rfb200910k.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C.  20549
 
FORM 10-K
 

 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (THE “EXCHANGE ACT”)

For the fiscal year ended December 31, 2009
Commission file number:  000-17007
REPUBLIC FIRST BANCORP, INC.
(Exact name of registrant as specified in charter)
Pennsylvania
 
23-2486815
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
     
50 South 16th Street, Suite 2400, Philadelphia, PA
 
19102
(Address of Principal Executive offices)
 
(Zip Code)
 
Issuer’s telephone number, including area code:   (215) 735-4422
 
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value
 
The Nasdaq Stock Market
(Title of each class)
 
(Name of each exchange on which registered)
 
              Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES   __      NO   X 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.
YES              NO   X
 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K   [  ]
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. (Check one):
Large accelerated filer ____
Accelerated filer   X
Non-accelerated filer  ____
(Do not check if a smaller reporting company)
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
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2009. The aggregate market value of $70,435,958 was based on the last sale price on the Nasdaq Stock Market on June 30, 2009.
 
APPLICABLE ONLY TO CORPORATE REGISTRANTS
 
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Common Stock $0.01 Par Value
 
10,665,635
Title of Class
 
Number of Shares Outstanding as of March 15, 2010

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders to be held April 20, 2010.
 
 
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REPUBLIC FIRST BANCORP, INC.

Form 10-K

 
INDEX

PART I
 
Page
     
Item 1
Business
     
Item 1A
Risk Factors
     
Item 1B
Unresolved Staff Comments
     
Item 2
Properties
     
Item 3
Legal Proceedings
     
Item 4
Removed and Reserved
     
PART II
   
     
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
     
Item 6
Selected Financial Data
     
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
     
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
     
Item 8
Financial Statements and Supplementary Data
     
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
     
Item 9A
Controls and Procedures
     
Item 9B
Other Information
     
PART III
   
     
Item 10
Directors, Executive Officers and Corporate Governance
     
Item 11
Executive Compensation
     
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     
Item 13
Certain Relationships and Related Transactions, and Directors Independence
     
Item 14
Principal Accounting Fees and Services
     
PART IV
   
     
Item 15
Exhibits, Financial Statement Schedules
   
Signatures

 
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PART I
 
Item 1:               Business
 
Throughout this annual report on Form 10-K, the registrant, Republic First Bancorp, Inc., is referred to as the “Company” or as “we.” The Company’s website address is rfbkonline.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed by the Company with the United States Securities and Exchange Commission (“SEC”) are available free of charge on the Company’s website under the Investor Relations menu. Such documents are available on the Company’s website as soon as reasonably practicable after they have been filed electronically with the SEC.
 
Forward Looking Statements
 
This document contains “forward-looking statements”, as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995.  These statements can be identified by reference to a future period or periods or by the use of words such as “would be,” “could be,” “should be,” “probability,” “risk,” “target,” “objective,” “may,” “will,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions or variations on such expressions.  These forward-looking statements include:
 
 
·
statements of goals, intentions and expectations;
 
·
statements regarding prospects and business strategy;
 
·
statements regarding asset quality and market risk; and
 
·
estimates of future costs, benefits and results.
 
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 current turmoil in the financial markets and the efforts of government agencies to stabilize the financial system;
 
·
adverse changes in the Company’s loan portfolio and credit risk-related losses and expenses;
 
·
changes in interest rates;
 
·
business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures, and similar items;
 
·
deposit flows;
 
·
loan demand;
 
·
the regulatory environment, including evolving banking industry standards, changes in legislation or regulation;
 
·
changes in accounting principles, policies and guidelines;
 
·
rapidly changing technology;
 
·
litigation liabilities, including costs, expenses, settlements and judgments; and
 
·
other economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, pricing, products and services.

 Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof.  Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.  Significant factors which could have an adverse effect on the operations and future prospects of the Company are detailed in the “Risk Factors” section included under Item 1A of Part I of this Annual Report on Form 10-K.  Readers should carefully review the risk factors described included in this Annual Report on Form 10-K and in other documents the Company files from time to time with the SEC.
 
 
 
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Republic First Bancorp, Inc.
 
 
On November 7, 2008, the board of directors of the Company approved an agreement and plan of merger, pursuant to which the Company would 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. The Company and Metro amended the agreement on July 31, 2009 and again on December 18, 2009 to extend the contractual deadline for completion of the merger to allow for additional time to obtain the required regulatory approvals. On March 15, 2010 the Company and Metro announced that their respective board of directors had voted to terminate the merger agreement due to uncertainties over the regulatory approval of the applications for the merger.
 

The Company was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 to be the holding company for Republic First Bank and, in 1999, it established a second subsidiary bank, First Bank of Delaware.  Through 2004, the Company was a two-bank holding company. Its wholly-owned subsidiaries, Republic First Bank (“Republic”) and First Bank of Delaware (“FBD”), offered a variety of credit and depository banking services. Such services were offered to individuals and businesses primarily in the Greater Philadelphia and Delaware area through their offices and branches in Philadelphia and Montgomery Counties in Pennsylvania and New Castle County, Delaware, but also through the national consumer loan products offered by the First Bank of Delaware.
 
First Bank of Delaware was spun off by the Company on January 31, 2005 through a distribution of all of the shares of FBD’s common stock to the Company’s shareholders.  Since that date, the Company has been a one bank holding company.
 
As of December 31, 2009, the Company had total assets of approximately $1.0 billion, total shareholders’ equity of approximately $70.3 million, total deposits of approximately $882.9 million and net loans receivable of approximately $681.0 million.
 
The Company provides banking services through Republic and does not presently engage in any activities other than banking activities.  The principal executive office of the Company is located at Two Liberty Place, 50 South 16th Street, Suite 2400, Philadelphia, PA 19102, telephone number (215) 735-4422.
 
At December 31, 2009 the Company and Republic had a total of 157 full-time equivalent employees.
 
Republic First Bank
 
Republic First Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania, and is subject to examination and comprehensive regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking. The deposits held by Republic are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Republic presently conducts its principal banking activities through its six Philadelphia offices and six suburban offices in Ardmore, Plymouth Meeting, Bala Cynwyd and Abington, located in Montgomery County, Media, located in Delaware County, and Voorhees, located in southern New Jersey.
 
As of December 31, 2009, Republic had total assets of approximately $1.0 billion, total shareholder’s equity of approximately $79.4 million, total deposits of approximately $894.6 million and net loans receivable of approximately $681.0 million.
 
Services Offered
 
Republic offers many commercial and consumer banking services with an emphasis on serving the needs of individuals, small and medium-sized businesses, executives, professionals and professional organizations in its service area.
 
Republic attempts to offer a high level of personalized service to both its small and medium-sized businesses and consumer customers.  Republic offers both commercial and consumer deposit accounts, including checking accounts, interest-bearing demand accounts, money market accounts, certificates of deposit, savings accounts, sweep accounts, lockbox services and individual retirement accounts (and other traditional banking services).  Republic actively solicits both non-interest and interest-bearing deposits from its borrowers.
 
 
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Republic offers a broad range of loan and credit facilities to the businesses and residents of its service area, including secured and unsecured commercial loans, commercial real estate and construction loans, residential mortgages, automobile loans, home improvement loans, home equity and overdraft lines of credit, and other products.
 
In relation to the offering of loan and credit facilities, Republic manages credit risk through loan application evaluation and monitoring for adherence with credit policies.  Since its inception, Republic has had a senior officer monitor compliance with Republic’s lending policies and procedures by Republic’s loan officers.
 
Republic also maintains an investment securities portfolio.  Investment securities are purchased by Republic in compliance with Republic’s investment policies, which are approved annually by Republic’s board of directors.  The investment policies address such issues as permissible investment categories, credit quality, maturities and concentrations.  At December 31, 2009 and 2008, approximately 86% and 70%, respectively, of the aggregate dollar amount of the investment securities consisted of either U.S. Government debt securities or U.S. Government agency issued mortgage backed securities.  Credit risk associated with these U.S. Government debt securities and the U.S. Government Agency securities is minimal, with risk-based capital weighting factors of 0% and 20%, respectively.  The remainder of the securities portfolio consists of municipal securities, trust preferred securities, corporate bonds, and Federal Home Loan Bank (FHLB) securities.
 
Service Area/Market Overview
 
Republic’s primary business banking service area consists of the Greater Philadelphia region, including Center City Philadelphia and the northern and western suburban communities located principally in Montgomery and Delaware Counties in Pennsylvania and northern Delaware. Republic also serves the surrounding counties of Bucks and Chester in Pennsylvania, southern New Jersey and southern Delaware.
 
Competition
 
There is substantial competition among financial institutions in Republic’s business banking service area.  Competitors include but are not restricted to the following banks:  Wells Fargo, Citizens, PNC, Sovereign, TD Bank and Royal Bank America.  Republic competes with new and established local commercial banks, as well as numerous regionally based and super-regional commercial banks. In addition Republic competes directly with savings banks, savings and loan associations, finance companies, credit unions, factors, mortgage brokers, insurance companies, securities brokerage firms, mutual funds, money market funds, private lenders and other institutions for deposits, commercial loans, mortgages and consumer loans, as well as other services.  Competition among financial institutions is based upon a number of factors, including, but not limited to, the quality of services rendered, interest rates offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the convenience of banking facilities, locations and hours of operation and, in the case of loans to larger commercial borrowers, relative lending limits.  It is the view of management that a combination of many factors, including, but not limited to, the level of market interest rates, has increased competition for loans and deposits.
 
Many of the banks with which Republic competes have greater financial resources than Republic and offer a wider range of deposit and lending instruments with higher legal lending limits. Republic’s legal lending limit was approximately $13.8 million at December 31, 2009.  Loans above these amounts may be made if the excess over the lending limit is participated to other institutions.  Republic is subject to potential intensified competition from new branches of established banks in the area as well as new banks that could open in its market area. Several new banks with business strategies similar to those of Republic have opened since Republic’s inception. There are banks and other financial institutions which serve surrounding areas, and additional out-of-state financial institutions, which currently, or in the future, may compete in Republic’s market. Republic competes to attract deposits and loan applications both from customers of existing institutions and from customers new to the greater Philadelphia area. Republic anticipates a continued increase in competition in its market area.
 
Operating Strategy for Business Banking
 
Since 2005, Republic’s primary business banking objective has been for Republic to become the primary alternative to the large banks that dominate the Greater Philadelphia market. The Company’s management team has developed a business strategy consisting of the following key elements to achieve this objective.
 

5

 
Providing Attentive and Personalized Service
 
The Company believes that a very attractive niche exists serving small to medium-sized business customers not adequately served by Republic’s larger competitors. The Company believes this segment of the market responds very positively to the attentive and highly personalized service provided by Republic. Republic offers individuals and small to medium-sized businesses a wide array of banking products, informed and professional service, extended operating hours, and local, timely credit decisions. The banking industry is experiencing a period of rapid consolidation, and many local branches have been acquired by large out-of-market institutions. The Company is positioned to respond to these dynamics by offering a community banking alternative and tailoring its product offerings to fill voids created as larger competitors increase the price of products and services or de-emphasize such products and services.
 
Capitalizing on Market Dynamics
 
In recent years, banks controlling large amounts of the deposits in Republic’s primary market areas have been acquired by large and super-regional bank holding companies. The ensuing cultural changes in these banking institutions have resulted in changes in their product offerings and in the degree of personal attention they provide. The Company has sought to capitalize on these changes by offering a community banking alternative.
 
Products and Services
 
Republic offers a range of competitively priced commercial and other banking services, including secured and unsecured commercial loans, real estate loans, construction and land development loans, automobile loans, home improvement loans, mortgages, home equity and overdraft lines of credit, and other products. Republic offers both commercial and consumer deposit accounts, including checking accounts, interest-bearing demand accounts, money market accounts, certificates of deposit, savings accounts, sweep accounts, lockbox services and individual retirement accounts (and other traditional banking services). Republic’s commercial loans typically range between $250,000 and $5.0 million but customers may borrow significantly larger amounts up to Republic’s legal lending limit of approximately $13.8 million.  Individual customers may have several loans, often secured by different collateral, which are in total subject to that lending limit.
 
Republic attempts to offer a high level of personalized service to both its commercial and consumer customers. Republic is a member of the STAR™ and PLUS™ automated teller (“ATM”) networks in order to provide customers with access to ATMs worldwide. Republic currently has twelve proprietary ATMs at branch locations and one additional proprietary ATM at a location in Southern New Jersey.
 
Republic’s lending activities generally are focused on small and medium sized businesses within the professional community. Commercial real estate loans are the most significant category of Republic’s outstanding loans, representing approximately 72% of total loans outstanding at December 31, 2009.  Repayment of these loans is, in part, dependent on general economic conditions affecting the community and the various businesses within the community.  Although management continues to follow established underwriting policies, and monitors loans through Republic’s loan review officer, credit risk is still inherent in the portfolio.  Although the majority of Republic’s loan portfolio is collateralized with real estate or other collateral, a portion of the commercial portfolio is unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit unsecured financing.  Republic makes both fixed and variable rate loans with terms typically ranging from one to five years. Variable rate loans are generally tied to the national prime rate of interest.
 

 
Branch Expansion Plans and Growth Strategy
 
The Company will carefully evaluate growth opportunities throughout 2010 as the national and local economies begin to recover.  Renovation and refurbishment of all existing branch locations took place during 2009 as the Company begins to direct more focus toward the retail customer experience. One new branch is currently planned for 2010 in southern New Jersey. Additional locations may also be pursued.
 

 
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Supervision and Regulation
 
Various requirements and restrictions under the laws of the United States and the Commonwealth of Pennsylvania affect the Company and Republic.
 
General
 
Republic, a Pennsylvania state chartered bank, is subject to supervision and regulation by the FDIC and the Pennsylvania Department of Banking. The Company is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the federal Bank Holding Company Act of 1956, as amended (the “BHC Act”). As a bank holding company, the Company’s activities and those of Republic are limited to the business of banking and activities closely related or incidental to banking, and the Company may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the FRB.
 
Republic is also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Republic. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve in attempting to control the money supply and credit availability in order to influence market interest rates and the national economy.   In response to the current global financial crises, the United States and other governments have taken unprecedented steps in effort to stabilize the financial system, and may continue to do so.
 
Holding Company Structure
 
Republic is subject to restrictions under federal law which limit its ability to transfer funds to the Company, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by Republic to the Company are generally limited in amount to 10% of Republic’s capital and surplus. Furthermore, such loans and extensions of credit are required to be secured in specific amounts, and all transactions are required to be on an arm’s length basis. Republic has never made any loans or extensions of credit to the Company or purchased any assets from the Company.
 
Under regulatory policy, the Company is expected to serve as a source of financial strength to Republic and to commit resources to support Republic. This support may be required at times when, absent such policy, the Company might not otherwise provide such support. Any capital loans by the Company to Republic are subordinate in right of payment to deposits and to certain other indebtedness of Republic. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of Republic will be assumed by the bankruptcy trustee and entitled to a priority of payment.
 
Gramm-Leach-Bliley Act
 
On November 12, 1999, the federal Gramm-Leach-Bliley Act (the “GLB Act”) was enacted.  The GLB Act did three fundamental things:
 
 
(a)
repealed the key provisions of the Glass Steagall Act so as to permit commercial banks to affiliate with investment banks (securities firms);
 
(b)
amended the BHC Act to permit qualifying bank holding companies to engage in any type of financial activities that were not permitted for banks themselves; and
 
(c)
permitted subsidiaries of banks to engage in a broad range of financial activities that were not permitted for banks themselves.
 
The result was that banking companies would generally be able to offer a wider range of financial products and services and would be more readily able to combine with other types of financial companies, such as securities and insurance companies.
 
The GLB Act created a new type of bank holding company called a “financial holding company” (an “FHC”).  An FHC is authorized to engage in any activity that is “financial in nature or incidental to financial activities” and any activity that the Federal Reserve determines is “complementary to financial activities” and does not pose undue risks to the financial system.  
 
 
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Among other things, “financial in nature” activities include securities underwriting and dealing, insurance underwriting and sales, and certain merchant banking activities.  A bank holding company qualifies to become an FHC if each of its depository institution subsidiaries is “well capitalized,” “well managed,” and CRA-rated “satisfactory” or better.  A qualifying bank holding company becomes an FHC by filing with the Federal Reserve an election to become an FHC.  If an FHC at any time fails to remain “well capitalized” or “well managed,” the consequences can be severe.  Such an FHC must enter into a written agreement with the Federal Reserve to restore compliance.  If compliance is not restored within 180 days, the Federal Reserve can require the FHC to cease all its newly authorized activities or even to divest itself of its depository institutions.  On the other hand, a failure to maintain a CRA rating of “satisfactory” will not jeopardize any then existing newly authorized activities; rather, the FHC cannot engage in any additional newly authorized activities until a “satisfactory” CRA rating is restored.
 
In addition to activities currently permitted by law and regulation for bank holding companies, an FHC may engage in virtually any other kind of financial activity.  Under limited circumstances, an FHC may even be authorized to engage in certain non-financial activities.  The most important of these authorized activities are as follows:
 
(a)      Securities underwriting and dealing;
(b)      Insurance underwriting and sales;
(c)      Merchant banking activities;
(d)      Activities determined by the Federal Reserve to be “financial in nature” and incidental activities; and
(e)      Activities determined by the Federal Reserve to be “complementary” to financial activities.
 
Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities to those previously permitted by law and regulation.  The Company has not elected to become a FHC.
 
The GLB Act also authorized national banks to create “financial subsidiaries.”  This is in addition to the present authority of national banks to create “operating subsidiaries”.  A “financial subsidiary” is a direct subsidiary of a national bank that satisfies the same conditions as an FHC, plus certain other conditions, and is approved in advance by the Office of the Comptroller of the Currency (the “OCC”).  A national bank’s “financial subsidiary” can engage in most, but not all, of the newly authorized activities.
 
In addition, the GLB Act provided significant new protections for the privacy of customer information.  These provisions apply to any company the business of which is engaging in activities permitted for an FHC, even if it is not itself an FHC.  The GLB Act subjected a financial institution to four new requirements regarding non-public information about a customer.  The financial institution must (1) adopt and disclose a privacy policy; (2) give customers the right to “opt out” of disclosures to non-affiliated parties; (3) not disclose any information to third party marketers; and (4) follow regulatory standards  to protect the security and confidentiality of customer information.
 
Sarbanes-Oxley Act of 2002
 
The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, auditing and accounting, executive compensation and corporate reporting for entities, such as the Company, with equity or debt securities registered under the Securities Exchange Act of 1934. Among other things, Sarbanes-Oxley and its implementing regulations have established new membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between the Company and its outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our chief executive officer and chief financial officer, and expanded the disclosure requirements for our corporate insiders. The requirements are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors.
 
We have taken necessary steps with respect to achieving compliance and have updated our assessment and reporting on internal controls through the end of 2009.
 
Regulatory Restrictions on Dividends
 
Dividend payments by Republic to the Company are subject to the Pennsylvania Banking Code of 1965 (the “Banking Code”) and the Federal Deposit Insurance Act (the “FDIA”). Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, Republic would be limited to $45.4 million of dividends payable plus an additional amount equal to its net profit for 2010, up to the date of any
 
 
 
8

 
 
such dividend declaration. However, dividends would be further limited in order to maintain capital ratios as discussed in “Regulatory Capital Requirements”.
 
State and federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks, which may vary. Adherence to such standards further limits the ability of Republic to pay dividends to the Company.
 
Dividend Policy
 
The Company has not paid any cash dividends on its common stock. The Company has no plans to pay cash dividends in 2010.
 
Deposit Insurance and Assessments
 
The deposits of Republic are insured up to applicable limits per insured depositor by the FDIC. As an FDIC-insured bank, Republic is also subject to FDIC insurance assessments. Beginning in 2007, the FDIC adopted a revised risk-based assessment system to determine the assessment rates to be paid by insured institutions. Under a final rulemaking announced by the FDIC on March 4, 2009, and depending on the institution’s risk category, assessment rates will range from 12 to 45 basis points. Institutions in the lowest risk category will be charged a rate between 12 and 16 basis points; these rates increase to 22, 32 and 45 basis points, respectively, for the remaining three risk categories. These rates may be offset in the future by any dividends declared by the FDIC if the deposit reserve ratio increases above a certain amount. Given the state of current economic environment, it is unlikely that the FDIC will lower these assessment rates, and such rates may in fact increase. Because FDIC deposit insurance premiums are “risk-based,” higher premiums would be charged to banks that have lower capital ratios or higher risk profiles. Consequently, a decrease in Republic’s capital ratios, or a negative evaluation by the FDIC, as Republic’s primary federal banking regulator, may also increase Republic’s net funding costs and reduce its net income.
 
All FDIC-insured depository institutions must also pay an annual assessment to provide funds for the repayment of debt obligations (commonly referred to as FICO bonds) issued by the Financing Corporation, a federal corporation, in connection with the disposition of failed thrift institutions by the Resolution Trust Corporation.  The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures.
 
Temporary Liquidity Guarantee Program
 
The Federal Deposit Insurance Corporation increased deposit insurance on most accounts from $100,000 to $250,000, until the end of 2009. In addition, pursuant to Section 13(c)(4)(G) of the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation has implemented two temporary programs to provide deposit insurance for the full amount of most non-interest bearing transaction deposit and certain other accounts through the end of 2009, effective October 1, 2009, the deadline was extended until June 30, 2010, and to guarantee certain unsecured debt of financial institutions and their holding companies through June 2012. For non-interest bearing transaction deposit accounts, including accounts swept from a non-interest bearing transaction account into a non-interest bearing savings deposit account, a 10 basis point annual rate surcharge will be applied to deposit amounts in excess of $250,000. Financial institutions could opt out of these two programs by December 5, 2008. We did opt out of the debt guarantee program, but did not opt out of the transaction account guarantee program.  We do not expect that the assessment surcharge will have a material impact on our results of operations.
 
Capital Adequacy
 
The Federal Reserve has adopted risk-based capital guidelines for bank holding companies, such as the Company. The required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8.0%. At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder, Tier 2 capital, may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance.
 
In addition to the risk-based capital guidelines, the Federal Reserve has established minimum leverage ratio (Tier 1 capital to average total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3%
 
 
9

 
 
for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company is in compliance with these guidelines. The FDIC subjects Republic to similar capital requirements.
 
The risk-based capital standards are required to take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities.
 
Interstate Banking
 
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995 (the “Interstate Banking Law”) amended various federal banking laws to provide for nationwide interstate banking, interstate bank mergers and interstate branching. The interstate banking provisions allow for the acquisition by a bank holding company of a bank located in another state.
 
Interstate bank mergers and branch purchase and assumption transactions were allowed effective September 1, 1998; however, states may “opt-out” of the merger and purchase and assumption provisions by enacting a law that specifically prohibits such interstate transactions. States could, in the alternative, enact legislation to allow interstate merger and purchase and assumption transactions prior to September 1, 1999. States could also enact legislation to allow for de novo interstate branching by out of state banks. In July 1997, Pennsylvania adopted “opt-in” legislation that allows interstate merger and purchase and assumption transactions.
 
Source of Strength
 
According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary.  This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC – either as a result of default of a banking affiliate or related to FDIC assistance provided to a subsidiary in danger of default – the affiliated banks may be assessed for the FDIC’s loss, subject to certain exceptions.
 
Transactions with Affiliates
 
Republic is subject to restrictions under federal law that limit certain types of transactions between Republic and its non-bank affiliates.  In general, Republic is subject to quantitative and qualitative limits on extensions of credit, purchases of assets and certain other transactions involving the Company and its non-bank affiliates.  Transactions between Republic and its nonbank affiliates are required to be on arms length terms.
 
Legislative and Regulatory Changes
 
We are heavily regulated by regulatory agencies at the federal and state levels.  As a result of the recent financial crisis and economic downturn, we, like most of our competitors, have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for us and the financial services industry in general.
 
In 2009, several major regulatory and legislative initiatives were adopted that may have future impacts on our businesses and financial results.  For instance, in November 2009, the Federal Reserve Board issued amendments to Regulation E, which implements the Electronic Fund Transfer Act.  The new rules have a compliance date of July 1, 2010.  These amendments change, among other things, the way we and other banks may charge overdraft fees by limiting our ability to charge an overdraft fee for automated teller machine and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively consents to payment of overdrafts for those transactions.
 
On May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) was signed into law.  The majority of the CARD Act provisions became effective in February 2010.  The CARD Act legislation contains comprehensive credit card reform related to credit card industry practices including significantly restricting banks’ ability to change interest rates and assess fees to reflect individual consumer risk, changing the way payments are applied and requiring
 
 
10

 
 
changes to consumer credit card disclosures.  Under the CARD Act, banks must give customers 45 days notice prior to a change in terms on their account and the grace period for credit card payments changes from 14 days to 21 days.  The CARD Act also requires banks to review any accounts that were repriced since January 1, 2009 for a possible rate reduction.  Additionally, the Federal Reserve Board has revised its regulations on consumer lending in Regulation Z.  We do not expect that they will have a substantial impact on Republic’s operations.
 
Future Legislative and Regulatory Developments
 
It is conceivable that compliance with current or future legislative and regulatory initiatives could require us to change certain of our business practices, impose significant additional costs on us, limit the products that we offer, result in a significant loss of revenue, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, cause business disruptions, impact the value of assets that we hold or otherwise adversely affect our business, results of operations, or financial condition.  We have recently witnessed the introduction of an ever-increasing number of regulatory proposals that could substantially impact us and others in the financial services industry.  The extent of changes imposed by, and frequency of adoption of, any regulatory initiatives could make it more difficult for us to comply in a timely manner, which could further limit our operations, increase compliance costs or divert management attention or other resources.  The long-term impact of legislative and regulatory initiatives on our business practices and revenues will depend upon the successful implementation of our strategies, consumer behavior, and competitors’ responses to such initiatives, all of which are difficult to predict.  Additionally, we will pursue all appropriate avenues to engage in legislative and regulatory advocacy to ensure the best possible input on possible legislative and regulator developments.
 
Profitability, Monetary Policy and Economic Conditions
 
In addition to being affected by general economic conditions, the earnings and growth of Republic will be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking, the FRB and the FDIC.  An important function of the Federal Reserve is to regulate the supply of money and other credit conditions in order to manage interest rates.  The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.  The effects of such policies upon the future business, earnings and growth of Republic cannot be determined.  See “Management’s Discussion and Analysis of Operations and Financial Condition - Results of Operations”.
 
Item 1A:             Risk Factors
 
In addition to factors discussed elsewhere in this report and in “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” the following are some of the important factors that could significantly affect our business, financial condition and results of operations.
 
Unfavorable economic and market conditions due to the current global financial crisis may adversely affect our financial position and results of operations.
 
Economic and market conditions in the United States and around the world have deteriorated significantly and may remain depressed for the foreseeable future.  Conditions such as slowing or negative growth and the sub-prime debt devaluation crisis have resulted in a low level of liquidity in many financial markets, and extreme volatility in credit, equity and fixed income markets.  These economic developments could have various effects on our business, including insolvency of major customers, an unwillingness of customers to borrow or to repay funds already borrowed and a negative impact on the investment income the Company is able to earn on its investment portfolio.  The potential effects of the current global financial crisis are difficult to forecast and mitigate.  As a consequence, the Company’s operating results for a particular period are difficult to predict.  Distress in the credit markets and issues relating to liquidity among financial institutions have resulted in the failure of some financial institutions around the world and others have been forced to seek acquisition partners. The United States and other governments have taken unprecedented steps in effort to stabilize the financial system, including investing in financial institutions. There can be no assurance that these efforts will succeed.  Our business and our financial condition and results of operations could be adversely affected by (1) continued or accelerated disruption and volatility in financial markets; (2) continued capital and liquidity concerns regarding financial institutions; (3) limitations resulting from further governmental
 
 
11

 
 
action in an effort to stabilize or provide additional regulation of the financial system; or (4) recessionary conditions that are deeper or longer lasting than currently anticipated.
 
Our earnings are sensitive to fluctuations in interest rates.
 
The earnings of the Company depend on the earnings of Republic. Republic is dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the operations of Republic are subject to risks and uncertainties surrounding their exposure to change in the interest rate environment.
 
Our earnings and financial condition may be negatively impacted by a general economic downturn or changes in the credit risk of our borrowers.
 
Republic’s results of operations and financial condition are affected by the ability of its borrowers to repay their loans.  Lending money is an essential part of the banking business.  However, borrowers do not always repay their loans.  The risk of non-payment is affected by credit risks of a particular borrower, changes in economic conditions, the duration of the loan and in the case of a collateralized loan, uncertainties as to the future value of the collateral and other factors.
 
Our allowance for loan losses may not be sufficient to absorb actual loan losses.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America require management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, and income taxes. Consideration is given to a variety of factors in establishing these estimates. There is no precise method of predicting loan losses.  Republic can give no assurance that its allowance for loan losses is or will be sufficient to absorb actual loan losses.  Loan losses could have a material adverse effect on Republic’s financial condition and results of operations.  Republic attempts to maintain an allowance for loan losses adequate to absorb losses inherent in its loan portfolio.  In maintaining the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors.   Since the allowance for loan losses and carrying value of real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond Republic’s control, it is at least reasonably possible that the estimates of the allowance for loan losses and the carrying values of the real estate owned could differ materially in the near term.
 
We face increasing competition in our market from other banks and financial institutions.
 
Republic may not be able to compete effectively in its markets, which could adversely affect its results of operations.  The banking and financial services industry in Republic’s market area is highly competitive.  The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and the accelerated pace of consolidation among financial service providers.  Larger institutions have greater access to capital markets, with higher lending limits and a broader array of services.  Competition may require increases in deposit rates and decreases in loan rates, and adversely impact our net interest margin.
 
Our governing documents contain provisions which may reduce the likelihood of a change in control transaction.
 
The Company’s articles of incorporation and bylaws contain certain anti-takeover provisions that may make it more difficult or expensive or may discourage a tender offer, change in control or takeover attempt that is opposed by its board of directors.  In particular, the articles of incorporation and bylaws: classify the board of directors into three groups, so that shareholders elect only one-third of the board each year;  permit shareholders to remove directors only for cause and only upon the vote of the holders of at least 75% of the voting shares; require shareholders to give the Company advance notice to nominate candidates for election to the board of directors or to make shareholder proposals at a shareholders’ meeting; and require the vote of the holders of at least 60% of the Company’s voting shares for stockholder amendments to the Company’s bylaws.  These provisions of the Company’s Articles of Incorporation and Bylaws could discourage potential acquisition
 
 
 
12

 
 
proposals and could delay or prevent a change in control, even though a majority of the Company’s shareholders may consider such proposals desirable.  Such provisions could also make it more difficult for third parties to remove and replace the members of the Company’s board of directors.  Moreover, these provisions could diminish the opportunities for shareholders to participate in certain tender offers, including tender offers at prices above the then-current market value of the Company’s common stock, and may also inhibit increases in the trading price of the Company’s common stock that could result from takeover attempts or speculation.
 
In addition, in the event of certain hostile fundamental changes, all of our senior officers are entitled to receive payments equal to two times such officers’ base annual salary in the event they determine not to continue their employment.
 
Government regulation restricts the scope of our operations.
 
The Company and Republic operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the FDIC, the Pennsylvania Department of Banking and the FRB.  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.  Regulations that apply to the Company and Republic are generally intended to provide protection for depositors and customers rather than for investors.  The Company and Republic will remain subject to these regulations, and to the possibility of changes in federal and state laws, regulations, governmental policies, income tax laws and accounting principles.  Changes in the regulatory environment in which the Company and Republic operate could adversely affect the banking industry as a whole and the Company and Republic’s operations in particular.  For example, regulatory changes could limit our growth and our return to investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, and providing securities, insurance or trust services.  Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.
 
Also, legislation may change present capital requirements, which could restrict the Company and Republic’s activities and require the Company and Republic to maintain additional capital.  The Company and Republic cannot predict what changes, if any, legislators and federal and state agencies will make to existing federal and state legislation and regulations or the effect that such changes may have on the Company and Republic’s business.
 
We anticipate increased and/or changes in regulations as a result of the current turmoil in the financial markets and the efforts of government agencies to stabilize the financial system.
 
Our business is concentrated in and dependent upon the continued growth and welfare of our primary market area.
 
We operate primarily in the Philadelphia geographic market.  Our success depends upon the business activity, population, income levels, deposits and real estate activity in this market. Although our customers’ business and financial interests may extend well beyond this market area, adverse economic conditions that affect our home market could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
 
We may experience difficulties in managing our growth, and our growth strategy involves risks that may negatively impact our net income.
 
 As part of our general growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by opening new branches and acquiring existing branches of other financial institutions. To the extent that we undertake additional branch openings and acquisitions, we are likely to continue to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruption to our business.
 
Our growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
 
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. However, we
 
 
 
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may at some point need to raise additional capital to support our continued growth. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth, branching, de novo bank formations and/or acquisitions could be materially impaired.
 
Our community banking strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
 
Much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market. Our ability to retain executive officers, the current management teams, branch managers and loan officers of our bank subsidiary will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
 
We have a continuing need for technological change and we may not have the resources to effectively implement new technology.
 
The financial services industry is constantly undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand in our market. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.
 
There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price shareholders paid for them.
 
Although our common shares are listed for trading on the NASDAQ Stock Market, the trading in our common shares has less liquidity than many other companies listed on the NASDAQ.   A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.
 
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.  
 
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
 
 
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We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors. 
 
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
 
We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
 
Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives.
 
Our system of internal controls cannot provide absolute assurance of achieving their intended objectives because of inherent limitations.  Internal control processes that involve human diligence and compliance are subject to lapses in judgment and breakdowns resulting from human failures.  Internal controls can also be circumvented by collusion or improper management override.  Because of such limitations, there is a risk that material misstatements due to error or fraud may not be prevented or detected on a timely basis by internal controls.
 

 
Item 1B:            Unresolved Staff Comments
 
None
 

 
Item 2:               Description of Properties
 
Republic First Bank leases approximately 39,959 square feet on two floors of Two Liberty Place, 50 South 16th Street, Philadelphia, Pennsylvania.  The space serves as the headquarters and executive offices of the Company and Republic.  Bank office operations and the commercial bank lending department of Republic First Bank are also located at the site.  The initial lease term will expire on December 31, 2020 and the lease contains two five year renewal options.  Rent expense commenced in June 2007 at an annual rate of approximately $562,684, subject to certain abatements during the first twenty-eight months of the lease.  The 2010 annual rent for such location is $902,728, payable in monthly installments.
 
Republic leases approximately 1,829 square feet on the ground floor at 1601 Market Street in Center City, Philadelphia.  This space contains a banking area and vault and represents Republic’s main office. The initial ten year term of the lease expired March 2003 and contains five-year and ten-year renewal options that have been exercised and also contains an additional five-year option. The 2010 annual rent for such location is $115,859 payable in monthly installments.
 
Republic leases approximately 1,743 square feet of space on the ground floor at 1601 Walnut Street, Center City Philadelphia, PA.  This space contains a banking area and vault.  The initial ten-year term of the lease expired August 2006.  The lease has been extended to August 2014 and contains an additional five-year renewal option.  The 2010 annual rent for such location is $138,119, payable in monthly installments.
 
Republic leases approximately 798 square feet of space on the ground floor and 903 square feet on the 2nd floor at 233 East Lancaster Avenue, Ardmore, PA.  The space contains a banking area and business development office.  The initial ten-year term of the lease expired in August 2005, and contains a five year renewal option that has been exercised and also contains an additional five-year option.  The 2010 annual rental at such location is $64,370, payable in monthly installments.
 
Republic entered into a lease agreement that commenced May 1, 2007 for approximately 1,574 square feet for its Bala Cynwyd office at Two Bala Plaza, Bala Cynwyd, Pennsylvania.  The space contains a banking area.  The initial six-year, four
 
 
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month lease term contains two five-year renewal options and the initial lease term will expire on August 31, 2013.  The 2010 annual rent at such location is $50,893, payable in monthly installments.
 
Republic entered into a lease agreement that commenced April 27, 2007 for approximately 2,820 square feet for its Plymouth Meeting office at 421 Germantown Pike, Plymouth Meeting, Pennsylvania.  The space contains a banking area and a business development office.  The initial seven-year, five month lease term contains one six-year renewal option and the initial lease terms will expire on September 30, 2014.  The 2010 annual rent at such location is $96,115, payable in monthly installments.
 
Republic owns an approximately 2,800 square foot facility for its Abington, Montgomery County office at 1480 York Road, Abington, Pennsylvania.  This space contains a banking area and a business development office.
 
Republic leases approximately 1,822 square feet on the ground floor at 1818 Market St. Philadelphia, Pennsylvania. The space contains a banking area and a vault. The initial ten-year term of the lease expired in August 2008, has been extended for fifteen years to August 2023, and contains an additional five-year renewal option. The 2010 annual rent for such location is $181,438, payable in monthly installments.
 
Republic leases approximately 4,700 square feet of space on the first, second, and third floor, at 436 East Baltimore Avenue, Media, Pennsylvania.  The space contains a banking area and business development office.  The initial five-year term of the lease expired in October 2009 contains a five-year renewal option that has been exercised and also contains three additional five-year renewal options.  The 2010 annual rent is $82,804 payable in monthly installments.
 
Republic leases an approximately 6,000 square feet facility for its Northeast Philadelphia office at Mayfair and Cottman Avenues, Philadelphia, Pennsylvania.  The space contains a banking area and a business development office.  The initial fifteen-year term of the lease expires June 2021 with two five-year renewal options.  The 2010 annual rent is $96,000 payable in monthly installments.
 
Republic leases an approximately 1,850 square feet facility for its Voorhees office at 342 Burnt Mill Road, Voorhees, New Jersey.  The space contains a banking area.  The initial fifteen-year term of the lease expires May 2021 with two five-year renewal options.  The 2010 annual rent is $45,000 payable in monthly installments.
 
Republic entered into a lease agreement that commenced September 1, 2007 for approximately 2,467 square feet at 833 Chestnut Street, Philadelphia, Pennsylvania.  The space contains a banking area and a business development office.  The initial fifteen-year term of the lease expires August 2022 with three five-year renewal options.  The 2010 annual rent is $74,421, payable in monthly installments.
 
Republic entered into a lease agreement that commenced December 26, 2007 for approximately 2,710 square feet for its Torresdale office, at 8764 Frankford Avenue, Philadelphia, Pennsylvania.  The space contains a banking area and business development office.  The initial fifteen-year term of the lease expires December 2022 with two five-year renewal options.  The 2010 annual rent is $130,000, payable in monthly installments.
 
Republic purchased a parcel of land consisting of approximately 2.1 acres, on July 23, 2008, at 335 Route 70 East, Cherry Hill, New Jersey.  A 4,000 square foot branch facility is in development, and is scheduled to be opened in 2011.
 
Republic entered into a lease agreement on October 29, 2008 for a building, approximately 5,000 square feet located at 30 Kings Highway East, Haddonfield, New Jersey.  This location will be utilized for its Haddonfield branch and is scheduled to open in 2010.  The initial twenty-year term of the lease expires January 2029 with two five-year renewal options.  The 2010 annual rent is to be $140,000 payable in monthly installments.
 
Republic entered into purchase agreements for three parcels of land on October 12, 2008 totaling approximately 1.2 acres located at the Black Horse Pike and Ganttown Road, Turnersville, New Jersey.  A 4,000 square foot branch facility is to be developed and is scheduled to open in 2011.
 
 
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Item 3:               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 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.
 

 
Item 4:               (Removed and Reserved)
 
 
 
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PART II
 
Item 5:               Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Shares of the Company’s class of common stock are listed on the Nasdaq Global Market under the symbol “FRBK.”  The table below presents the range of high and low trade prices reported for the common stock on the Nasdaq Global Market for the periods indicated.  Market prices reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not necessarily reflect actual transactions.  As of March 12, 2010, there were approximately 2,400 holders of the Company’s common stock, which includes an estimate of individual participants in security position listings.  On March 12, 2010, the closing price of a share of common stock on Nasdaq was $4.24.
 
Year
   Quarter   High     Low  
2009
 
4th
  $ 5.05     $ 3.81  
   
3rd
    8.10       4.26  
   
2nd
    8.69       6.74  
   
1st
    9.00       4.02  
                     
2008
 
4th
  $ 9.19     $ 7.26  
   
3rd
    10.73       5.71  
   
2nd
    7.75       4.20  
   
1st
    8.59       4.31  

 
Dividend Policy
 
The Company has not paid any cash dividends on its common stock and has no plans to pay cash dividends during 2010.  For certain limitations on Republic’s ability to pay cash dividends to the Company, see “Description of Business - Supervision and Regulation”.
 
 
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Item 6:               Selected Financial Data
 
   
As of or for the Years Ended December 31,
 
(Dollars in thousands, except per share data)
 
2009
   
2008
   
2007
   
2006
   
2005
 
                               
INCOME STATEMENT DATA
                             
Total interest income
  $ 43,470     $ 53,976     $ 68,346     $ 62,745     $ 45,381  
Total interest expense
    16,055       25,081       38,307       28,679       16,223  
Net interest income
    27,415       28,895       30,039       34,066       29,158  
Provision for loan losses
    14,200       7,499       1,590       1,364       1,186  
Non-interest income
    79       1,242       3,073       3,640       3,614  
Non-interest expenses
    30,959       23,887       21,364       21,017       18,207  
Income (loss) before provision (benefit) for income taxes
    (17,665 )     (1,249 )     10,158       15,325       13,379  
Provision (benefit) for income taxes
    (6,223 )     (777 )     3,273       5,207       4,486  
Net income (loss)
  $ (11,442 )   $ (472 )   $ 6,885     $ 10,118     $ 8,893  
                                         
PER SHARE DATA
                                       
Basic earnings per share
                                       
Net income (loss)
  $ (1.07 )   $ (0.04 )   $ 0.66     $ 0.97     $ 0.88  
Diluted earnings per share
                                       
Net income (loss)
  $ (1.07 )   $ (0.04 )   $ 0.65     $ 0.95     $ 0.84  
                                         
Book value per share
  $ 6.59     $ 7.46     $ 7.80     $ 7.16     $ 6.17  
                                         
BALANCE SHEET DATA
                                       
Total assets
  $ 1,008,642     $ 951,980     $ 1,016,308     $ 1,008,824     $ 850,855  
Total loans, net
    680,977       774,673       813,041       784,002       670,469  
Total investment securities (1)
    192,395       90,066       90,299       109,176       44,161  
Total deposits
    882,894       739,167       780,855       754,773       647,843  
FHLB & overnight advances
    25,000       102,309       133,433       159,723       123,867  
Subordinated debt
    22,476       22,476       11,341       6,186       6,186  
Total shareholders’ equity
    70,264       79,327       80,467       74,734       63,677  
                                         
PERFORMANCE RATIOS
                                       
Return on average assets on continuing operations
    (1.22 )%     (0.05 )%     0.71 %     1.19 %     1.22 %
Return on average shareholders’ equity on continuing operations
    (15.32 )%     (0.60 )%     8.86 %     14.59 %     15.22 %
Net interest margin
    3.13 %     3.28 %     3.26 %     4.20 %     4.23 %
Total non-interest expenses as a percentage of average assets
    3.29 %     2.54 %     2.20 %     2.48 %     2.49 %
                                         
ASSET QUALITY RATIOS
                                       
Allowance for loan losses as a percentage of loans
    1.85 %     1.07 %     1.04 %     1.02 %     1.12 %
Allowance for loan losses as a percentage of non-performing loans
    49.32 %     48.51 %     38.19 %     116.51 %     222.52 %
Non-performing loans as a percentage of total loans
    3.75 %     2.21 %     2.71 %     0.87 %     0.50 %
Non-performing assets as a percentage of total assets
    3.93 %     2.72 %     2.55 %     0.74 %     0.42 %
Net charge-offs as a percentage of average loans, net
    1.33 %     0.96 %     0.14 %     0.13 %     0.04 %
                                         
LIQUIDITY AND CAPITAL RATIOS
                                       
Average equity to average assets
    7.94 %     8.44 %     8.01 %     8.17 %     7.99 %
Leverage ratio
    9.36 %     11.14 %     9.44 %     8.75 %     8.89 %
Tier 1 capital to risk-weighted assets
    11.89 %     12.26 %     10.07 %     9.46 %     10.65 %
Total capital to risk-weighted assets
    13.14 %     13.26 %     11.01 %     10.30 %     11.81 %

 (1)
Includes restricted stock


19



Item 7:               Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
The following is management’s discussion and analysis of the Company’s financial condition, changes in financial condition and results of operations, liquidity and capital resources presented in the accompanying consolidated financial statements.  This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
 
Critical Accounting Policies, Judgments and Estimates
 
In reviewing and understanding financial information for the Company you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 3 of the notes to our audited consolidated financial statements. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses, other-than-temporary impairment of securities and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the bases for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
Allowance for Loan Losses— Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, the volume and composition of lending conducted by the Company, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio.  The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management, based upon its evaluation, considers adequate to absorb losses inherent in the loan portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant change.
 
The allowance consists of specific allowances for both impaired loans and all classified loans which are not impaired, and a general allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
 
We establish an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price, or fair value of collateral if the loan is collateral dependent, is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. A delay or shortfall in amount of payments does not necessarily result in the loan being identified as impaired.
 
We also establish a specific valuation allowance on classified loans which are not impaired. We segregate these loans by category and assign allowances to each loan based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.  Classification of a loan within this category is based on identified weaknesses that increase the credit risk of the loan.
 
We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends, and management’s evaluation of the collectibility of the loan portfolio.
 
 
 
20

 
 
The allowance is adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are reevaluated each reporting period to ensure their relevance in the current economic environment.
 
While management uses the best information known to it in order to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio, or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the allowance for loan losses in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, our estimates of the allowance for loan loss have provided adequate coverage against actual losses incurred.  In addition, the Pennsylvania Department of Banking and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Pennsylvania Department of Banking or the FDIC may require the recognition of adjustment to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
 
Other-Than-Temporary Impairment of 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 prospects 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 the 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.
 
Income Taxes—Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of various deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision.
 
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.
 
 
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Results of Operations for the years ended December 31, 2009 and 2008
 
Overview
 
 The Company had a net loss of $11.4 million or $1.07 per diluted share for the year ended December 31, 2009, compared to a net loss of $472,000, or $0.04 per diluted share for the comparable prior year.  There was a $10.5 million, or 19.5%, decrease in total interest income, reflecting a 90 basis point decrease in the yield on average loans outstanding while interest expense decreased $9.0 million, reflecting a 130 basis point decrease in the rate on average interest-bearing deposits outstanding.  Accordingly, net interest income decreased $1.5 million between the periods.  The provision for loan losses in 2009 increased to $14.2 million, compared to $7.5 million provision expense in 2008, reflecting additional reserves on certain loans as the Company continues to deal with the extreme impact of the current economic environment.  Non-interest income decreased $1.2 million to $79,000 in 2009 compared to $1.2 million in 2008, primarily due to impairment charges on investment securities.  Non-interest expenses increased $7.1 million to $31.0 million compared to $23.9 million in 2008, primarily due to activities surrounding the anticipated closing of the Metro merger as salaries and employee benefit expense increased by $3.1 million and consulting fees increased by $1.3 million.  In addition, regulatory assessments and costs increased by $1.8 million due to actions taken by the FDIC coupled with strong growth in core deposits.  Return on average assets and average equity was (1.22)% and (15.32)% respectively, in 2009 compared to (0.05)% and (0.60)% respectively in 2008.
 
 
 
22

 
 
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 on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders’ equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic’s net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency in 2009, 2008 and 2007, as Republic had tax-exempt income in those years.
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Rate (1)
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Rate (1)
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Rate (1)
 
(Dollars in thousands)
 
For the Year
Ended
December 31, 2009
   
For the Year
Ended
December 31, 2008
   
For the Year
Ended
December 31, 2007
 
Interest-earning assets:
                                                     
Federal funds sold and other interest-earning assets
  $ 48,580     $ 118       0.24 %   $ 9,821     $ 218       2.22 %   $ 13,923     $ 686       4.93 %
Investment securities and restricted stock
    96,787       4,633       4.79 %     89,365       5,135       5.75 %     95,715       5,752       6.01 %
Loans receivable
    736,647       38,943       5.29 %     789,446       48,846       6.19 %     820,380       62,184       7.58 %
Total interest-earning assets
    882,014       43,694       4.95 %     888,632       54,199       6.10 %     930,018       68,622       7.38 %
Other assets
    58,106                       51,349                       39,889                  
Total assets
  $ 940,120                     $ 939,981                     $ 969,907                  
Interest-bearing liabilities:
                                                                       
Demand - non-interest bearing
  $ 86,621     $ -       N/A     $ 76,671     $ -       N/A     $ 78,641     $ -       N/A  
Demand - interest-bearing
    47,174       310       0.66 %     33,976       327       0.96 %     38,850       428       1.10 %
Money market & savings
    281,621       5,258       1.87 %     222,590       6,150       2.76 %     266,706       11,936       4.48 %
Time deposits
    383,535       8,374       2.18 %     397,740       14,844       3.73 %     361,120       18,822       5.21 %
Total deposits
    798,951       13,942       1.75 %     730,977       21,321       2.92 %     745,317       31,186       4.18 %
Total interest-
                                                                       
bearing deposits
    712,330       13,942       1.96 %     654,306       21,321       3.26 %     666,676       31,186       4.68 %
Other borrowings
    57,454       2,113       3.68 %     121,236       3,760       3.10 %     133,122       7,121       5.35 %
Total interest-bearing
                                                                       
liabilities
    769,784       16,055       2.09 %     775,542       25,081       3.23 %     799,798       38,307       4.79 %
Total deposits and
                                                                       
other borrowings
    856,405       16,055       1.87 %     852,213       25,081       2.94 %     878,439       38,307       4.36 %
Non-interest-bearing
                                                                       
Other liabilities
    9,031                       8,459                       13,734                  
Shareholders’ equity
    74,684                       79,309                       77,734                  
Total liabilities and
                                                                       
Shareholders’ equity
  $ 940,120                     $ 939,981                     $ 969,907                  
Net interest income (2)
          $ 27,639                     $ 29,118                     $ 30,315          
Net interest spread
                    2.86 %                     2.87 %                     2.59 %
Net interest margin (2)
                    3.13 %                     3.28 %                     3.26 %
__________
(1) Yields on investments are calculated based on amortized cost.
(2) Net interest income and net interest margin are presented on a tax equivalent basis.  Net interest income has been increased over the financial statement amount by $224, $223 and $276 in 2009, 2008 and 2007, 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.
 
 
 
23

 

 
Rate/Volume Analysis of Changes in Net Interest Income
 
Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates.
 
   
Year ended December 31,
2009 vs. 2008
   
Year ended December 31,
2008 vs. 2007
 
         
Change due to
               
Change due to
       
(Dollars in thousands)
 
Average
Volume
   
Average
Rate
   
Total
   
Average Volume
   
Average
Rate
   
Total
 
Interest earned on:
                                   
Federal funds sold and other
                                   
interest-earning assets
  $ 94     $ (194 )   $ (100 )   $ (91 )   $ (377 )   $ (468 )
Securities
    355       (857 )     (502 )     (366 )     (251 )     (617 )
Loans
    (2,791 )     (7,112 )     (9,903 )     (1,919 )     (11,419 )     (13,338 )
Total interest earning assets
  $ (2,342 )   $ (8,163 )   $ (10,505 )   $ (2,376 )   $ (12,047 )   $ (14,423 )
Interest expense of
                                               
Deposits
                                               
Interest-bearing demand deposits
  $ (87 )   $ 104     $ 17     $ 47     $ 54     $ 101  
Money market and savings
    (1,102 )     1,994       892       1,222       4,564       5,786  
Time deposits
    310       6,160       6,470       (1,370 )     5,348       3,978  
Total deposit interest expense
    (879 )     8,258       7,379       (101 )     9,966       9,865  
Other borrowings
    2,346       (699 )     1,647       370       2,991       3,361  
Total interest expense
    1,467       7,559       9,026       269       12,957       13,226  
Net interest income
  $ (875 )   $ (604 )   $ (1,479 )   $ (2,107 )   $ 910     $ (1,197 )

Net Interest Income
 
The Company’s tax equivalent net interest margin decreased 15 basis points to 3.13% for the year ended December 31, 2009, versus 3.28% in the prior year comparable period.
 
While yields on interest-bearing assets decreased 115 basis points to 4.95% in 2009 from 6.10% in the prior year comparable period, the rate on total deposits and other borrowings decreased 107 basis points to 1.87% from 2.94% between those respective periods. The decrease in yields on assets and rates on deposits and borrowings was due to repricing assets and liabilities primarily as a result of actions taken by the Federal Reserve.
 
The Company's tax equivalent net interest income decreased $1.5 million, or 5.2%, to $27.6 million for 2009, from $29.1 million for the prior year comparable period. The decrease in net interest income was due primarily to a decrease in average loans.  Average interest earning assets amounted to $882.0 million for 2009 and $888.6 million for the comparable prior year period but average loans decreased $52.8 million, replaced primarily with lower yielding investment securities, federal funds sold and other interest earning assets.
 
The Company’s total tax equivalent interest income decreased $10.5 million, or 19.4%, to $43.7 million for 2009, from $54.2 million for the prior year comparable period.  Interest and fees on loans decreased $9.9 million, or 20.3%, to $38.9 million for 2009, from $48.8 million for the prior year comparable period.  The decrease was due primarily to the 90 basis point decline in the yield on loans resulting from the repricing of the variable rate loan portfolio as a result of actions taken by the Federal Reserve.  Tax equivalent interest and dividends on investment securities decreased $502,000 to $4.6 million for 2009, from $5.1 million for the prior year comparable period, primarily reflecting lower yields.  Interest on federal funds sold and other interest-earning assets decreased $100,000, or 45.9%, reflecting decreases in short- term market interest rates.
 
The Company’s total interest expense decreased $9.0 million, or 36.0%, to $16.1 million for 2009, from $25.1 million for the prior year comparable period.  Interest-bearing liabilities averaged $769.8 million for 2009, versus $775.5 million for the prior year comparable period, or a decrease of $5.8 million.  The decrease primarily reflected reduced external funding requirements due to a decrease in outstanding loans.  Average deposit balances increased $68.0 million while there was a $63.8 million decrease in average other borrowings.  The average rate paid on interest-bearing liabilities decreased 114 basis points to 2.09% for 2009.  Interest expense on time deposit balances decreased $6.5 million to $8.4 million in 2009 from $14.8 million
 
 
 
24

 
 
in the comparable prior year period, primarily reflecting lower rates.  Money market and savings interest expense decreased $892,000 to $5.3 million in 2009, from $6.2 million in the comparable prior year period.  The decrease in interest expense on deposits reflected the impact of the lower short-term interest rate environment.  Accordingly, rates on total interest-bearing deposits decreased 130 basis points in 2009 compared to the comparable prior year period.
 
Interest expense on other borrowings decreased $1.6 million to $2.1 million in 2009, as a result of lower average balances due to reduced external funding requirements.  Average other borrowings, primarily overnight FHLB borrowings, decreased $63.8 million, or 52.6%, between the respective periods.  Interest expense on other borrowings includes the impact of $22.5 million of average trust preferred securities and $25.0 million of FHLB term borrowings.
 
Provision for Loan Losses
 
The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that reflects the known and adequate to absorb estimated inherent losses in the portfolio. The provision for loan losses amounted to $14.2 million during 2009 compared to $7.5 million for the comparable prior year period.
 
The $14.2 million provision recorded in 2009 was primarily driven by a comprehensive internal, external and regulatory review of the Company’s loan portfolio.  As a result of these reviews, management determined that an increased provision would be required.  The significant increase from the comparable prior year period was primarily due to the continued decline of collateral values within the Company’s commercial real estate portfolio and a change in its methodology for calculating potential loan losses inherent in its loan portfolio, coupled with a more conservative loan classification system.  At December 31, 2009, as a result of the above items loan specific reserves were increased to $7.1 million representing 55% of the overall allowance for loan losses.
 
Non-Interest Income
 
Total non-interest income decreased $1.1 million to $79,000 for 2009 compared to $1.2 million for the comparable prior year period, primarily due to an increase of $0.7 million in impairment charges on bank pooled trust preferred securities held in the Company’s investment portfolio. During the second quarter of 2009, the Company recorded a cumulative effect adjustment in the amount of $0.8 million to reclassify the non-credit component of previously recognized impairment on one these securities in accordance with accounting guidance issued in April 2009 under ASC 320-10. The reclassification resulted in an adjustment between retained earnings and accumulated other comprehensive income on the balance sheet. This impairment had previously been recognized as a reduction to earnings during the fourth quarter of 2008. Due to further deterioration of the underlying collateral of the pooled trust preferred securities, the Company again recognized an other than temporary impairment charge of $0.8 million related to the same security during the fourth quarter of 2009 without the ability to re-state prior year results according to the accounting guidance.
 
Non-Interest Expenses
 
Total non-interest expenses increased $7.1 million, or 29.6% to $31.0 million for 2009 compared to $23.9 million for 2008. Salaries and employee benefits increased $3.1 million, or 31.9%, to $12.7 million for 2009 as a result annual merit increases and higher medical insurance premiums. In addition, the Company continued to add staff in anticipation of the closing of the proposed Metro merger. Occupancy expense increased to $3.1 million in 2009, compared to $2.4 million for 2008 due to higher maintenance costs and incremental rent increases at several store locations, as well as the corporate headquarters.  Professional fees increased to $2.3 million in 2009, compared to $1.0 million in 2008 mainly due to an increase in consulting fees mainly due to activities surrounding the anticipated closing of the proposed Metro merger.  Regulatory assessments and costs increased to $2.3 million for 2009 from $0.6 million in 2008, primarily resulting from increases in statutory FDIC insurance rates along with a one-time special assessment paid during the third quarter of 2009
 

25

 
 
Provision for Income Taxes
 
The benefit for income taxes generated by the Company’s net operating losses increased to $6.2 million for 2009, compared to $777,000 for the prior year comparable period.  The effective tax rates in those periods were 35% and a 62% benefit respectively.
 
Results of Operations for the years ended December 31, 2008 and 2007
 
Overview
 
The Company’s net income decreased $7.4 million, or 106.9%, to a loss of $472,000 or $ (.04) per diluted share for the year ended December 31, 2008, compared to $6.9 million, or $0.65 per diluted share for the prior year.  There was a $14.4 million, or 21.0%, decrease in total interest income, reflecting a 3.8% decrease in average loans outstanding while interest expense decreased $13.2 million reflecting a 1.9% decrease in average interest bearing deposits.  Accordingly, net interest income decreased $1.1 million.  The provision for loan losses in 2009 increased $5.9 million to $7.5 million, compared to $1.6 million in 2007, reflecting the impact of an economic downturn in real estate markets.  Non-interest income decreased $1.8 million to $1.2 million in 2008 compared to $3.1 million in 2007.  The decrease reflected a $4.1 million impairment charge on a bank pooled trust preferred security.  Non-interest expenses increased $2.5 million to $23.9 million compared to $21.4 million in 2007.  The increase reflected $1.6 million of write downs and losses on the sale of other real estate which also reflected the impact of the economic downturn.  Return on average assets and average equity of (0.05)% and (0.60)% respectively in 2008 compared to 0.71% and 8.86% respectively in 2007.
 
Net Interest Income
 
The Company’s tax equivalent net interest margin increased 2 basis points to 3.28% for 2008, versus 3.26% in 2007.
 
While yields on interest-bearing assets decreased 128 basis points to 6.10% in 2008 from 7.38% in 2007, the rate on total deposits and other borrowings decreased 142 basis points to 2.94% from 4.36% between those respective periods. The 142 basis point decrease in the cost of deposits and other borrowings exceeded the 128 basis point decrease in yield on interest-bearing assets by 14 basis points. However, the net interest margin increased by a lesser 2 basis points reflecting a reduction in the amount loan balances which are the highest yielding interest earning assets. The decrease in yields on assets and rates on deposits and borrowings was due primarily to the repricing of assets and liabilities as a result of actions taken by the Federal Reserve since September 2007.
 
The Company's tax equivalent net interest income decreased $1.2 million, or 3.9%, to $29.1 million for 2008, from $30.3 million for the prior year comparable period. As shown in the Rate Volume table above, the decrease in net interest income was due primarily to a decrease in average interest-earning assets as well as a larger concentration of higher rate time deposits that offset a decrease in average money market and savings deposits.  Average interest earning assets amounted to $888.6 million for 2008 and $930.0 million for the comparable prior year period.  The $41.4 million decrease resulted from reductions in loans, securities and federal funds sold.
 
The Company’s total tax equivalent interest income decreased $14.4 million, or 21.0%, to $54.2 million for 2008, from $68.6 million for the prior year comparable period.  Interest and fees on loans decreased $13.3 million, or 21.4%, to $48.8 million for 2008, from $62.2 million for the prior year comparable period.  The decrease was due primarily to the 139 basis point decline in the yield on loans resulting primarily from the repricing of the variable rate loan portfolio as a result of actions taken by the Federal Reserve as well as a $30.9 million, or 3.8%, decrease in average loans outstanding to $789.4 million from $820.4 million.  Interest and dividends on investment securities decreased $617,000, or 10.7%, to $5.1 million 2008, from $5.8 million for the prior year comparable period.  This decrease reflected a decrease in average securities outstanding of $6.4 million, or 6.6%, to $89.4 million from $95.7 million for the prior year comparable period.  Interest on federal funds sold and other interest-earning assets decreased $468,000, or 68.2%, reflecting decreases in short-term interest rates and a $4.1 million decrease in average balances to $9.8 million for 2008 from $13.9 million for the comparable prior year period.
 
 
 
26

 
 
The Company’s total interest expense decreased $13.2 million, or 34.5%, to $25.1 million for 2008, from $38.3 million for the prior year comparable period.  Interest-bearing liabilities averaged $775.5 million for 2008, versus $799.8 million for the prior year comparable period, or a decrease of $24.3 million.  The decrease primarily reflected reduced funding requirements due to a decrease in average interest earning assets.  Average deposit balances decreased $14.3 million while there was an $11.9 million decrease in average other borrowings.  The average rate paid on interest-bearing liabilities decreased 156 basis points to 3.23% for 2008.  Interest expense on time deposit balances decreased $4.0 million to $14.8 million in 2008 from $18.8 million in the comparable prior year period, reflecting lower rates, the impact of which more than offset the impact of higher average balances.  Money market and savings interest expense decreased $5.8 million to $6.2 million in 2008, from $11.9 million in the comparable prior year period.  The decrease in interest expense on deposits reflected the impact of the lower short-term interest rate environment as well as lower average balances.  Accordingly, rates on total interest-bearing deposits decreased 142 basis points in 2008 compared to the comparable prior year period.
 
Interest expense on other borrowings decreased $3.4 million to $3.8 million in 2008, reflecting the lower short- term interest rate environment and lower average balances.  Average other borrowings, primarily overnight FHLB borrowings, decreased $11.9 million, or 8.9%, between the respective periods.  Rates on overnight borrowings reflected the lower short- term interest rate environment as the rate of other borrowings decreased to 3.10% in 2008, from 5.35% in the comparable prior year period.  In addition to the overnight FHLB borrowings, other borrowings also include average balances of $17.8 million of subordinated debentures supporting trust preferred securities and $14.3 million of FHLB term borrowings.
 
Provision for Loan Losses
 
The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that reflects the known and inherent losses in the portfolio.  The provision for loan losses amounted to $7.5 million for 2008 compared to $1.6 million for 2007.  The majority of the increase in the provision for 2008 resulted from specific provisions for individual loans on properties secured by real estate.  The 2007 provision reflected $283,000 for net recoveries on tax refund loans.  The remaining provisions in both periods also reflected amounts required to increase the allowance for loan growth in accordance with the Company’s methodology.  Net charge-offs increased from $1.1 million in 2007 to $7.6 million in 2008 and non-accrual loans decreased from $22.3 million at December 31, 2007 to $17.3 million at December 31, 2008.
 
Non-Interest Income
 
Total non-interest income decreased $1.8 million to $1.2 million for 2008 compared to $3.1 million for 2007, primarily due to a $1.4 million impairment charge on a bank pooled trust preferred security.  In addition, a decrease of $815,000 in loan advisory and servicing fees, which reflected the economic downturn in real estate markets was partially offset by a onetime $309, 000 gain from a Mastercard transaction and a $100,000 legal settlement
 
Non-Interest Expenses
 
Total non-interest expenses increased $2.5 million, or 11.8%, to $23.9 million for 2008 from $21.4 million in 2007.  Salaries and employee benefits decreased $983,000, or 9.3%, to $9.6 million for 2008 from $10.6 million in 2007.  That decrease reflected a reduction in bonuses and incentives, deferred compensation and other benefits of $702,000.
 
Occupancy expense increased $27,000, or 1.1%, to $2.4 million for 2008 compared to $2.4 million for 2007.
 
Depreciation expense decreased $17,000, of 1.3%, to $1.3 million for 2008 compared to $1.3 million for 2007.
 
Legal fees increased $704,000, or 93.9%, to $1.5 million for 2008 compared to $750,000 for 2007 resulting primarily from increased legal fees for loan collections and fees related to the merger that had been proposed with Metro.
 
Other real estate, including property write downs and losses on sales and property maintenance expenses, increased $2.1 million to $2.1 million in 2008 compared to $23,000 in 2007 as a result of the increase in properties taken into other real estate owned, which reflected the economic downturn in real estate markets and declining credit quality.
 
Advertising expenses decreased $39,000, or 7.8%, to $464,000 for 2008 compared to $503,000 for 2007.  The decrease was primarily due to lower levels of print advertising.
 
 
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Data processing increased $152,000, or 21.9%, to $845,000 for 2008 compared to $693,000 for 2007, primarily due to system enhancements.
 
Insurance expense increased $163,000, or 41.0%, to $561,000 for 2008 compared to $398,000 for 2007, resulting primarily from higher rates.
 
Professional fees increased $431,000, or 79.5%, to $973,000 for 2008 compared to $542,000 for 2007, reflecting increases in consulting fees.
 
 Regulatory assessments and costs increased $380,000 to $556,000 in 2008, compared to $176,000 in 2007, resulting primarily from increases in statutory FDIC insurance rates.
 
Taxes, other decreased $92,000, or 11.2%, to $728,000 for 2008 compared to $820, 000 for 2007.  The decrease reflected a reduction in Philadelphia Business Privilege Tax which more than offset an increase in Pennsylvania shares tax, which is assessed at an amount of 1.25% on a 6 year moving average of regulatory capital.  The full amount of the increase resulted from increased capital.
 
Other expenses decreased $308,000, or 10.0%, to $2.8 million for 2008 compared to $3.1 million for 2007. The decrease reflected a $150,000 decrease in courier fees resulting from the imaging of checks which replaced physical couriers, and lesser decreases in a number of other categories including printing, supplies, director fees, fraud losses, auto expense, postage, freight and others.
 
Provision for Income Taxes
 
The provision for income taxes decreased $4.1 million to a benefit of $777,000 for 2008 from $3.3 million for 2007.  That decrease was primarily the result of the decrease in pre-tax income.  The effective tax rate for 2007 was 32% and because of the small benefit in 2008, the tax rate was not meaningful in that year.
 

 
Financial Condition
 
December 31, 2009 Compared to December 31, 2008
 
Total assets increased $56.7 million to $1.0 billion at December 31, 2009, compared to $952.0 million at December 31, 2008. This increase was driven by strong growth in the Company’s core deposit base resulting in increased balances in cash and cash equivalents and the investment securities portfolio.  This growth was partially offset by a reduction in outstanding loans receivable as the Company continues to strategically manage its concentration of loans in the commercial real estate portfolio.
 
Loans
 
The loan portfolio, which represents the Company’s largest asset, is its most significant source of interest income. The Company’s lending strategy is to focus on small and medium sized businesses and professionals that seek highly personalized banking services. 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. Total gross loans decreased $89.3 million, or 11.4%, to $693.8 million at December 31, 2009, versus $783.1 million at December 31, 2008. Substantially all of the decrease resulted from a reduction in commercial real estate loans as a result of the Company’s ongoing effort to reduce exposure to commercial real estate and reposition its portfolio.  Republic’s commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to Republic’s legal lending limit of approximately $13.8 million at December 31, 2009. Individual customers may have several loans that are secured by different collateral which are in total subject to that lending limit. The aggregate amount of those relationships that exceeded $9.2 million at December 31, 2009, was $296.5 million. The $9.2 million threshold approximates 10% of total regulatory capital and reflects an additional internal monitoring guideline.
 
 
 
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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 bonds, U.S. Government Agency issued mortgage backed securities which include collateralized mortgage obligations (CMOs), municipal securities and debt securities, which include corporate bonds and trust preferred securities.  Available-for-sale securities totaled $185.4 million at December 31, 2009, an increase of $102.4 million, or 123.3%, from year-end 2008. At December 31, 2009, the portfolio had a net unrealized loss of $1.1 million, compared to a net unrealized loss of $2.2 million at December 31, 2008.
 
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 December 31, 2009, securities held to maturity totaled $155,000, which was comparable to the $198,000 at year-end 2008. At both dates, respective carrying values approximated market values.
 
Restricted Stock
 
Republic is required to maintain FHLB stock in proportion to its outstanding debt to FHLB.  When the debt is repaid, the purchase price of the stock is refunded.  At December 31, 2009 and 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 contingency line of credit.  At December 31, 2009 and 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 increased by $21.2 million, to $55.6 million at December 31, 2009, from $34.4 million at December 31, 2008, primarily due to the deposit growth recognized during 2009.
 
Fixed Assets
 
Bank premises and equipment, net of accumulated depreciation totaled $24.5 million at December 31, 2009 an increase of $10.3 million, or 72.4% from $14.2 million at December 31, 2008, primarily reflecting store renovation and expansion to enhance retail and deposit gathering efforts.
 
Other Real Estate Owned
 
 The balance of other real estate owned increased to $13.6 million at December 31, 2009 from $8.6 million at December 31, 2008 due to additions totaling $8.1 million partially offset by write-downs on properties of $1.6 million and proceeds from sales of $1.5 million.
 
Bank Owned Life Insurance
 
At December 31, 2009, the value of the insurance was $12.4 million, an increase of $255,000, or 2.1%, from $12.1 million at December 31, 2008.  The increase reflected income earned on the insurance policies.
 
Other Assets
 
Other assets increased by $11.2 million to $25.2 million at December 31, 2009, from $14.0 million at December 31, 2008.  This change was driven by increase in the tax receivable and deferred tax asset balances, along with an increase in prepaid expenses related to the prepayment of three-years of FDIC insurance premiums.
 
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
 
 
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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 $143.7 million to $882.9 million at December 31, 2009, from $739.2 million at December 31, 2008 due to the emphasis placed on the gathering of low-cost core deposits.  Average transaction accounts increased 24.7%, or $82.2 million from the prior year end to $415.4 million in 2009.  Time deposits decreased $16.4 million, or 4.2%, to $377.3 million at December 31, 2009, versus $393.7 million at the prior year-end as the Company intentionally reduced its dependence upon brokered deposits as a funding source.
 
Short-Term Borrowings and FHLB Advances
 
Short-term borrowings and FHLB advances are used to supplement deposit generation. Republic had $25.0 million of term borrowings at December 31, 2009 and December 31, 2008. The $25.0 million of term borrowings mature June, 2010. Republic had no short-term borrowings (overnight) at December 31, 2009 versus $77.3 million at the prior year-end.
 
Shareholders’ Equity
 
Total shareholders’ equity decreased $9.0 million to $70.3 million at December 31, 2009, versus $79.3 million at December 31, 2008.  This decrease was primarily the result of the net loss recorded during 2009.
 
Off-balance Sheet Arrangements
 
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
 
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments.
 
Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $68.6 million and $83.1 million and standby letters of credit of approximately $3.7 million and $5.3 million at December 31, 2009 and 2008, respectively.  Commitments often expire without being drawn upon. The $68.6 million of commitments to extend credit at December 31, 2009, were substantially all variable rate commitments.
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
 
Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
 

 
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Contractual obligations and other commitments
 
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2009:
 
(Dollars in thousands)
 
Total
   
Less than
One Year
   
One to
Three
Years
   
Three to
Five
Years
   
After
Five
Years
 
Minimum annual rentals or noncancellable operating leases
  $ 48,263     $ 2,118     $ 4,412     $ 4,620     $ 37,113  
Remaining contractual maturities of time Deposits
    377,254       371,565       4,013       1,676       -  
Subordinated debt
    22,476       -       -       -       22,476  
Employment agreements
    1,298       433       865       -       -  
Director and Officer retirement plan obligations
    1,412       244       251       210       707  
Loan commitments
    68,611       58,706       2,152       7,592       161  
Standby letters of credit
    3,683       3,575       108       -       -  
Total
  $ 522,997     $ 436,641     $ 11,801     $ 14,098     $ 60,457  

 
As of December 31, 2009, the Company had entered into non-cancelable lease agreements for its main office and operations center, eleven current Republic retail branch facilities, and a new branch facility scheduled to open in 2010, expiring through August 31, 2037, including renewal options. The leases are accounted for as operating leases. The minimum rental payments required under these leases are $48.3 million through the year 2037, including renewal options.  The Company has entered into an employment agreement with the CEO of the Company. The aggregate commitment for future salaries and benefits under this employment agreement at December 31, 2009 is approximately $1.3 million.  The Company has retirement plan agreements with certain directors and officers.   The accrued benefits under the plan at December 31, 2009 was approximately $1.4 million, with a minimum age of 65 established to qualify for the payments.
 
At December 31, 2009, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans except for credits extended to real estate operators and lessors in the aggregate amount of $253.7 million, which represented 36.6% of gross loans receivable at December 31, 2009. Various types of real estate are included in this category, including industrial, retail shopping centers, office space, residential multi-family and others.  In addition, credits extended for real estate agents and managers amounted to $119.6 million, which represented 17.2% of gross loans receivable at December 31, 2009 and single family construction loans in the amount of $72.6 million which represented 10.5% of gross loans receivable at December 31, 2009. Loan concentrations are considered to exist when amounts are loaned to a multiple number of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions.
 
Interest Rate Risk Management
 
The Company attempts to manage its assets and liabilities in a manner that optimizes net interest income in a range of interest rate environments. Management uses GAP analysis and simulation models to monitor behavior of its interest sensitive assets and liabilities. Adjustments to the mix of assets and liabilities are made periodically in an effort to provide steady growth in net interest income.
 
Management presently believes that the effect on Republic of any future reduction in interest rates, reflected in lower yielding assets, could be detrimental since Republic may not have the immediate ability to commensurately decrease rates on its interest bearing liabilities, primarily time deposits, other borrowings and certain transaction accounts. An increase in interest rates could have a negative effect on Republic, due to a possible lag in the repricing of core deposits not taken into account in the static GAP analysis.
 
Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. The Company attempts to optimize net interest income while managing period-to-period fluctuations
 
 
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therein. The Company typically defines interest-sensitive assets and interest-sensitive liabilities as those that reprice within one year or less.  Generally, the Company limits long-term fixed rate assets and liabilities in its efforts to manage interest rate risk.
 
The difference between interest-sensitive assets and interest-sensitive liabilities is known as the “interest-sensitivity gap” (“GAP”). A positive GAP occurs when interest-sensitive assets exceed interest-sensitive liabilities repricing in the same time periods, and a negative GAP occurs when interest-sensitive liabilities exceed interest-sensitive assets repricing in the same time periods. A negative GAP ratio suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a positive GAP ratio suggests the converse.  Static GAP analysis describes interest rate sensitivity at a point in time. However, it alone does not accurately measure the magnitude of changes in net interest income as changes in interest rates do not impact all categories of assets and liabilities equally or simultaneously.  Interest rate sensitivity analysis also requires assumptions about repricing certain categories of assets and liabilities.  For purposes of interest rate sensitivity analysis, assets and liabilities are stated at either their contractual maturity, estimated likely call date, or earliest repricing opportunity.  Mortgage backed securities and amortizing loans are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends.  Savings, money market and interest-bearing demand accounts do not have a stated maturity or repricing term and can be withdrawn or repriced at any time. Management estimates the repricing characteristics of these accounts based on historical performance and other deposit behavior assumptions. These deposits are not considered to reprice simultaneously and, accordingly, a portion of the deposits are moved into time brackets exceeding one year. However, management may choose not to reprice liabilities proportionally to changes in market interest rates, for competitive or other reasons.
 
Shortcomings, inherent in a simplified and static GAP analysis, may result in an institution with a negative GAP having interest rate behavior associated with an asset-sensitive balance sheet. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Furthermore, repricing characteristics of certain assets and liabilities may vary substantially within a given time period. In the event of a change in interest rates, prepayments and other cash flows could also deviate significantly from those assumed in calculating GAP in the manner presented in the table on the following page.
 
 
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The following tables present a summary of the Company’s interest rate sensitivity GAP at December 31, 2009.  Amounts shown in the table include both estimated maturities and instruments scheduled to reprice, including prime based loans.  For purposes of these tables, the Company has used assumptions based on industry data and historical experience to calculate the expected maturity of loans because, statistically, certain categories of loans are prepaid before their maturity date, even without regard to interest rate fluctuations. Additionally, certain prepayment assumptions were made with regard to investment securities based upon the expected prepayment of the underlying collateral of the mortgage-backed securities. The interest rate on a portion of the trust preferred securities is variable and adjusts quarterly.
 
Interest Sensitivity Gap
At December 31, 2009
(Dollars in thousands)
 
   
0–90 Days
   
91–180 Days
   
181–365 Days
   
1–2 Years
   
2–3 Years
   
3–4 Years
   
4–5 Years
   
More than 5 Years
   
Financial Statement Total
   
Fair Value
 
                                                             
Interest Sensitive Assets:
                                                           
                                                             
Investment securities and other interest-bearing balances
  $ 58,081     $ 4,914     $ 18,708     $ 21,652     $ 20,907     $ 19,486     $ 19,947     $ 73,454     $ 237,149     $ 237,159  
Average interest rate
    1.32 %     4.57 %     3.48 %     4.58 %     4.58 %     4.57 %     3.24 %     2.83 %                
Loans receivable
    324,399       33,430       56,581       84,180       72,289       37,653       19,451       65,835       693,818       687,422  
Average interest rate
    4.43 %     6.32 %     6.29 %     6.19 %     6.14 %     5.92 %     6.09 %     5.95 %                
Total
    382,480       38,344       75,289       105,832       93,196       57,139       39,398       139,289       930,967       924,581  
                                                                                 
Cumulative Totals
  $ 382,480     $ 420,824     $ 496,113     $ 601,945     $ 695,141     $ 752,280     $ 791,678     $ 930,967                  
                                                                                 
Interest Sensitive Liabilities:
                                                                               
                                                                                 
Demand Interest Bearing(1)
  $ 26,460     $ -     $ -     $ 26,459     $ -     $ -     $ -     $ -       52,919       52,919  
Average interest rate
    0.65 %     -       -       0.65 %     -       -       -       -       -       -  
Savings Accounts (1)
    5,786       -       -       5,785       -       -       -       -       11,571       11,571  
Average interest rate
    1.14 %     -       -       1.14 %     -       -       -       -                  
Money Market Accounts(1)
    157,766       -       -       157,766       -       -       -       -       315,532       315,532  
Average interest rate
    1.53 %     -       -       1.53 %     -       -       -       -                  
Time Deposits
    114,038       106,714       149,589       2,918       1,095       736       940       1,224       377,254       379,090  
Average interest rate
    1.37 %     1.31 %     2.01 %     2.18 %     2.94 %     3.30 %     2.78 %     1.42 %                
FHLB and Short Term Advances
    -       25,000       -       -       -       -       -       -       25,000       25,291  
Average interest rate
    -       3.35 %     -       -       -       -       -       -                  
Subordinated Debt
    22,476       -       -       -       -       -       -       -       22,476       22,476  
Average interest rate
    4.93 %     -       -       -       -       -       -       -                  
Total
    326,526       131,714       149,589       192,928       1,095       736       940       1,224       804,752       806,879  
                                                                                 
Cumulative Totals
  $ 326,526     $ 458,240     $ 607,829     $ 800,757     $ 801,852     $ 802,588     $ 803,528     $ 804,752                  
Interest Rate
                                                                               
Sensitivity GAP
  $ 55,954     $ (93,370 )   $ (74,300 )   $ (87,096 )   $ 92,101     $ 56,403     $ 38,458     $ 138,065                  
Cumulative GAP
  $ 55,954     $ (37,416 )   $ (111,716 ))   $ (198,812 )   $ (106,711 )   $ (50,308 )   $ (11,850 )   $ 126,215