rfbk10-k.htm


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

FORM 10-K
(Mark One)
 
[ X ]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2011.

 
[     ]  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)

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 per share
 
Nasdaq Global Market
 
Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known season 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.   YES  [X]     NO  [  ]
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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     [   ]
Non-Accelerated filer   [   ]
(Do not check if a smaller reporting company)
Smaller reporting company    [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  [  ]    NO   [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $46,691,463 based on the last sale price on Nasdaq Global Market on June 30, 2011.

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 per share
25,972,897
Title of Class
Number of Shares Outstanding as of March 15, 2012

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for its 2012 Annual Meeting of Shareholders, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year-ended December 31, 2011, are incorporated by reference into Part III of this Form 10-K; provided, however, that the Compensation Committee Report, the Audit Committee Report and any other information in such proxy statement that is not required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated herein by reference or filed as a part of this Annual Report on Form 10-K.
 
 
 
 

 
 
 
 
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
 
 
TABLE OF CONTENTS
 
     
 
PAGE
PART I:
   
Item 1.
Business
     
Item 1A.
Risk Factors
     
Item 1B.
Unresolved Staff Comments
     
Item 2.
Properties
     
Item 3.
Legal Proceedings
     
Item 4.
Mine Safety Disclosures
     
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
 
 
 
 

 

 
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,” “our” or “us”. The Company’s website address is www.myrepublicbank.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, among others:  statements of goals, intentions and expectations, statements regarding the impact of accounting pronouncements, statements regarding prospects and business strategy, statements regarding allowance for loan losses, asset quality and market risk and estimates of future costs, benefits and results.
 
Forward-looking statements 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, and in addition to the “Risk Factors” discussed elsewhere in this Form 10-K, risks and uncertainties can arise with changes in:

·  
general economic conditions, including turmoil in the financial markets and related efforts of government agencies to stabilize the financial system;

·  
the adequacy of our allowance for loan losses and our methodology for determining such allowance;

·  
adverse changes in our loan portfolio and credit risk-related losses and expenses;

·  
concentrations within our loan portfolio, including our exposure to commercial real estate loans, and to our primary service area;

·  
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;
 
 
 
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·  
impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

·  
our securities portfolio and the valuation of our securities;

·  
accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements;

·  
rapidly changing technology;

·  
litigation liabilities, including costs, expenses, settlements and judgments; and

·  
other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s beliefs 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 included in this Annual Report on Form 10-K and in other documents the Company files from time to time with the SEC.

General

Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the name Republic Bank, and we may refer to as Republic or the Bank.  Republic offers a variety of credit and depository banking services. Such services are offered to individuals and businesses primarily in the Greater Philadelphia and Southern New Jersey area through their offices and branches in Philadelphia, Montgomery, and Delaware Counties in Pennsylvania and Camden County, New Jersey.
  
Beginning in 2005, our primary objective had been to be an alternative to the large banks for commercial banking services in the Greater Philadelphia and Southern New Jersey area.  Since the second quarter of 2008, we began to redirect our strategic efforts toward retail banking and creating a major regional retail and commercial bank with a distinct brand, by focusing on innovation, customer satisfaction, brand building and shareholder value creation.  To achieve this transformation, the Bank hired a number of former senior Commerce Bank employees: Andrew Logue, President and Chief Operating Officer; Rhonda Costello, Chief Retail Officer; Jay Neilon, Chief Credit Officer and Frank Cavallaro, Chief Financial Officer. With this management team in place and additional new employees for support, we believe the Bank has the foundation and commitment to become a leading financial institution in the Philadelphia metropolitan area.
 
Additionally, the Bank hired two experienced and former Commerce Bank regional market managers, Stephen McWilliams and Robert Worley.  Messrs. McWilliams and Worley focus on our commercial lending initiatives and lead the Bank’s lending efforts in the greater Philadelphia and Southern New Jersey area. They in turn have hired a number of experienced lenders with the same focus and the Bank has seen the results of these teams in many new opportunities for loan and deposit relationships.
 
 
 
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We believe we have a strong management team, as well as adequate capital resources and liquidity to deal with current economic conditions and growth plans for the future.   In connection with the change in strategy to internally grow our distinct brand, in August 2010 we rebranded our stores to operate under the name, “Republic Bank,” the name under which the Bank was originally incorporated and under which it did business from 1988 until 1996.
 
During 2009 and 2010, we renovated, refurbished and remodeled most of our existing stores, making significant capital improvements, as part of our ongoing effort to adopt a more retail customer focus and attract additional retail business.  We have expanded customer services hours, enhanced our banking systems to better serve the retail customer and expand our retail product offerings.
 
On the lending side, we historically focused our efforts on business banking and commercial lending transactions, in particular commercial real estate loans.  We have restructured our loan portfolio and deemphasized origination of commercial real estate loans.  To further these efforts, we undertook detailed reviews of our more significant credit relationships with an emphasis on reducing exposure, enhanced our allowance for loan loss methodology, and committed to originate fewer commercial real estate loans in order to reduce credit concentrations in that loan category.

In December 2011, we completed the sale of several distressed commercial real estate loans and foreclosed properties to a single investor.  This transaction dramatically reduced non-performing asset balances and significantly improved credit quality metrics.  We believe the loan sale represents the final step in completing the transformation of the Bank, which began back in 2008.

As of December 31, 2011, we had total assets of approximately $1.0 billion, total shareholders’ equity of approximately $64.9 million, total deposits of approximately $952.6 million and net loans receivable of approximately $577.4 million. 

We provide banking services through the Bank, and do not presently engage in any activities other than banking activities.

Republic Bank
 
  Republic 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 the Bank 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 seven suburban offices in Plymouth Meeting, Bala Cynwyd, Ardmore and Abington, located in Montgomery County, Media, located in Delaware County, and Haddonfield and Voorhees, located in Southern New Jersey.

Service Area/Market Overview
 
Our primary service area consists of Greater Philadelphia and Southern New Jersey.  Our commercial lending activities extend beyond our primary service area, to include other counties in Pennsylvania and New Jersey, as well as parts of Delaware, Maryland, New York and other out-of-market opportunities.
 
 
 
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Competition

We face substantial competition from other financial institutions in our service area.  Competitors include Wells Fargo, Citizens, PNC, Sovereign, TD Bank and Bank of America, as well as local community banks.  In addition, we compete 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 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, applicable lending limits.  Many of the financial institutions with which we compete have greater financial resources than we do, and offer a wider range of deposit and lending products.
 
Our legal lending limit to one borrower was approximately $16.4 million at December 31, 2011.  Loans above this amount may be made if the excess over the lending limit is participated to other institutions.  We are subject to potential intensified competition from new branches of established banks in the area as well as new banks that could open in our market area. Several new banks with business strategies similar to ours have opened since we commenced operations.  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 our market. We compete to attract deposits and loan applications both from customers of existing institutions and from customers new to the greater Philadelphia area, and we anticipate a continued increase in competition in our market area.
 
We continue to believe that an attractive niche exists serving small to medium sized business customers not adequately served by our larger competitors, and we will continue to seek opportunities to build commercial relationships to complement our retail strategy.  We believe small to medium-sized businesses will respond very positively to the attentive and highly personalized service we provide.

Products and Services
 
 We offer a range of competitively priced banking products and services, including consumer and commercial deposit accounts, 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), 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.  We attempt to offer a high level of personalized service to both our retail and commercial customers.
 
In February 2011, we announced the launch of a Small Business Administration (“SBA”) lending group to provide much needed credit to small businesses throughout our service areas.  We hired two experienced lenders to lead our new SBA lending unit.  Arnold V. Horvath, Executive Vice-President, and Pamela Innis, Senior Vice-President, who are both former executives with Commerce Bank and most recently Metro Bank.

We are members of the STAR™ and PLUS™ automated teller (ATM) networks, which enable us to provide our customers with access to ATMs worldwide. We currently have thirteen proprietary ATMs at branch locations and one additional proprietary ATM at a location in Southern New Jersey.
 
 
 
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Our lending activities generally are focused on small and medium sized businesses within the communities that we serve. Commercial real estate loans represent the largest category within our loan portfolio, amounting to approximately 58% of total loans outstanding at December 31, 2011.  Repayment of these loans is, in part, dependent on general economic conditions affecting our customers and various businesses within the community.  As a commercial lender, we are subject to credit risk. Recent economic and financial conditions have adversely affected many of our borrowers.  To manage the challenges of this economic environment we have adopted a more conservative loan classification system, enhanced our allowance for loan loss methodology, and undertaken a comprehensive review of our loan portfolio.  

Although management continues to follow established underwriting policies and closely monitor loans through Republic’s loan review officer, credit risk is still inherent in the portfolio.  The majority of Republic’s loan portfolio is collateralized with real estate or other collateral, however, 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.
  
We have been affected by the challenging conditions in the economy and financial markets.  Since mid-2008, like many other commercial lenders, we have experienced elevated levels of charge-offs and loan loss provisions and increased amounts of non-performing loans and other real estate owned. During 2009 we instituted a vigilant credit administration process where we touch and review a significant portion of our loan portfolio on a regular basis. The sale of commercial real estate loans and other real estate owned in December 2011 substantially improved asset quality for the Bank and immediately strengthened the balance sheet. We also believe that economic indicators in the markets that we serve are showing signs of improvement which will enable us to continue progress toward consistent and sustainable growth and profitability.

Branch Expansion Plans and Growth Strategy
 
We will carefully evaluate growth opportunities throughout 2012 and beyond as the national and local economies continue to recover.  Renovation and refurbishment of all existing store locations took place during 2009 and relocations of certain store locations are planned for the future as we began to direct more focus toward the retail customer experience. We anticipate pursuing additional de novo store opportunities in our primary service area in the future.  The opening of these stores is subject to regulatory approval.

Securities Portfolio

We also maintain an investment securities portfolio.  We purchase investment securities that are in compliance with our investment policies, which are approved annually by our board of directors.  The investment policies address such issues as permissible investment categories, credit quality, maturities and concentrations.  At December 31, 2011 and 2010, approximately 75% and 85%, 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.
 
 
 
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Supervision and Regulation
 
General

Republic, as a Pennsylvania state chartered bank, which is not a member of the Federal Reserve System (“Federal Reserve”), is subject to supervision and regulation by the FDIC and the Pennsylvania Department of Banking. We are a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve under the federal Bank Holding Company Act of 1956, as amended (“BHC Act”).  As a bank holding company, our activities and those of Republic are limited to the business of banking and activities closely related or incidental to banking, and we 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 Federal Reserve.
 
We are 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 federal and state 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 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 crisis, the United States and other governments have taken unprecedented steps in efforts to stabilize the financial system, and may continue to do so.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).  The Dodd-Frank Act has and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector.  Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Consumer Financial Protection Bureau, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC.  A summary of certain provisions of the Dodd-Frank Act is set forth below.
 
 Source of Strength.  According to Federal Reserve 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.  The Dodd-Frank Act codifies the source-of-strength doctrine and expands upon the Federal Reserve policy, defining “source of strength” to mean the “ability of a company that directly or indirectly controls an insured depository institution to provide financial assistance to such insured depository institution in the event of the financial distress of the insured depository institution.”  As of January 2012, implementing regulations of the Dodd-Frank Act source of strength provision have not yet been promulgated.
 

 
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 Increased Capital Standards and Enhanced Supervision.  The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies.  These new standards will be no lower than current regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies.  The Dodd-Frank Act requires capital requirements to be countercyclical such that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction consistent with safety and soundness.
 
 The Consumer Financial Protection Bureau (“Bureau”).  The Dodd-Frank Act creates the Bureau within the Federal Reserve.  The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services.  The Bureau has broad rulemaking, supervisory and enforcement powers for a wide range of consumer protection laws applicable to banks with greater than $10 billion or more in assets.  Smaller institutions will be subject to rules promulgated by the Bureau but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions.

 Corporate Governance.  The Dodd-Frank Act requires publicly traded companies to provide their shareholders with 1) a non-binding shareholder vote on executive compensation; 2) a non-binding shareholder vote on the frequency of such vote; 3) disclosure of “golden parachute” arrangements in connection with specified change in control transactions; and 4) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions.  Generally, the new rules applied to proxy statements relating to annual meetings of shareholders held after January 20, 2011, except with respect to “smaller reporting companies.”  “Smaller reporting companies,” those with a public float of less than $75 million, are required to include the non-binding shareholder votes on executive compensation and the frequency thereof in proxy statements relating to annual meetings occurring on or after January 21, 2013.  We qualify as a smaller reporting company.
 
 Prohibition Against Charter Conversions of Troubled Institutions. Effective July 21, 2011, the Dodd-Frank Act prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the depository institution seeks prior approval from its regulator and complies with specified procedures to ensure compliance with the enforcement action.

 Debit Card Interchange Fees.  Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer.  While the restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks.

 Interstate Banking and Branching.  The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (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. The Interstate Banking Law permits mergers and branch purchase and assumption transactions, though states may “opt-out” of the merger and purchase and assumption provisions by enacting a law that specifically prohibits such interstate transactions.  States could also enact legislation to allow for de novo interstate branching by out of state banks.  The Dodd-Frank Act relaxes national branching requirements, allowing national and state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.
 
 
 
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 Deposit Insurance.  The Dodd-Frank Act permanently increases the maximum deposit insurance amount to $250,000 for insured deposits, as well as extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012.  Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) will be calculated.  Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period.  Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits by 2020 and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.  The Dodd- Frank Act also provides that, effective one year after the date of enactment, depository institutions may pay interest on demand deposits.
 
 Transactions with Affiliates.  Under federal law, we are subject to restrictions that limit certain types of transactions between Republic and its non-bank affiliates.  In general, we are subject to quantitative and qualitative limits on extensions of credit, purchases of assets and certain other transactions involving us and our non-bank affiliates.  Transactions between Republic and its nonbank affiliates are required to be on arms length terms.  The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and “affiliates,”  as well as an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.
 
 Transactions with Insiders.  Under the Dodd-Frank Act, insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions.  Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, if representing more than 10% of capital, approved by the institution’s board of directors.
 
 Compensation Practices.  The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm.  In June 2010, prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behavior.  Together, the Dodd-Frank Act and the guidance on compensation may impact the current compensation policies at the Company.
 
 Holding Company Capital Levels.  The Dodd-Frank Act requires bank regulators to establish minimum capital levels for holding companies that are at least as stringent as those applicable to depository institutions.  All trust preferred securities, or TRUPs, issued by bank holding companies will be excluded from Tier 1 Capital unless such securities were issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets as of December 31, 2009.  TRUPS issued before May 19, 2010, by a bank holding company with at least $15 billion in assets as of December 31, 2009, will continue to qualify as Tier 1 capital until January 2013, at which time the treatment of TRUPS as Tier 1capital will be phased out over a 3 year period ending in January 2016.
 
 
 
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Many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years.  Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear.  The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
 
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” (“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.  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 has a rating under the Community Reinvestment Act (“CRA”) of “satisfactory” or better.  A qualifying bank holding company becomes an FHC by filing with the Federal Reserve an election to become an FHC.  We have not elected to become an FHC.  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.
 
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: adopt and disclose a privacy policy; give customers the right to “opt out” of disclosures to non-affiliated parties; not disclose any information to third party marketers; and follow regulatory standards to protect the security and confidentiality of customer information.


 
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Sarbanes-Oxley Act of 2002
 
 The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) comprehensively revised the laws affecting corporate governance, auditing and accounting, executive compensation and corporate reporting for entities, such as us, with equity or debt securities registered under the Exchange Act. 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 us and our 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.

Regulatory Restrictions on Dividends
  
Dividend payments by Republic to us are subject to the Pennsylvania Banking Code of 1965 (“Banking Code”) and the Federal Deposit Insurance Act (“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 the Banking Code, Republic would be limited to $10.7 million of dividends payable plus an additional amount equal to its net profit for 2012, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios as discussed in “Regulatory Capital Requirements”.
 
Federal regulatory authorities have adopted standards for the maintenance of adequate levels of regulatory capital by banks. Adherence to such standards further limits the ability of Republic to pay dividends to us.

Dividend Policy
 
We have not paid any cash dividends on our common stock, and have no plans to pay any cash dividends in 2012 or in the future.  See Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for more information.

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.  Effective January 1, 2007, the FDIC revised its risk-based deposit insurance system by placing each depository institution in one of four risk categories based on capital levels and supervisory ratings.  The FDIC utilizes a risk-based assessment system to determine the assessment rates to be paid by insured institutions. Depending on the institution’s risk category, assessment rates will range from 2.5 to 45 basis points. The rate schedules will automatically adjust in the future as the deposit fund reaches certain milestones.  In 2011, the assessment ranged from 7 to 77.5 basis points of an institution’s deposits, depending on its risk category.   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.
 
 
 
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Additionally, in 2009, the FDIC adopted an interim rule that imposes a 20 basis point emergency special assessment on all insured depository institutions on June 30, 2009. The special assessment was collected September 30, 2009, at the same time that the risk-based assessments for the second quarter of 2009 were collected.  The FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, payable on September 30, 2009, and reserved the right to impose additional special assessments. In November 2009, instead of imposing additional special assessments, the FDIC amended the assessment regulations to require all insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30, 2009. For purposes of estimating the future assessments, each institution’s base assessment rate in effect on September 30, 2009, was used, assuming a 5% annual growth rate in the assessment base and a 3 basis point increase in the assessment rate in 2011 and 2012. The prepaid assessment will be applied against actual quarterly assessments until exhausted. Any funds remaining after June 30, 2013, will be returned to the institution. If the prepayment would impair an institution’s liquidity or otherwise create significant hardship, it may apply for an exemption. Requiring this prepaid assessment does not preclude the FDIC from changing assessment rates or from further revising the risk-based assessment system.

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.

Due to the decline in economic conditions, the deposit insurance provided by the FDIC per account owner was raised from $100,000 to $250,000 for most accounts. That change, initially intended to be temporary, was made permanent by the Dodd-Frank Act.  In addition, the FDIC adopted a Temporary Liquidity Guarantee Program under which, for a fee, non-interest bearing transaction accounts would receive unlimited insurance coverage until December 31, 2009, later extended to December 31, 2010, and certain senior unsecured debt issued between October 13, 2008, and June 30, 2009, later extended to October 31, 2009, by institutions and their holding companies would be guaranteed by the FDIC through June 30, 2012, or in certain cases, until December 31, 2012. Republic did opt out of the debt guarantee program, but did not opt out of the transaction account guarantee program. The Dodd-Frank Act has provided for continued unlimited coverage for certain non-interest bearing transactions accounts until December 31, 2012.

The Dodd-Frank Act increased the minimum target deposit fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. Pursuant to a new Deposit Insurance Fund restoration plan, the FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act also changes the base of FDIC insurance assessments such that assessments will be based on average consolidated total assets less average tangible equity capital of a financial institution rather than its insured deposits. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.  Management does not know of any practice, condition, or violation that might lead to termination of Republic’s deposit insurance.  The termination of deposit insurance for Republic, however, could have a material adverse effect on our earnings.
 
 
 
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Capital Adequacy
 
The Federal Reserve has adopted risk-based capital guidelines for bank holding companies, such as us. 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% 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 must maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weakness, a high risk profile, or are undergoing or anticipating rapid growth. Both Republic and us are 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. 
 
Legislative and Regulatory Changes
 
We are heavily regulated by regulatory agencies at the federal and state levels.  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 as well as the financial services industry in general.
 
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 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 and the U.S. Department of Housing and Urban Development (HUD) has revised its regulations implementing the Real Estate Settlement Procedures Act.  We do not expect that they will have a substantial impact on Republic’s operations.
 
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.  Additionally, in May 2010, the FDIC issued a proposed rule to revise the method through which insured depository institutions are assessed premiums for federal deposit insurance.
 
 
 
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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.  Proposed legislation pending in Congress has the potential to effect a complex and sweeping overhaul of the financial services industry, impacting a variety of areas of financial services activities, including but not limited consumer protection, securities, corporate governance, and deposit insurance assessment methods.  Additionally, we have recently witnessed the introduction of a 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 may pursue, through appropriate avenues, legislative and regulatory advocacy to provide our input on possible legislative and regulatory 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.

Employees

As of December 31, 2011, we had a total of 212 full-time equivalent employees.

Item 1A:  Risk Factors
 
In addition to the other information included elsewhere in this report and in “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” the following factors could significantly affect our business, financial condition, results of operations, or future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial condition, results of operations, or future prospects.  If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may be materially adversely affected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also materially adversely affect our business, financial condition, results of operations, or future prospects.
 
 
 
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We are subject to credit risk in connection with our lending activities, and our financial condition and results of operations may be negatively impacted by economic conditions and other factors that adversely affect our borrowers.
 
Our financial condition and results of operations are affected by the ability of our borrowers to repay their loans, and in a timely manner.  Lending money is a significant part of the banking business.  Borrowers, however, do not always repay their loans.  The risk of non-payment is assessed through our underwriting and loan review procedures based on several factors including 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.  Despite our efforts, we do and will experience loan losses, and our financial condition and results of operations will be adversely affected. Our non-performing assets were approximately $17.8 million at December 31, 2011.  Our allowance for loan losses was approximately $12.1 million at December 31, 2011.  Our loans between thirty and fifty-nine days delinquent totaled $9.7 million at December 31, 2011.

Our concentration of commercial real estate loans could result in increased loan losses and costs of compliance.
 
A substantial portion of our loan portfolio is comprised of commercial real estate loans.  The commercial real estate market is cyclical and poses risks of loss to us because of the concentration of commercial real estate loans in our loan portfolio, and the lack of diversity in risk associated with such a concentration.  Banking regulators have been giving and continue to give commercial real estate lending greater scrutiny, and banks with larger commercial real estate loan portfolios are expected by their regulators to implement improved underwriting, internal controls, risk management policies and portfolio stress-testing practices to manage risks associated with commercial real estate lending.  In addition, commercial real estate lenders are making greater provisions for loan losses and accumulating higher capital levels as a result of commercial real estate lending exposures.  Additional losses or regulatory requirements related to our commercial real estate loan concentration could materially adversely affect our business, financial condition and results of operations.
 
Our allowance for loan losses may not be adequate to absorb actual loan losses, and we may be required to make further provisions for loan losses and charge off additional loans in the future, which could materially and adversely affect our business.
 
We attempt to maintain an allowance for loan losses, established through a provision for loan losses accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio.  If our allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition and results of operations.
 
The determination of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. Increases in nonperforming loans have a significant impact on our allowance for loan losses.  Our allowance for loan losses may not be adequate to absorb actual loan losses. If trends in the real estate markets were to deteriorate, we could experience increased delinquencies and credit losses, particularly with respect to real estate construction and land acquisition and development loans and one-to-four family residential mortgage loans. As a result, we may have to make provisions for loan losses and charge off loans in the future, which could materially adversely affect our financial condition and results of operations. 
 
 
 
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In addition to our internal processes for determining loss allowances, bank regulatory agencies periodically review our allowance for loan losses and may require us to increase the provision for loan losses or to recognize further loan charge-offs, based on judgments that differ from those of our management.  If loan charge-offs in future periods exceed the allowance for loan losses, we will need to increase our allowance for loan losses. Furthermore, growth in our loan portfolio would generally lead to an increase in the provision for loan losses. Any increases in our allowance for loan losses will result in a decrease in net income and capital, and may have a material adverse effect on our financial condition, results of operations and cash flows.
 
We are required to make significant estimates and assumptions in the preparation of our financial statements, including our allowance for loan losses, and our estimates and assumptions may not be accurate.
 
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, require our 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 income and expense during the reporting periods.  Critical estimates are made by management in determining, among other things, the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, impairment of restricted stock, and the realization of deferred income taxes.  If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially adversely effected.
 
Our results of operations may be materially and adversely affected by other-than-temporary impairment charges relating to our investment portfolio.
 
During both 2011 and 2010, we recorded other-than-temporary impairment charges for certain bank pooled trust preferred securities, and we may be required to record future impairment charges on our investment securities if they suffer declines in value that we determine are other-than-temporary. Numerous factors, including the lack of liquidity for re-sales of certain investment securities, the absence of reliable pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the Bank’s ability to pay dividends, which could materially adversely affect us. Significant impairment charges could also negatively impact our regulatory capital ratios and result in us not being classified as “well-capitalized” for regulatory purposes.
 
Our net interest income, net income and results of operations are sensitive to fluctuations in interest rates.
 
Our net income depends on the net income of Republic, and Republic is dependent primarily upon its net interest income, which is the difference between the 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.
 
Our results of operations will be affected by changes in market interest rates and other economic factors beyond our control.  If our interest-earning assets have longer effective maturities than our interest-bearing liabilities, the yield on our interest-earning assets generally will adjust more slowly than the cost of our interest-bearing liabilities, and, as a result, our net interest income generally will be adversely affected by material and prolonged increases in interest rates, and positively affected by comparable declines in interest rates.  Conversely, if liabilities re-price more slowly than assets, net interest income would be adversely affected by declining interest rates, and positively affected by increasing interest rates.  At any time, our assets and liabilities will reflect interest rate risk of some degree.
 
 
 
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In addition to affecting interest income and expense, changes in interest rates also can affect the value of our interest-earning assets, comprising fixed- and adjustable-rate instruments, as well as the ability to realize gains from the sale of such assets.  Generally, the value of fixed-rate instruments fluctuates inversely with changes in interest rates, and changes in interest rates may therefore have a material adverse affect on our results of operations.
 
We are a holding company dependent for liquidity on payments from our banking subsidiary, which payments are subject to restrictions.
 
We are a holding company and depend on dividends, distributions and other payments from Republic to fund dividend payments, if any, and to fund all payments on obligations. Republic and its subsidiaries are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to us.  Restrictions or regulatory actions of that kind could impede our access to funds that we may need to make payments on our obligations or dividend payments, if any.  In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
 
Increases in FDIC insurance premiums may have a material adverse effect on our results of operations.
 
During 2008 and 2009, higher levels of bank failures have dramatically increased resolution costs of the Federal Deposit Insurance Corporation, or the FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress have taken action to increase federal deposit insurance coverage, placing additional stress on the deposit insurance fund.
 
In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC increased assessment rates of insured institutions uniformly by seven cents for every $100 of deposits beginning with the first quarter of 2009, with additional changes beginning April 1, 2009, which require riskier institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels.
 
To further support the rebuilding of the deposit insurance fund, the FDIC imposed a special assessment on each insured institution, equal to five basis points of the institution’s total assets minus Tier 1 capital as of June 30, 2009.  This special assessment was collected on September 30, 2009.  For us, this represents an aggregate charge of approximately $0.4 million, which was recorded as a pre-tax charge during the second quarter of 2009.  The FDIC has indicated that future special assessments are possible, although it has not determined the magnitude or timing of any future assessments.   Any such future assessments will decrease our earnings.
 
In November 2009, the FDIC also imposed a 13-quarter prepayment of FDIC premiums.  The prepayment will be used to offset future FDIC premiums beginning with the March 31, 2010 payment.
 
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums.  Our expenses for the years ended December 31, 2011 and 2010 were significantly and adversely affected by these increased premiums.  These increases and assessment and any future increases in insurance premiums or additional special assessments may materially adversely affect our results of operations.
 
 
 
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Our business is concentrated in and dependent upon the continued growth and welfare of our primary market area.
 
Our primary service area consists of Greater Philadelphia and Southern New Jersey.  Our success depends upon the business activity, population, income levels, deposits and real estate activity in this area.  Although our customers’ businesses and financial interests may extend well beyond this area, adverse economic conditions that affect our primary service area could reduce our growth rate, affect the ability of our customers to repay their loans to us, and generally adversely 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.
 
Unfavorable economic and financial market conditions may adversely affect our financial position and results of operations.
 
Economic and financial market conditions in the United States and around the world may remain depressed for the foreseeable future.  Conditions such as slow 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:
 
 
•  
increasing our credit risk, by increasing the likelihood that our major customers become insolvent and unable to satisfy their obligations to us;
 
 
•  
impairing our ability to originate loans, by making our customers and prospective customers less willing to borrow, and making loans that meet our underwriting criteria difficult to find; and
 
 
•  
limiting our interest income, by depressing the yields we are able to earn on our investment portfolio.
 
These potential effects are difficult to forecast and mitigate.  Distress in the credit markets and issues relating to liquidity among financial institutions have resulted in the failure of some financial institutions and others have been forced to seek acquisition partners. The United States and other governments have taken unprecedented steps in an effort to stabilize the financial system, including investing in financial institutions.  These efforts, however, may not succeed.  Our business as well as our financial condition and results of operations could be adversely affected by continued or accelerated disruption and volatility in financial markets, continued capital and liquidity concerns regarding financial institutions, limitations resulting from further governmental action in an effort to stabilize or provide additional regulation of the financial system, and recessionary conditions that are deeper or longer lasting than currently anticipated.
 
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.
 
As of December 31, 2011, we had approximately $35.9 million of U.S. Federal net operating loss carryforwards, referred to as “NOLs,” available to reduce taxable income in future years.
 
Utilization of the NOLs may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the “Code.” These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups.
 
 
 
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In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. The limitation imposed by Section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains which may be present with respect to assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change. Our use of NOLs arising after the date of an ownership change would not be affected.
 
In addition, the ability to use NOLs will be dependent on our ability to generate taxable income. The NOLs may expire before we generate sufficient taxable income. There were no NOLs that expired in the fiscal years ended December 31, 2011 and December 31, 2010. There are no NOLs that could expire if not utilized for the year ending December 31, 2012.
 
Our assets as of December 31, 2011 included a deferred tax asset and we may not be able to realize the full amount of such asset.
 
We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 2011, the net deferred tax asset was approximately $4.0 million, compared to a balance of approximately $12.8 million at December 31, 2010. The decrease in net deferred tax asset resulted mainly from the recognition of a deferred tax asset valuation allowance of $14.9 million in 2011.
 
We regularly review our deferred tax assets for recoverability to determine whether it is more likely than not (i.e. likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence.  If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods a valuation allowance is calculated and recorded.  These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.
 
Based on the analysis of the available positive and negative evidence, we determined that a valuation allowance should be recorded as of December 31, 2011.  As a result of cumulative losses in recent years and the uncertain nature of the current economic environment, we did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor to project recoverability of the deferred tax asset balance.   We will exclude future taxable income as a factor until we can show consistent and sustained profitability.  The valuation allowance had a negative impact on our 2011 earnings.  The release of this valuation allowance would have a positive impact on future earnings.  There can be no assurance as to when we could be in a position to recapture the benefits of our deferred tax asset.
 
We may not be able to manage our growth, which may adversely impact our financial results.
 
As part of our retail growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by opening new stores and acquiring existing stores of other financial institutions.  To the extent that we undertake additional stores openings and acquisitions, we are likely 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.
 
 
 
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As part of our retail strategy, we plan to open new stores in our primary service area, including Southern New Jersey.  We may not, however, be able to identify attractive locations on terms favorable to us, obtain regulatory approvals, or hire qualified management to operate new stores.  In addition, the organizational and overhead costs may be greater than we anticipate.  New stores may take longer than expected to reach profitability, or may not become profitable.  The additional costs of starting new stores may adversely impact our financial results.
 
Our ability to manage growth successfully will depend on whether we can continue to fund our growth while maintaining cost controls, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends.  If we are not able to control costs, such growth could adversely impact our earnings and financial condition.
 
We rebranded Republic First Bank as “Republic Bank” which may be more costly than anticipated or may fail to achieve its intended result.
 
In connection with our change in strategy to internally grow our brand, during 2010 we rebranded our stores and now operate under the name, “Republic Bank,” the name under which Republic was incorporated and under which it did business from 1988 until 1996.    Several companies in the United States, including companies in the banking and financial services industries, use variations of the word “Republic,” as well as a stylized "R," as part of a trademark or trade name.  As such, we face potential objections to our use of these marks.  If there are any objections, we may incur additional costs to defend our use, and may be required to further rebrand our banking business.  Our rebranding efforts may not achieve their intended results, which include enhancing our brand and increasing our retail business.
 
Our retail strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
 
Since June 2008, we have been successful in attracting new, talented management to Republic, to add to our management team.   We believe that our ability to successfully implement our retail strategy will require us to retain and attract additional 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 Republic 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 the 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 are subject to numerous governmental regulations and to comprehensive examination and supervision by regulators, which could have an adverse impact on our operations and could restrict the scope of our operations.
 
Both the Company and Republic operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, FDIC and the Pennsylvania Department of Banking.  We are subject to federal and state regulations governing virtually all aspects of our activities, including lines of business, capital, liquidity, investments, payment of dividends, and others.  Regulations that apply to us are generally intended to provide protection for depositors and customers rather than for investors.
 
We are also subject to comprehensive examination and supervision by banking and other regulatory bodies. Examination reports and ratings (which often are not publicly available) and other aspects of this supervisory framework can materially impact the conduct, growth, and profitability of our businesses.  In response to our May 2009 examination, Republic and its board entered into an informal agreement with the FDIC and the Pennsylvania Department of Banking to enhance a variety of Republic’s policies, procedures and processes regarding asset quality, earnings and loan concentrations. As a result of our June 2010 examination we entered into a revised informal agreement, which contains many of the same provisions of the prior agreement with the addition of a limitation on branch expansion, regulatory approval in advance of dividend payments from Republic to the Company, and increased minimum capital ratios.
 
 
 
19

 
 
 
We have taken steps to improve certain policies, procedures and processes related to asset quality, earnings and loan concentrations which management believes addresses most of the issues raised in the informal agreement. We have strengthened procedures to closely monitor and improve asset quality through the addition of experienced staff and the implementation of more stringent underwriting standards. A strategy has been implemented to reduce adversely classified assets and concentration levels in the commercial real estate loan portfolio. We have enhanced the methodology and documentation process for determining the adequacy of the Allowance for Loan Loss provision by expanding our risk rating scale and implementing more detailed and frequent reviews of problem loans.  We are also in the process of implementing a revised strategic plan which we expect will improve future earnings and strengthen our capital position. While we can not specifically quantify, we believe that these enhancements have had a positive effect on our operating performance and financial condition since implementation. A failure to have adequate procedures to comply with regulatory requirements could expose us to damages, fines and regulatory penalties, which could be significant, and could also injure our reputation with customers and others with whom we do business.
 
We are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing.  Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is within our control.  New programs and proposals may subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. We cannot predict the substance or impact of future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.
 
In addition, the Dodd-Frank Act recently became law and implements significant changes in the financial regulatory landscape that will impact all financial institutions, including us and Republic.  The Dodd-Frank Act is likely to increase our regulatory compliance burden.  It is too early, however, for us to assess the full impact that the Dodd-Frank Act may have on our business, financial condition or results of operations.  Many of the Dodd-Frank Act’s provisions require subsequent regulatory rulemaking.  The Dodd-Frank Act’s significant regulatory changes include the creation of a new financial consumer protection agency, known as the Bureau of Consumer Financial Protection, that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer compliance, which will increase our regulatory compliance burden and costs and may restrict the financial products and services we offer to our customers.  Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and states’ attorneys general may enforce consumer protection rules issued by the Bureau of Consumer Financial Protection. The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier 1 capital.  These restrictions will limit our future capital strategies.  The Dodd-Frank Act also increases regulation of derivatives and hedging transactions, which could limit our ability to enter into, or increase the costs associated with, interest rate and other hedging transactions.  Although certain provisions of the Dodd-Frank Act, such as direct supervision by the Bureau of Consumer Financial Protection, will not apply to banking organizations with less than $10 billion of assets, such as us, and Republic, the changes resulting from the legislation will impact our business.  These changes will require us to invest significant management attention and resources to evaluate and make necessary changes.
 
 
 
20

 

 
We face significant competition in our market from other banks and financial institutions.
 
The banking and financial services industry in our market area is highly competitive.  We may not be able to compete effectively in our markets, which could adversely affect our results of operations.  The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and 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.
 
We may not have the resources to effectively implement new technologies, which could adversely affect our competitive position and results of operations.
 
The financial services industry is constantly undergoing 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 may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.  If we are unable to do so, our competitive position and results of operations could be adversely affected.
 
Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives.
 
We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in the rules and forms of the Securities and Exchange Commission, although we have not always so reported.  We also maintain a system of internal control over financial reporting.  These controls may not achieve their intended objectives.  Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures.  Controls can also be circumvented by collusion or improper management override.  Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis.  If our controls are not effective, it could have a material adverse effect on our financial condition, results of operations, and market for our common stock, and could subject us to regulatory scrutiny.
 
 
 
 
21

 
 
 
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.
 
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, these security measures may not 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.
 
If we want to, or are compelled to, raise additional capital in the future, that capital may not be available to us when it is needed or on terms that are favorable to us or current shareholders.
 
Federal banking regulators require us, and Republic, to maintain capital to support our operations.  Regulatory capital ratios are defined and required ratios are established by laws and regulations promulgated by banking regulatory agencies.  At December 31, 2011, our regulatory capital ratios were above “well capitalized” levels under current bank regulatory guidelines. To be “well capitalized,” banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%. Regulators, however, may require us, or Republic, to maintain higher regulatory capital ratios.  For example, regulators recently have required some banks to attain a Tier 1 leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10%, and a total risk-based capital ratio of at least 12%.
 
Our ability to raise additional capital in the future will depend on conditions in the capital markets at that time, which are outside of our control, on our financial performance and on other factors. Accordingly, we may not be able to raise additional capital on terms and time frames acceptable to us, or at all.  If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition and results of operations.  Our ability to borrow could also be impaired by factors that are nonspecific to us, such as disruption of the financial markets or negative news and expectations about the prospects for the financial services industry.  If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of investors, and could dilute the per share book value and earnings per share of our common stock.  Furthermore, a capital raise through issuance of additional shares may have an adverse impact on our stock price.
 
 
 
22

 
 
 
We are exposed to environmental liabilities with respect to real estate that we have or had title to in the past.
 
A significant portion of our loan portfolio is secured by real property. In the course of our business, we may foreclose, accept deeds in lieu of foreclosure, or otherwise acquire real estate, and in doing so could become subject to environmental liabilities with respect to these properties.  We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.  Although we have policies and procedures to perform an environmental review before acquiring title to any real property, these may not be sufficient to detect all potential environmental hazards.  If we were to become subject to significant environmental liabilities, it could materially and adversely affect us.
 
A substantial decline in the value of our Federal Home Loan Bank of Pittsburgh common stock may adversely affect our financial condition.
 
       We own common stock of the Federal Home Loan Bank of Pittsburgh, or the FHLB, in order to qualify for membership in the Federal Home Loan Bank system, which enables us to borrow funds under the Federal Home Loan Bank advance program. The carrying value and fair market value of our FHLB common stock was $5.2 million as of December 31, 2011.
 
Published reports indicate that certain member banks of the Federal Home Loan Bank system may be subject to asset quality risks that could result in materially lower regulatory capital levels. In December 2008, the FHLB had notified its member banks that it had suspended dividend payments and the repurchase of capital stock until further notice was provided.  In October 2010, the FHLB of Pittsburgh repurchased 5% of Republic’s total restricted stock outstanding.  In 2011, the FHLB of Pittsburgh continued to repurchase 5% of Republic’s total restricted stock outstanding on a quarterly basis.  Decisions regarding any future repurchases of restricted stock will be made on a quarterly basis.  In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the FHLB, could be substantially diminished or reduced to zero. Consequently, given that there is no market for our FHLB common stock, we believe that there is a risk that our investment could be deemed other-than-temporarily impaired at some time in the future. If this occurs, it may adversely affect our results of operations and financial condition. If the FHLB were to cease operations, or if we were required to write-off our investment in the FHLB, our business, financial condition, liquidity, capital and results of operations may be materially adversely effected.

Our common stock is not insured by any governmental entity and, therefore, an investment in our common stock involves risk.

Our common stock is not a deposit account or other obligation of any bank, and is not insured by the FDIC or any other governmental entity, and is subject to investment risk, including possible loss.
 
 
 
 
23

 

 
There may be future sales of our common stock, which may materially and adversely affect the market price of our common stock.

We are not restricted from issuing additional shares of our common stock, including securities that are convertible into or exchangeable or exercisable for shares of our common stock. Our issuance of shares of common stock in the future will dilute the ownership interests of our existing shareholders.
 
Additionally, the sale of substantial amounts of our common stock or securities convertible into or exchangeable or exercisable for our common stock, whether directly by us or by existing common shareholders in the secondary market, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock could, in turn, materially and adversely affect the market price of our common stock and our ability to raise capital through future offerings of equity or equity-related securities.  We are party to a registration rights agreement with the holders of the convertible trust preferred securities of Republic First Bancorp Capital Trust IV, which requires us, under certain circumstances, to register up to 1.7 million shares of our common stock into which the trust preferred securities may be converted for resale under the Securities Act of 1933.
 
In addition, our board of directors is authorized to designate and issue preferred stock without further shareholder approval, and we may issue other equity securities that are senior to our common stock in the future for a number of reasons, including, without limitation, to support operations and growth, to maintain our capital ratios and to comply with any future changes in regulatory standards.
 
Our common stock is currently traded on the Nasdaq Global Market.  During 2011, the average daily trading volume for our common stock was approximately 25,042 shares.  Sales of our common stock may place significant downward pressure on the market price of our common stock. Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all.

Our common stock is subordinate to our existing and future indebtedness and any preferred stock, and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.

Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our existing and future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any classes or series of preferred stock that our board of directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors and preferred shareholders. As of December 31, 2011, we had $22.5 million of outstanding debt.

Our ability to pay dividends depends upon the results of operations of our subsidiaries.

Neither us, nor Republic, has declared or paid cash dividends on its common stock since Republic began operations.  Our board of directors intends to follow a policy of retaining earnings for the purpose of increasing our capital for the foreseeable future.
 
Holders of our common stock are entitled to receive dividends if, as and when declared from time to time by our board of directors in its sole discretion out of funds legally available for that purpose, after debt service payments and payments of dividends required to be paid on our outstanding preferred stock, if any.
 
 
 
24

 
 
 
While we, as a bank holding company, are not subject to certain restrictions on dividends applicable to Republic, our ability to pay dividends to the holders of our common stock will depend to a large extent upon the amount of dividends paid by Republic to us.  Regulatory authorities restrict the amount of cash dividends Republic can declare and pay without prior regulatory approval.  Presently, Republic cannot declare or pay dividends in any one-year in excess of retained earnings for that year subject to risk based capital requirements.

If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, current and potential shareholders may lose confidence in our financial reporting and disclosures and could subject us to regulatory scrutiny.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management’s report on internal control over financial reporting. While we have reported no material weaknesses in the Form 10-K for the fiscal year ended December 31, 2011, we cannot guarantee that we will not have any material weaknesses in the future.
 
Compliance with the requirements of Section 404 is expensive and time-consuming. If, in the future, we fail to complete this evaluation in a timely manner we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting.  In addition, any failure to maintain an effective system of disclosure controls and procedures could cause our current and potential shareholders and customers to lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business.

Our governing documents, Pennsylvania law, and current policies of our board of directors contain provisions, which may reduce the likelihood of a change in control transaction, that may otherwise be available and attractive to shareholders.

Our 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 our board of directors.  In particular, the articles of incorporation and bylaws: classify our board of directors into three groups, so that shareholders elect only approximately 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 our shareholders to give us advance notice to nominate candidates for election to the board of directors or to make shareholder proposals at a shareholders’ meeting; require the vote of the holders of at least 60% of our voting shares for shareholder amendments to our bylaws; require the vote of the holders of at least 75% of our voting shares to approve certain business combinations; and restrict the holdings and voting rights of shareholders who would acquire more than 10% of our outstanding common stock without the approval of two-thirds of our board of directors.  These provisions of our articles of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of our shareholders may consider such proposals desirable.  Such provisions could also make it more difficult for third parties to remove and replace the members of our 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 our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation.
 
In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold.  For example, Pennsylvania law may restrict a third party’s ability to obtain control of us and may prevent shareholders from receiving a premium for their shares of our common stock.  Pennsylvania law also provides that our shareholders are not entitled by statute to propose amendments to our articles of incorporation.
 
 
 
25

 
 
Item 1B:  Unresolved Staff Comments
 
None.
 
Item 2:  Description of Properties

The Company currently leases its headquarters, executive offices, and twelve store locations under various lease agreements that expire at various times.  The spaces covered by these leases range in square footage from approximately 800 square feet to 40,000 square feet.  Please see Note 11 “Commitments and Contingencies” to the Consolidated Financial Statements for further information regarding the leases. Management believes these facilities are adequate to meet the Company’s present and immediately foreseeable needs.  In addition, the Company owns two parcels of land on which new store locations are expected to be developed, subject to regulatory approvals and other factors.
  
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:  Mine Safety Disclosures
 
Not applicable.
 

 
26

 
 
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 sets forth the high and low sales prices reported for the common stock on the Nasdaq Global Market for the periods indicated.   As of March 15, 2012, there were approximately 2,000 recordholders of the Company’s common stock.  On March 15, 2012, the closing price of a share of common stock on Nasdaq Global Market was $1.99.

Quarter
 
High
   
Low
 
2011:
           
4th
  $ 1.83     $ 1.13  
3rd
  $ 2.35     $ 1.50  
2nd
  $ 3.00     $ 2.01  
1st
  $ 3.27     $ 2.55  
                 
2010:
               
4th
  $ 2.46     $ 1.89  
3rd
  $ 2.44     $ 1.62  
2nd
  $ 4.49     $ 1.75  
1st
  $ 5.30     $ 2.98  

 
Dividend Policy
 
The Company has not paid any cash dividends on its common stock and has no plans to pay cash dividends during 2012.  The Company’s ability to pay dividends depends primarily on receipt of dividends from the Company’s subsidiary, Republic.  Dividend payments from Republic are subject to legal and regulatory limitations.  The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures and other cash flow requirements.  For certain limitations on the Company’s ability to pay cash dividends and Republic’s ability to pay cash dividends to the Company, see “Supervision and Regulation” under Item 1:  Business.
 
 
 
27

 
 
Item 6:  Selected Financial Data

   
As of or for the Years Ended December 31,
 
(dollars in thousands, except per share data)
 
2011
   
2010
   
2009
   
2008
   
2007
 
                               
INCOME STATEMENT DATA
                             
Total interest income
  $ 38,273     $ 40,309     $ 43,470     $ 53,976     $ 68,346  
Total interest expense
    8,199       10,245       16,055       25,081       38,307  
Net interest income
    30,074       30,064       27,415       28,895       30,039  
Provision for loan losses
    15,966       16,600       14,200       7,499       1,590  
Non-interest income
    10,581       2,839       79       1,242       3,073  
Non-interest expenses
    41,200       33,067       30,959       23,887       21,364  
Income (loss) before provision (benefit) for income taxes
    (16,511 )     (16,764 )     (17,665 )     (1,249 )      10,158  
Provision (benefit) for income taxes
    8,191       (6,074 )     (6,223 )     (777 )     3,273  
Net income (loss)
  $ (24,702 )   $ (10,690 )   $ (11,442 )   $ (472 )   $ 6,885  
                                         
PER SHARE DATA
                                       
Basic earnings (loss) per share
  $ (0.95 )   $ (0.57 )   $ (1.07 )   $ (0.04 )   $ 0.66  
Diluted earnings (loss) per share
  $ (0.95 )   $ (0.57 )   $ (1.07 )   $ (0.04 )   $ 0.65  
Book value per share
  $ 2.50     $ 3.39     $ 6.64     $ 7.46     $ 7.80  
                                         
BALANCE SHEET DATA
                                       
Total assets
  $ 1,047,353     $ 876,097     $ 1,008,642     $ 951,980     $ 1,016,308  
Total loans, net
    577,442       608,911       680,977       774,673       813,041  
Total investment securities
    179,784       150,087       192,395       90,066       90,299  
Total deposits
    952,611       757,730       882,894       739,167       780,855  
FHLB & overnight advances
    -       -       25,000       102,309       133,433  
Subordinated debt
    22,476       22,476       22,476       22,476       11,341  
Total shareholders’ equity
    64,851       88,146       70,264       79,327       80,467  
                                         
PERFORMANCE RATIOS
                                       
Return on average assets
    (2.68 )%     (1.14 )%     (1.22 )%     (0.05 )%     0.71 %
Return on average shareholders’ equity
    (28.68 )%     (13.42 )%     (15.32 )%     (0.60 )%     8.86 %
Net interest margin
    3.59 %     3.50 %     3.13 %     3.28 %     3.26 %
Total non-interest expenses as a percentage of average assets
    4.47 %     3.52 %     3.29 %     2.54 %     2.20 %
                                         
ASSET QUALITY RATIOS
                                       
Allowance for loan losses as a percentage of loans
    2.04 %     1.84 %     1.85 %     1.07 %     1.04 %
Allowance for loan losses as a percentage of non-performing loans
    106.52 %     28.62 %     49.32 %     48.51 %     38.19 %
Non-performing loans as a percentage of total loans
    1.92 %     6.45 %     3.75 %     2.21 %     2.71 %
Non-performing assets as a percentage of total assets
    1.70 %     6.30 %     3.93 %     2.72 %     2.55 %
Net charge-offs as a percentage of average loans, net
    2.44 %     2.73 %     1.33 %     0.96 %     0.14 %
                                         
LIQUIDITY AND CAPITAL RATIOS
                                       
Average equity to average assets
    9.34 %     8.47 %     7.94 %     8.44 %     8.01 %
Leverage ratio
    8.77 %     11.01 %     9.36 %     11.14 %     9.44 %
Tier 1 capital to risk-weighted assets
    11.81 %     13.68 %     11.89 %     12.26 %     10.07 %
Total capital to risk-weighted assets
    13.09 %     14.93 %     13.14 %     13.26 %     11.01 %
 
 
 
28

 
 
Item 7:  Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with Item 6 “Selected Financial Data” and our consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled, “Risk Factors” and elsewhere in this report may cause actual results to differ materially from those projected in the forward-looking statements.

Executive Summary

The highlights for the year ended December 31, 2011 are as follows:

·  
Completed the transformation of our balance sheet through the sale of $59.0 million of distressed and impaired loans and foreclosed properties to a single investor, which substantially reduced non-performing asset balances and immediately improved credit quality metrics.

·  
Asset quality trends improved for a sixth consecutive quarter.  Non-performing asset balances decreased significantly by $37.4 million, or 68%, to $17.8 million as of December 31, 2011 compared to $55.2 million as of December 31, 2010.

·  
Non-performing asset and loan ratios improved significantly year over year.

   
December 31, 2011
   
December 31, 2010
 
Non-Performing Loans/Total Loans
    1.92 %     6.45 %
Non-Performing Assets/Total Assets
    1.70 %     6.30 %
Loan Loss Reserve/Total Loans
    2.04 %     1.84 %
Loan Loss Reserve/Non-Performing Loans
    106.52 %     28.62 %
Non-Performing Assets/Capital and Reserves
    23.13 %     55.46 %

·  
Total assets increased to $1.0 billion as of December 31, 2011 compared to $876.1 million as of December 31, 2010, which represents growth of $171.3 million, or 20%.

·  
Total deposits increased by $194.9 million, or 26%, to $952.6 million as of December 31, 2011 compared to $757.7 million as of December 31, 2010.  Core deposits grew by $83.5 million, or 12%, to a total of $785.2 million during the year ended December 31, 2011.

·  
Capital levels remain strong with a Total Risk-Based Capital ratio of 13.09% and a Tier 1 Leverage Ratio of 8.77% at December 31, 2011.

·  
The net interest margin increased to 3.59% for the year ended December 31, 2011 compared to 3.50% for the year ended December 31, 2010.

·  
The SBA Lending Team hired in the beginning of the year established itself as a strong component of the Company’s operating results with the origination of $52 million in new loans during 2011.  The SBA department generated a net profit before tax of approximately $3.2 million in the current year.  This team is now ranked as the #1 SBA lender in New Jersey and the #39 lender in the nation based on the dollar volume of loan originations.
 
 
 
 
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·  
Non-interest income grew to $10.6 million for the year ended December 31, 2011 compared to $2.8 million for the year ended December 31, 2010.  This represents a year over year increase of $7.7 million, or 273%, primarily due to the gains recognized on the sale of SBA loans.

·  
The Haddonfield store, which has been open for just over one year, increased its core deposits to $40 million as of December 31, 2011.

Critical Accounting Policies, Judgments and Estimates
 
In reviewing and understanding our financial information, you are encouraged to read and understand the significant accounting policies used in preparing the consolidated financial statements. These policies are described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. The accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the 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 basis 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.

We have identified the policies related to the allowance for loan losses, other-than-temporary impairment of securities and deferred income taxes as being critical.
 
Allowance for Loan Losses - Management’s ongoing evaluation of the adequacy of the allowance for loan losses is based on our past loan loss experience, the volume and composition of our lending, 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 and a general allowance on the remainder of the portfolio. Although management determines the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
 
Management establishes 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 we 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.
 

 
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Management also establishes 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.

       Management also evaluates classified loans, which are not impaired. We segregate these loans by category and assign qualitative factors 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.

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 its 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 re-evaluated 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, the 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 the 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 our intent and ability 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, management’s estimates and judgments to calculate the deferred tax accounts have not required significant revision.
 
 
 
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In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and 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 future taxable income and are consistent with the plans and estimates used to manage the business. Any reduction in estimated future taxable income may require management to record a valuation allowance against the 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 future earnings.

Results of Operations - for the year ended December 31, 2011 (2011) as compared to the year ended December 31, 2010 (2010)
 
Overview
 
We recorded a net loss of $24.7 million or $0.95 per diluted share for 2011 compared to a net loss of $10.7 million, or $0.57 per diluted share, for 2010.  The loss for 2011 was primarily driven by provisions and charge-offs in the amount of $14.4 million related to a bulk sale of distressed and impaired commercial real estate loans and foreclosed properties during the fourth quarter of 2011.  In addition, we also recorded a $14.9 million valuation allowance related to deferred tax assets.  Return on average assets and average equity was (2.68)% and (28.68)% respectively, for 2011 as compared to (1.14)% and (13.42)% respectively, for 2010.

Average Balances and Net Interest Income
 
Historically, our 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 2011, 2010 and 2009, as Republic had tax-exempt income in those years.
 
 
 
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Average Balances and Net Interest Income

   
For the Year Ended
December 31, 2011
   
For the Year Ended
December 31, 2010
   
For the Year Ended
December 31, 2009
 
 
 
(dollars in thousands)
 
Average Balance
   
Interest Income/
Expense
   
Yield/
Rate(1)
   
Average Balance
   
Interest Income/
Expense
   
Yield/
Rate(1)
   
Average Balance
   
Interest Income/
Expense
   
Yield/
Rate(1)
 
Interest-earning assets:
                                                     
Federal funds sold and
  other interest
  earning assets
  $ 62,082     $  145       0.23 %   $ 31,313     $  80       0.26 %   $ 48,580     $  118       0.24 %
Investment securities
  and restricted stock
     156,367        5,119       3.27 %      175,074        6,176       3.53 %      96,787        4,633       4.79 %
Loans receivable
    630,309       33,417       5.30 %     659,882       34,293       5.20 %     736,647       38,943       5.29 %
Total interest-earning assets
     848,758        38,681       4.56 %      866,269        40,549       4.68 %      882,014        43,694       4.95 %
Other assets
    73,053                       73,961                       58,106                  
Total assets
  $ 921,811                     $ 940,230                     $ 940,120                  
                                                                         
Interest bearing liabilities:
                                                                       
Demand – non-interest bearing
  $ 119,189                     $ 116,895                     $ 86,621                  
Demand – interest bearing
     91,577     $ 590       0.64 %      58,467     $ 427       0.73 %      47,174     $ 310       0.66 %
Money market & savings
     345,885        3,457       1.00 %      320,296        3,689       1.15 %      281,621        5,258       1.87 %
Time deposits
    244,741       3,017       1.23 %     320,194       4,621       1.44 %     383,535       8,374       2.18 %
Total deposits
    801,392       7,064       0.88 %     815,852       8,737       1.07 %     798,951       13,942       1.75 %
Total interest bearing deposits
     682,203        7,064       1.04 %      698,957        8,737       1.25 %      712,330        13,942       1.96 %
Other borrowings
    24,831       1,135       4.57 %     35,930       1,508       4.20 %     57,454       2,113       3.68 %
Total interest-bearing liabilities
     707,034        8,199       1.16 %      734,887        10,245       1.39 %      769,784        16,055       2.09 %
Total deposits and other borrowings
     826,223        8,199       0.99 %      851,782        10,245       1.20 %      856,405        16,055       1.87 %
Non-interest bearing other liabilities
     9,472                        8,781                        9,031                  
Shareholders’ equity
    86,116                       79,667                       74,684                  
Total liabilities and shareholder’s equity
  $ 921,811                     $ 940,230                     $ 940,120                  
                                                                         
Net interest income(2)
          $ 30,482                     $ 30,304                     $ 27,639          
Net interest spread
                    3.40 %                     3.29 %                     2.86 %
Net interest margin(2)
                    3.59 %                     3.50 %                     3.13 %
                                                                         
(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 $408, $240 and $224 in 2011, 2010 and 2009, 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.
 
 
 
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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, 2011 vs. 2010
   
Year ended December 31, 2010 vs. 2009
 
   
Changes due to
         
Changes due to
       
 
(dollars in thousands)
 
Average Volume
   
Average
Rate
   
Total
Change
   
Average Volume
   
Average
 Rate
   
Total
Change
 
Interest earned on:
                                   
Federal funds sold and other interest-earning assets
  $ 72     $ (7 )   $ 65     $ (46 )   $ 8     $ (38 )
Securities
    (612 )     (445 )     (1,057 )     2,762       (1,219 )     1,543  
Loans
    (1,568 )     692       (876 )     (4,011 )     (639 )     (4,650 )
Total interest earning assets
  $ (2,108 )   $ 240     $ (1,868 )   $ (1,295 )   $ (1,850 )   $ (3,145 )
                                                 
Interest expense of:
                                               
Deposits:
                                               
Interest-bearing demand
  $ (213 )   $ 50     $ (163 )   $ (83 )   $ (34 )   $ (117 )
Money market and savings
    (256 )     488       232       (451 )     2,020       1,569  
Time
    930       674       1,604       847       2,906       3,753  
Total deposit interest expense
    461       1,212       1,673       313       4,892       5,205  
Other borrowings
    507       (134 )     373       517       88       605  
Total interest expense
    968       1,078       2,046       830       4,980       5,810  
Net interest income
  $ (1,140 )   $ 1,318     $ 178     $ (465 )   $ 3,130     $ 2,665  

Net Interest Income
 
Tax equivalent net interest margin increased 9 basis points to 3.59% during 2011, compared to 3.50% during 2010.
 
While yields on interest-bearing assets decreased 12 basis points to 4.56% in 2011 from 4.68% in 2010, the rates on total deposits and other borrowings decreased 21 basis points to 0.99% in 2011 from 1.20% in 2010. The decrease in yields on assets and rates on deposits/borrowings was due to decreases in both average loans and the average cost of deposits.
 
Tax equivalent net interest income increased $178,000, or 0.6%, to $30.5 million for 2011, as compared to $30.3 million for 2010. The increase in net interest income was due primarily to a 21 basis point decrease in the cost of interest-bearing deposits.  Average interest bearing liabilities amounted to $707.0 million for 2011 and $734.9 million for 2010, and the total interest expense decreased $2.0 million, or 20.0%, to $8.2 million for 2011, from $10.2 million in 2010, primarily the result of lowering our cost of funds on money market, savings and time deposits as a result of our retail focused, customer service strategy which includes the gathering of low-cost core deposits.

Total tax equivalent interest income decreased $1.9 million, or 4.6%, to $38.7 million for 2011, from $40.5 million for 2010.  Interest and fees on loans decreased $876,000, or 2.6%, to $33.4 million for 2011, from $34.3 million for 2010.  The decrease was due primarily to a $29.6 million decrease in average loans receivable due to our intentional effort to reduce exposure in the commercial real estate portfolio. Tax equivalent interest and dividends on investment securities decreased $1.1 million to $5.1 million for 2011, from $6.2 million for 2010, which is reflective of an $18.7 million decrease in average investment securities mainly driven by principal and interest payments received on our mortgage backed securities portfolio.  
 
 
 
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Total interest expense decreased $2.0 million, or 20.0%, to $8.2 million for 2011, from $10.2 million for 2010 as a result of our retail focused customer service strategy, which emphasizes the gathering of low-cost core deposits.  Interest-bearing liabilities averaged $707.0 million for 2011, versus $734.9 million for 2010, a decrease of $27.9 million.  Average deposit balances decreased $14.5 million and average other borrowings decreased $11.1 million.  The average rate paid on interest-bearing liabilities decreased 23 basis points to 1.16% for 2011.  Interest expense on time deposit balances decreased $1.6 million to $3.0 million in 2011 from $4.6 million in 2010, primarily due to both lower balances and lower rates.  Money market and savings interest expense decreased $232,000 to $3.5 million in 2011, from $3.7 million in 2010.   Accordingly, rates on total interest-bearing deposits decreased 21 basis points in 2011 compared to the comparable prior year period.
 
Interest expense on other borrowings decreased $373,000 to $1.1 million in 2011, primarily as a result of the maturity of $25.0 million of FHLB term borrowings in June 2010.  Average other borrowings, consisting mainly of the FHLB term borrowings, decreased $11.1 million, or 30.9%, between the respective periods.  Interest expense on other borrowings includes the impact of $22.5 million of average trust preferred securities outstanding.  We intentionally reduced our dependence on short-term borrowings during 2011.
 
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 losses and adequate to absorb estimated inherent losses in the portfolio. The provision for loan losses amounted to $16.0 million during 2011 compared to $16.6 million for the comparable prior year period.
 
The $16.0 million provision recorded in 2011 was primarily driven by $9.6 million of charge-offs taken in relation to a bulk sale of classified and non-performing commercial real estate loans that was closed during the fourth quarter of 2011.  This sale substantially reduced non-performing asset balances and immediately improved credit quality metrics.  The remainder of the provision recorded during 2011 was driven by updated appraisals of collateral associated with troubled loans, which were received earlier in the year.  Every non-performing asset included in the loan sale or remaining on our books, which has driven the loan loss provision recorded during 2011 and 2010, was originated prior to December 31, 2007.  
 
Non-Interest Income
 
Total non-interest income increased to $10.6 million for 2011 compared to $2.8 million for 2010, primarily due to $5.3 million in gains recognized through the sale of SBA loans during 2011, which were originated by an experienced team of SBA lenders that joined the Company at the beginning of the year.  Non-interest income was also impacted by $2.8 million in legal settlements received during 2011, which were associated with lender liability lawsuits initiated in prior years.
 
Non-Interest Expenses
 
Total non-interest expenses increased $8.1 million, or 25% to $41.2 million for 2011 compared to $33.1 million for 2010 as a result of the disposition of foreclosed assets included in the loan sale combined with expenses related to the SBA lending team that joined the Company during 2011. Write downs and carrying costs associated with other real estate owned increased to $7.3 million in 2011, compared to $2.2 million in 2010.  Expenses related to the origination and sale of SBA loans amounted to $2.3 million in 2011.
 
 
 
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Provision for Income Taxes
 
We recorded a provision for income taxes in the amount of  $8.2 million for the twelve month period ended December 31, 2011, compared to a benefit for income taxes of $6.1 million for the twelve month period ended December 31, 2010.  The provision for income taxes in 2011 included the recognition of a valuation allowance of $14.9 million against the deferred tax asset balance during the fourth quarter of 2011.  Excluding the impact of the deferred tax asset valuation allowance, we recorded a benefit for income taxes in the amount of $6.2 million in 2011.  The effective tax rate was 38% for 2011 and 36% for 2010.

Results of Operations - for the year ended December 31, 2010 (2010) as compared to the year ended December 31, 2009 (2009)
 
Overview
 
We had a net loss of $10.7 million or $0.57 per diluted share for 2010 as compared to a net loss of $11.4 million, or $1.07 per diluted share, for 2009.  Interest income decreased $3.2 million due to a decrease in average loans outstanding from $736.6 million at December 31, 2009 to $659.9 million at December 31, 2010.  The decrease was due to our intentional effort to reduce exposure in our CRE portfolio.  The decrease in interest income is more than offset by a decrease in interest expense of $5.8 million, which was primarily driven by a decrease in the cost of interest bearing deposits from 1.96% at December 31, 2009 to 1.25% at December 31, 2010 as we continued to focus on the gathering of low-cost core deposits.  The provision for loan losses increased to $16.6 million during 2010, as compared to $14.2 million for 2009, reflecting additional reserves on certain loans as a result of the impact of the current economic environment.  Non-interest income increased to $2.8 million in 2010 from $79,000 in 2009, primarily due to $1.7 million reduction in impairment charges on bank pooled trust preferred securities held in our investment portfolio and a $1.3 million gain on sale of investment securities.  Non-interest expenses increased $2.1 million to $33.1 million for 2010 as compared to $31.0 million for 2009, which was primarily due to $1.0 million of one-time charges related to the termination of the merger agreement with Metro Bancorp, Inc., as well as an increase of $355,000 in costs associated with other real estate owned and $444,000 in legal fees related to the work out of problem loans.  Return on average assets and average equity was (1.14)% and (13.42)% respectively, for 2010 as compared to (1.22)% and (15.32)% respectively, for 2009.

Net Interest Income
 
Tax equivalent net interest margin increased 37 basis points to 3.50% during 2010, compared to 3.13% during 2009.
 
While yields on interest-bearing assets decreased 27 basis points to 4.68% in 2010 from 4.95% in 2009, the rates on total deposits and other borrowings decreased 67 basis points to 1.20% in 2010 from 1.87% in 2009. The decrease in yields on assets and rates on deposits/borrowings was due to decreases in both average loans and the average cost of deposits.
 
Tax equivalent net interest income increased $2.7 million, or 9.6%, to $30.3 million for 2010, as compared to $27.6 million for 2009. The increase in net interest income was due primarily to a 71 basis point decrease in the cost of interest-bearing deposits.  Average interest bearing liabilities amounted to $734.9 million for 2010 and $769.8 million for 2009, and the total interest expense decreased $5.8 million, or 36.2%, to $10.2 million for 2010, from $16.1 million in 2009, primarily the result of lowering our cost of funds on money market, savings and time deposits as a result of our retail focused, customer service strategy which includes the gathering of low-cost core deposits.

Total tax equivalent interest income decreased $3.1 million, or 7.2%, to $40.5 million for 2010, from $43.7 million for 2009.  Interest and fees on loans decreased $4.7 million, or 11.9%, to $34.3 million for 2010, from $38.9 million for 2009.  The decrease was due primarily to a $76.8 million decrease in average loans receivable due to our intentional efforts to reduce exposure in the commercial real estate portfolio. Tax equivalent interest and dividends on investment securities increased $1.5 million to $6.2 million for 2010, from $4.6 million for 2009, primarily reflecting a $78.3 million increase in average investment securities.  
 
 
 
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Total interest expense decreased $5.8 million, or 36.2%, to $10.2 million for 2010, from $16.1 million for 2009 as a result of our decision to reduce dependence on the more volatile sources of funding such as brokered and public fund certificates of deposit.  Interest-bearing liabilities averaged $734.9 million for 2010, versus $769.8 million for 2009, or a decrease of $34.9 million.  Average deposit balances increased $16.9 million, offset by a $21.5 million decrease in average other borrowings.  The average rate paid on interest-bearing liabilities decreased 70 basis points to 1.39% for 2010.  Interest expense on time deposit balances decreased $3.8 million to $4.6 million in 2010 from $8.4 million in 2009, primarily reflecting lower rates.  Money market and savings interest expense decreased $1.6 million to $3.7 million in 2010, from $5.3 million in 2009.   Accordingly, rates on total interest-bearing deposits decreased 71 basis points in 2010 compared to the comparable prior year period.
 
Interest expense on other borrowings decreased $605,000 to $1.5 million in 2010, primarily as a result of the maturity of $25.0 million of FHLB term borrowings in June 2010.  Average other borrowings, primarily overnight FHLB borrowings, decreased $21.5 million, or 37.5%, between the respective periods.  Interest expense on other borrowings includes the impact of $22.5 million of average trust preferred securities.  We intentionally reduced our dependence on short-term borrowings during 2010.
 
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 losses and adequate to absorb estimated inherent losses in the portfolio. The provision for loan losses amounted to $16.6 million during 2010 compared to $14.2 million for the comparable prior year period.
 
The $16.6 million provision recorded in 2010 was primarily driven by a comprehensive internal, external and regulatory review of our loan portfolio.  As a result of these reviews, management determined that an increased provision would be required.  The increase from the comparable prior year period was primarily due to the continued decline of collateral values within our commercial real estate portfolio due to the challenging economic environment as we took actions to reduce exposure levels throughout the year.  
 
Non-Interest Income
 
Total non-interest income increased to $2.8 million for 2010 compared to $79,000 for 2009, primarily due to a decrease of $1.7 million in impairment charges on bank pooled trust preferred securities held in our investment portfolio and a $1.3 million gain on sale of investment securities during 2010.  We believe the reduction in impairment charges on our bank pooled trust preferred securities will continue in 2011 and after. During 2010, we capitalized on an opportunity to recognize available gains on the sale of certain investment securities.
 

 
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Non-Interest Expenses
 
Total non-interest expenses increased $2.1 million, or 6.8% to $33.1 million for 2010 compared to $31.0 million for 2009.  Occupancy expense increased to $4.0 million in 2010, compared to $3.1 million for 2009 primarily as a result of the write-off of future site development costs associated with the termination of the merger agreement with Metro Bancorp, Inc. in March 2010.  Legal fees increased to $1.9 million in 2010, compared to $1.2 million in 2009 mainly due to an increase in loan workouts as well as fees that were incurred as a result of the termination of the merger agreement with Metro Bancorp, Inc.  Other real estate expenses increased to $658,000 in 2010, compared to $303,000 in 2009, primarily due to an increase in property maintenance expenses on foreclosed properties.

Provision for Income Taxes
 
The benefit for income taxes generated by our net operating losses remained consistent at  $6.1 million for 2010, as compared to $6.2 million for 2009.  The effective tax rates in those periods were 35% and 35%, respectively.

Financial Condition

December 31, 2011 compared to December 31, 2010

Total assets increased $171.3 million to $1.0 billion at December 31, 2011, compared to $876.1 million at December 31, 2010. This increase was primarily driven by an increase in total deposits of $194.9 million.
 
Loans
 
The loan portfolio, which represents our largest asset, is our most significant source of interest income. Our 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 and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages. Total gross loans decreased $30.9 million, or 5.0%, to $589.5 million at December 31, 2011, versus $620.4 million at December 31, 2010. The decrease resulted from a fourth quarter sale of distressed and impaired commercial real estate loans to a single investor.  This decrease is reflective of our effort to transform and strengthen the balance sheet by substantially reducing non-performing asset balances and improving credit quality metrics.  

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 $16.4 million at December 31, 2011. Loans made to an individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit. The aggregate amount of those relationships that exceeded $9.5 million at December 31, 2011, was $164.1 million. The $9.5 million threshold approximates 10% of total regulatory capital and reflects an additional internal monitoring guideline.
 
 
 
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Investment Securities
 
Investment securities considered available-for-sale are investments that may be sold in response to changing market and interest rate conditions and for liquidity and other purposes.  Our investment securities classified as available-for-sale consist primarily of U.S. Government Agency issued mortgage backed securities which include collateralized mortgage obligations (CMOs), corporate bonds, municipal securities and debt securities, which include bank pooled trust preferred securities.  Available-for-sale securities totaled $174.3 million at December 31, 2011, an increase of $30.9 million, or 21.5%, from year-end 2010, due primarily to purchases of corporate bonds during 2011.  At December 31, 2011, the portfolio had a net unrealized loss of $73,000, compared to a net unrealized loss of $1.7 million at December 31, 2010.
 
Investment securities considered 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, 2011, securities held to maturity totaled $140,000, which was comparable to the $147,000 at year-end 2010. 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, 2011 and 2010, FHLB stock totaled $5.2 million and $6.4 million, respectively.  The FHLB completed quarterly partial repurchases of excess capital stock during 2011.
 
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, 2011 and 2010, 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 our most liquid assets. The aggregate amount in these three categories increased by $195.1 million, to $231.0 million at December 31, 2011, from $35.9 million at December 31, 2010, reflecting a $188.1 million increase in interest-bearing deposits and a $7.1 million increase in cash and due from banks.  The substantial increase in cash was driven by deposit growth during 2011 combined with cash received from the loan sale.
 
Fixed Assets
 
Bank premises and equipment, net of accumulated depreciation, totaled $23.5 million at December 31, 2011, a decrease of $2.0 million from $25.5 million at December 31, 2010.  This decrease was mainly due to a limited amount of capital expenditures offset by $2.1 million in depreciation and amortization expense in 2011.
 
Other Real Estate Owned
 
 The balance of other real estate owned decreased to $6.5 million at December 31, 2011 from $15.2 million at December 31, 2010. The $8.7 million decrease was primarily driven by the sale of foreclosed assets included in the loan sale transaction, which closed during the fourth quarter of 2011.
 
 
 
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Bank Owned Life Insurance
 
At December 31, 2011, the value of the insurance was $10.4 million, compared to $12.6 million at December 31, 2010.  The decrease was mainly due to a death benefit of $2.3 million received in the fourth quarter of 2011.
 
Other Assets
 
Other assets decreased by $10.0 million to $14.8 million at December 31, 2011, from $24.8 million at December 31, 2010, primarily due to a deferred tax asset valuation allowance of $14.9 million recorded during the fourth quarter of 2011, offset by a $5.5 million increase in the net deferred tax asset prior to the recognition of the valuation allowance.

Deposits
 
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are Republic’s major source of funding. Deposits are generally solicited from our 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 $194.9 million to $952.6 million at December 31, 2011, from $757.7 million at December 31, 2010, as a result of the Company’s strategy that focuses on relationship banking.

Short-Term Borrowings and FHLB Advances
 
Republic had no FHLB advances outstanding as of December 31, 2011 and 2010. Republic also had no short-term borrowings (overnight) at December 31, 2011 or 2010 as we reduced our dependence on outside borrowings and focused on low-cost core deposit funding sources.
 
Shareholders’ Equity
 
Total shareholders’ equity decreased $23.3 million to $64.9 million at December 31, 2011, versus $88.1 million at December 31, 2010, primarily due to a $24.7 million net loss recorded during 2011.

Investment Securities Portfolio
 
Republic’s investment securities portfolio is intended to provide liquidity and contribute to earnings while diversifying credit risk. We attempt to maximize earnings while minimizing our exposure to interest rate risk. The securities portfolio consists primarily of U.S. Government Agency issued mortgage-backed securities, which include collateralized mortgage obligations (CMOs), corporate bonds, municipal securities and debt securities, which include trust preferred securities. Our ALCO committee monitors and approves all security purchases.  The increase in the total amortized cost of securities in 2011 was primarily driven by the purchase of $23.9 million of corporate bonds during 2011.
 
 
 
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A summary of investment securities available-for-sale and investment securities held-to-maturity at December 31, 2011, 2010 and 2009 is as follows:

   
At December 31,
 
(dollars in thousands)
 
2011
   
2010
   
2009
 
Available for sale:
                 
Mortgage-back securities/CMOs
  $ 130,146     $ 125,011     $ 144,081  
Municipal securities
    10,863       10,589       10,325  
Corporate bonds
    26,881       3,000       5,989  
Agency bonds
    -       -       18,991  
Trust preferred securities
    6,375       6,417       6,789  
Other securities
    131       131       281  
Total amortized cost of securities
  $ 174,396     $ 145,148     $ 186,456  
                         
Total fair value of investment securities
  $ 174,323     $ 143,439     $ 185,404  
                         
Held to maturity:
                       
U.S. Government Agencies
  $ 2     $ 2     $ 2  
Other securities
    138       145       153  
Total amortized cost of securities
  $ 140     $ 147     $ 155  
                         
Total fair value of investment securities
  $ 144     $ 157     $ 165  

No single issuer of securities (excluding government agencies) account for more than 5% of shareholders’ equity.

At December 31, 2011, the portfolio included 25 municipal securities with a market value of $11.0 million.  The securities are reviewed on a quarterly basis for impairment.  Research on each issuer is completed to ensure the financial stability of the municipal entity.  The largest geographic concentration was in California where 13 municipal securities had a market value of $5.5 million. As of December 31, 2011, we had no reason to believe there was any impairment on the municipal securities held in the investment securities portfolio.

At December 31, 2011, the portfolio included bank pooled trust preferred securities with a market value of $3.4 million. The unrealized loss for the bank pooled trust preferred securities was due to the secondary market for such securities becoming inactive and is considered temporary.

At December 31, 2011, the portfolio included corporate bonds with a market value of $25.6 million.  The unrealized loss on the corporate bonds is due to changes in market value resulting from changes in market interest rates and is also considered temporary.
 
 

 
 
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The following table presents the contractual maturity distribution and weighted average yield of our securities portfolio at December 31, 2011. Mortgage-backed securities are presented without consideration of amortization or prepayments.

   
December 31, 2011
 
   
Within One Year
   
One to Five Years
   
Five to Ten Years
   
Past Ten Years
   
Total
 
 
(dollars in thousands)
 
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Fair value
   
Cost
   
Yield
 
Available for Sale:
                                                                 
Mortgage-backed securities/CMOs
  $ 52       5.27 %   $ 96,248       3.00 %   $ 34,936       2.80 %   $ 2,891       4,96 %   $ 134,127     $ 130,146       2.99 %
Municipal securities
    -       -       2,157       4.17 %     239       4.20 %     8,638       4.32 %     11,034       10,863       4.28 %
Corporate bonds
    -       -       14.215       3.85 %     8,398       5.69 %     3,004       3.64 %     25,617       26,881       4.43 %
Trust Preferred securities
     -        -       -        -       3,410       0.00 %     -        -       3,410       6,375       0.00 %
Other securities
    -       -       135       1.67 %     -       -       -       -       135       131       1.67 %
Total AFS securities
  $ 52       5.27 %   $ 112,755       3.13 %   $ 46,983       3.12 %   $ 14,533       4.30 %   $ 174,323     $ 174,396       3.23 %
                                                                                         
Held to Maturity:
                                                                                       
U.S. Government Agencies
  $ -        -     $ 2       1.55 %   $ -        -     $ -        -     $ 2     $ 2       1.55 %
Other securities
    76       6.45 %     46       6.01 %     -       -       20       0.00 %     142       138       6.28 %
Total HTM securities
  $ 76       6.45 %   $ 48       5.85 %   $ -       -     $ 20       0.00 %   $ 144     $ 140       5.35 %

Fair Value of Financial Instruments

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or 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 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, we do 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 primarily comprised of various issues of bank pooled trust preferred securities and a corporate bond.

Bank pooled trust preferred securities consist 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.

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 year ended December 31, 2011, 2010 and 2009:

 
(dollars in thousands)
 
2011
   
2010
   
2009
 
                   
Beginning Balance, January 1st
  $ 6,450     $ 3,926     $ 4,932  
                         
Security transferred to Level 3 measurement
    -       3,000       -  
Unrealized gains/(losses)
    6       (104 )     208  
Impairment charges on Level 3 securities
    (42 )     (372 )     (2,073 )
Adjustment for non-credit component of previously recognized OTTI
    -       -       837  
Other, including proceeds from calls of investment securities
     -        -        22  
                         
Ending Balance, December 31st
  $ 6,414     $ 6,450     $ 3,926  
 
A third party pricing service was used in the development of the fair market valuation for the bank pooled trust preferred securities. 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 desktop valuation model was utilized to obtain information regarding the attributes of each security and its specific collateral as of December 31, 2011 and 2010. Financial information on the issuers was also obtained from Bloomberg, the FDIC and the Office of Thrift Supervision. 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 that do default.
 
Prepayment Assumptions. Trust preferred securities generally allow for prepayments without a prepayment penalty any time after 5 years.  Due to the lack of new bank pooled trust preferred issuances and the relativity poor conditions of the financial institution industry, the rate of voluntary prepayments are estimated at 2% for both December 31, 2011 and 2010, respectively.

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.
 
 
 
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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. Also, the receipt of TARP funding is considered, and if so, the amount. Finally, each bank’s ability to generate capital (internally or externally), which is predictive of a troubled bank’s ability to recover, is considered.

Estimates for longer term rates of deferral and defaults are based on historical averages from 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 0.29% to 0.44% at December 31, 2011 and estimated at 0.36% at December 31, 2010.
 
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 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 trust preferred securities
 
Bond Waterfall. The bank pooled trust preferred securities have several tranches: Senior tranches, Mezzanine tranches and the Residual or income tranches. We invested in the mezzanine tranches for all of the bank pooled trust preferred securities. The Senior and Mezzanine tranches were overcollateralized 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.
 
The INTEX desktop model calculates collateral cash flows based on the attributes of the trust preferred securities as of the collateral cut-off date of December 31, 2011 and certain valuation input assumptions for the underlying collateral.  Allocations of the cash flows to securities are based on the overcollateralization and interest coverage tests (triggers), events of default and liquidation, deferrals of interest, mandatory auction calls, optional redemptions and any interest rate hedge agreements.
 
 
 
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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 December 31, 2011 and December 31, 2010 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 and few new trust preferred securities have been issued since 2007.
 
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 and LIBOR 6-month forward looking curve plus 418 to 1,014 basis points.

Also included in Level 3 investment securities classified as available for sale is a single-issue corporate bond transferred from Level 2 in 2010 since the bond is not actively traded.  Impairment would depend on the repayment ability of the single underlying institution, which is supported by a detailed quarterly review of the institution’s financial statements. The institution is a “well capitalized” institution under banking regulations and has recently demonstrated the ability to raise additional capital, when necessary, through the public capital market.

Loan Portfolio
 
Our loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, construction and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. 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 $16.4 million at December 31, 2011. Individual customers may have several loans often secured by different collateral. Such relationships in excess of $9.5 million (an internal monitoring guideline which approximates 10% of capital and reserves) at December 31, 2011, amounted to $164.1 million. There were no loans in excess of the legal lending limit at December 31, 2011.
 
The majority of loans outstanding are with borrowers in our marketplace, Philadelphia and surrounding suburbs, including southern New Jersey. In addition, we have loans to customers whose assets and businesses are concentrated in real estate. Repayment of our loans is in part dependent upon general economic conditions affecting our market place and specific industries. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral varies but primarily includes residential, commercial and income-producing properties.
 
 
 
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At December 31, 2011, we had no foreign loans and no loan concentrations exceeding 10% of total loans except for credits extended to lessors of nonresidential real estate in the aggregate amount of $218.8 million, which represented 37.1% of gross loans receivable at December 31, 2011 and lessors of residential real estate in the aggregate amount of $82.7 million, which represented 14.0% of gross loans receivable at December 31, 2011.  Loan concentrations are considered to exist when amounts are loaned to multiple numbers of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions.
 
Total loans, net of deferred loan fees, decreased by $30.9 million, or 5.0%, to $589.5 million at December 31, 2011, from $620.4 million at December 31, 2010.  The decrease was primarily driven by a bulk sale of several distressed loans and foreclosed properties to a single investor during the fourth quarter.  This transaction is reflective of our concentrated effort to transform and strengthen the balance sheet over the past three years.  The bulk sale provided us with the opportunity to expedite this transformation by substantially reducing non-performing asset balances and significantly improving credit quality metrics as of December 31, 2011.  The sale included $59.0 million of commercial real estate loans and foreclosed properties with a carrying value of $45.1 million at the time of the sale. This included loans with a book value of $32.2 million and foreclosed properties with a book value of $12.8 million which were classified as Other Real Estate Owned.  Net proceeds from the sale amounted to $30.6 million and resulted in additional provisions and charge-offs totaling $14.4 million when closed during the fourth quarter of 2011.

The following table sets forth gross loans by major categories for the periods indicated:

   
At December 31,
 
(dollars in thousands)
 
2011
   
2010
   
2009
   
2008
   
2007
 
                               
Commercial real estate
  $ 344,377     $ 374,935     $ 393,262     $ 369,508     $ 367,159  
Construction and land development
     35,061        73,795        103,790       216,060       228,225  
Commercial and industrial
    87,668       78,428       88,926       97,777       101,624  
Owner occupied real estate
    102,777       70,833       85,481       71,821       95,990  
Consumer and other
    16,683       17,808       19,460       23,066       23,396  
Residential mortgage
    3,150       5,026       3,341       5,347       5,960  
Total loans
  $ 589,716     $ 620,825     $ 694,260     $ 783,579     $ 822,354  
                                         
Deferred loan fees
    224       470       442       497       805  
Total loans, net of deferred loan fees
  $ 589,492     $ 620,355     $ 693,818     $ 783,082     $ 821,549  
                                         
 
 

 
 
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Loan Maturity and Interest Rate Sensitivity

The amount of loans outstanding by category as of the dates indicated, which are due in: (i) one year or less, (ii) more than one year through five years, and (iii) over five years, is shown in the following table.  Loan balances are also categorized according to their sensitivity to changes in interest rates.

 
 
(dollars in thousands)
 
 
Commercial Real Estate
   
Construction and Land Development
   
Commercial and Industrial
   
Owner Occupied Real Estate
   
 
Consumer and Other
   
 
Residential Mortgage
   
 
 
Total
 
Fixed rate:
                                         
1 year or less
  $ 53,228     $ 15,886     $ 6,979     $ 5,943     $ 307     $ -     $ 82,343  
1-5 years
    123,135       -       17,987       41,741       72       -       182,935  
After 5 years
    75,219       -       13,721       31,702       1,906       3,150       125,698  
    Total fixed rate
    251,582       15,886       38,687       79,386       2,285       3,150       390,976  
                                                         
Adjustable rate: