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: September 30, 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 16th Street, 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.
10,665,635 shares of Issuer’s Common Stock, par value
$0.01 per share, issued and outstanding as of November 9, 2009

Page 1

Exhibit index appears on page 39



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 September 30, 2009 (unaudited) and December 31, 2008
   
Consolidated Statements of Operations for the three and nine months ended
 
September 30, 2009 and 2008 (unaudited)
   
Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended
September 30, 2009 and 2008 (unaudited)
Consolidated Statements of Cash Flows for the nine months ended
 
September 30, 2009 and 2008 (unaudited)
   
Notes to Consolidated Financial Statements (unaudited)
   


3


Republic First Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
 September 30, 2009 and December 31, 2008
(Dollars in thousands, except share data)
(unaudited)

ASSETS:
 
September 30, 2009
   
December 31, 2008
 
             
Cash and due from banks
  $ 47,653     $ 12,925  
Interest bearing deposits with banks
    155       334  
Federal funds sold
    29,207       21,159  
Total cash and cash equivalents
    77,015       34,418  
                 
Investment securities available for sale, at fair value
    102,108       83,032  
Investment securities held to maturity, at amortized cost
               
     (Fair value of $170 and $214, respectively)
    160       198  
Restricted stock, at cost
    6,836       6,836  
Loans receivable (net of allowance for loan losses of
               
     $12,644 and $8,409, respectively)
    697,073       774,673  
Premises and equipment, net
    24,729       14,209  
Other real estate owned, net
    10,847       8,580  
Accrued interest receivable
    3,428       3,939  
Bank owned life insurance
    12,312       12,118  
Other assets
    17,943       13,977  
Total Assets
  $ 952,451     $ 951,980  
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Liabilities:
               
Deposits:
               
Demand – non-interest-bearing
  $ 92,017     $ 70,814  
Demand – interest-bearing
    47,418       43,044  
Money market and savings
    303,111       231,643  
Time less than $100,000
    141,597       139,708  
Time over $100,000
    239,495       253,958  
    Total Deposits
    823,638       739,167  
                 
Short-term borrowings
    -       77,309  
FHLB Advances
    25,000       25,000  
Accrued interest payable
    2,928       2,540  
Other liabilities
    5,626       6,161  
Subordinated debt
    22,476       22,476  
Total Liabilities
    879,668       872,653  
Shareholders’ Equity:
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized;
               
    no shares issued as of September 30, 2009 and December 31, 2008
    -       -  
Common stock par value $0.01 per share, 20,000,000 shares authorized;
               
    shares issued 11,081,938 as of September 30, 2009
               
    and 11,047,651 as of December 31, 2008
    111       110  
Additional paid in capital
    77,001       76,629  
Retained earnings (accumulated deficit)
    (167 )     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
    (525 )     (1,391 )
Total Shareholders’ Equity
    72,783       79,327  
Total Liabilities and Shareholders’ Equity
  $ 952,451     $ 951,980  
                 




(See notes to unaudited consolidated financial statements)


4


 
Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2009 and 2008
(Dollars in thousands, except per share data)
(unaudited)
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest income:
                       
   Interest and fees on loans
  $ 9,705     $ 12,208     $ 29,558     $ 37,821  
   Interest and dividends on taxable investment securities
    871       1,173       2,843       3,315  
   Interest and dividends on tax-exempt investment securities
    109       106       325       326  
   Interest on federal funds sold and other interest-earning assets
    28       45       50       199  
   Total interest income
    10,713       13,532       32,776       41,661  
                                 
Interest expense:
                               
   Demand- interest bearing
    78       68       218       283  
   Money market and savings
    1,366       1,625       3,841       4,663  
   Time less than $100,000
    1,035       1,671       3,395       5,900  
   Time over $100,000
    928       1,545       3,249       5,925  
   Other borrowings
    501       1,005       1,618       3,046  
Total interest expense
    3,908       5,914       12,321       19,817  
Net interest income
    6,805       7,618       20,455       21,844  
Provision for loan losses
    150       43       13,200       5,898  
Net interest income after provision for loan losses
    6,655       7,575       7,255       15,946  
                                 
Non-interest income:
                               
    Loan advisory and servicing fees
    91       120       381       270  
    Service fees on deposit accounts
    305       300       970       884  
    Mastercard transaction
    -       -       -       309  
    Legal settlement
    -       -       -       100  
    Gain on sale of investment security
    -       -       -       5  
    Impairment charges on investment securities
    (242 )     -       (441 )     -  
    Bank owned life insurance income
    62       98       194       311  
    Other non-interest income
    34       154       180       294  
   Total non-interest income
    250       672       1,284       2,173  
Non-interest expenses:
                               
   Salaries and employee benefits
    3,094       2,319       9,727       7,752  
   Occupancy
    811       611       2,250       1,809  
   Depreciation and amortization
    460       342       1,168       1,007  
   Legal
    82       249       762       720  
   Write down/loss on sale of other real estate owned
    105       559       1,424       1,615  
   Other real estate
    83       163       235       505  
   Advertising
    68       75       126       353  
   Data processing
    148       214       630       620  
   Insurance
    154       149       482       401  
   Professional fees
    340       315       1,296       558  
   Regulatory assessments and costs
    312       151       1,079       381  
   Taxes, other
    246       207       744       719  
   Other operating expenses
    797       654       2,481       2,077  
Total non-interest expense
    6,700       6,008       22,404       18,517  
                                 
Income (Loss) before provision (benefit) for income taxes
    205       2,239       (13,865 )     (398 )
Provision (benefit)  for income taxes
    20       706       (4,855 )     (342 )
                                 
Net income (loss)
  $ 185     $ 1,533     $ (9,010 )   $ (56 )
                                 
Net income (loss) per share:
                               
Basic
  $ 0.02     $ 0.14     $ (0.85 )   $ (0.01 )
Diluted
  $ 0.02     $ 0.14     $ (0.85 )   $ (0.01 )
 
(See notes to unaudited consolidated financial statements)

 
5

 

Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2009 and 2008
(Dollars in thousands, except share data)
                (unaudited)
 

 
   
 
Comprehensive
Loss
   
 
Common
Stock
   
Additional
Paid in
Capital
   
 
Retained
Earnings
(Accumulated
Deficit)
   
 
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
gain, net of tax of $785
    1,254                                     1,254       1,254  
Net loss
    (9,010 )                 (9,010 )                       (9,010 )
Total comprehensive loss
  $ (7,756 )                                                        
 
Cumulative effect adjustment:
                                               
Reclassify non-credit
component of previously
recognized OTTI
                      388                   (388 )      
Share based compensation
                207                               207  
Options exercised
(34,287 shares)
          1       165                               166  
Deferred compensation plan
distribution
                                  839             839  
                                                               
Balance September 30, 2009
        $ 111     $ 77,001     $ (167 )   $ (3,099 )   $ (538 )   $ (525 )   $ 72,783  
                                                               
                                                               
   
 
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 $(1,099)
    (2,133 )                                   (2,133 )     (2,133 )
Net loss
    (56 )                 (56 )                       (56 )
Total comprehensive loss
  $ (2,189 )                                                        
Stock based compensation
                  94                               94  
Options exercised
(294,402 shares)
            3       882                               885  
                                                                 
                                                                 
Balance September 30, 2008
          $ 110     $ 76,297     $ 8,871     $ (2,993 )   $ (1,165 )   $ (1,863 )   $ 79,257  
                                                                 


 (See notes to unaudited consolidated financial statements)



6


Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
Dollars in thousands
(unaudited)
 
   
Nine months ended
 
   
September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net loss
  $ (9,010 )   $ (56 )
Adjustments to reconcile net income (loss) to net
               
cash provided by operating activities:
               
Provision for loan losses
    13,200       5,898  
Write down or loss on sale of other real estate owned
    1,424       1,615  
Depreciation  and amortization
    1,168       1,007  
Deferred compensation plan distribution
    839       -  
Share based compensation
    207       94  
Gain on sale of investment security
    -       (5 )
Impairment charges on investment securities
    441       -  
Amortization of discounts on investment securities
    (161 )     (168 )
Increase in value of bank owned life insurance
    (194 )     (311 )
Increase in accrued interest receivable and other assets
    (4,000 )     (627 )
Decrease in accrued interest payable and other liabilities
    (147 )     (2,382 )
Net cash provided by operating activities
    3,767       5,065  
Cash flows from investing activities:
               
Purchase of securities:
               
Available for sale
    (29,985 )     (16,366 )
Proceeds from maturities and calls of securities:
               
Held to maturity
    38       79  
Available for sale
    12,428       10,621  
Purchase of restricted stock
    -       (43 )
Net decrease in loans
    60,348       21,514  
Net proceeds from sale of other real estate owned
    361       14,870  
Premises and equipment expenditures
    (11,688 )     (4,130 )
Net cash provided by investing activities
    31,502       26,545  
Cash flows from financing activities:
               
Net proceeds from exercise of stock options
    166       885  
Net increase (decrease) in demand, money market and savings deposits
    97,045       (7,705 )
Net decrease in short term borrowings
    (77,309 )     (32,751 )
Increase in other borrowings
    -       25,000  
Issuance of subordinated debt
    -       11,135  
Net decrease in time deposits
    (12,574 )     (43,663 )
Net cash provided by (used in) financing activities
    7,328       (47,099 )
Increase (decrease) in cash and cash equivalents
    42,597       (15,489 )
Cash and cash equivalents, beginning of period
    34,418       73,225  
Cash and cash equivalents, end of period
  $ 77,015     $ 57,736  
Supplemental disclosure:
               
Interest paid
  $ 11,933     $ 20,716  
Taxes paid
  $ -     $ 400  
Non-monetary transfers from loans to other real estate owned
  $ 4,052     $ 21,384  
                 


 
 

 
(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 Metro Bancorp, Inc. (“Metro”) formerly known as Pennsylvania Commerce Bancorp, Inc. (“Pennsylvania Commerce”), subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions.  Approvals were obtained from the Company’s shareholders on March 18, 2009 and Metro’s shareholders on March 19, 2009.  On April 29, 2009, Metro 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.  On July 31, 2009, the Company and Metro entered into a First Amendment to Agreement and Plan of Merger, amending the November 7, 2008 Agreement and Plan of Merger between the parties.  The First Amendment extended a contractual deadline for the completion of the merger of Republic First into Metro until October 31, 2009, and provided each party with a right to further extend the contractual deadline in the event that all required regulatory approvals for the merger had not been obtained by September 30, 2009.  On October 29, 2009 the Company and Metro announced the extension of a contractual deadline until December 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 store locations 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 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.
 
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 Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets generally accepted accounting principles (“GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows.  Over time, the FASB and other GAAP-setting bodies have issued standards in the form of FASB Statements, Interpretations, Staff Positions, EITF Abstracts, AICPA Statements of Position, and Practice Bulletins.  The FASB recognized the complexity of its standard setting process and embarked on a revised process in 2004 that culminated in the release of the FASB Accounting Standards Codification (“ASC”) on July 1, 2009.  The ASC does not change how the Company accounts for its transactions or the nature of related disclosures made, nor does it impact the Company’s financial
 
8

 
 
position or results of operations. It simply took thousands of individual pronouncements that comprise GAAP and reorganized them under accounting topics using a consistent structure. References to GAAP in this Quarterly Report on Form 10-Q have been updated to refer to Topics in the ASC. This change was made effective by the FASB for periods ending on or after September 15, 2009.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP 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 been included.  Operating results for the three or nine month period ended September 30, 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.
 
The Company has evaluated subsequent events through the date of issuance of the financial data included herein, November 9, 2009.
 
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 GAAP 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 (“OTTI”) 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
 
 
9

 
 
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 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.
 
Share-Based Compensation:

The Company maintains a Stock Option Plan and Restricted Stock Plan (the “Stock Option 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 Stock Option 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 Stock Option Plan to 1.5 million shares, are reserved for such options.  The Stock Option 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 have 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 Metro, all unvested options would immediately vest.  Based on terms provided in various grant letters, 228,200 unvested options granted in 2008 and 2009 will not vest upon the completion proposed merger with Metro.  Expense related to the acceleration of options that will vest at the time of the merger is estimated at $169,000 as of September 30, 2009.
 
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 21.58% to 27.61%; a risk-free interest rate of 1.99% to 3.31%; 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% to 34.52%; a risk-free interest rate of 3.08% to 3.69%; 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 September 30, 2009, there were 359,500 unvested options with a fair value of $1,048,760 with $646,765 of that amount remaining to be recognized as expense. At that date, the intrinsic value of the 562,758 options outstanding was $21,662, while the intrinsic value of the 203,258 exercisable (vested) was also $21,662.
 
A summary of the status of the Company’s stock options under the Stock Option Plan as of September 30, 2009 and 2008 and changes during the nine months ended September 30, 2009 and 2008 are presented below:
 
 
10

 
   
For the Nine Months Ended September 30,
 
   
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
    129,200       6.28       105,000       6.62  
Exercised
    (34,287 )     4.84       (294,042 )     3.01  
Forfeited
    (143 )     3.88       (113,327 )     8.90  
Outstanding, end of period
    562,758       8.08       435,472       8.07  
                                 
Options exercisable at period-end
    203,258       8.21       264,922       7.47  
                                 
Weighted average fair value of options granted during the period
          $ 2.12             $ 2.47  
                                 

   
For the Nine Months Ended
 September 30,
 
   
2009
   
2008
 
Number of options exercised
    34,287       294,042  
Cash received
  $ 165,950     $ 884,615  
Intrinsic value
    101,011       862,833  
Tax benefit
    35,354       301,992  



The following table summarizes information about options outstanding under the Stock Option Plan as of September 30, 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       1.3     $ 1.81       7,453     $ 1.81  
  $2.77       743       2.4       2.77       743       2.77  
  $5.70 to $8.72       389,153       8.1       7.04       87,953       6.25  
  $9.93 to $12.13       165,409       6.3       10.82       107,109       10.31  
          562,758             $ 8.08       203,258     $ 8.21  
                                             

   
For the Nine Months Ended,
 
   
September 30, 2009
 
   
Number of shares
   
Weighted average
grant date fair value
 
Nonvested at beginning of year
    236,350     $ 3.50  
Granted
    129,200       2.12  
Vested
    (6,050 )     5.10  
Nonvested at end of period
    359,500     $ 2.92  
                 

During the three months ended September 30, 2009, $70,000 was recognized in compensation expense, with a 35% assumed tax benefit, for the Stock Option Plan.  During the nine months ended September 30, 2009, $207,000 was recognized in compensation expense, with a 35% assumed tax benefit, for the Stock Option Plan.  During the three months ended September 30, 2008, $19,000 was recognized in compensation expense, with a 35% assumed tax benefit, for the Stock Option Plan.  During the nine months ended September 30, 2008, $94,000 was recognized in compensation expense, with a 35% assumed tax benefit for the Stock Option Plan.
 
 
 
11

 

Note 4:  Recent Accounting Pronouncements

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring Liabilities at Fair Value, which updates ASC 820-10, Fair Value Measurements and Disclosures. The updated guidance clarifies that the fair value of a liability can be measured in relation to the quoted price of the liability when it trades as an asset in an active market, without adjusting the price for restrictions that prevent the sale of the liability. This guidance is effective beginning October 1, 2009 and is not expected to affect the Company’s consolidated financial statements.

In June 2009, the FASB issued new guidance impacting ASC 860, Transfers and Servicing (SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140).  This guidance prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. This guidance also modifies the de-recognition conditions related to legal isolation and effective control and adds additional disclosure requirements for transfer of financial assets. This guidance is effective for fiscal years beginning after November 15, 2009.  We have not determined the effect that the adoption of this guidance will have on our financial position or results of operations.

In June 2009, the FASB issued new guidance impacting ASC 810-10, Consolidation (SFAS No. 167, Amendments to FASB Interpretation No. 46R). This guidance requires a company to determine whether its variable interest or interests gives it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the company that has both (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity. The guidance also amends existing consolidation guidance that required ongoing re-assessments of whether a company is the primary beneficiary of a variable interest entity. This guidance is effective for fiscal years beginning after November 15, 2009.  We have not determined the effect that the adoption of this guidance will have on our financial position or results of operations.

In June 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Principles (SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162).  This new guidance establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. This standard is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard had no impact on our financial position or results of operations.

In April 2009, the FASB issued new guidance impacting ASC 820, Fair Value Measurement and Disclosures (FASB Staff Position 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).  This provides additional guidance on determining fair value when the volume and level of activity for an asset or liability have significantly decreased when compared with normal market activity for the asset or liability. A significant decrease in the volume or level of activity is an indication that transactions or quoted market prices may not be determinative of fair value because transactions may not be orderly. In that circumstance, further analysis of transactions or quoted prices is needed, and an adjustment to the transactions or quoted prices may be necessary to estimate fair value. The guidance was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements or results of operations.

In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments – Debt and Equity Securities (FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments).  This guidance amends the other-than-temporary impairment guidance for debt securities. If the fair value of a debt security is less than its amortized cost basis at the measurement date, the updated guidance requires the company to determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, an entity must recognize full impairment. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the guidance requires that the credit loss portion of impairment be recognized in earnings and the temporary impairment related to all other factors be recorded in other comprehensive income. In addition, the guidance requires additional disclosures regarding impairments
 
 
12

 
 
on debt and equity securities The Company adopted this guidance effective April 1, 2009 and in connection therewith, recorded a credit loss of $418,000 during the six month period ending September 30, 2009.

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.
 
On or about June 19, 2009, Members 1st Federal Credit Union (“Members 1st”) filed a complaint in the United States District Court for the Middle District of Pennsylvania against the Company, Republic, Metro Bancorp, Inc. and Metro Bank (collectively referred to as “Metro”).  Members 1st’s claims are for federal trademark infringement, federal unfair competition, and common law trademark infringement and unfair competition.  It is Members 1st’s assertion that Metro’s use of a red letter “M” alone, or in conjunction with its trade name METRO, purportedly infringes Members 1st’s federally registered and common law trademark for the mark MIST (stylized).  The complaint seeks damages in an unspecified amount and injunctive relief.  The Company and Republic are named in the complaint in connection with the pending merger with Metro.
 
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 stores.
 
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 (loss) 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 Stock Option 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 income (loss).  For the three months ended September 30, 2009, nine months ended September 30, 2009 and nine months ended September 30, 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.  For the three months ended September 30, 2008, there were 198,495 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.  For the three months ended September 30, 2009, the Company included no stock options in calculating diluted EPS as the effect of the add back of after tax interest related to the trust preferred securities issuance to net income was anti-dilutive.  For the nine months ended September 30, 2009 and nine months ended September 30, 2008, the Company included no stock options in calculating diluted EPS due to a net loss from operations.
 

 
13

 
The following tables are a comparison of EPS for the three months ended September 30, 2009 and 2008.
 
 
Three months ended September 30,    
2009
     
2008
 
                             
Net Income
  $ 185,000           $ 1,533,000        
(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)
    10,665,635             10,581,435        
Earnings per share - basic
          $ 0.02             $ 0.14  
Add common stock equivalents
representing dilutive stock options and
convertible debt
    -                1,728,926          
Effect on basic EPS of dilutive CSE
          $ -             $ -  
Weighted average shares outstanding
    10,665,635               12,310,361          
                                 
Income per share - diluted
          $ 0.02             $ 0.14  


      The following tables are a comparison of EPS for the nine months ended September 30, 2009 and 2008.

 
Nine months ended September 30,    
2009
     
2008
 
                 
Net Loss
  $ (9,010,000 )         $ (56,000 )      
(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)
    10,650,995             10,463,331        
Loss per share - basic
          $ (0.85 )           $ (0.01 )
Add common stock equivalents
representing dilutive stock options
    -                -          
Effect on basic EPS of dilutive CSE
          $ -             $ -  
Weighted average shares outstanding
    10,650,995               10,463,331          
                                 
Loss per share - diluted
          $ (0.85 )           $ (0.01 )


Note 8:  Comprehensive Income:
      The Company presents as a component of comprehensive income (loss) the amounts from transactions and other events which currently are excluded from the consolidated statements of operation and are recorded directly to shareholders’ equity. These amounts consist of unrealized holding gains (losses) on available for sale securities.
 
The components of comprehensive income (loss), net of related tax, are as follows (in thousands):
 
 
14

 
   
Three months ended 
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net income (loss)
  $ 185     $ 1,533     $ (9,010 )   $ (56 )
Other comprehensive income (loss):
                               
Unrealized gains (losses) on investment
securities: arising during the period, net of tax
expense (benefit) of $597, $(493), $544, and
$(1,099)
    1,066       (956 )     971       (2,133 )
Add: reclassification adjustment for impairment
charge included in net income (loss), net of tax
benefit of $87, $ -, $158 and $ -
    155       -       283       -  
Other comprehensive income (loss)
    1,221       (956 )     1,254       (2,133 )
Comprehensive income (loss)
  $ 1,406     $ 577     $ (7,756 )   $ (2,189 )
                                 

 
Note 9:  Investment Securities:

Investment securities available for sale as of September 30, 2009 are as follows:

 
 
(Dollars in thousands)
 
 
Amortized Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Fair
Value
 
Mortgage Backed Securities                                                                      
  $ 48,217     $ 2,640     $ (1 )   $ 50,856  
Municipal Securities                                                                      
    10,261       292       (362 )     10,191  
Corporate Bonds                                                                      
    5,989       117       -       6,106  
Agency Bonds                                                                      
    29,985       -       -       29,985  
Trust Preferred Securities                                                                      
    8,193       -       (3,476 )     4,717  
Other  Securities                                                                      
    281       2       (30 )     253  
Total                                                                
  $ 102,926     $ 3,051     $ (3,869 )   $ 102,108  
                                 
Investment securities held to maturity as of September 30, 2009 are as follows:
 
 
(Dollars in thousands)
 
 
 
Amortized Cost
 
 
Gross
Unrealized
Gains
   
 
 Gross
Unrealized
Losses
   
 
 
Fair
Value
 
U.S. Government Agencies                                                                      
  $ 2     $ -     $ -     $ 2  
Municipal Securities                                                                      
    5       -       -       5  
Other Securities                                                                      
    153       10       -       163  
Total                                                               
  $ 160     $ 10     $ -     $ 170  
                                 
                                 
Investment securities available for sale as of December 31, 2008 are as follows:
 
 
(Dollars in thousands)
 
 
Amortized Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Fair
Value
 
Mortgage Backed Securities                                                                      
  $ 60,859     $ 1,821     $ (4 )   $ 62,676  
Municipal Securities                                                                      
    10,073       15       (963 )     9,125  
Corporate Bonds                                                                      
    5,988       59       (4 )     6,043  
Trust Preferred Securities                                                                      
    8,003       -       (3,071 )     4,932  
Other  Securities                                                                      
    279       7       (30 )     256  
Total                                                                
  $ 85,202     $ 1,902     $ (4,072 )   $ 83,032  
                                 
                                 
Investment securities held to maturity as of December 31, 2008 are as follows:
 
 
 
15

 
 
 
 
(Dollars in thousands)
 
 
Amortized Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Fair
Value
 
                                 
U.S. Government Agencies                                                                      
  $ 3     $ -     $ -     $ 3  
Mortgage Backed Securities                                                                      
    15       1       -       16  
Municipal Securities                                                                      
    30       -       -       30  
Other Securities                                                                      
    150       15       -       165  
Total                                                               
  $ 198     $ 16     $ -     $ 214  
                                 
 
 
       The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at September 30, 2009 is as follows:

   
Available for Sale
   
Held to Maturity
 
 
(Dollars in thousands)
 
Amortized
 
Cost
   
Estimated
 
Fair Value
   
Amortized
 
Cost
   
Estimated
 
Fair
Value
 
                         
Due in 1 year or less                                                                      
  $ 150     $ 152     $ -     $ -  
After 1 year to 5 years                                                                      
    10,080       10,085       113       123  
After 5 years to 10 years                                                                      
    23,110       23,243       2       2  
After 10 years                                                                      
    69,586       68,628       5       5  
No stated maturity                                                                      
                40       40  
Total                                                                
  $ 102,926     $ 102,108     $ 160     $ 170  
                                 

Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
 
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 the investor will be required to sell the debt security prior to its anticipated recovery, ASC 320-10 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 all other factors is recognized in other comprehensive income.  The adoption of updated guidance under ASC 320-10 had an impact on the amounts reported in the consolidated financial statements as impairment charges (credit losses) on bank pooled trust preferred securities of $242,000 and $418,000 were recognized during the quarter ended September 30, 2009 and the nine months ended September 30, 2009, respectively.  In addition, a cumulative effect adjustment of $388,000 was recorded during the current year to reclassify the non-credit component of previously recognized OTTI within shareholders' equity between retained earnings and accumulated other comprehensive loss.  The June 30, 2009 cumulative effect adjustment of $537,000 was reduced by $149,000 during the current quarter related to the ongoing evaluation of the assumptions and estimates used to determine the fair value of the bank pooled trust preferred securities.
 
The Company realized gross losses due to impairment charges on securities of $242,000 for the three months ended September 30, 2009 and $441,000 for the nine months ended September 30, 2009.  The tax benefit applicable to the gross losses was $87,000 for third quarter 2009 and $158,000 for the nine months ended September 30, 2009. The Company realized gross gains on the sale of securities of $5,000 for the nine months ended September 30, 2008.  The tax provision applicable to gross gains in 2008 amounted to approximately $2,000.
 
 
 
16


 
Temporarily impaired securities as of September 30, 2009 are as follows:

(Dollars in thousands)
 
Less than 12 months
   
12 Months or more
   
Total
 
Description of Securities
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Mortgage Backed Securities
  $ -     $ -     $ 93     $ 1     $ 93     $ 1  
Municipal Securities
    -       -       4,021       362       4,021       362  
Corporate Bonds
    -       -       -       -       -       -  
Agency Bonds
    -       -       -       -       -       -  
Trust Preferred Securities
    -       -       4,717       3,476       4,717       2,872  
Other Securities
    -       -       101       30       101       30  
Total Temporarily Impaired Securities
  $ -     $ -     $ 8,932     $ 3,869     $ 8,932     $ 3,265  
                                                 

The impairment of the investment portfolio at September 30, 2009 totaled $3.9 million on 27 securities with a total fair value of $8.9 million at September 30, 2009.  The unrealized loss for the bank pooled trust preferred securities was due to the secondary market for such securities becoming inactive and was considered temporary at September 30, 2009. The unrealized loss on the remaining securities was due to changes in market value resulting from changes in market interest rates and is considered temporary.

Temporarily impaired securities as of December 31, 2008 are as follows:

(Dollars in thousands)
 
Less than 12 months
   
12 Months or more
   
Total
 
Description of Securities
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
US Government Agencies
  $ -     $ -     $ -     $ -     $ -     $ -  
Mortgage Backed Securities
    -       -       114       4       114       4  
Municipal Securities
    -       -       6,908       963       6,908       963  
Corporate Bonds
    -       -       1,991       4       1,991       4  
Trust Preferred Securities
    -       -       3,371       3,071       3,371       3,071  
Other Securities
    -       -       60       30