committee shall constitute a quorum of that committee for the full conduct and management of the affairs and business of the Corporation in accordance with this emergency By-Law. In the event of the unavailability, at such time, of a minimum of three members of the then incumbent Executive Committee, any three available directors shall constitute the management of the affairs and business of the corporation in accordance with the foregoing provisions of this section. This section shall be subject to implementation by resolutions of the Board passed from time to time for that purpose, and any provision of these By-Laws other than this section and any resolutions which are contrary to the provisions of this section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Executive Committee acting under this section that it shall be to the advantage of this Corporation to resume the conduct and management of its affairs and business under all of the other provisions of these By-Laws. During an emergency resulting in any authorized place of business of this Corporation being unable to function, the business ordinarily conducted at such location shall be relocated elsewhere in suitable quarters, in addition to or in lieu of the location heretofore mentioned, as may be designated by the Board or by the Executive Committee or by such persons as are then, in accordance with resolutions adopted from time to time by the Board dealing with the exercise of authority in the time of such emergency, conducting the affairs of this Corporation. Any temporarily relocated place of business of this Corporation shall be returned to its legally authorized location as soon as practicable and such temporary place of business shall then be discontinued. ARTICLE X --------- AMENDMENTS ---------- These By-Laws may be amended or repealed by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the Board of Directors, or by the vote of shareholders holding at least seventy-five (75%) percent of the total aggregate outstanding shares of the Corporation's capital stock, at an annual or special meeting called for such purpose. REPUBLIC FIRST BANCORP | 96 EX-10 4 ex10-5.txt EXHIBTI 10.5 Exhibit 10.5 HUMAN RESOURCES AND PAYROLL SERVICES AGREEMENT Effective January 1, 2005 - ---------------------------------------------- THIS OPERATIONS & DATA PROCESSING SERVICE AGREEMENT is made and entered into this 1st day of January, 2005, by and between Republic First Bank ("Customer") and BSC Services Corp ("Servicer"), and updated as necessary to assure an objective allocation of costs, consistent with arms length business practices and all applicable regulations. Actual costs will be billed, based upon good faith estimates of time allocations, unless both parties to the contract agree to a mark-up. Without such mark-up, the services performed are under-market; however, this is acceptable, since neither party is suffering a detriment. So that the Customer can independently gauge the below-market, objective allocation of costs, detail of salary and time allocations will be provided as requested. Should such objective allocations change prior to billings, Customer agrees to modify the next billing to "true up" billings to the actual amounts of the new allocations. In consideration of the mutual promises set forth herein, Servicer and Customer agree as follows: SECTION 1 - SERVICES PROVIDED - ----------------------------- 1.2 Human Resources and Payroll Function. Human resources functions will be provided. Management services include updating and maintaining human resources policies and complying with all related legal requirements, including the preparation of mandated governmental reporting. All payroll and payroll related services will be provided. These services include all elements of the preparation of payroll including maintaining personnel files, benefit administration, and assistance in recruitment. All benefits administration will also be centralized to maximize cost effectiveness. SECTION 2 - OTHER SERVICES AND OBLIGATIONS - ------------------------------------------ 2.1 Training. Servicer shall provide to Customer service standard training programs for the purpose of training Customer's personnel in the proper use of Servicer's procedures, systems and reports. Customer shall provide competent personnel for such training and shall cooperate with Servicer in properly scheduling such training in conjunction with Customer's conversion to Servicer's standard training. SECTION 3 - PAYMENT OF FEES - --------------------------- 3.1 Service Charges. Customer agrees to pay Servicer for the Services in accordance with the charges set forth in Schedule A attached hereto. Payment shall be due monthly upon receipt of invoice. Any charges not paid within thirty (30) days of invoice date shall bear interest at the rate of 1% per month. Customer agrees to pay all applicable sales or other taxes with respect to the Services. After expiration of one (1) year from the date of initial processing under this Agreement, the charges shall be reevaluated on the basis of updated time/expense allocations if necessary. SECTION 4 - TERM OF AGREEMENT - ----------------------------- 4.1 Term. This Agreement is effective and legally binding as of the date hereof and, unless terminated as hereinafter provided, shall continue for a period of ten years from January 1, 2005. Upon agreement of the Boards of Directors of both Customer and Servicer, the term may be shortened or otherwise modified. SECTION 5 - PROTECTION OF CUSTOMER DATA/AUDIT/COMPLIANCE WITH REGULATIONS - ------------------------------------------------------------------------- 5.1 Confidentiality. All data relating to Customer's business provided to Servicer by Customer shall be treated confidentially and safeguarded by Servicer using the same care and discretion, which Servicer uses with data it regards as confidential. 5.2 Access to Personnel, Systems and Records/Audit. Consistent with normal business standards and regulatory requirements, Servicer will be subject to reasonable access to auditors. REPUBLIC FIRST BANCORP | 97 5.3 Compliance with Regulations. Servicer agrees to comply with all applicable regulations. SECTION 6 - TERMINATION - ----------------------- 6.1 Termination for Default. Either Customer or Servicer may terminate this Agreement upon material default of the other party under this Agreement and failure of such defaulting party to cure such default within one hundred eighty (180) days after receipt of written notice specifying the event of default claimed. If such default is not cured within such 180-day period, and the terminating party intends to terminate, the terminating party must within ten (10) days thereafter give thirty (30) days written notice of termination. SECTION 7 - GENERAL - ------------------- 7.1 Governing Law. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware. This Agreement has been accepted in and shall be performable in New Castle County, Delaware. 7.2 Entire Agreement. This Agreement constitutes the entire integrated agreement between the parties, hereby superseding any and all previous representations, understandings or agreements, and may be amended only by an instrument in writing signed by Customer and an executive officer of Servicer. SERVICER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OTHER THAN THOSE CONTAINED HEREIN. 7.3 Assignment. Neither Customer nor any successor, receiver or assignee shall directly or indirectly assign this Agreement (whether such assignment is effected in connection with a sale of Customer's assets, stock or through merger, an insolvency proceeding or otherwise) without the prior written consent of Servicer. 7.4 Binding Effect. This Agreement is binding on the parties hereto and their respective successors and assigns. Customer represents that the officer signing below is duly authorized to enter into this Agreement on behalf of Customer. If amended, this Agreement shall be deemed binding on Servicer only when signed by an executive officer of Servicer. IN WITNESS WHEREOF, Customer and Servicer have entered into this revised Agreement. BSC Services Corp. BY: /s/Paul Frenkiel --------------------------- Paul Frenkiel TITLE: Chief Financial Officer DATE: January 31, 2005 ------------------------- REPUBLIC FIRST BANK BY: /s/ Robert Davis --------------------------- Robert Davis TITLE: President DATE: January 31, 2005 ------------------------- REPUBLIC FIRST BANCORP | 98 EX-10 5 ex10-6.txt EXHIBIT 10.6 Exhibit 10.6 OPERATIONS & DATA PROCESSING SERVICES AGREEMENT Effective January 1, 2005 - ----------------------------------------------- THIS OPERATIONS & DATA PROCESSING SERVICE AGREEMENT is made and entered into this 1st day of January, 2005, by and between Republic First Bank ("Customer") and BSC Services Corp ("Servicer"), and updated as necessary to assure an objective allocation of costs, consistent with arms length business practices and all applicable regulations. Actual costs will be billed, based upon good faith estimates of time allocations, unless both parties to the contract agree to a mark-up. Without such mark-up, the services performed are under-market; however, this is acceptable, since neither party is suffering a detriment. So that the Customer can independently gauge the below-market, objective allocation of costs, detail of salary and time allocations will be provided as requested. Should such objective allocations change prior to billings, Customer agrees to modify the next billing to "true up" billings to the actual amounts of the new allocations. In consideration of the mutual promises set forth herein, Servicer and Customer agree as follows: SECTION 1 - SERVICES PROVIDED - ----------------------------- 1.1 Operations & Data Processing Services. Customer hereby engages Servicer to provide operations and data processing services to Customer during the term of this Agreement, such services ("Services") to include facilities maintenance, IT security, technology, deposit, loan accounting, cash management products, wire services and processing of all accounts of Customer associated with processing application charges as set forth in Schedule A attached hereto. Customer shall transport or transmit to Servicer's designated data center, at Customer's risk and expense and in Servicer specified formats, all items, data or information required to enable Servicer to process daily account information and update Customer's master files at the end of each business day. Daily reports shall be available to Customer at data center or available for transmission to Customer on the next business day following the processing date in accordance with an agreed delivery schedule, subject to Customer's timely delivery of its items, data or information to the data center for processing. If Customer requests on-line data inquiry and update capability, Servicer's data processing system shall be made available for such purposes in accordance with Servicer's standard availability. 1.2 Financial Accounting/Reporting. All general ledger accounting functions will be performed. These services include maintenance of general ledger, and reconciliation of all accounts, monthly closing, preparation of call reports, preparation of monthly financial statements and related board reports, asset/liability management reporting, tax reporting and preparation and maintenance of the budget. 1.3 Human Resources Function. Human resources functions will be provided. These services include preparation of payroll, benefit administration, and assistance in recruitment. 1.4 Compliance. Compliance reviews, training, implementation of new regulations, and assistance to regulatory authorities in assuring compliance with regulatory and examination team requirements will be provided. SECTION 2 - OTHER SERVICES AND OBLIGATIONS - ------------------------------------------ 2.1 Item Processing and Special Services. If requested by Customer, Servicer may, at its option, provide certain item processing services through its designated data center or outside contractor, which services may include receipt and capture of Customer items to magnetic media, balancing of captured and rejected transactions to proof totals and notification to Customer of any out-of-balance condition. If requested by Customer, Servicer will provide any special back office services indicated in the Services Schedule attached with charges reflected in Schedule A, which services may include proof and balancing, inclearing, proof of deposit, reject processing, bulk filing, statement preparation, filming and research services. Customer shall have full responsibility to determine the authenticity, genuineness or accuracy of items delivered by Customer and the accuracy of the reports based thereon. 2.3 Training. Servicer shall provide to Customer service standard training programs for the purpose of training Customer's personnel in the proper use of Servicer's procedures, systems and reports. Customer shall provide competent personnel for such training and shall cooperate with Servicer in properly scheduling such training in conjunction with Customer's conversion to Servicer's standard training. SECTION 3 - PAYMENT OF FEES - --------------------------- 3.1 Service Charges. Customer agrees to pay Servicer for the Services in accordance with the charges set forth in Schedule A attached hereto. Changes will be determined to approximate market rates as necessary. Payment shall be due monthly upon receipt of invoice. Any charges not paid within thirty (30) days of invoice date shall bear interest at the rate of REPUBLIC FIRST BANCORP | 99 1% per month. Customer agrees to pay all applicable sales or other taxes with respect to the Services. After expiration of one (1) year from the date of initial processing under this Agreement, the charges shall be reevaluated on the basis of updated time/expense allocations SECTION 4 - TERM OF AGREEMENT - ----------------------------- 4.1 Term. This Agreement is effective and legally binding as of the date hereof and, unless terminated as hereinafter provided, shall continue for a period of ten years from January 1, 2005. Upon agreement of the Boards of Directors of both Customer and Servicer, the term may be shortened or otherwise modified. SECTION 5 - PROTECTION OF CUSTOMER DATA/AUDIT/COMPLIANCE WITH REGULATIONS - ------------------------------------------------------------------------- 5.1 Confidentiality. All data relating to Customer's business provided to Servicer by Customer shall be treated confidentially and safeguarded by Servicer using the same care and discretion, which Servicer uses with data it regards as confidential. 5.2 Access to Personnel, Systems and Records/Audit. Consistent with normal business standards and regulatory requirements, Servicer will be subject to reasonable access to auditors. 5.3 Compliance with Regulations. Servicer agrees to comply with all applicable regulations. SECTION 6 - TERMINATION - ----------------------- 6.1 Termination for Default. Either Customer or Servicer may terminate this Agreement upon material default of the other party under this Agreement and failure of such defaulting party to cure such default within one hundred eighty (180) days after receipt of written notice specifying the event of default claimed. If such default is not cured within such 180-day period, and the terminating party intends to terminate, the terminating party must within ten (10) days thereafter give thirty (30) days written notice of termination. SECTION 7 - GENERAL - ------------------- 7.1 Governing Law. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware. This Agreement has been accepted in and shall be performable in New Castle County, Delaware. 7.2 Entire Agreement. This Agreement constitutes the entire integrated agreement between the parties, hereby superseding any and all previous representations, understandings or agreements, and may be amended only by an instrument in writing signed by Customer and an executive officer of Servicer. SERVICER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OTHER THAN THOSE CONTAINED HEREIN. 7.3 Assignment. Neither Customer nor any successor, receiver or assignee shall directly or indirectly assign this Agreement (whether such assignment is effected in connection with a sale of Customer's assets, stock or through merger, an insolvency proceeding or otherwise) without the prior written consent of Servicer. 7.4 Binding Effect. This Agreement is binding on the parties hereto and their respective successors and assigns. Customer represents that the officer signing below is duly authorized to enter into this Agreement on behalf of Customer. If amended, this Agreement shall be deemed binding on Servicer only when signed by an executive officer of Servicer. IN WITNESS WHEREOF, Customer and Servicer have entered into this revised Agreement. BSC Services Corp. BY: /s/ Paul Frenkiel --------------------- Paul Frenkiel TITLE: Chief Financial Officer DATE: January 31, 2005 --------------------- REPUBLIC FIRST BANK BY: /s/ Robert Davis --------------------- Robert Davis TITLE: President DATE: January 31, 2005 --------------------- REPUBLIC FIRST BANCORP | 100 .. EX-10 6 ex10-7.txt EXHIBIT 10.7 Exhibit 10.7 COMPLIANCE SERVICES AGREEMENT Effective January 1, 2005 THIS OPERATIONS & DATA PROCESSING SERVICE AGREEMENT is made and entered into this 1st day of January, 2005, by and between Republic First Bank ("Customer") and BSC Services Corp ("Servicer"), and updated as necessary to assure an objective allocation of costs, consistent with arms length business practices and all applicable regulations. Actual costs will be billed, based upon good faith estimates of time allocations, unless both parties to the contract agree to a mark-up. Without such mark-up, the services performed are under-market; however, this is acceptable, since neither party is suffering a detriment. So that the Customer can independently gauge the below-market, objective allocation of costs, detail of salary and time allocations will be provided as requested. Should such objective allocations change prior to billings, Customer agrees to modify the next billing to "true up" billings to the actual amounts of the new allocations. In consideration of the mutual promises set forth herein, Servicer and Customer agree as follows: SECTION 1 - SERVICES PROVIDED - ----------------------------- 1.1 Compliance. Compliance reviews, training, implementation of new regulations, and assistance to regulatory authorities in assuring compliance with regulatory and regulatory examination team requirements will be provided. SECTION 2 - OTHER SERVICES AND OBLIGATIONS - ------------------------------------------ 2.1 Training. Servicer shall provide to Customer service standard training programs for the purpose of training Customer's personnel in the proper use of Servicer's procedures, systems and reports. Customer shall provide competent personnel for such training and shall cooperate with Servicer in properly scheduling such training in conjunction with Customer's conversion to Servicer's standard training. SECTION 3 - PAYMENT OF FEES - --------------------------- 3.1 Service Charges. Customer agrees to pay Servicer for the Services in accordance with the charges set forth in Schedule A attached hereto. Changes will be determined to approximate market rates as necessary. Payment shall be due monthly upon receipt of invoice. Any charges not paid within thirty (30) days of invoice date shall bear interest at the rate of 1% per month. Customer agrees to pay all applicable sales or other taxes with respect to the Services. After expiration of one (1) year from the date of initial processing under this Agreement, the charges shall be reevaluated on the basis of updated time/expense allocations SECTION 4 - TERM OF AGREEMENT - ----------------------------- 4.1 Term. This Agreement is effective and legally binding as of the date hereof and, unless terminated as hereinafter provided, shall continue for a period of ten years from January 1, 2005. Upon agreement of the Boards of Directors of both Customer and Servicer, the term may be shortened or otherwise modified. SECTION 5 - PROTECTION OF CUSTOMER DATA/AUDIT/COMPLIANCE WITH REGULATIONS - ------------------------------------------------------------------------- 5.1 Confidentiality. All data relating to Customer's business provided to Servicer by Customer shall be treated confidentially and safeguarded by Servicer using the same care and discretion, which Servicer uses with data it regards as confidential. 5.2 Access to Personnel, Systems and Records/Audit. Consistent with normal business standards and regulatory requirements, Servicer will be subject to reasonable access to auditors. REPUBLIC FIRST BANCORP | 101 5.3 Compliance with Regulations. Servicer agrees to comply with all applicable regulations. SECTION 6 - TERMINATION - ----------------------- 6.1 Termination for Default. Either Customer or Servicer may terminate this Agreement upon material default of the other party under this Agreement and failure of such defaulting party to cure such default within one hundred eighty (180) days after receipt of written notice specifying the event of default claimed. If such default is not cured within such 180-day period, and the terminating party intends to terminate, the terminating party must within ten (10) days thereafter give thirty (30) days written notice of termination. SECTION 7 - GENERAL - ------------------- 7.1 Governing Law. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware. This Agreement has been accepted in and shall be performable in New Castle County, Delaware. 7.2 Entire Agreement. This Agreement constitutes the entire integrated agreement between the parties, hereby superseding any and all previous representations, understandings or agreements, and may be amended only by an instrument in writing signed by Customer and an executive officer of Servicer. SERVICER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OTHER THAN THOSE CONTAINED HEREIN. 7.3 Assignment. Neither Customer nor any successor, receiver or assignee shall directly or indirectly assign this Agreement (whether such assignment is effected in connection with a sale of Customer's assets, stock or through merger, an insolvency proceeding or otherwise) without the prior written consent of Servicer. 7.4 Binding Effect. This Agreement is binding on the parties hereto and their respective successors and assigns. Customer represents that the officer signing below is duly authorized to enter into this Agreement on behalf of Customer. If amended, this Agreement shall be deemed binding on Servicer only when signed by an executive officer of Servicer. IN WITNESS WHEREOF, Customer and Servicer have entered into this revised Agreement. BSC Services Corp. BY: /s/ Paul Frenkiel --------------------------- Paul Frenkiel TITLE: Chief Financial Officer DATE: January 31, 2005 REPUBLIC FIRST BANK BY: /s/ Robert Davis --------------------------- Robert Davis TITLE: President DATE: January 31, 2005 REPUBLIC FIRST BANCORP | 102 EX-10 7 ex10-8.txt EXHIBIT 10.8 Exhibit 10.8 Effective January 1, 2005 FINANCIAL ACCOUNTING AND REPORTING SERVICES AGREEMENT - ----------------------------------------------------- THIS OPERATIONS & DATA PROCESSING SERVICE AGREEMENT is made and entered into this 1st day of January, 2005, by and between Republic First Bank ("Customer") and BSC Services Corp ("Servicer"), and updated as necessary to assure an objective allocation of costs, consistent with arms length business practices and all applicable regulations. Actual costs will be billed, based upon good faith estimates of time allocations, unless both parties to the contract agree to a mark-up. Without such mark-up, the services performed are under-market; however, this is acceptable, since neither party is suffering a detriment. So that the Customer can independently gauge the below-market, objective allocation of costs, detail of salary and time allocations will be provided as requested. Should such objective allocations change prior to billings, Customer agrees to modify the next billing to "true up" billings to the actual amounts of the new allocations. In consideration of the mutual promises set forth herein, Servicer and Customer agree as follows: SECTION 1 - SERVICES PROVIDED - ----------------------------- 1.1 Financial Accounting/Reporting. Management services will be provided, to support all of the major policy and regulatory mandates, including the investment policy, ALCO policies, and liquidity and balance sheet management policies. Assistance in pricing and availability to Bank officers will be made on a reasonable basis consistent with standard banking practices. Tax planning will also be performed to minimize tax burden consistent with standard business practices. Assistance to facilitate regulatory examinations will be provided as deemed necessary and beneficial. Centralization of cash management and investments will also be centralized, consistent with banking practices. All general ledger accounting functions will be performed. These services include maintenance of the general ledger and reconciliation of applicable accounts, monthly closings, preparation of call reports, preparation of monthly financial statements and related board reports, asset/liability management and related reporting, tax reporting and preparation and maintenance of the budget. To obtain the most cost effective insurance coverages, and consistent with standard banking practice, insurance will be centralized. Compliance with Sarbanes Oxley requirements will also be on a centralized basis to minimize duplication of costs. SECTION 2 - OTHER SERVICES AND OBLIGATIONS - ------------------------------------------ 2.1 Special Services. If requested by Customer, other financial analyses will be performed. 2.3 Training. Servicer shall provide to Customer service standard training programs for the purpose of training Customer's personnel in the proper use of Servicer's procedures, systems and reports. Customer shall provide competent personnel for such training and shall cooperate with Servicer in properly scheduling such training in conjunction with Customer's conversion to Servicer's standard training. SECTION 3 - PAYMENT OF FEES - --------------------------- 3.1 Service Charges. Customer agrees to pay Servicer for the Services in accordance with the charges set forth in Schedule A. Payment shall be due monthly upon receipt of invoice. Any charges not paid within thirty (30) days of invoice date shall bear interest at the rate of 1% per month. Customer agrees to pay all applicable sales or other taxes with respect to the Services. After expiration of one (1) year from the date of initial processing under this Agreement, the charges shall be reevaluated annually on the basis of updated time/expense allocations SECTION 4 - TERM OF AGREEMENT - ----------------------------- 4.1 Term. This Agreement is effective and legally binding as of the date hereof and, unless terminated as hereinafter provided, shall continue for a period of ten years from January 1, 2005. Upon agreement of the Boards of Directors of both Customer and Servicer, the term may be shortened or otherwise modified. SECTION 5 - PROTECTION OF CUSTOMER DATA/AUDIT/COMPLIANCE WITH REGULATIONS - ------------------------------------------------------------------------- REPUBLIC FIRST BANCORP | 103 5.1 Confidentiality. All data relating to Customer's business provided to Servicer by Customer shall be treated confidentially and safeguarded by Servicer using the same care and discretion, which Servicer uses with data it regards as confidential. 5.2 Access to Personnel, Systems and Records/Audit. Consistent with normal business standards and regulatory requirements, Servicer will be subject to reasonable access to auditors. 5.3 Compliance with Regulations. Servicer agrees to comply with all applicable regulations. SECTION 6 - TERMINATION - ----------------------- 6.1 Termination for Default. Either Customer or Servicer may terminate this Agreement upon material default of the other party under this Agreement and failure of such defaulting party to cure such default within one hundred eighty (180) days after receipt of written notice specifying the event of default claimed. If such default is not cured within such 180-day period, and the terminating party intends to terminate, the terminating party must within ten (10) days thereafter give thirty (30) days written notice of termination. SECTION 7 - GENERAL - ------------------- 7.1 Governing Law. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware. This Agreement has been accepted in and shall be performable in New Castle County, Delaware. 7.2 Entire Agreement. This Agreement constitutes the entire integrated agreement between the parties, hereby superseding any and all previous representations, understandings or agreements, and may be amended only by an instrument in writing signed by Customer and an executive officer of Servicer. SERVICER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OTHER THAN THOSE CONTAINED HEREIN. 7.3 Assignment. Neither Customer nor any successor, receiver or assignee shall directly or indirectly assign this Agreement (whether such assignment is effected in connection with a sale of Customer's assets, stock or through merger, an insolvency proceeding or otherwise) without the prior written consent of Servicer. 7.4 Binding Effect. This Agreement is binding on the parties hereto and their respective successors and assigns. Customer represents that the officer signing below is duly authorized to enter into this Agreement on behalf of Customer. If amended, this Agreement shall be deemed binding on Servicer only when signed by an executive officer of Servicer. IN WITNESS WHEREOF, Customer and Servicer have entered into this revised Agreement. BSC Services Corp. BY: /s/ Paul Frenkiel -------------------------------- Paul Frenkiel TITLE: Chief Financial Officer DATE: January 31, 2005 ---------------- REPUBLIC FIRST BANK BY: /s/ Robert Davis ------------------------------- Robert Davis TITLE: President DATE: January 31, 2005 ----------------- REPUBLIC FIRST BANCORP | 104 EX-21 8 ex21-1.txt EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE COMPANY Republic First Bank (the "PA Bank"), a wholly-owned subsidiary, commenced operations on November 3, 1988. The PA Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania. First Bank of Delaware ("DE Bank") is also a wholly-owned subsidiary of the Company and commenced operations June 1, 1999. The DE Bank is a commercial bank chartered pursuant to the laws of the State of Delaware. The PA Bank and the DE Bank are primarily regulated by the FDIC. The DE Bank was spun off on January 31, 2005. REPUBLIC FIRST BANCORP | 105 EX-23 9 exhibit23-1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated March 24, 2005 accompanying the consolidated financial statements included in the 2004 Annual Report of Republic First Bancorp, Inc. and Subsidiaries on Form10-K for the year ended December 31, 2004. We hereby consent to the incorporation by reference of said report in the Registration Statements of Republic First Bancorp, Inc. on Form S-8 (File No. 333-602265, effective March 26, 2001). /s/ Grant Thornton LLP Philadelphia, Pennsylvania March 24, 2005 REPUBLIC FIRST BANCORP | 106 EX-31 10 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Harry D. Madonna, certify that: 1. I have reviewed this annual report on Form 10-K of Republic First Bancorp, Inc. (the "company"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: March 18, 2005 /s/ Harry D. Madonna -------------------------------------------------- Chairman, President and Chief Executive Officer REPUBLIC FIRST BANCORP | 107 EX-31 11 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 I, Paul Frenkiel, certify that: 1. I have reviewed this annual report on Form 10-K of Republic First Bancorp, Inc. (the "company"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: March 18, 2005 /s/ Paul Frenkiel -------------------------------------------------- Executive Vice President and Chief Financial Officer REPUBLIC FIRST BANCORP | 108 EX-32 12 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission by Republic First Bancorp, Inc. (the "Company") on the date hereof (the "Report"), I, Harry D. Madonna, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: March 18, 2005 By:/s/ Harry D. Madonna ----------------------------- Harry D. Madonna Chairman, President and Chief Executive Officer REPUBLIC FIRST BANCORP | 109 EX-32 13 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission by Republic First Bancorp, Inc. (the "Company") on the date hereof (the "Report"), I, Paul Frenkiel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: March 18, 2005 By:/s/ Paul Frenkiel ------------------------------------- Paul Frenkiel, Executive Vice President and Chief Financial Officer REPUBLIC FIRST BANCORP | 110 -----END PRIVACY-ENHANCED MESSAGE-----