repfirst10q9-30.htm
 


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

FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
        For the quarterly period ended: September 30, 2010
OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
        For the transition period from ________ to ________

Commission File Number: 000-17007

REPUBLIC FIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Pennsylvania
23-2486815
(State or other jurisdiction of  incorporation or organization)
(I.R.S. Employer Identification  No.)

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

215-735-4422
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X]   NO  [  ]

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File Required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES  [   ]   NO[  ]

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    [   ]
Accelerated filer     [X]
Non-Accelerated filer   [   ]
Smaller reporting company    [   ]
(Do not check if a 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]

As of November 5, 2010, there were 25,965,443 shares of Issuer’s Common Stock issued and outstanding.
 
 


 
 
 

 


 
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
 
 
TABLE OF CONTENTS
 
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements (unaudited)
 
 
Consolidated balance sheets as of September 30, 2010 (unaudited) and December 31, 2009
 
Consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)
 
Consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009 (unaudited)
 
Consolidated statements of changes in shareholders’ equity for the nine months ended September 30, 2010 and 2009 (unaudited)
 
Notes to consolidated financial statements (unaudited)
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
     
Item 4.
Controls and Procedures
     
Part II:  Other Information
 
     
Item 1.
Legal Proceedings
     
Item 1A.
Risk Factors
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
     
Item 3.
Defaults Upon Senior Securities
     
Item 4.
(Removed and Reserved)
     
Item 5.
Other Information
     
Item 6.
Exhibits
     
Signatures

 
2

 

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

Republic First Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2010 and December 31, 2009
(dollars in thousands, except share data)
(unaudited)

   
September 30, 2010
   
December 31, 2009
 
ASSETS 
           
Cash and due from banks
  $ 9,420     $ 10,864  
Interest bearing deposits with banks
    74,992       36,007  
Federal funds sold
    1,397       8,747  
Cash and cash equivalents
    85,809       55,618  
                 
Investment securities available for sale, at fair value
    149,561       185,404  
Investment securities held to maturity, at amortized cost (fair value of $159 and $165, respectively)
    147       155  
Restricted stock, at cost
    6,836       6,836  
Loans receivable (net of allowance for loan losses of $10,889 and $12,841, respectively)
    625,071       680,977  
Premises and equipment, net
    25,536       24,490  
Other real estate owned, net
    10,647       13,611  
Accrued interest receivable
    3,340       3,957  
Bank owned life insurance
    12,519       12,373  
Other assets
    27,191       25,221  
Total Assets
  $ 946,657     $ 1,008,642  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits:
               
Demand – non-interest bearing
  $ 111,908     $ 125,618  
Demand – interest bearing
    62,537       52,919  
Money market and savings
    335,045       327,103  
Time less than $100,000
    119,211       144,622  
Time over $100,000
    196,433       232,632  
    Total Deposits
    825,134       882,894  
Short-term borrowings
    -       -  
FHLB Advances
    -       25,000  
Accrued interest payable
    2,030       1,826  
Other liabilities
    6,856       6,182  
Subordinated debt
    22,476       22,476  
Total Liabilities
    856,496       938,378  
                 
Shareholders’ Equity
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued as of September 30, 2010 and December 31, 2009
    -       -  
Common stock par value $0.01 per share, 50,000,000 shares authorized; shares issued 26,494,288 as of September 30, 2010 and 11,081,938 as of  December 31, 2009
    265       111  
Additional paid in capital
    105,942       77,086  
Accumulated deficit
    (13,299     (2,450 )
Treasury stock at cost (416,303 shares)
    (3,099     (3,099 )
Stock held by deferred compensation plan
    (809     (709 )
Accumulated other comprehensive income/(loss)
    1,161       (675 )
Total Shareholders’ Equity
    90,161       70,264  
Total Liabilities and Shareholders’ Equity
  $ 946,657     $ 1,008,642  
 
(See notes to unaudited consolidated financial statements)

 
3

 

Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2010 and 2009
(dollars in thousands, except per share data)
(unaudited)

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Interest income:
                       
Interest and fees on loans
  $ 8,766     $ 9,705     $ 26,200     $ 29,558  
Interest and dividends on taxable investment securities
    1,390       871       4,367       2,843  
Interest and dividends on tax-exempt investment securities
    111       109       333       325  
Interest on federal funds sold and other interest-earning assets
    4       28       40       50  
Total interest income
    10,271       10,713       30,940       32,776  
                                 
Interest expense:
                               
   Demand- interest bearing
    119       78       326       218  
   Money market and savings
    839       1,366       2,801       3,841  
   Time less than $100,000
    569       1,035       1,944       3,395  
   Time over $100,000
    530       928       1,799       3,249  
   Other borrowings
    293       501       1,229       1,618  
Total interest expense
    2,350       3,908       8,099       12,321  
Net interest income
    7,921       6,805       22,841       20,455  
Provision for loan losses
    700       150       16,950       13,200  
Net interest income after provision for loan losses
    7,221       6,655       5,891       7,255  
                                 
Non-interest income:
                               
Loan advisory and servicing fees
    146       91       299       381  
Service fees on deposit accounts
    296       305       829       970  
Gain on sale of other real estate owned
    -       -       246       -  
Bank owned life insurance income
    44       62       146       194  
Total other-than-temporary impairments
    155       (88 )     (673 )     (215 )
Portion recognized in other comprehensive income (before taxes)
    (155 )     (154 )     301       (226 )
Net other-than-temporary impairments
    -       (242 )     (372 )     (441 )
Other non-interest income
    35       34       102       180  
Total non-interest income
    521       250       1,250       1,284  
                                 
Non-interest expenses:
                               
Salaries and employee benefits
    3,192       3,094       9,110       9,727  
Occupancy
    751       811       3,247       2,250  
Depreciation and amortization
    529       460       1,497       1,168  
Legal
    476       82       1,429       762  
Write down of other real estate owned
    -       105       885       1,424  
Other real estate owned
    165       83       232       235  
Advertising
    104       68       199       126  
Data processing
    196       148       649       630  
Insurance
    209       154       744       482  
Professional fees
    477       340       1,367       1,296  
Regulatory assessments and costs
    530       312       1,603       1,079  
Taxes, other
    238       246       681       744  
Other operating expenses
    851       797       2,433       2,481  
Total non-interest expense
    7,718       6,700       24,076       22,404  
                                 
Income (loss) before (benefit) provision for income taxes
    24       205       (16,935 )     (13,865 )
(Benefit) provision for income taxes
    (44 )     20       (6,086 )     (4,855 )
Net income (loss)
  $ 68     $ 185     $ (10,849 )   $ (9,010 )
                                 
Net income (loss) per share:
                               
Basic
  $ -     $ 0.02     $ (0.67 )   $ (0.85 )
Diluted
  $ -     $ 0.02     $ (0.67 )   $ (0.85 )

(See notes to unaudited consolidated financial statements)

 
4

 

Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2010 and 2009
(dollars in thousands)
(unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Cash flows from operating activities
           
Net loss
  $ (10,849 )   $ (9,010 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Provision for loan losses
    16,950       13,200  
Write downs on other real estate owned
    885       1,424  
Gain on sale of other real estate owned
    (246 )     -  
Depreciation and amortization
    1,497       1,168  
Deferred compensation plan distributions and transfers
    -       839  
Share based compensation
    198       207  
Impairment charges on investment securities
    372       441  
Amortization of premiums/(discounts) on investment securities
    43       (161 )
Increase in value of bank owned life insurance
    (146 )     (194 )
Increase in accrued interest receivable and other assets
    (2,248 )     (4,000 )
Increase (decrease) in accrued interest payable and other liabilities
    878       (147 )
Net cash provided by operating activities
    7,334       3,767  
                 
Cash flows from investing activities
               
Purchases of investment securities:
               
Available for sale
    -       (29,985 )
Proceeds from maturities and calls of investment securities:
               
Available for sale
    38,159       12,428  
Held to maturity
    8       38  
Net decrease in loans
    38,293       60,348  
Net proceeds from sale of other real estate owned
    2,988       361  
Premises and equipment expenditures
    (2,543 )     (11,688 )
Net cash provided by investing activities
    76,905       31,502  
                 
Cash flows from financing activities
               
Net proceeds from stock offering
    28,812       -  
Net proceeds from exercise of stock options
    -       166  
Stock purchases for deferred compensation plans
    (100 )     -  
Net increase in demand, money market and savings deposits
    3,850       97,045  
Net decrease in time deposits
    (61,610 )     (12,574 )
Net decrease in other borrowings
    (25,000 )     -  
Net increase/(decrease) in short term borrowings
    -       (77,309 )
Net cash (used in) provided by financing activities
    (54,048 )     7,328  
                 
Net increase in cash and cash equivalents
    30,191       42,597  
Cash and cash equivalents, beginning of period
    55,618       34,418  
Cash and cash equivalents, end of period
  $ 85,809     $ 77,015  
                 
Supplemental disclosure:
               
Interest paid
  $ 7,895     $ 11,933  
Non-cash transfers from loans to other real estate owned
    663       4,052  


(See notes to unaudited consolidated financial statements)


 
5

 

Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2010 and 2009
(dollars in thousands, except share data)
(unaudited)

   
 
Common Stock
   
Additional Paid in Capital
   
 
 
Accumulated Deficit
   
 
Treasury Stock
   
Stock Held by Deferred Compensation Plan
   
Accumulated Other Comprehensive Income (Loss)
   
Total Shareholders’ Equity
 
Balance January 1, 2010
  $ 111     $ 77,086     $ (2,450 )   $ (3,099 )   $ (709 )   $ (675 )   $ 70,264  
Net loss
                    (10,849 )                             (10,849 )
Other comprehensive income, net of tax:
                                                       
Unrealized gain on securities
(pre-tax $2,493)
                                            1,598       1,598  
Reclassification adjustment for impairment charge (pre-tax $372)
                                            238       238  
                                                      1,836  
Total comprehensive loss
                                                    (9,013 )
Shares issued under common stock offering (15,412,350 shares)
    154       28,658                                       28,812  
Stock-based compensation
            198                                       198  
Stock purchases for deferred compensation plan (24,489 shares)
                                    (100 )             (100 )
Balance September 30, 2010
  $ 265     $ 105,942     $ (13,299 )   $ (3,099 )   $ (809 )   $ 1,161     $ 90,161  

   
 
Common Stock
   
Additional Paid in Capital
   
Retained Earnings (Accumulated Deficit)
   
 
Treasury Stock
   
Stock Held by Deferred Compensation Plan
   
Accumulated Other Comprehensive Loss
   
Total Shareholders’ Equity
 
Balance January 1, 2009
  $ 110     $ 76,629     $ 8,455     $ (3,099 )   $ (1,377 )   $ (1,391 )   $ 79,327  
Net loss
                    (9,010 )                             (9,010 )
Other comprehensive income, net of tax:
                                                       
Unrealized gain on securities (pre-tax $1,515)
                                            971       971  
Reclassification adjustment for impairment charge (pre-tax $441)
                                            283       283  
                                                      1,254  
Total comprehensive loss
                                                    (7,756 )
Cumulative effect adjustment:
                                                       
Reclassify non-credit component of previously recognized OTTI
                    388                       (388 )     -  
Stock-based compensation
            207                                       207  
Options exercised (34,287 shares)
    1       165                                       166  
Deferred compensation plan distribution
                                    839               839  
Balance September 30, 2009
  $ 111     $ 77,001     $ (167 )   $ (3,099 )   $ (538 )   $ (525 )   $ 72,783  


(See notes to unaudited consolidated financial statements)

 
6

 

Republic First Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited)

Note 1.  Basis of Presentation

Republic First Bancorp, Inc. (the “Company”) is a corporation incorporated under the laws of the Commonwealth of Pennsylvania and a registered bank holding company.  The Company offers a variety of retail and commercial banking services to individuals and businesses throughout the Greater Philadelphia and Southern New Jersey area through its wholly-owned subsidiary, Republic First Bank (“Republic”) which does business under the name Republic Bank.  The Company also has three unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of three separate issuances of trust preferred securities.
 
The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
 
The Company and Republic are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and Republic for adherence to laws and regulations. As a consequence, the cost of doing business may be affected.
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets accounting principles generally accepted in the United States of America (“U.S. GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The Company has evaluated subsequent events through the date of issuance of the financial data included herein.
 

Note 2.  Common Stock Offering

On June 24, 2010, in an underwritten public offering the Company sold 15 million shares of common stock at $2.00 per share.  The gross proceeds of $30.0 million were reduced for $1.4 million of underwriting expenses, $379,000 in legal expenses, and $82,000 in other expenses. On July 22, 2010, the Company sold an additional 412,350 shares of common stock at $2.00 per share when the underwriters exercised their over-allotment option to purchase additional shares related to the underwritten public offering of June 24, 2010.  The gross proceeds of $825,000 were reduced for $54,000 in underwriting expenses and $63,000 in other expenses.  The net proceeds of approximately $28.8 million from the offering are being used for general corporate purposes, including implementing the Company’s retail and rebranding strategies, renovating its existing stores and adding new stores.

Note 3.  Summary of Significant Accounting Policies
 
Risks and Uncertainties
 
The earnings of the Company depend primarily on the earnings of Republic.  The earnings of Republic are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding the Republic’s exposure to changes in the interest rate environment.
 
 
 
7

 
 
 
Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly, and may cause significant fluctuations in interest margins.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, impairment of restricted stock and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
 
In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors.  Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.
 
In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other than temporary.  To determine whether a loss in value is other than temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value.  The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of investment.  Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
 
In estimating impairment of restricted stock, management’s determination of whether these investments are impaired is based on the assessment of the ultimate recoverability of the cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of the cost is influenced by criteria such as (1) the significance of the decline in net assets of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and accordingly, on the customer base of the FHLB.
 
In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the Company’s past operating results and the Company’s 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 management to make judgments about the Company’s future taxable income and are consistent with the plans and estimates management uses to manage the Company’s business.  Any reduction in estimated future taxable income may require the Company to record a valuation allowance against its 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 the Company’s future earnings.
 
Stock-Based Compensation
 
The Company maintains the Amendment and Restatement No. 3 of the Stock Option Plan and Restricted Stock Plan of Republic First Bancorp, Inc. (“Plan”), under which the Company may grant options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants.  Under the terms of the Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that may be available for grant under the Plan to 1.5 million shares, are available for such grants.  As of September 30, 2010, the only grants under the Plan have been option grants.  The Plan provides that the exercise price of each option granted equals the market price of the Company’s stock on the date of the grant.  Any option granted vests within one to five years and has a maximum term of ten years.
 
 
 
8

 
 
 
 
The Company utilizes a Black-Scholes option pricing model to determine the fair market value of stock options.  In 2010, the following assumptions were utilized: a dividend yield of 0%; expected volatility of 33.67% to 37.37%; a risk-free interest rate of 2.06% to 3.46%; and an expected life of 7.0 years.  In 2009 the following assumptions were utilized: a dividend yield of 0%; expected volatility of 21.58% to 27.61%; a risk-free interest rate of 1.99% to 3.31%; and an expected life of 7.0 years.  A dividend yield of 0% is utilized, because cash dividends have never been paid.  The expected life reflects a 3 to 4 year “all or nothing” vesting period, the maximum ten-year term and review of historical behavior.  The volatility was based on Bloomberg’s seven-year volatility calculation for “FRBK” stock.  The risk-free interest rate is based on the seven year Treasury bond.  No options vested during the three months ended September 30, 2010 and the three months ended September 30, 2009.  No options vested during the nine months ended September 30, 2010 and options to purchase 6,050 shares vested during the nine months ended September 30, 2009.  Expense is recognized ratably over the period required to vest.  There were 328,700 unvested options at January 1, 2010 with a fair value of $907,000 with $564,000 of that amount remaining to be recognized as expense.  At September 30, 2010, there were 449,350 unvested options with a fair value of $1.2 million with $604,000 of that amount remaining to be recognized as expense. At that date, the intrinsic value of the 664,954 options outstanding was $2,000, while the intrinsic value of the 215,604 exercisable (vested) options was also $2,000.
 
Compensation expense of $78,000 and $198,000 was recognized during the three and nine months ended September 30, 2010, respectively.  Compensation expense of $70,000 and $207,000 was recognized during the three and nine months ended September 30, 2009, respectively.  For each of these periods, a 35% assumed tax benefit for the Plan was utilized in making the calculations.
 
Earnings per Share
 
Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s Plan and convertible securities related trust preferred securities issued in 2008.  In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance is added back to the net income.  For the three months ended September 30, 2010 and 2009, the effect of CSEs and the related add back of after tax interest expense was considered anti-dilutive and therefore was not included in the EPS calculation.  For the nine months ended September 30, 2010 and 2009, the Company included no stock options in calculating diluted EPS due to a net loss from operations.
 
The calculation of EPS for the three and nine months ended September 30, 2010 and 2009 is as follows (in thousands, except per share amounts):
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income (loss)
  $ 68     $ 185     $ (10,849 )   $ (9,010 )
                                 
Weighted average shares outstanding
    25,871       10,656       16,109       10,651  
                                 
Net income (loss) per share – basic and diluted
  $ -     $ 0.02     $ (0.67 )   $ (0.85 )
 
Recent Accounting Pronouncements

     In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The FASB believes that this guidance will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures. 
 
 
 
 
9

 

 
This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators.  Both new and existing disclosures must be disaggregated by portfolio segment or class.  The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this Update apply to all public and nonpublic entities with financing receivables.  Financing receivables include loans and trade accounts receivable.  However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments. 

The effective date of ASU 2010-20 differs for public and nonpublic companies.  For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010.  The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.  We do not expect the adoption of this guidance to have a material effect on our financial position or results of operations.

Note 4:  Legal Proceedings
 
The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business.  While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
 
Note 5:  Segment Reporting
 
The Company has one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as consumer loan products in the area surrounding its stores.
 
Note 6:  Comprehensive Income/(Loss)

Total comprehensive income, which for the Company included net income and changes in unrealized gains and losses on the Company’s available for sale securities, was $610,000 and $1.4 million for the three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, total comprehensive loss was $9.0 million and $7.8 million, respectively.
 

 
10

 

Note 7:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at September 30, 2010 and December 31, 2009 is as follows (dollars in thousands):

   
At September 30, 2010
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Mortgage-backed securities/CMOs
  $ 124,689     $ 4,757     $ -     $ 129,446  
Municipal securities
    10,522       253       (436 )     10,339  
Corporate bonds
    5,990       421       -       6,411  
Agency bonds
    -       -       -       -  
Pooled Trust Preferred Securities
    6,417       -       (3,164 )     3,253  
Other securities
    131       5       (24 )     112  
Total securities available for sale
  $ 147,749     $ 5,436     $ (3,624 )   $ 149,561  
                                 
U.S. Government agencies
  $ 2     $ -     $ -     $ 2  
Other securities
    145       12       -       157  
Total securities held to maturity
  $ 147     $ 12     $ -     $ 159  

   
At December 31, 2009
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Mortgage-backed securities/CMOs
  $ 144,081     $ 2,686     $ (1 )   $ 146,766  
Municipal securities
    10,325       49       (851 )     9,523  
Corporate bonds
    5,989       101       -       6,090  
Agency bonds
    18,991       -       (147 )     18,844  
Pooled Trust Preferred Securities
    6,789       -       (2,863 )     3,926  
Other securities
    281       -       (26 )     255  
Total securities available for sale
  $ 186,456     $ 2,836     $ (3,888 )   $ 185,404  
                                 
U.S. Government agencies
  $ 2     $ -     $ -     $ 2  
Other securities
    153       10       -       163  
Total securities held to maturity
  $ 155     $ 10     $ -     $ 165  

The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at September 30, 2010 is as follows (dollars in thousands):

   
Available for Sale
   
Held to Maturity
 
   
Amortized Cost
   
Estimated Fair Value
   
Amortized Cost
   
Estimated Fair Value
 
Due in 1 year or less
  $ -     $ -     $ -     $ -  
After 1 year to 5 years
    32       34       115       127  
After 5 years to 10 years
    3,408       3,855       2       2  
After 10 years
    144,309       145,672       -       -  
No stated maturity
    -       -       30       30  
Total
  $ 147,749     $ 149,561     $ 147     $ 159  

As of September 30, 2010 and December 31, 2009, the mortgage backed securities and collateralized mortgage obligations included in the investment securities portfolio consist solely of securities issued by U.S. government sponsored agencies.  There were no private label mortgage securities held in the investment securities portfolio as of those dates.
 
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
 
In instances when a determination is made that an OTTI exists but the investor does not intend to sell the debt security and it is not more likely than not that the investor will be required to sell the debt security prior to its anticipated recovery, ASC 320-10 changes the presentation and amount of the OTTI recognized in the income statement.  The OTTI is separated into (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total OTTI related to all other factors.  The amount of the total OTTI related to all other factors is recognized in other comprehensive income.  Impairment charges (credit losses) on pooled trust preferred securities in the amount of $0 and $372,000 were recognized during the three and nine months ended September 30, 2010, respectively.  The Company realized gross losses due to impairment charges on pooled trust preferred securities of $242,000 and $441,000 for the three and nine months ended September 30, 2009, respectively.
 
 
 
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Temporarily impaired securities as of September 30, 2010 and December 31, 2009 is as follows (dollars in thousands):

   
At September 30, 2010
 
   
Less than 12 months
   
12 months or more
   
Total
 
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Mortgage-backed securities/CMOs
  $ -     $ -     $ 31     $ -     $ 31     $ -  
Municipal securities
    -       -       4,133       436       4,133       436  
Corporate bonds
    -       -       -       -       -       -  
Agency bonds
    -       -       -       -       -       -  
Trust Preferred Securities
    -       -       3,253       3,164       3,253       3,164  
Other securities
    -       -       66       24       66       24  
Total temporarily impaired securities
  $ -     $ -     $ 7,483     $ 3,624     $ 7,483     $ 3,624  

   
At December 31, 2009
 
   
Less than 12 months
   
12 months or more
   
Total
 
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Mortgage-backed securities/CMOs
  $ 60     $ -     $ 32     $ 1     $ 92     $ 1  
Municipal securities
    3,573       131       3,412       720       6,985       851  
Corporate bonds
    -       -       -       -       -       -  
Agency bonds
    18,844       147       -       -       18,844       147  
Trust Preferred Securities
    -       -       3,926       2,863       3,926       2,863  
Other securities
    41       -       63       26       104       26  
Total temporarily impaired securities
  $ 22,518     $ 278     $ 7,433     $ 3,610     $ 29,951     $ 3,888  

The impairment of the investment portfolio totaled $3.6 million with a total fair value of $7.5 million at September 30, 2010. The unrealized loss for the bank pooled trust preferred securities was primarily due to the secondary market for such securities becoming inactive and is considered temporary at September 30, 2010. The unrealized losses on the municipal securities held in the available for sale portfolio has been caused by temporary declines in the value of these securities as a result of challenges facing local municipal entities in the current economic environment. We have reviewed the credit quality of the municipalities in this group and consider all unrealized losses to be temporary as of September 30, 2010. The unrealized loss on the remaining securities is due to reductions in market values resulting from changes in interest rates and is also considered temporary.

 

 
12

 

Note 8:  Loans Receivable

The following table sets forth the Company’s gross loans by major categories as of September 30, 2010 and December 31, 2009 (dollars in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Commercial
  $ 79,118     $ 88,926  
Owner occupied
    72,723       85,481  
Total commercial
    151,841       174,407  
                 
Consumer and residential
    22,491       22,359  
Commercial real estate
    462,049       497,494  
Total loans receivable
    636,381       694,260  
Less: Deferred loan fees
    (421 )     (442 )
Less: Allowance for loan losses
    (10,889 )     (12,841 )
                 
Net loans receivable
  $ 625,071     $ 680,977  

The recorded investment in loans with a valuation allowance, which are impaired in accordance with ASC 310, totaled $13.0 million and $43.5 million at September 30, 2010 and December 31, 2009, respectively. The amounts of related valuation allowances were $2.0 million and $7.1 million, respectively, at September 30, 2010 and December 31, 2009.  The recorded investment in loans without a valuation allowance which were impaired in accordance with ASC 310 totaled $77.0 million and $80.9 million at September 30, 2010 and December 31, 2009, respectively.  Impaired loans without a valuation allowance are backed by adequate collateral to support the carrying value or have been written down to the current fair value.  There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein.
 
As of September 30, 2010 and December 31, 2009, management had not identified any troubled debt restructurings in the loan portfolio.  The Company is currently evaluating the guidance issued under the recent Exposure Draft on Troubled Debt Restructurings issued by the FASB.
 
As of September 30, 2010 and December 31, 2009, there were loans of approximately $46.5 million and $26.0 million, respectively, which were classified as non-accrual. At September 30, 2010 there were four loans, totaling $1.8 million, past due 90 days and accruing.  There were no loans past due 90 days and accruing at December 31, 2009.
 
Note 9:  Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
 
The Company follows the guidance issued under ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.
 
    ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820-10 are as follows:
 
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
 
 
 
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Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
 
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2010 and December 31, 2009 are as follows (dollars in thousands):
 
   
At September 30, 2010
 
   
Total Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Mortgage Backed Securities/CMOs
  $ 129,446     $ -     $ 129,446     $ -  
Municipal securities
    10,339       -       10,339       -  
Corporate bonds
    6,411       -       6,411       -  
Agency bonds
    -       -       -       -  
Pooled Trust Preferred Securities
    3,253       -       -       3,253  
Other securities
    112       -       112       -  
Total fair value
  $ 149,561     $ -     $ 146,308     $ 3,253  
 
   
At December 31, 2009
 
   
Total Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Mortgage Backed Securities/CMOs
  $ 146,766     $ -     $ 146,766     $ -  
Municipal securities
    9,523       -       9,523       -  
Corporate bonds
    6,090       -       6,090       -  
Agency bonds
    18,844       -       18,844       -  
Pooled Trust Preferred Securities
    3,926       -       -       3,926  
Other securities
    255       -       255       -  
Total fair value
  $ 185,404     $ -     $ 181,478     $ 3,926  

 
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010 (dollars in thousands):
 
   
Significant Unobservable Inputs
(Level 3)
 
Beginning Balance, January 1, 2010
  $ 3,926  
Unrealized losses arising during 2010
    (301 )
Impairment charge on Level 3 security
    (372 )
Ending balance, September 30, 2010
  $ 3,253  

 

 
14

 
 
 
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2010 and December 31, 2009 were as follows (dollars in thousands):
 
   
At September 30, 2010
 
   
Total Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Impaired loans
  $ 10,983     $ -     $ -     $ 10,983  
Other real estate owned
    10,647       -       -       10,647  
Total fair value
  $ 21,630     $ -     $ -     $ 21,630  
 
   
At December 31, 2009
 
   
Total Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Impaired loans
  $ 36,359     $ -     $ -     $ 36,359  
Other real estate owned
    13,611       -       -       13,611  
Total fair value
  $ 49,970     $ -     $ -     $ 49,970  

The recorded investment in impaired loans with a valuation allowance totaled $13.0 million at September 30, 2010 and $43.5 million at December 31, 2009.  The amounts of related valuation allowances were $2.0 million and $7.1 million, respectively, at September 30, 2010 and December 31, 2009.
 
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2010 and December 31, 2009:
 
Cash and Cash Equivalents (Carried at Cost)
 
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.
 
Investment Securities
 
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.
 
The types of instruments valued based on matrix pricing in active markets include all of the Company’s U.S. government and agency securities, municipal obligations and corporate bonds. Such instruments are generally classified within level 2 of the fair value hierarchy. As required by ASC 820-10, the Company does not adjust the matrix pricing for such instruments.
 
 
 
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Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, and may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

The Level 3 investment securities classified as available for sale are comprised of various issues of bank pooled trust preferred securities. Bank pooled trust preferred consists of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically. The securities are performing according to terms, however the secondary market for such securities has become inactive, and such securities are therefore classified as Level 3 securities. The fair value analysis does not reflect or represent the actual terms or prices at which any party could purchase the securities. There is currently no secondary market for the securities and there can be no assurance that any secondary market for the securities will develop.
 
A third party pricing service was used in the development of the fair market valuation. The calculations used to determine fair value are based on the attributes of the bank pooled trust preferred securities, the financial condition of the issuers of the bank pooled trust preferred securities, and market based assumptions. The INTEX CDO Deal Model Library was utilized to obtain information regarding the attributes of each security and its specific collateral as of September 30, 2010 and December 31, 2009. Financial information on the issuers was also obtained from Bloomberg, the FDIC and the Office of Thrift Supervision and SNL Financial. Both published and unpublished industry sources were utilized in estimating fair value. Such information includes loan prepayment speed assumptions, discount rates, default rates, and loss severity percentages. Due to the current state of the global capital and financial markets, the fair market valuation is subject to greater uncertainty that would otherwise exist.
 
Fair market valuation for each security was determined based on discounted cash flow analyses. The cash flows are primarily dependent on the estimated speeds at which the bank pooled trust preferred securities are expected to prepay, the estimated rates at which the bank pooled trust preferred securities are expected to defer payments, the estimated rates at which the bank pooled trust preferred securities are expected to default, and the severity of the losses on securities which default.

Prepayment Assumptions. Our estimates for the long-term rate of voluntary prepayments on all trust preferred securities are 2%.

Prepayments affect the securities in three ways. First, prepayments lower the absolute amount of excess spread, an important credit enhancement. Second, the prepayments are directed to the senior tranches, the effect of which is to increase the overcollateralization of the mezzanine layer, the layer at which the Company is located in each of the securities. However, the prepayments can lead to adverse selection in which the strongest institutions have prepaid, leaving the weaker institutions in the pool, thus mitigating the effect of the increased overcollateralization. Third, prepayments can limit the numeric and geographic diversity of the pool, leading to concentration risks.

The Company believes the recently enacted Dodd-Frank act could affect prepayments of trust preferred securities in the collateral pool.  Depository institution holding companies with more than $15 billion of total assets at December 31, 2009 will no longer be able to count trust preferred securities as Tier 1 regulatory capital beginning January 1, 2013.  Similarly, US bank holding company subsidiaries of foreign banking organizations with more than $15 billion in total assets will no longer be able to count trust preferred securities as Tier 1captial beginning January 1, 2015.  However, many of the trust preferred securities contained in the collateral pools of trust preferred collateralized debt obligations were issued at relatively favorable interest rates, including floating rate securities with relatively modest spreads compared to the rates in the marketplace today.  The Company believes that many of these issues represent an efficient long-term funding mechanism and will not be necessarily be prepaid based on the change in capital treatment. 

These factors were considered when estimating the impact of prepayments on the fair value of the pooled trust preferred securities.
 
 
 
16

 
 
 

Deferral and Default Rates. Bank pooled trust preferred securities include a provision that allows the issuing bank to defer interest payments for up to five years. The estimates for the rates of deferral are based on the financial condition of the trust preferred issuers in the pool. Estimates for the conditional default rates are based on the bank pooled trust preferred securities themselves as well as the financial condition of the trust preferred issuers in the pool.

Estimates for the near-term rates of deferral and conditional default are based on key financial ratios relating to the financial institutions’ capitalization, asset quality, profitability and liquidity. Each bank in each security is evaluated based on ratings from outside services including Standard & Poors, Moodys, Fitch, Bankrate.com and The Street.com. Recent stock price information is also considered, as well as the 52 week high and low, for each bank in each security. Finally, the receipt of TARP funding is considered, and if so, the amount.

Estimates for longer term rates of deferral and defaults are based on historical averages based on a research report issued by Salomon Smith Barney in 2002. Default is defined as any instance when a regulator takes an active role in a bank’s operations under a supervisory action. This definition of default is distinct from failure. A bank is considered to have defaulted if it falls below minimum capital requirements or becomes subject to regulatory actions including a written agreement, or a cease and desist order.  The rates of deferral and conditional default are estimated at a range of 0.03% to 0.37%.

Loss Severity. The fact that an issuer defaults on a loan, does not necessarily mean that the investor will lose all of their investment. Thus, it is important to understand not only the default assumption, but also the expected loss given a default, or the loss severity assumption.  Both Standard & Poors and Moody’s Analytics have performed and published research that indicates that recoveries on bank pooled trust preferred securities are low (less than 20%). The loss severity estimates are estimated at a range of 80% to 100%.

Ratings Agencies. The major ratings agencies have recently been cutting the ratings on various bank pooled trust preferred securities

Bond Waterfall. The bank pooled trust preferred securities have several tranches: Senior tranches, Mezzanine tranches and the Residual or income tranches. The Company invested in the mezzanine tranches for all of its bank pooled trust preferred securities. The Senior and Mezzanine tranches were over collateralized at issuance, meaning that the par value of the underlying collateral was more than the balance issued on the tranches. The terms generally provide that if the performing collateral balances fall below certain triggers, then income is diverted from the residual tranches to pay the Senior and Mezzanine tranches. However, if significant deferrals occur, income could also be diverted from the Mezzanine tranches to pay the Senior tranches.

Internal Rate of Return. Internal rates of return are the pre-tax yield rates used to discount the future cash flow stream expected from the collateral cash flow. The marketplace for the bank pooled trust preferred securities at September 30, 2010 and December 31, 2009 was not active. This is evidenced by a significant widening of the bid/ask spreads the markets in which the bank pooled trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive.

ASC 820-10 provides guidance on the discount rates to be used when a market is not active. The discount rate should take into account the time value of money, price for bearing the uncertainty in the cash flows and other case specific factors that would be considered by market participants, including a liquidity adjustment. The discount rate used is a LIBOR 3-month to 6-month forward looking curve plus 507 to 1,000 basis points.

Loans Receivable (Carried at Cost)
 
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
 

 
17

 
 
 
Other Real Estate Owned (Carried at Lower of Cost or Market)
 
These assets are carried at the lower of cost or market.  At September 30, 2010 these assets were carried at current market value.
 
Restricted Stock (Carried at Cost)
 
The carrying amount of restricted stock approximates fair value, and considers the limited marketability of such securities.
 
Accrued Interest Receivable and Payable (Carried at Cost)
 
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
 
Deposit Liabilities (Carried at Cost)
 
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
 
FHLB Advances (Carried at Cost)
 
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
 
Subordinated Debt (Carried at Cost)
 
Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.
 

 
18

 

Off-Balance Sheet Financial Instruments (Disclosed at Notional amounts)
 
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
 
The estimated fair values of the Company’s financial instruments were as follows at September 30, 2010 and December 31, 2009 (dollars in thousands).
 
   
September 30, 2010
   
December 31, 2009
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Balance Sheet Data
                       
Financial Assets
                       
Cash and cash equivalents
  $ 85,809     $ 85,809     $ 55,618     $ 55,618  
Investment securities available for sale
    149,561       149,561       185,404       185,404  
Investment securities held to maturity
    147       159       155       165  
Restricted stock
    6,836       6,836       6,836       6,836  
Loans receivable, net
    625,071       622,966       680,977       674,581  
Other real estate owned
    10,647       10,647       13,611       13,611  
Accrued interest receivable
    3,340       3,340       3,957       3,957  
                                 
Financial Liabilities
                               
Deposits :
                               
Demand, savings and money market
  $ 509,490     $ 509,490     $ 505,640     $ 505,640  
Time
    315,644       316,665       377,254       379,090  
Subordinated debt
    22,476       17,135       22,476       14,609  
Short-term borrowings
    -       -       -       -  
FHLB advances
    -       -       25,000       25,291  
Accrued interest payable
    2,030       2,030       1,826       1,826  
                                 
Off Balance Sheet financial instruments
                               
Commitments to extend credit
    -       -       -       -  
Standby letters-of-credit
    -       -       -       -  

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

The following is management’s discussion and analysis of the Company’s financial condition, changes in financial condition, and results of operations in the accompanying consolidated financial statements.  This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements.
 
Certain statements in this report may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “may,” “believes,” “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective” and similar expressions or variations on such expressions.  The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.  For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; new service and product offerings by competitors and price pressures; and similar items. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof.  The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof, except as may be required by applicable laws or regulations.  Readers should carefully review the risk factors described in the Form 10-Q for the quarter ended March 31, 2010 and other documents the Company files from time to time with the SEC, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K, as well as other filings.
 
Regulatory Reform and Legislation

Congress recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. The discussion below generally discusses the material provision of the Dodd-Frank Act applicable to the Company and the Bank and is not complete or meant to be an exhaustive discussion.
 
Among other things, the Dodd-Frank Act directs the Federal Deposit Insurance Corporation to redefine the base for deposit insurance assessments paid by banks (assessments will now be based on the average consolidated total assets less tangible equity of a financial institution), permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, extends the FDIC’s program of insuring non-interest bearing transaction accounts on an unlimited basis through December 31, 2012, increases the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35% of estimated insured deposits and requires the FDIC to take the necessary steps for the reserve ratio to reach the new minimum reserve ratio by September 30, 2020, imposes new capital requirements on bank and thrift holding companies, permits interest on demand deposits, imposes new restrictions on transactions between banks and thrifts and their affiliates and insiders, relaxes de novo branching and imposes additional requirements for interstate bank acquisitions and mergers.
 
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as Republic, will continued to be examined for compliance with the consumer laws by their primary bank regulators.  The Dodd-Frank Act also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives.
 
 
 
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It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on savings and loan holding companies and banks. The Dodd-Frank Act and resulting rules and regulations may impact the profitability of our business or change certain of our business practices, including our ability to offer new products, make loans and achieve satisfactory interest spreads, and could expose us to additional costs, including increased regulatory compliance costs.  These changes also may require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply, and could materially adversely affect our business, results of operations and financial condition.
 
Public Offering of Common Stock

On June 24, 2010, in an underwritten public offering the Company sold 15 million shares of its common stock at $2.00 per share.  The gross proceeds of $30.0 million were reduced for $1.4 million of underwriting expenses, $379,000 in legal expenses, and $82,000 in other expenses.  On July 22, 2010, the Company sold 412,350 shares of common stock at $2.00 per share when the underwriters exercised their over-allotment option to purchase additional shares related to the underwritten public offering of June 24, 2010.  The gross proceeds of $825,000 were reduced for $54,000 in underwriting expenses and $63,000 in other expenses.  The aggregate net proceeds totaled approximately $28.8 million and are being used for general corporate purposes, including implementing the Company’s retail and rebranding strategies, renovating its existing stores and adding new stores.
 
Financial Condition

Assets

Total assets decreased by $62.0 million to $946.7 million at September 30, 2010, compared to $1.0 billion at December 31, 2009. This decrease was primarily driven by a $55.9 million decrease in net loans receivable.
 
Loans
 
The loan portfolio represents the Company’s largest asset category and is its most significant source of interest income. The Company’s lending strategy is focused on small and medium size businesses and professionals that seek highly personalized banking services.  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. Gross loans decreased $57.8 million, to $636.0 million at September 30, 2010, compared to $693.8 million at December 31, 2009.  This decrease is reflective of the Company’s continuing effort to reduce exposure to commercial real estate and strengthen the credit quality of the loan portfolio.  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, which was approximately $13.8 million at September 30, 2010.  Loans made to one individual customer even if secured by different collateral, are aggregated for purposes of the lending limit.
 
Investment Securities

Investment securities available-for-sale are investments which may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes.  The Company’s investment securities available-for-sale consist primarily of U.S. Government Agency issued mortgage backed securities which include collateralized mortgage obligations (CMOs), municipal securities and debt securities, which include corporate bonds and trust preferred securities. Available-for-sale securities totaled $149.6 million at September 30, 2010, compared to $185.4 million at year-end 2009.  The decrease of $35.8 million was mainly attributable to early calls on two U.S. Government Agency bonds as well as principal and interest pay downs on mortgage-backed securities held in the investment portfolio.  At September 30, 2010, the portfolio had a net unrealized gain of $1.8 million compared to a net unrealized loss of $1.1 million at December 31, 2009.
 
       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 September 30, 2010 and December 31, 2009, securities held to maturity totaled $147,000 and $155,000, respectively.
 

 
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Restricted Stock
 
Republic is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and, as such, had been required to maintain an investment in FHLB stock in proportion to its outstanding FHLB advances, prior to the FHLB suspension of dividend payments in 2008.  Since that suspension of dividend payments, the restricted stock has been frozen, therefore, at both September 30, 2010 and December 31, 2009, the investment in FHLB stock totaled $6.7 million.
 
Republic is also required to maintain stock in Atlantic Central Bankers Bank (“ACBB”) as a condition of a rarely used contingency line of credit.  At both September 30, 2010 and December 31, 2009, 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 $30.2 million, to $85.8 million at September 30, 2010, from $55.6 million at December 31, 2009.  This increase was caused by the reduction in both loan balances and investment securities during the first nine months of 2010.
 
Fixed Assets
 
The balance in premises and equipment, net of accumulated depreciation, was $25.5 million at September 30, 2010, compared to $24.5 million at December 31, 2009.
 
Other Real Estate Owned
 
Other real estate owned decreased to $10.6 million at September 30, 2010, compared to $13.6 million at December 31, 2009, primarily due to the sale of two properties totaling $2.7 million during the first quarter of 2010.
 
Bank Owned Life Insurance
 
The balance of bank owned life insurance amounted to $12.5 million at September 30, 2010 and $12.4 million at December 31, 2009. The income earned on these policies is reflected in non-interest income.
 
Other Assets
 
Other assets increased by $2.0 million to $27.2 million at September 30, 2010, from $25.2 million at December 31, 2009 due to an increase in the current tax asset balances caused by the operating net loss recorded during the nine months ended September 30, 2010.
 
Included in other assets at September 30, 2010 were current tax assets of $9.5 million and deferred tax assets of $5.2 million. Deferred tax assets are recognized based on differences between financial statement carrying amounts and the tax bases of certain assets and liabilities. A significant component of the deferred tax asset is driven by the allowance for loan losses recorded for financial reporting purposes which is not currently deductible for federal income tax reporting purposes. The Company regularly reviews deferred tax assets for recoverability based on a history of earnings, expectations for future earnings and expected reversals of temporary differences and believes the deferred tax assets recorded at September 30, 2010 are fully realizable. The Company has the ability to carry-back all net operating losses (“NOLs”) recognized for federal income tax purposes through the period ended December 31, 2009.
 
Deposits
 
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, including some brokered deposits, are Republic’s major source of funding. Deposits are generally solicited from the Company’s market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.
 
Total deposits decreased by $57.8 million to $825.1 million at September 30, 2010 from $882.9 million at December 31, 2009 mainly due to the maturity of several high cost time deposit balances which were not renewed as a result of the Company’s intentional effort to reduce its cost of funds.
 
 
 
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Short-Term Borrowings and FHLB Advances
 
Short-term borrowings and FHLB advances are used to supplement deposits as a source of funds.  Republic had no FHLB advance amounts outstanding at September 30, 2010 and a $25.0 million advance outstanding at December 31, 2009 which matured and was repaid during the second quarter of 2010.  Republic had no short-term borrowings (overnight) at September 30, 2010 and December 31, 2009.
 
Subordinated Debt
 
Subordinated debt, which is comprised of the subordinated debentures supporting the common and capital, or trust preferred, securities of the Company’s unconsolidated capital trusts, amounted to $22.5 million at September 30, 2010 and December 31, 2009.
 
Shareholders’ Equity

Total shareholders’ equity increased $19.9 million to $90.2 million at September 30, 2010, compared to $70.3 million at December 31, 2009, primarily due to $28.8 million of net proceeds from the 2010 common stock offering and a $1.8 million increase in other comprehensive income related to the Company’s investment securities portfolio, partially offset by a $10.8 million net loss recorded during the nine months ended September 30, 2010.
 
Results of Operations

Three Months Ended September 30, 2010 Compared to September 30, 2009

The Company reported net income of $68,000, or $0.00 per share, for the three months ended September 30, 2010, as compared to net income of $185,000, or $0.02 per share, for the three months ended September 30, 2009.
 
Net interest income for the three months ended September 30, 2010 increased $1.1 million compared to the three months ended September 30, 2009, from $6.8 million to $7.9 million.  Interest income decreased $442,000, or 4.1%, from $10.7 million for the three months ended September 30, 2009 to $10.3 million for the three months ended September 30, 2010, primarily due to a $27.2 million decrease in average interest earning assets, while interest expense decreased $1.6 million, or 39.9%, from $3.9 million for the three months ended September 30, 2009 to $2.4 million for the three months ended September 30, 2010, due to a 72 basis point decrease in the rate on average interest-bearing deposits outstanding.
 
Non-interest income increased $271,000 to $521,000 during the three months ended September 30, 2010 as compared to $250,000 during the three months ended September 30, 2009. Non-interest expenses increased $1.0 million to $7.7 million during the three months ended September 30, 2010 as compared to $6.7 million during the three months ended September 30, 2009. Return on average assets and average equity from continuing operations were 0.03% and 0.30%, respectively, during the three months ended September 30, 2010 compared to 0.08% and 1.02%, respectively, for the same period in 2009.
 
Nine Months Ended September 30, 2010 Compared to September 30, 2009

The Company reported a net loss of $10.8 million, or $0.67 per share, for the nine months ended September 30, 2010, as compared to a net loss of $9.0 million, or $0.85 per share, for the nine months ended September 30, 2009.  The increase in net loss for the nine months ended September 30, 2010 was primarily the result of a $17.0 million loan loss provision necessary to cover the asset quality concerns related to the commercial real estate loan portfolio.
 
Net interest income for the nine months ended September 30, 2010 increased $2.4 million as compared to the nine months ended September 30, 2009.  During the nine months ended September 30, 2010, interest income decreased $1.8 million, or 5.6%, due to a 33 basis point decrease on average interest earning assets, and interest expense decreased $4.2 million, or 34.3%, primarily due to a 76 basis point decrease in the rate on average interest-bearing deposits outstanding.
 
 
 
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Non-interest expenses increased $1.7 million to $24.1 million during the nine months ended September 30, 2010 as compared to $22.4 million during the nine months ended September 30, 2009. Return on average assets and average equity from continuing operations were (1.53)% and (18.89)%, respectively, during the nine months ended September 30, 2010 compared to (1.31)% and (15.95)%, respectively, for the same period in 2009.
 
Analysis of Net Interest Income

Historically, the Company’s earnings have depended primarily upon Republic’s net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income, setting forth for the periods (i) average assets, liabilities, and shareholders’ equity, (ii) interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, (iii) annualized average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and (iv) Republic’s annualized net interest margin (net interest income as a percentage of average total interest-earning assets).  Averages are computed based on daily balances.  Non-accrual loans are included in average loans receivable.  All yields are adjusted for tax equivalency.
 
Average Balances and Net Interest Income
 
   
For the three months ended
September 30, 2010
   
For the three months ended
September 30, 2009
 
 
(dollars in thousands)
 
Average Balance
   
Interest
   
Yield/
Rate(1)
   
Average Balance
   
Interest
   
Yield/
Rate(1)
 
Interest-earning assets:
                                   
Federal funds sold and other interest-earning assets
  $ 15,888     $ 4       0.10 %   $ 55,008     $ 28       0.20 %
Investment securities and restricted stock
    174,059       1,562       3.59 %     82,039       1,036       5.05 %
Loans receivable
    653,618       8,766       5.32 %     733,767       9,705       5.25 %
Total interest-earning assets
    843,565       10,332       4.86 %     870,814       10,769       4.91 %
Other assets
    78,405                       58,123                  
Total assets
  $ 921,970                     $ 928,937                  
                                                 
Interest-earning liabilities:
                                               
Demand – non-interest bearing
  $ 109,617                     $ 86,206                  
Demand – interest bearing
    59,934     $ 119       0.79 %     48,148     $ 78       0.64 %
Money market & savings
    314,626       839       1.06 %     296,642       1,366       1.83 %
Time deposits
    312,364       1,099       1.40 %     369,863       1,963       2.11 %
Total deposits
    796,541       2,057       1.02 %     800,859       3,407       1.69 %
Total interest-bearing deposits
    686,924       2,057       1.19 %     714,653       3,407       1.90 %
Other borrowings
    26,511       293       4.38 %     47,476       501       4.19 %
Total interest-bearing liabilities
    713,435       2,350       1.31 %   $ 762,129       3,908       2.03 %
 
Total deposits and other borrowings
    823,052       2,350       1.13 %     848,335       3,908       1.83 %
Non interest-bearing other liabilities
    9,068                       8,897                  
Shareholder’s equity
    89,850                       71,705                  
Total liabilities and shareholder’s equity
  $ 921,970                     $ 928,937                  
Net interest income (2)
          $ 7,982                     $ 6,861          
Net interest spread
                    3.55 %                     2.88 %
Net interest margin (2)
                    3.75 %                     3.13