republicfirst10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2009

Commission File Number: 000-17007

Republic First Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania
23-2486815
(State or other jurisdiction of
IRS Employer Identification
incorporation or organization)
Number

50 South 16thStreet, Philadelphia, Pennsylvania 19102
 
(Address of principal executive offices)
(Zip code)

215-735-4422
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES    X   
NO____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File Required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES ____    
NO____    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____
Accelerated Filer      X     
 
Non-Accelerated filer ____
Smaller reporting company ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
 
YES____
NO     X    
APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latestpracticable date.
 
10,655,201 shares of Issuer’s Common Stock, par value
$0.01 per share, issued and outstanding as of May 7, 2009

Page 1

Exhibit index appears on page 33


 

 
TABLE OF CONTENTS
 
   
Part I: Financial Information
Page
   
Item 1: Financial Statements (unaudited)
   
Item 2:  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
   
Item 3:  Quantitative and Qualitative Disclosures about Market Risk
   
Item 4:  Controls and Procedures
   
Part II: Other Information
 
   
Item 1: Legal Proceedings
   
Item 1A: Risk Factors
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
   
Item 3: Defaults Upon Senior Securities
   
Item 4: Submission of Matters to a Vote of Security Holders
   
Item 5: Other Information
   
Item 6: Exhibits
   
Signatures



 
2

 


PART I - FINANCIAL INFORMATION



ITEM 1: FINANCIAL STATEMENTS

 
Page
   
   
Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008
   
Consolidated Statements of Operations for the three months ended
 
March 31, 2009 and 2008 (unaudited)
   
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended
March 31, 2009 and 2008 (unaudited)
 
Consolidated Statements of Cash Flows for the three months ended
 
March 31, 2009 and 2008 (unaudited)
   
   
Notes to Consolidated Financial Statements (unaudited)
   




 
3

 

Republic First Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
 March 31, 2009 and December 31, 2008
(Dollars in thousands, except share data)
(unaudited)


 
ASSETS:
 
March 31, 2009
   
December 31, 2008
 
             
Cash and due from banks
  $ 19,246     $ 12,925  
Interest bearing deposits with banks
    151       334  
Federal funds sold
    6,883       21,159  
Total cash and cash equivalents
    26,280       34,418  
                 
Investment securities available for sale, at fair value
    79,410       83,032  
Investment securities held to maturity, at amortized cost
               
     (Fair value of $213 and $214,  respectively)
    198       198  
Restricted stock, at cost
    6,836       6,836  
Loans receivable (net of allowance for loan losses of
               
     $8,434 and $8,409, respectively)
    741,822       774,673  
Premises and equipment, net
    15,366       14,209  
Other real estate owned, net
    10,016       8,580  
Accrued interest receivable
    3,762       3,939  
Bank owned life insurance
    12,191       12,118  
Other assets
    15,499       13,977  
Total Assets
  $ 911,380     $ 951,980  
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Liabilities:
               
Deposits:
               
Demand – non-interest-bearing
  $ 87,849     $ 70,814  
Demand – interest-bearing
    38,448       43,044  
Money market and savings
    253,101       231,643  
Time less than $100,000
    131,054       139,708  
Time over $100,000
    268,676       253,958  
    Total Deposits
    779,128       739,167  
                 
Short-term borrowings
    -       77,309  
FHLB Advances
    25,000       25,000  
Accrued interest payable
    2,923       2,540  
Other liabilities
    5,366       6,161  
Subordinated debt
    22,476       22,476  
Total Liabilities
    834,893       872,653  
Shareholders’ Equity:
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized;
               
    no shares issued as of March 31, 2009 and December 31, 2008
    -       -  
Common stock par value $0.01 per share, 20,000,000 shares authorized;
               
    shares issued 11,059,578 as of March 31, 2009
               
    and 11,047,651 as of December 31, 2008
    111       110  
Additional paid in capital
    76,723       76,629  
Retained earnings
    4,695       8,455  
Treasury stock at cost (416,303 shares)
    (3,099 )     (3,099 )
Stock held by deferred compensation plan
    (538 )     (1,377 )
Accumulated other comprehensive loss
    (1,405 )     (1,391 )
Total Shareholders’ Equity
    76,487       79,327  
Total Liabilities and Shareholders’ Equity
  $ 911,380     $ 951,980  
                 
                 
                 



(See notes to unaudited consolidated financial statements)
 
 
4




Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three Months Ended March 31, 2009 and 2008
(Dollars in thousands, except per share data)
(unaudited)

 
   
Three months ended
 
   
March 31,
 
   
2009
   
2008
 
Interest income:
           
   Interest and fees on loans
  $ 9,990     $ 13,453  
   Interest and dividends on taxable investment securities
    1,027       1,138  
   Interest and dividends on tax-exempt investment securities
    108       114  
   Interest on federal funds sold and other interest-earning assets     3       96  
   Total interest income
    11,128       14,801  
                 
Interest expense:
               
   Demand- interest bearing
    65       146  
   Money market and savings
    1,101       1,667  
   Time less than $100,000
    1,194       2,053  
   Time over $100,000
    1,307       2,387  
   Other borrowings
    603       1,326  
Total interest expense
    4,270       7,579  
Net interest income
    6,858       7,222  
Provision for loan losses
    4,800       5,812  
Net interest income after provision for loan losses
    2,058       1,410  
                 
                 
Non-interest income:
               
    Loan advisory and servicing fees
    227       112  
    Service fees on deposit accounts
    301       287  
    Gain on sale of investment security
    -       5  
    Impairment charge on investment security
    (23 )     -  
    Bank owned life insurance income
    73       108  
    Other non-interest income
    74       153  
Total non-interest income     652       665  
Non-interest expenses:
               
   Salaries and employee benefits
    3,558       2,730  
   Occupancy
    687       603  
   Depreciation and amortization
    335       326  
   Legal
    359       197  
   Write down/loss on sale of other real estate
    1,319       1,016  
   Other real estate
    103       -  
   Advertising
    24       129  
   Data processing
    259       203  
   Insurance
    174       104  
   Professional fees
    461       99  
   Regulatory assessments and costs
    171       52  
   Taxes, other
    252       261  
   Other operating expenses
    783       728  
Total non-interest expense
    8,485       6,448  
                 
Loss before benefit for income taxes
    (5,775 )     (4,373 )
Benefit for income taxes
    (2,015 )     (1,595 )
                 
Net loss
  $ (3,760 )   $ (2,778 )
                 
Net loss per share:
               
Basic
  $ (0.35 )   $ (0.27 )
Diluted
  $ (0.35 )   $ (0.27 )
                 
                 



(See notes to unaudited consolidated financial statements)
 

 

 
5

 


Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2009 and 2008
(Dollars in thousands, except share data)
(unaudited)
 

 
   
 
Comprehensive
Loss
   
 
Common
Stock
   
Additional
Paid in
Capital
   
 
Retained
Earnings
   
 
Treasury Stock
   
Stock Held by
Deferred
Compensation
Plan
   
Accumulated
Other
Comprehensive
Loss
   
Total
Shareholders’
Equity
 
                                                 
                                                 
Balance January 1, 2009
        $ 110     $ 76,629     $ 8,455     $ (3,099 )   $ (1,377 )   $ (1,391 )   $ 79,327  
 
Total other comprehensive loss,
net of tax benefit of $(8)
    (14 )                                   (14 )     (14 )
Net loss
    (3,760 )                 (3,760 )                       (3,760 )
Total comprehensive loss
  $ (3,774 )                                                        
                                                                 
Stock based compensation
                  69                               69  
Options exercised
(11,927 shares)
            1       25                               26  
Deferred compensation plan
distribution
                                    839             839  
                                                                 
Balance March 31, 2009
          $ 111     $ 76,723     $ 4,695     $ (3,099 )   $ (538 )   $ (1,405 )   $ 76,487  
                                                                 
                                                                 
   
 
Comprehensive
Loss
   
 
Common
Stock
   
Additional
Paid in
Capital
   
 
Retained
Earnings
   
 
Treasury Stock
   
Stock Held by
Deferred
Compensation
Plan
   
Accumulated
Other
Comprehensive
Loss
   
Total
Shareholders’
Equity
 
                                                 
                                                 
Balance January 1, 2008
        $ 107     $ 75,321     $ 8,927     $ (2,993 )   $ (1,165 )   $ 270     $ 80,467  
 
Total other comprehensive loss,
net of tax benefit of $(108)
    (210 )                                   (210 )     (210 )
Net loss
    (2,778 )                 (2,778 )                       (2,778 )
Total comprehensive loss
  $ (2,988 )                                                        
                                                                 
Stock based compensation
                  35                               35  
Options exercised
(63,355 shares)
            1       162                               163  
                                                                 
                                                                 
Balance March 31, 2008
          $ 108     $ 75,518     $ 6,149     $ (2,993 )   $ (1,165 )   $ 60     $ 77,677  
                                                                 


 (See notes to unaudited consolidated financial statements)



6


 
 
 Republic First Bancorp, Inc. and Subsidiary
 
 
 For the Three Months Ended March 31, 2009 and 2008
 
 (Dollars in thousands)
 
 (unaudited)
 
   
Three months ended
 
   
March 31,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net loss
  $ (3,760 )   $ (2,778 )
Adjustments to reconcile net loss to net
               
   cash provided by operating activities:
               
Provision for loan losses
    4,800       5,812  
Write down or loss on sale of other real estate owned
    1,319       1,016  
Depreciation  and amortization
    335       326  
Deferred compensation plan distribution
    839       -  
Stock based compensation
    69       35  
Gain on sale of investment security
    -       (5 )
Impairment charge on investment security
    23       -  
Amortization of discounts on investment securities
    (64 )     (50 )
Increase in value of bank owned life insurance
    (73 )     (108 )
Increase in accrued interest receivable
               
and other assets
    (1,330 )     (1,812 )
Decrease in accrued interest payable
               
and other liabilities
    (412 )     (2,266 )
Net cash provided by operating activities
    1,746       170  
Cash flows from investing activities:
               
Purchase of investment securities:
               
Available for sale
    -       (992 )
Proceeds from maturities and calls of securities:
               
Available for sale
    3,634       5,585  
Held to maturity
    -       25  
Purchase of FHLB stock
    -       (942 )
Net decrease in loans
    25,296       4,045  
Net proceeds from sale of other real estate owned
    -       2,126  
Premises and equipment expenditures
    (1,492 )     (736 )
Net cash provided by investing activities
    27,438       9,111  
Cash flows from financing activities:
               
Net proceeds from exercise of stock options
    26       163  
Net (decrease) increase in demand, money market and savings deposits
    33,897       (35,487 )
Net increase (decrease) in short term borrowings
    (77,309 )     19,234  
Net increase in time deposits
    6,064       4,164  
Net cash used in financing activities
    (37,322 )     (11,926 )
Decrease in cash and cash equivalents
    (8,138 )     (2,645 )
Cash and cash equivalents, beginning of period
    34,418       73,225  
Cash and cash equivalents, end of period
  $ 26,280     $ 70,580  
Supplemental disclosure:
               
Interest paid
  $ 3,887     $ 7,493  
Non-monetary transfers from loans to other real estate owned
  $ 2,755     $ 15,839  


(See notes to unaudited consolidated financial statements)

 
7



 

REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1:  Definitive Agreement of Merger:

 
On November 7, 2008, the board of directors of Republic First Bancorp, Inc. (“the Company”) approved an agreement and plan of merger, pursuant to which the Company will be merged with and into Pennsylvania Commerce Bancorp, Inc. (“Pennsylvania Commerce”), subject to the receipt of shareholder and regulatory approvals and the satisfaction of other customary closing conditions.  Approvals were obtained from the Company’s shareholders on March 18, 2009 and Pennsylvania Commerce’s shareholders on March 19, 2009.  On April 29, 2009, Pennsylvania Commerce notified the Company of its extension, in accordance with the terms of the merger agreement, of a contractual deadline for the completion of the merger until July 31, 2009, in order to allow the parties additional time to obtain required regulatory approvals for the merger.  As a result of the extension, either Pennsylvania Commerce or Republic First, provided it is not responsible for the delay, may terminate the merger agreement if the merger is not completed by July 31, 2009.
 
Note 2:  Nature of Operations:

The Company is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania.  It is comprised of one wholly owned subsidiary, Republic First Bank (“Republic”), a Pennsylvania state chartered bank, and Republic’s subsidiaries.  Republic offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and branches in Philadelphia, Montgomery, Delaware and Camden Counties.  The Company also has three unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of three separate issuances of trust preferred securities.
 
Between January 2005 and August 2008, Republic engaged BSC Services Corporation (“BSC”), a former affiliate, to provide data processing, accounting, employee leasing, human resources, credit and compliance services.  In August 2008, BSC discontinued its operations and many of its employees were transferred to the direct employ of Republic.  BSC allocated costs of services to Republic on the basis of Republic’s usage, and Republic classified such costs to the appropriate non-interest expense categories.
 
The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
 
The Company and Republic are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and Republic for adherence to laws and regulations. As a consequence, the cost of doing business may be affected.
 
Note 3:  Summary of Significant Accounting Policies:

 
Basis of Presentation:
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information  and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have
 
8

 
been included.  Operating results for the three month period ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. 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 primarily on the earnings of Republic.  The earnings of Republic 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, our results of operations are subject to risks and uncertainties surrounding our exposure to changes in the interest rate environment.
 
Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly, and may cause significant fluctuations in interest margins.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment of investment securities, impairment of restricted stock and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
 
In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors.  Because 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 Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.
 
In estimating other than temporary impairment of investment securities, securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other than temporary.  To determine whether a loss in value is other than temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value.  The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of investment.  Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
 
In estimating impairment of restricted stock, management’s determination of whether these investments are impaired is based on the assessment of the ultimate recoverability of the cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of the cost is influenced by criteria such as (1) the significance of the decline in net assets of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and accordingly, on the customer base of the FHLB.
 
In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income.  In
 
9

 
determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business.  Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.  An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
 
The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends, and others.  Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.
 
Share-Based Compensation:

The Company maintains a Stock Option Plan  (the “Plan”), under which the Company grants options to its employees, directors and independent contractors and consultants who perform services for the Company.  Under terms of the Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that may be available for grant under the Plan to 1.5 million shares, are reserved for such options.  The Plan provides that the exercise price of each option granted equals the market price of the Company’s stock on the date of grant.  Any options granted vest within one to five years and has a maximum term of 10 years.  Unless otherwise provided in a grant letter, upon a change in control such as the completion of the proposed merger with Pennsylvania Commerce, all unvested options would immediately vest.  Based on terms provided in various grant letters, 212,700 unvested options granted in 2008 and 2009 will not vest upon the completion proposed merger with Pennsylvania Commerce.  Expense is estimated at $233,000.
 
The Black-Sholes option pricing model is utilized to determine the fair market value of stock options.  In 2009, the following assumptions were utilized: a dividend yield of 0%; expected volatility of 26.45% to 27.61%; a risk-free interest rate of 1.99% to 2.72%; and an expected life of 7.0 years.  In 2008 the following assumptions were utilized: a dividend yield of 0%; expected volatility of 24.98%; a risk-free interest rate of 3.08%; and an expected life of 7.0 years.  A dividend yield of 0% is utilized, because cash dividends have never been paid.  The expected life reflects a 3 to 4 year “all or nothing” vesting period, the maximum ten year term and review of historical behavior.  The volatility was based on Bloomberg’s seven year volatility calculation for “FRBK” stock.  The risk-free interest rate is based on the seven year Treasury bond.  6,050 shares vested in the first quarter of 2009.  Expense is recognized ratably over the period required to vest.  There were 236,350 unvested options at January 1, 2009 with a fair value of $827,755 with $599,551 of that amount remaining to be recognized as expense.  At March 31, 2009, there were 339,000 unvested options with a fair value of $1,014,130 with $749,084 of that amount remaining to be recognized as expense. At that date, the intrinsic value of the 564,761 options outstanding was $279,843, while the intrinsic value of the 225,761 exercisable (vested) was $225,474.

 
10

 
A summary of the status of the Company’s stock options under the Stock Option Plan as of March 31, 2009 and 2008 and changes during the three months ended March 31, 2009 and 2008 are presented below:
 
   
For the Three Months Ended March 31,
 
   
2009
   
2008
 
   
Shares
   
Weighted
Average
Exercise
Price
   
Shares
   
Weighted
Average
Exercise
Price
 
Outstanding, beginning of year
    467,988     $ 8.33       737,841     $ 6.39  
Granted
    108,700       6.35       52,000       6.18  
Exercised
    (11,927 )     2.17       (63,355 )     2.56  
Forfeited
    -       -       (63,442 )     8.62  
Outstanding, end of period
    564,761       8.08       663,044       6.53  
Options exercisable at period-end
    225,761       8.02       509,294       5.51  
                                 
Weighted average fair value of
options granted during the period
          $ 2.17             $ 2.11  
                                 

   
For the Three Months Ended
 March 31,
 
   
2009
   
2008
 
Number of options exercised
    11,927       63,355  
Cash received
  $ 26,000     $ 163,000  
Intrinsic value
    62,139       266,233  
Tax benefit
    21,749       93,181  

The following table summarizes information about options outstanding under the Plan as of March 31, 2009.
 
         
     
Options outstanding
   
Options exercisable
 
Range of Exercise Prices
   
Shares
   
Weighted
Average
remaining
contractual
life (years)
   
Weighted
Average
exercise
price
   
Shares
   
Weighted
Average
Exercise
Price
 
 
$1.81
      7,453       1.8     $ 1.81       7,453     $ 1.81  
 
$2.77 to $3.88
      886       2.4       2.95       886       2.95  
 
$5.70 to $8.72
      391,013       6.3       7.05       110,313       6.25  
 
$9.93 to $12.13
      165,409       6.8       10.82       107,109       10.31  
          564,761             $ 8.08       225,761     $ 8.02  
                                             

   
For the Three Months Ended,
 
   
March 31, 2009
 
   
Number of shares
   
Weighted average grant date fair value
 
Nonvested at beginning of year
    236,350     $ 3.50  
Granted
    108,700       2.17  
Vested
    (6,050 )     5.10  
Nonvested at end of period
    339,000     $ 2.99  

During the three months ended March 31, 2009, $69,000 was recognized in compensation expense, with a 35% assumed tax benefit, for the Stock Option Plan.  During the three months ended March 31, 2008, $35,000 was recognized in compensation expense, with a 35% assumed tax benefit, for the Stock Option Plan.
 

11

 

Note 4:  Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4).  FASB Statement 157, Fair Value Measurements, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.

FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.

This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2).   FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in
 
 
12

 
other comprehensive income.

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1).  FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly and FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

Note 5:  Legal Proceedings
The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business.  While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
 
Note 6:  Segment Reporting
 
The Company has one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as consumer loan products in the area surrounding its branches.
 
Note 7:  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 (“CSEs”). CSEs consist of dilutive stock options granted through the Plan and convertible securities related to an issuance of trust preferred securities sponsored by the Company in June 2008.  In the diluted EPS computation, the after tax interest expense on that trust preferred securities issuance is added back to the net loss.  For the three months ended March 31, 2009 and 2008, the effect of CSEs and the related add back of after tax interest expense was anti-dilutive. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. CSEs which are anti-dilutive are not included in the following calculation.  At March 31, 2009, there were 335,406 stock options to purchase common stock, which were excluded from the computation of earnings per share because the option price was greater than the average market price.  At March 31, 2008, there were 289,029 stock options to purchase common stock, which were excluded from the computation of earnings per share
 
 
13

 
because the option price was greater than the average market price.  For the three months ended March 31, 2009 and 2008, the Company included no stock options in calculating diluted EPS due to a net loss from operations.
 
The following tables are a comparison of EPS for the three months ended March 31, 2009 and 2008.
 
 
Three months ended March 31,    
2009 
     
2008 
 
Net Loss
  $ (3,760,000 )         $ (2,778,000 )      
(numerator for basic and diluted earnings
per share)
         
Per
           
Per
 
   
Shares
   
Share
   
Shares
   
Share
 
Weighted average shares
                           
for period (denominator for basic earnings per
share)
    10,631,480             10,363,376        
Earnings (loss) per share - basic
          $ (0.35 )           $ (0.27 )
Add common stock equivalents
representing dilutive stock options
    -               -          
Effect on basic EPS of dilutive CSE
          $ -             $ -  
Weighted average shares outstanding  
    10,631,480               10,363,376          
                                 
Loss per share - diluted
          $ (0.35 )           $ (0.27 )

Note 8:  Fair Value of Financial Instruments:

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements.  The Company adopted SFAS 157 effective for its fiscal year beginning January 1, 2008.
 
In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.  As such, the Company only partially adopted the provisions of SFAS 157, and will begin to account and report for non-financial assets and liabilities in 2009.  In October 2008, the FASB issued FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP 157-3”), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market.  FSP 157-3 is effective immediately and applies to the Company’s December 31, 2008 consolidated financial statements.  The adoption of FSP 157-3 had an impact on the amounts reported in the consolidated financial statements as an impairment charge on a bank pooled trust preferred security of $23,000 was recognized during the quarter ended March 31, 2009.
 
SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in
 
14

 
active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under SFAS 157 are as follows:
 
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
 
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2009 and December 31, 2008 are as follows:
 
Description
 
March 31, 2009
   
(Level 1)
Quoted Prices in Active Markets for Identical Assets
   
(Level 2) Significant Other Observable Inputs
   
(Level 3) Significant Unobservable Inputs
 
(In Thousands)
                       
Securities available for sale
  $ 79,410     $ -     $ 74,438     $ 4,972  

Description
 
December 31, 2008
   
(Level 1)
Quoted Prices in Active Markets for Identical Assets
   
(Level 2) Significant Other Observable Inputs
   
(Level 3) Significant Unobservable Inputs
 
(In Thousands)
                       
Securities available for sale
  $ 83,032     $ -     $ 78,100     $ 4,932  
                                 

 
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31:
 
   
2009
 
   
(In Thousands)
 
       
Beginning Balance, January 1,
  $ 4,932  
Unrealized gains arising during 2009
    63  
Impairment charge on Level 3 security
    (23 )
Ending balance, March 31,
  $ 4,972  
         




15


 
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2009 and December 31, 2008 are as follows:
 
Description
 
March 31, 2009
   
(Level 1)
Quoted Prices in Active Markets for Identical Assets
   
(Level 2) Significant Other Observable Inputs
   
(Level 3) Significant Unobservable Inputs
 
(In thousands)
                       
Impaired loans
  $ 48,505     $ -     $ -     $ 48,505  
                                 
Other real estate owned
  $ 10,016     $ -     $ -     $ 10,016  
                                 

Description
 
December 31, 2008
   
(Level 1)
Quoted Prices in Active Markets for Identical Assets
   
(Level 2) Significant Other Observable Inputs
   
(Level 3) Significant Unobservable Inputs
 
(In thousands)
                       
Impaired loans
  $ 15,934     $ -     $ -     $ 15,934  
                                 
Other real estate owned
  $ 8,580     $ -     $ -     $ 8,580  
                                 


The recorded investment in impaired loans totaled $53.8 million at March 31, 2009 and $18.3 million at December 31, 2008.  The amounts of related valuation allowances were $5.3 million and $2.4 million respectively at those dates.
 

 
16

 

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 “may,” “believes,” “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective” and similar expressions or variations on such expressions.  The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.  For example, risks and uncertainties can arise with changes in:  general economic conditions, including their impact on capital expenditures; new service and product offerings by competitors and 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 other documents the Company files from time to time with the SEC, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K, as well as other filings.
 
Financial Condition:
 
March 31, 2009 Compared to December 31, 2008

Assets decreased $40.6 million to $911.4 million at March 31, 2009, compared to $952.0 million at December 31, 2008. This decrease reflected a $32.9 million decrease in loans receivable and an $8.1 million decrease in cash and cash equivalents.
 
Loans:
 
The loan portfolio represents the Company’s largest asset category and is its most significant source of interest income.  The Company’s lending strategy is focused on small and medium size businesses and professionals that seek highly personalized banking services.  Gross loans decreased $32.8 million, to $750.3 million at March 31, 2009, compared to $783.1 million at December 31, 2008.  Substantially all of the decrease resulted from decreases in commercial and construction loans.  The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, automobile loans, home improvement loans, home equity loans and lines of credit, overdraft lines of credit and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit, which was approximately $15.0 million at March 31, 2009.  Individual customers may have several loans that are secured by different collateral, which were in total subject to that lending limit.
 
Investment Securities:

Investment securities available-for-sale are investments which may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes.  The Company’s investment securities available-for-sale consist primarily of U.S. Government Agency issued mortgage-backed securities, municipal securities, corporate bonds, and trust preferred securities.  Available-for-sale securities totaled $79.4 million at March 31, 2009, compared to $83.0 million at year-end 2008.  At both
 
 
17

 
March 31, 2009 and December 31, 2008, the portfolio had net unrealized losses of $2.2 million.
 
Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of debt securities and stocks. At March 31, 2009 and year-end 2008, securities held to maturity totaled $198,000 for both periods.
 
Restricted Stock:
 
Republic is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and, as such, had been required to maintain stock in FHLB in proportion to its outstanding FHLB advances, prior to the FHLB suspension of dividend payments in 2008.  Since that suspension of dividend payments, the restricted stock has been frozen, therefore, at both March 31, 2009 and December 31, 2008, FHLB stock totaled $6.7 million.
 
Republic is also required to maintain stock in Atlantic Central Bankers Bank (“ACBB”) as a condition of a rarely used contingency line of credit.  At both March 31, 2009 and December 31, 2008, ACBB stock totaled $143,000.
 
Cash and Cash Equivalents:
 
Cash and due from banks, interest bearing deposits and federal funds sold comprise this category which consists of the Company’s most liquid assets. The aggregate amount in these three categories decreased by $8.1 million, to $26.3 million at March 31, 2009, from $34.4 million at December 31, 2008, primarily reflecting a $14.3 million decrease in federal funds sold partially offset by a $6.3 million increase in due from banks.
 
Fixed Assets:
 
The balance in premises and equipment, net of accumulated depreciation, was $15.4 million at March 31, 2009, compared to $14.2 million at December 31, 2008, reflecting primarily branch expansion.
 
Other Real Estate Owned:
 
Other real estate owned amounted to $10.0 million at March 31, 2009 compared to $8.6 million at December 31, 2008, primarily reflecting a transfer from loans of $2.8 million, partially offset by two writedowns totaling $1.3 million.
 
Bank Owned Life Insurance:
 
The balance of bank owned life insurance amounted to $12.2 million at March 31, 2009 and $12.1 million at December 31, 2008. The income earned on these policies is reflected in non-interest income.
 
Other Assets:
 
Other assets increased by $1.5 million to $15.5 million at March 31, 2009, from $14.0 million at December 31, 2008, reflecting a $2.0 million increase in current income tax assets, a $565,000 increase in prepaid expenses, partially offset by the collection of $1.1 million in short-term receivables collected in the first quarter of 2009.
 
Deposits:
 
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits including some brokered deposits, are Republic’s major source of funding. Deposits are generally solicited from the Company’s market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.
 
Total deposits increased by $40.0 million to $779.1 million at March 31, 2009 from $739.2 million at December 31, 2008.  Average transaction account balances increased 4.0% or $13.3 million
 
 
18

 
more than the prior year period to $346.3 million in the first quarter of 2009.  Period end time deposits increased $6.1 million, or 1.5% to $399.7 million at March 31, 2009, compared to $393.7 million at the prior year-end.
 
Short-Term Borrowings and FHLB Advances:
 
Short-term borrowings and FHLB advances are used to supplement deposits as a source of funds.  Republic had $25.0 million FHLB advances at March 31, 2009 and December 31, 2008.  These FHLB advances mature June, 2010.  Republic had no short-term borrowings (overnight) at March 31, 2009 compared to $77.3 million at the prior year-end.
 
Subordinated Debt:
 
Subordinated debt, which is comprised of the subordinated debentures supporting the common and capital, or trust preferred, securities of the Company’s unconsolidated capital trusts, amounted to $22.5 million at March 31, 2009 and December 31, 2008.
 
 
Shareholders’ Equity:

Total shareholders’ equity decreased $2.8 million to $76.5 million at March 31, 2009, compared to $79.3 million at December 31, 2008, primarily due to the $3.8 million net loss recorded in first quarter 2009.
 
Three Months Ended March 31, 2009 and March 31, 2008
Results of Operations:
 
Overview

The Company reported a net loss of $3.8 million, or $(0.35) per diluted share, for the three months ended March 31, 2009, compared to a $2.8 million net loss, or $(0.27) per diluted share, for the comparable prior year period.  There was a $3.7 million, or 24.8%, decrease in total interest income, reflecting a 127 basis point decrease in the yield on average loans outstanding while interest expense decreased $3.3 million, reflecting a 173 basis point decrease in the rate on average interest-bearing deposits outstanding and a 73 basis point decrease in the rate on average borrowings outstanding.  Net interest income for the three months ended March 31, 2009 decreased $364,000 compared to the comparable period of 2008.  The provision for loan losses in the first quarter of 2009 decreased to $4.8 million, compared to $5.8 million in the first quarter of 2008.  In both periods, the provision for loan losses reflected additional specific reserves on certain loans.  Non-interest income decreased $13,000 to $652,000 in first quarter 2009 compared to $665,000 in first quarter 2008.  Non-interest expenses increased $2.0 million to $8.5 million compared to $6.4 million in the first quarter of 2008, primarily due to increases in salaries and employee benefits expense of $828,000, $406,000 in other real estate owned related expenses, $362,000 in professional fees, $162,000 in legal fees and $119,000 in regulatory assessments and costs. Return on average assets and average equity from continuing operations of (1.66)% and (19.41)% respectively, in the first quarter of 2009 compared to (1.16)% and (13.90)% respectively for the same period in 2008.
 
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
 
 
19

 
 average total interest-earning assets).  Averages are computed based on daily balances.  Non-accrual loans are included in average loans receivable.  Yields are adjusted for tax equivalency first quarter 2009 and 2008.

 
   
For the three months ended
   
For the three months ended
 
   
March 31, 2009
   
March 31, 2008
 
                                     
         
Interest
               
Interest
       
(Dollars in thousands)
 
Average
   
Income/
   
Yield/
   
Average
   
Income/
   
Yield/
 
Interest-earning assets:
 
Balance
   
Expense
   
Rate (1)
   
Balance
   
Expense
   
Rate (1)
 
Federal funds sold
                                   
and other interest-
                                   
earning assets
  $ 3,726     $ 3       0.33 %   $ 12,271     $ 96       3.15 %
Investment securities and
                                               
restricted stock
    90,966       1,190       5.23 %     87,545       1,313       6.00 %
Loans receivable
    770,562       9,990       5.26 %     817,702       13,453       6.62 %
Total interest-earning assets
    865,254       11,183       5.24 %     917,518       14,862       6.51 %
Other assets
    51,229                       42,977                  
Total assets
  $ 916,483                     $ 960,495                  
                                                 
Interest-bearing liabilities:
                                               
Demand - non-interest bearing
  $ 77,527                     $ 83,393                  
Demand - interest-bearing
    42,087     $ 65       0.63 %     41,993     $ 146       1.40 %
Money market & savings
    226,663       1,101       1.97 %     207,571       1,667       3.23 %
Time deposits
    394,742       2,501       2.57 %     384,040       4,440       4.65 %
Total deposits
    741,019       3,667       2.01 %     716,997       6,253       3.51 %
Total interest-bearing deposits
    663,492       3,667       2.24 %     633,604       6,253       3.97 %
Other borrowings
    87,726       603       2.79 %     151,552       1,326       3.52 %
Total interest-bearing
                                               
liabilities
  $ 751,218     $ 4,270       2.31 %   $ 785,156     $ 7,579       3.88 %
Total deposits and
                                               
other borrowings
    828,745       4,270       2.09 %     868,549       7,579       3.51 %
Non interest-bearing
                                               
other liabilites
    9,184                       11,558                  
Shareholders' equity
    78,554                       80,388                  
Total liabilities and
                                               
shareholders' equity
  $ 916,483                     $ 960,495                  
                                                 
Net interest income (2)
          $ 6,913                     $ 7,283          
Net interest spread
                    2.93 %                     2.63 %
                                                 
Net interest margin (2)
                    3.24 %                     3.19 %
                                                 
 
(1) Yields on investments are calculated basd 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 $55 and $61 in first quarter 2009 and 2008, 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 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.
 
 
20


 
   
Three months ended March 31, 2009
 
   
versus March 31, 2008
 
   
Due to change in:
 
(Dollars in thousands)
 
Volume
   
Rate
   
Total
 
Interest earned on:
                 
Federal funds sold and other