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FRBK > SEC Filings for FRBK > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for REPUBLIC FIRST BANCORP INC

Form 10-Q for REPUBLIC FIRST BANCORP INC


12-Nov-2013

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management's discussion and analysis of the Company's financial condition, changes in financial condition, and results of operations in the accompanying consolidated financial statements. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements.

Certain statements in this report 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 "would be," "could be," "should be," "probability," "risk," "target," "objective," "may," "will," "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions or variations on such expressions. 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 turmoil in the financial markets and related efforts of government agencies to stabilize the financial system; business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures and similar items. 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, except as may be required by applicable laws or regulations. Readers should carefully review the risk factors described in the Form 10-K for the year ended December 31, 2012 and other documents the Company files from time to time with the SEC, such as Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K, as well as other filings.

Regulatory Reform and Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") has and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Consumer Financial Protection Bureau, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. A summary of certain provisions of the Dodd-Frank Act is set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions' operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of the Company's business activities, require changes to certain of the Company's business practices, impose upon the Company more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect the Company's business. These changes may also require the Company to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.


In June 2012, the federal bank regulatory agencies issued a series of proposed revisions to the agencies' capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. In July 2013, the federal bank regulatory agencies adopted final rules, which differ in certain respects from the June 2012 proposals.

The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered "well capitalized") and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered "well capitalized"); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered "well capitalized"). Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements are effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.

The July 2013 final rules include three significant changes from the June 2012 proposals: (i) the final rules do not change the current risk weighting for residential mortgage exposures; (ii) the final rules permit institutions, other than certain large institutions, to elect to continue to treat certain components of accumulated other comprehensive income as permitted under the current general risk-based capital rules, and not reflect unrealized gains and losses on available-for-sale securities in common equity tier 1 calculations; and (iii) the final rules permit institutions with less than $15.0 billion in assets to grandfather certain non-qualifying capital instruments (including trust preferred securities) issued prior to May 19, 2009 into tier 1 capital.

The Company and the Bank will continue to analyze these new rules and their effects on the business, operations and capital levels of the Company and the Bank.

Financial Condition

Assets

Total assets decreased by $45.8 million, or 4.6%, to $942.9 million at September 30, 2013, compared to $988.7 million at December 31, 2012, mainly due to decreases in cash and cash equivalents and deposit balances.

Cash and Cash Equivalents

Cash and due from banks, interest bearing deposits and federal funds sold comprise this category, which consists of our most liquid assets. The aggregate amount in these three categories decreased by $83.7 million, to $44.3 million at September 30, 2013, from $128.0 million at December 31, 2012. This decrease was primarily caused by a $43.7 million decrease in deposit balances along with a $32.3 million increase in outstanding loan balances during the first nine months of 2013.

Loans Held for Sale

Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration ("SBA") which the Company usually originates with the intention of selling in the future. Total SBA loans held for sale were $7.1 million at September 30, 2013 as compared to $82,000 at December 31, 2012. This increase was driven by the timing of settlement on three loans which closed shortly after the quarter end. Loans held for sale, as a percentage of total Company assets, were less than 1% at September 30, 2013.


Loans Receivable

The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium size businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, automobile loans, home improvement loans, home equity loans and lines of credit, overdraft lines of credit and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $14.8 million at September 30, 2013. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit.

Loans increased $32.3 million, or 5.2%, to $650.2 million at September 30, 2013, compared to $617.9 million at December 31, 2012, driven by an increase in loan demand in the commercial and industrial and owner occupied real estate categories resulting in higher originations during the first nine months of 2013.

Investment Securities

Investment securities considered available-for-sale are investments which may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our investment securities classified as available-for-sale consist primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), municipal securities, corporate bonds, asset-backed securities (ABS), and pooled trust preferred securities (CDO). Available-for-sale securities totaled $199.7 million at September 30, 2013, compared to $189.3 million at December 31, 2012. The increase was primarily due to the purchase of investment securities considered available for sale totaling $50.1 million partially offset by the proceeds from the sales and maturities of available for sale securities totaling $35.3 million during the first nine months of 2013. At September 30, 2013, the portfolio had a net unrealized loss of $2.8 million compared to a net unrealized gain of $1.6 million at December 31, 2012. The change in value of the investment portfolio, from an unrealized gain to an unrealized loss, was driven by an increase in market interest rates and widening asset spreads during the second and third quarters of 2013.

Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of debt securities. At September 30, 2013 and December 31, 2012, securities held to maturity totaled $69,000 and $67,000, respectively. At both dates, respective carrying values approximated market values.

Restricted Stock

Restricted stock, which represents required investment in the capital stock of correspondent banks related to available credit facilities, is carried at cost as of September 30, 2013 and December 31, 2012. As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of Pittsburgh ("FHLB") and Atlantic Central Bankers Bank ("ACBB").

At September 30, 2013 and December 31, 2012, the investment in FHLB of Pittsburgh capital stock totaled $1.4 million and $3.7 million, respectively. At both September 30, 2013 and December 31, 2012, ACBB capital stock totaled $143,000. During the first nine months of 2013, FHLB repurchased 61% of Republic's total restricted stock outstanding, continuing its recent policy of quarterly repurchases of capital stock in excess of the minimum required investment. In 2012, the FHLB repurchased 29% of Republic's total restricted stock outstanding. All remaining capital stock in excess of the minimum required investment was repurchased by the FHLB of Pittsburgh during the first nine months of 2013. The FHLB also issued a dividend payment during the first, second and third quarter of 2013.


Bank Owned Life Insurance

At September 30, 2013, the Company carried no investment in bank owned life insurance asset, compared to a $10.5 million asset at December 31, 2012. The decrease was due to surrender proceeds of $10.5 million received as a result of the Company's decision to liquidate this investment in the second quarter of 2013.

Deposits

Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are Republic's major source of funding. Deposits are generally solicited from the Company's market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.

Total deposits decreased by $43.7 million, or 4.9%, to $845.5 million at September 30, 2013 from $889.2 million at December 31, 2012. The decrease was primarily the result of a reduction in certificate of deposit balances totaling $39.7 million. This decrease was primarily the result of maturities of internet-based certificates of deposit which the Company considers non-core deposits and intentionally decided not to renew.

Shareholders' Equity

Total shareholders' equity decreased $2.8 million to $67.1 million at September 30, 2013, compared to $69.9 million at December 31, 2012, primarily due to a reduction in accumulated other comprehensive income associated with unrealized losses in the investment securities portfolio during the first nine months of 2013. The shift in market value of the securities portfolio resulting in accumulated other comprehensive losses of $1.8 million at September 30, 2013 compared to accumulated other comprehensive income of $1.0 million at December 31, 2012 was primarily driven by an increase in market interest rates and widening asset spreads during the period.

Results of Operations

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

The Company reported a net loss of $2.2 million, or $0.09 per share, for the three months ended September 30, 2013, compared to net income of $398,000, or $0.02 per share, for the three months ended September 30, 2012. Earnings for the three month period ended September 30, 2013 were impacted by a one-time charge of $1.9 million related to a settlement agreement in connection with litigation in which the Company was a defendant. The Company had been vigorously contesting the claims in the litigation. However, as a result of reversals of certain prior procedural rulings in the case, the Company concluded that it would be in its best interest to avoid further litigation by executing a settlement agreement. This settlement releases the Company from all claims and actions related to this matter.

Net interest income was $8.2 million for the three month period ended September 30, 2013 and September 30, 2012. Interest income decreased $273,000 for the three months ended September 30, 2013 compared to September 30, 2012. Interest expense decreased $323,000, or 22.5%, to $1.1 million for the three months ended September 30, 2013 compared to $1.4 million for the three months ended September 30, 2012. This decrease was primarily due to a 15 basis point decrease in the rate on average deposits outstanding to 0.39%.


Non-interest income increased by $61,000 to $1.9 million during the three months ended September 30, 2013 compared to $1.8 million during the three months ended September 30, 2012. The increase was primarily due to a $113,000 increase in loan advisory and servicing fees. The Company recognized $1.1 million in gains on the sale of SBA loans for the three months ended September 30, 2013 and September 30, 2012.

Non-interest expenses increased $3.3 million to $12.1 million during the three months ended September 30, 2013 compared to $8.8 million during the three months ended September 30, 2012, due to the aforementioned legal settlement. There was also an increase in foreclosed real estate expenses in the amount of $458,000 over the prior year period primarily driven by a writedown of one property based on the current appraised value.

Return on average assets and average equity was (0.93)% and (12.94)%, respectively, during the three months ended September 30, 2013 compared to 0.17% and 2.32%, respectively, for the three months ended September 30, 2012.

Nine Months Ended September 30, 2013 compared to September 30, 2012

The Company reported a net loss of $219,000, or $0.01 per share, for the nine months ended September 30, 2013 compared to net income of $2.7 million, or $0.10 per share, for the nine months ended September 30, 2012. The decrease in net income was primarily driven by the one-time charge of $1.9 million related to a settlement agreement in connection with litigation in which the Company was a defendant. The Company had been vigorously contesting the claims in the litigation. However, as a result of reversals of certain prior procedural rulings in the case, the Company concluded that it would be in its best interest to avoid further litigation by executing a settlement agreement. This settlement releases the Company from all claims and actions related to this matter.

Net interest income for the nine months ended September 30, 2013 increased $300,000 to $24.2 million compared to $23.9 million for the nine months ended September 30, 2012. Interest income decreased $1.2 million, or 4.1%, due to decreases in yields on loans and investment securities and interest expense decreased $1.5 million, or 29.8%, primarily due to a 21 basis point decrease in the rate on average deposits outstanding.

Non-interest income increased $1.0 million to $7.0 million during the nine months ended September 30, 2013 as compared to $6.0 million during the nine months ended September 30, 2012 primarily due to an increase in gains recognized on the sale of SBA loans and increases in loan advisory and servicing fees.

Non-interest expenses increased $3.7 million to $30.3 million during the nine months ended September 30, 2013 as compared to $26.6 million during the nine months ended September 30, 2012, primarily due to the aforementioned legal settlement and an increase of $1.3 million in foreclosed real estate expenses. Return on average assets and average equity from continuing operations were (0.03)% and (0.42)%, respectively, during the nine months ended September 30, 2013 compared to 0.37% and 5.42%, respectively, for the nine months ended September 30, 2012.


Analysis of Net Interest Income

Historically, the Company's earnings have depended primarily upon Republic's net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income, 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) annualized average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and (iv) Republic's annualized 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. All yields are adjusted for tax equivalency.

                    Average Balances and Net Interest Income

                                        For the three months ended                 For the three months ended
                                            September 30, 2013                         September 30, 2012
                                      Average                     Yield/         Average                     Yield/
(dollars in thousands)                Balance      Interest      Rate(1)         Balance      Interest      Rate(1)
Interest-earning assets:
Federal funds sold and other
interest-earning assets            $   58,532     $      40         0.27 %    $   88,996     $      54         0.24 %
Investment securities and
restricted stock                      197,283         1,183         2.40 %       190,441         1,428         3.00 %
Loans receivable                      641,698         8,192         5.06 %       613,190         8,228         5.34 %
Total interest-earning assets         897,513         9,415         4.16 %       892,627         9,710         4.33 %
Other assets                           45,652                                     56,814
Total assets                       $  943,165                                 $  949,441

Interest-earning liabilities:
Demand - non-interest bearing      $  150,915                                 $  134,857
Demand - interest bearing             198,341           213         0.43 %       162,270           211         0.52 %
Money market & savings                410,402           425         0.41 %       416,038           572         0.55 %
Time deposits                          85,576           197         0.91 %       138,148           370         1.07 %
Total deposits                        845,234           835         0.39 %       851,313         1,153         0.54 %
Total interest-bearing deposits       694,319           835         0.48 %       716,456         1,153         0.64 %
Other borrowings                       22,476           278         4.91 %        22,476           283         5.01 %
Total interest-bearing
liabilities                           716,795         1,113         0.62 %       738,932         1,436         0.77 %
Total deposits and other
borrowings                            867,710         1,113         0.51 %       873,789         1,436         0.65 %
Non interest-bearing other
liabilities                             7,313                                      7,409
Shareholders' equity                   68,142                                     68,243
Total liabilities and
shareholders' equity               $  943,165                                 $  949,441
Net interest income (2)                           $   8,302                                  $   8,274
Net interest spread                                                 3.54 %                                     3.56 %
Net interest margin (2)                                             3.67 %                                     3.69 %

(1)Yields on investments are calculated based on amortized cost.
(2)Net interest income and net interest margin are presented on a tax equivalent basis. Net interest income has been increased over the financial statement amount by $76 and $98 for the three months ended September 30, 2013 and 2012, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.


                    Average Balances and Net Interest Income

                                         For the nine months ended                  For the nine months ended
                                            September 30, 2013                         September 30, 2012
                                     Average                      Yield/        Average                      Yield/
(dollars in thousands)               Balance      Interest       Rate(1)        Balance      Interest       Rate(1)
Interest-earning assets:
Federal funds sold and other
interest-earning assets            $  69,109     $     143          0.28 %    $ 123,332     $     239          0.26 %
Investment securities and
restricted stock                     187,616         3,459          2.46 %      184,748         4,324          3.12 %
Loans receivable                     632,369        24,297          5.14 %      604,245        24,570          5.43 %
Total interest-earning assets        889,094        27,899          4.20 %      912,325        29,133          4.27 %
Other assets                          52,048                                     56,025
Total assets                       $ 941,142                                  $ 968,350

Interest-earning liabilities:
Demand - non-interest bearing      $ 145,475                                  $ 135,079
Demand - interest bearing            183,445           615          0.45 %      135,461           567          0.56 %
Money market & savings               416,867         1,355          0.43 %      436,182         2,157          0.66 %
Time deposits                         96,103           680          0.95 %      164,797         1,384          1.12 %
Total deposits                       841,890         2,650          0.42 %      871,519         4,108          0.63 %
Total interest-bearing deposits      696,415         2,650          0.51 %      736,440         4,108          0.75 %
Other borrowings                      22,476           834          4.96 %       22,526           852          5.05 %
Total interest-bearing
liabilities                          718,891         3,484          0.65 %      758,966         4,960          0.87 %
Total deposits and other
borrowings                           864,366         3,484          0.54 %      894,045         4,960          0.74 %
Non interest-bearing other
liabilities                            7,439                                      7,529
Shareholders' equity                  69,337                                     66,776
Total liabilities and
shareholders' equity               $ 941,142                                  $ 968,350
Net interest income (2)                          $  24,415                                  $  24,173
Net interest spread                                                 3.55 %                                     3.40 %
Net interest margin (2)                                             3.67 %                                     3.54 %

(1)Yields on investments are calculated based on amortized cost.
(2)Net interest income and net interest margin are presented on a tax equivalent basis. Net interest income has been increased over the financial statement amount by $238 and $296 for the nine months ended September 30, 2013 and 2012, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.


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
three and nine months ended September 30, 2013, as compared to the three and
nine months ended September 30, 2012. 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.
. . .
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