Republic First Bancorp (FRBKQ) 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2006

Commission File Number: 000-17007

Republic First Bancorp, Inc.

(Exact name of business issuer as specified in its charter)

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

1608 Walnut Street, Philadelphia, Pennsylvania19103

(Address of principal executive offices)(Zip code)

215-735-4422

(Registrant's telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

YES  X NO___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer __ Accelerated Filer   X Non-accelerated filer __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

YES__ NO  X

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date.

9,741,737 shares of Issuer's Common Stock, par value

$0.01 per share, issued and outstanding as of May 5, 2006

Page 1

Exhibit index appears on page 31

TABLE OF CONTENTS
Part I:Financial Information	Page
Item 1: Financial Statements (unaudited)	3
Item 2: Management’s Discussion and Analysis of Financial Condition and	15
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk	30
Item 4: Controls and Procedures	30
Part II: Other Information
Item 1: Legal Proceedings	31
Item 1A: Risk Factors	31
Item 2: Unregistered Sales of Equity and Use of Proceeds	31
Item 3: Defaults Upon Senior Securities	31
Item 4: Submission of Matters to a Vote of Security Holders	31
Item 5: Other Information	31
Item 6: Exhibits	31

2

PART I - FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

	Page
Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005	4
Consolidated Statements of Income for the three months ended
March 31, 2006 and 2005 (unaudited)	5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2006 and 2005 (unaudited)	6
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended
March 31, 2006 and 2005 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8

3

Republic First Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

As of March 31, 2006 and December 31, 2005

Dollars in thousands, except share data

ASSETS:	March 31, 2006			December 31, 2005
	(unaudited)
Cash and due from banks	$	17,758		$	19,985
Interest bearing deposits with banks		788			768
Federal funds sold		78,824			86,221
Total cash and cash equivalents		97,370			106,974
Investment securities available for sale, at fair value		36,379			37,283
Investment securities held to maturity at amortized cost
(Fair value of $568 and $570, respectively)		560			559
Federal Home Loan Bank stock, at cost		5,137			6,319
Loans receivable (net of allowance for loan losses of
$7,803 and $7,617, respectively)		694,107			670,469
Premises and equipment, net		3,755			3,598
Other real estate owned		137			137
Accrued interest receivable		4,095			3,784
Business owned life insurance		11,013			10,926
Other assets		11,616			10,806
Total Assets	$	864,169		$	850,855
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand – non-interest-bearing	$	81,462		$	88,862
Demand – interest-bearing		59,172			69,940
Money market and savings		243,469			223,129
Time less than $100,000		108,036			128,022
Time over $100,000		182,725			137,890
Total Deposits		674,864			647,843
Short-term borrowings		105,000			123,867
Accrued interest payable		2,833			1,813
Other liabilities		8,358			7,469
Subordinated debt		6,186			6,186
Total Liabilities		797,241			787,178
Shareholders’ Equity:
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized;
no shares issued as of March 31, 2006 and December 31, 2005		-			-
Common stock par value $0.01 per share, 20,000,000 shares authorized;
shares issued 9,740,834 as of March 31, 2006
and 8,753,998 as of December 31, 2005		97			88
Additional paid in capital		63,036			50,203
Retained earnings		6,060			15,566
Treasury stock at cost (250,555 and 227,778 shares, respectively)		(1,688	)		(1,688	)
Stock held by deferred compensation plan		(573	)		(573	)
Accumulated other comprehensive income (loss)		(4	)		81
Total Shareholders’ Equity		66,928			63,677
Total Liabilities and Shareholders’ Equity	$	864,169		$	850,855

(See notes to consolidated financial statements)

4

Republic First Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

For the Three Months Ended March 31, 2006 and 2005

Dollars in thousands, except per share data

(unaudited)

	Three months ended
	March 31,
	2006		2005
Interest income:
Interest and fees on loans	$	14,154	$	9,915
Interest and dividend income on federal
funds sold and other interest-earning balances		400		476
Interest and dividends on investment securities		509		441
Total interest income		15,063		10,832
Interest expense:
Demand interest-bearing		122		85
Money market and savings		1,699		880
Time under $100,000		1,149		777
Time $100,000 or more		2,294		1,254
Other borrowed funds		490		638
Total interest expense		5,754		3,634
Net interest income		9,309		7,198
Provision for loan losses		1,313		703
Net interest income after provision
for loan losses		7,996		6,495
Non-interest income:
Loan advisory and servicing fees		511		184
Service fees on deposit accounts		453		485
Other income		151		474
		1,115		1,143
Non-interest expenses:
Salaries and benefits		2,924		2,225
Occupancy		435		379
Depreciation		200		320
Legal		167		171
Advertising		49		45
Data processing		130		119
Taxes, other		215		143
Other expenses		921		1,069
		5,041		4,471
Income before income taxes		4,070		3,167
Provision for income taxes		1,399		1,045
Net income	$	2,671	$	2,122
Net income per share (1):
Basic	$	0.28	$	0.24
Diluted	$	0.28	$	0.22
(1) Adjusted for 10% stock dividend with a record date of May 5, 2006 and a payable date of May 17, 2006

(See notes to consolidated financial statements)

5

Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2006 and 2005
Dollars in thousands
(unaudited)
	Three months ended
	March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	2,671		$	2,122
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		1,313			703
Depreciation		200			320
Amortization of discounts on investment securities		50			38
Increase in value of business owned life insurance		(87	)		(84	)
Increase in accrued interest receivable
and other assets		(1,121	)		(274	)
Increase in accrued expenses
and other liabilities		1,909			631
Net cash provided by operating activities		4,935			3,456
Cash flows from investing activities:
Purchase of securities:
Available for sale		-			(100	)
Proceeds from principal receipts, calls and maturities of securities:
Held to maturity		-			110
Available for sale		768			1,036
Proceeds from sale of FHLB stock		1,182			1,317
Net increase in loans		(24,951	)		(14,577	)
Increase in other interest-earning restricted cash		-			(499	)
Premises and equipment expenditures		(357	)		(594	)
Net cash used in investing activities		(23,358	)		(13,307	)
Cash flows from financing activities:
Net proceeds from exercise of stock options		665			-
Net increase in demand, money market and savings deposits		2,172			73,434
Repayment of overnight borrowings		(18,867	)		(28,035	)
Repayment of long term borrowings		-			(25,000	)
Net increase in time deposits		24,849			38,625
Net cash provided by financing activities		8,819			59,024
Increase (decrease) in cash and cash equivalents		(9,604	)		49,173
Cash and cash equivalents, beginning of period		106,974			36,703
Cash and cash equivalents, end of period	$	97,370		$	85,876
Supplemental disclosure:
Interest paid	$	4,735		$	3,505
Taxes paid	$	-		$	-

(See notes to consolidated financial statements)

6

Republic First Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2006 and 2005

Dollars in thousands

(unaudited)

	Comprehensive Income/(loss)			Common Stock		Additional Paid in Capital			Retained Earnings			Treasury Stock at Cost			Stock Held by Deferred Compensation Plan			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
				��
Balance January 1, 2006				$	88	$	50,203		$	15,566		$	(1,688	)	$	(573	)	$	81		$	63,677
Total other comprehensive loss, net of reclassification adjustments and taxes		(85	)		-		-			-			-						(85	)		(85	)
Net income		2,671			-		-			2,671			-						-			2,671
Total comprehensive income	$	2,586
Stock dividend declared (885,612 shares)					8		12,169			(12,177	)											-
Options exercised (111,436 shares)					1		664			-			-						-			665
Balance March 31, 2006				$	97	$	63,036		$	6,060		$	(1,688	)	$	(573	)	$	(4	)	$	66,928
	Comprehensive Income/(loss)				Common Stock		Additional Paid in Capital			Retained Earnings			Treasury Stock at Cost			Stock Held by Deferred Compensation Plan			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
Balance January 1, 2005				$	74	$	42,494		$	23,867		$	(1,541	)	$	-		$	330		$	65,224
Total other comprehensive loss, net of reclassification adjustments and taxes		(111	)		-		-			-			-						(111	)		(111	)
Net income		2,122			-		-			2,122			-						-			2,122
Total comprehensive income	$	2,011
First Bank of Delaware spin-off							(5,158	)		(6,216	)		-						(22	)		(11,396	)
Balance March 31, 2005				$	74	$	37,336		$	19,773		$	(1,541	)	$	-		$	197		$	55,839

(See notes to consolidated financial statements)

7

REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1:Organization

 Republic First Bancorp, Inc. (“the Company”) spun off its former subsidiary, the First Bank of Delaware, through a pro-rata distribution of one share of the common stock of the First Bank of Delaware (“FBD”) for every share of the Company’s common stock outstanding on January 31, 2005. The Company’s financial statements are presented herein with an effective date of the spin-off as of January 1, 2005. The Company is now a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised of one wholly owned subsidiary, Republic First Bank (“Republic”), a Pennsylvania state chartered bank. Republic offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and branches in Philadelphia, Montgomery, and Delaware Counties.

Both Republic and FBD share data processing, accounting, human resources and compliance services through BSC Services Corp. (”BSC”), which is a subsidiary of FBD. BSC allocates its cost on the basis of usage, to Republic and FBD, which classify such costs to the appropriate non-interest expense categories.

The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, other community banks, thrift institutions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.

The Company and Republic are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and its subsidiary for adherence to laws and regulations. As a consequence, the cost of doing business may be affected.

Note 2: Summary of Significant Accounting Policies:

Basis of Presentation:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.

Risks and Uncertainties and Certain Significant Estimates:

The earnings of the Company depend on the earnings of Republic. Earnings are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the results of operations are subject to risks and uncertainties surrounding their exposure to change in the interest rate environment.

8

Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned and income taxes. Consideration is given to a variety of factors in establishing these estimates. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond Republic’s control, it is at least reasonably possible that the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.

The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends, and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.

Share-Based Compensation:

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No, 123R (revised 2004), “Share-Based Payment”, which revises SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS No. 123R are effective January 1, 2006.

In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107 which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term.

In 2005, the Company vested all previously issued unvested options. The impact on operations in future periods will be the value imputed on future options grants using the methods prescribed in SFAS No. 123R.

At March 31, 2006, the Company maintains a Stock Option Plan (the “Plan”) under which the Company grants options to its employees and directors. Under terms of the plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that may be available for grant under the plan to 1.5 million shares, are reserved for such options. The Plan provides that the exercise price of each option granted equals the market price of the Company’s stock on the date of grant. Any options granted vest within one to five years and has a maximum term of 10 years.

9

A summary of the status of the Company’s stock options under the Stock Option Plan as of March 31, 2006 and changes during the three months ended March 31, 2006 are presented below:

	For the Three Months Ended
	March 31, 2006
	Shares	Weighted Average Exercise Price
Outstanding, beginning of year	709,372	$ 5.97
Granted	-	-
Exercised	(111,436)	(5.97)
Forfeited	-	-
Outstanding, end of period	597,936	5.97
Options exercisable at period-end	597,936	5.97
Weighted average fair value of options granted during the period		$ -

The following table summarizes information about options outstanding under the Stock Options Plan as of March 31, 2006.

	Options outstanding				Options exercisable
Range of Exercise Prices	Number outstanding at March 31, 2006	Weighted Average remaining contractual life (years)	Weighted Average exercise price	Shares		Weighted Average Exercise Price
$1.99	103,673	4.8	$ 1.99	103,673		$ 1.99
$2.99 to $3.91	160,591	6.0	3.23	160,591		3.23
$4.14 to $5.08	28,493	5.2	4.38	28,493		4.38
$6.63 to $7.41	159,914	7.8	6.85	159,914		6.85
$10.93 to $11.95	145,265	9.2	11.17	145,265		11.17
	597,936		$ 5.97	597,936		$5.97

During the three months ended March 31, 2006, $0 was recognized in compensation expense for the Stock Options Plan. Prior to January 1, 2006, the Company accounted for the Stock Option Plan under the recognition and measurement principles of APB No. 25 and related interpretations. Share-based employee compensation costs were not reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. Since, in 2005, the Company vested all previously issued unvested options and the Company has granted no options during the three months ended March 31, 2006, there is no compensation expense to be recognized on the Stock Option Plan during the three months ended March 31, 2006.

10

In accordance with SFAS No. 123, the following table shows pro forma net income and earnings per share assuming stock options had been expensed based on their fair value of the options granted along with significant assumptions used in the Black-Scholes option valuation model (dollars in thousands, except per share date)

	Three months ended
	March 31,
	2005
Net Income as reported	$	2,122
Stock-based employee compensation costs determined
if the fair value method had been applied to all awards,
net of tax		(52	)
Pro-forma net income	$	2,070
Basic Earnings per Common Share:
As reported	$	0.24
Pro-forma	$	0.23
Diluted Earnings per Common Share:
As reported	$	0.22
Pro-forma	$	0.22

The pro forma compensation expense is based upon the fair value of the option at grant date. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for those grants: dividend yield of 0%; expected volatility of between 32.2% and 35.2%; risk-free interest rate of between 3.24% and 3.77% and an expected life of 5.0 years.

Note 3:Reclassifications and Restatement for 12% and 10% Stock Dividends

Certain items in the consolidated financial statements and accompanying notes have been reclassified to conform to the current year’s presentation format. There was no effect on net income for the periods presented herein as a result of reclassifications. All applicable amounts in these consolidated financial statements (including stock options and earnings per share information) have been restated for a 12% stock dividend paid on June 7, 2005, and a 10% stock dividend to be paid on May 17, 2006.

Note 4: Recent Accounting Pronouncements

In March 2004, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS 115 and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB Staff Position FAS No. 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The FSP addresses when an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 with earlier application permitted. For the Company, the effective was the first quarter of fiscal 2006. The adoption of this accounting principle did not have a significant impact on the Company’s financial position or results of operations.

11

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the accounting and reporting requirements for a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle, as well as to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005 and requires retrospective application to prior periods’ financial statements for most voluntary changes in an accounting principle, unless it is impracticable to do so. The Company adopted this guidance on January 1, 2006. The adoption did not have a material effect on the Company’s financial position or results of operations.

In October 2005, the FASB issued FASB Staff Position FAS 13-1 (“FSP FAS 13-1”), which requires companies to expense rental costs associated with ground or building operating leases that are incurred during a construction period. As a result, companies that are currently capitalizing these rental costs are required to expense them beginning in its first reporting period beginning after December 15, 2005. FSP FAS 13-1 is effective for the Company as of the first quarter of fiscal 2006. The provisions of FSP FAS 13-1 did not have an impact on the Company’s financial position or results of operations.

In November 2005, the FASB issued final FSP No. 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” The FSP provides an alternative method of calculating excess tax benefits (the Additional Paid-in Capital “APIC” pool) from the method defined in FAS 123(R) for share-based payments. A one-time election to adopt the transition method in this FSP is available to those entities adopting 123(R) using either the modified retrospective or modified prospective method. Up to one year from the initial adoption of FAS 123(R) or the effective date of the FSP is provided to make this one-time election. However, until an entity makes its election, it must follow the guidance in FAS 123(R). The Company is currently evaluating the potential impact of calculating the APIC pool with this alternative method and has not yet determined which method we will adopt, or the expected impact on the Company’s financial position or results of operations.

In January 2006, the Company adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations - an interpretation of SFAS No. 143,” (“FIN 47”). This Interpretation provides clarification with respect to the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation are conditional on a future event. The adoption of FIN 47 did not materially impact the Company’s financial position or results of operations.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends FASB Statement No. 133 and FASB Statement No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is required to adopt the provisions of SFAS No. 155, as applicable, beginning in fiscal year 2007. Management does not believe the adoption of SFAS No. 155 will have a material impact on the Company’s financial position and results of operations.

12

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets —An Amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006, which for the Company will be as of the beginning of fiscal 2007. The Company does not believe that the adoption of SFAS 156 will have a significant effect on its financial statements.

In February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event.” This position amends SFAS 123R to incorporate that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet certain conditions in SFAS 123R until it becomes probable that the event will occur. The guidance in this FASB Staff Position shall be applied upon initial adoption of Statement 123R. The Company is currently evaluating the impact that the adoption of SFAS 123R will have on its financial statements.

Note 5:Legal Proceedings

The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with legal counsel, is of the opinion that the liabilities 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.

Note 6:Segment Reporting

As a result of the spin-off of FBD in the first quarter of 2005, the tax refund products and short-term consumer loan segments were also spun off as they were divisions of that bank. In the normal course of business, tax refund loans may continue to be purchased from FBD. After the spin off, the Company has one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as consumer loan products in the area surrounding its branches.

Note 7: Earnings Per Share:

Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plan. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. CSEs which are anti-dilutive are not included in the following calculation. At March 31, 2006, and 2005, respectively, there were no stock options that were not included in the calculation of EPS because the option exercise price is greater than the average market price for the period. The following tables are a comparison of EPS for the three months ended March 31, 2006 and 2005. EPS has been restated for a stock dividend paid on June 7, 2005 and a stock dividend payable on May 17, 2006 (See Note 3).

13

Three months ended March 31,	2006			2005
Net Income	$2,671,000		$2,122,000
		Per			Per
	Shares	Share	Shares		Share
Weighted average shares
for period	9,391,009		8,914,913
Basic EPS		$0.28			$0.24
Add common stock equivalents representing dilutive stock options	249,836		593,217
Effect on basic EPS of dilutive CSE		$ -			$(.02)
Equals total weighted average
shares and CSE (diluted)	9,640,845		9,508,130
Diluted EPS		$0.28			$0.22

Note 8: Comprehensive Income

The components of comprehensive income, net of related tax, are as follows (in thousands):

	Three Months Ended March 31,
	2006	2005
Net income	$2,671	$2,122
Other comprehensive loss:
Unrealized losses on securities:
Arising during the period, net of tax benefit of $44 and $57	(85)	(111)
Comprehensive income	$2,586	$2,011
The accumulated balances related to each component of other comprehensive income (loss) are as follows (in thousands):
	March 31,
	2006	2005
Unrealized gains (losses) on securities	$(4)	$197

14

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

The following is management’s discussion and analysis of significant changes in the Company’s results of operations, financial condition and capital resources presented in the accompanying consolidated financial statements. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements.

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “may,” “believes,” “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective” and similar expressions or variations on such expressions. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; new service and product offerings by competitors and price pressures; and similar items. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, Quarterly Reports on Form 10-Q, filed by the Company in 2006 and 2005, and any Current Reports on Form 8-K filed by the Company, as well as other filings.

Financial Condition:

March 31, 2006 Compared to December 31, 2005

Assets increased $13.3 million to $864.2 million at March 31, 2006, versus $850.9 million at December 31, 2005. This increase reflected a $23.6 million increase in net loans. These loans were funded primarily by increases in time certificates of deposits. The increase in loans was partially offset by a $9.6 million decrease in cash and cash equivalents.

Loans:

The loan portfolio represents the Company’s largest asset category and is its most significant source of interest income. The Company’s lending strategy focuses on small and medium size businesses and professionals that seek highly personalized banking services. Net loans increased $23.6 million, to $694.1 million at March 31, 2006, versus $670.5 million at December 31, 2005. Substantially all of the increase resulted from commercial and construction loans. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, automobile loans, home improvement loans, home equity loans and lines of credit, overdraft lines of credit and others. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to the legal lending limit of approximately $11.5 million at March 31, 2006. Individual customers may have several loans that are secured by different collateral.

15

Investment Securities:

Investment securities available-for-sale are investments which may be sold in response to changing market and interest rate conditions and for liquidity and other purposes. The Company’s investment securities available-for-sale consist primarily of U.S. Government debt securities, U.S. Government agency issued mortgage-backed securities, and debt securities which include corporate bonds and trust preferred securities. Available-for-sale securities totaled $36.4 million at March 31, 2006, compared to $37.3 million at year-end 2005. The decrease reflected principal payments on mortgage backed securities. At March 31, 2006 and December 31, 2005, the portfolio had net unrealized losses of $6,000 and net unrealized gains of $123,000, respectively.

Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of debt securities and stocks. At March 31, 2006, securities held to maturity totaled $560,000, compared to $559,000 at year-end 2005.

FHLB 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 March 31, 2006, FHLB stock totaled $5.1 million, a decrease of $1.2 million from $6.3 million at December 31, 2005.

Cash and Cash Equivalents:

Cash and due from banks, interest bearing deposits and federal funds sold are all liquid funds. The aggregate amount in these three categories decreased by $9.6 million, to $97.4 million at March 31, 2006, from $107.0 million at December 31, 2005, reflecting a decrease in federal funds sold.

Fixed Assets:

The balance in premises and equipment, net of accumulated depreciation, was $3.8 million at March 31, 2006, compared to $3.6 million at December 31, 2005, reflecting 2006 premises and equipment expenditures.

Other Real Estate Owned:

Other real estate owned amounted to $137,000 at March 31, 2006 and December 31, 2005.

Bank Owned Life Insurance:

The balance of bank owned life insurance amounted to $11.0 million at March 31, 2006 and $10.9 million at December 31, 2005. The income earned on these policies is reflected in other income.

Other Assets:

Other assets increased by $0.8 million to $11.6 million at March 31, 2006, from $10.8 million at December 31, 2005, principally resulting from an increase in prepaid taxes and insurance.

Deposits:

Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits including brokered deposits, are Republic’s major source of funding. Deposits are generally solicited from the Company’s market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships. Institutional deposits also may be utilized when they represent a lower-cost funding alternative.

Total deposits increased by $27.0 million to $674.9 million at March 31, 2006 from $647.8 million at December 31, 2005. The majority of that increase represents balances that are likely short-term. Average core deposits increased 14.0% or $45.3 million more than the prior year period to $368.1 million in the first quarter of 2006. Deposit growth benefited from the Company’s business development efforts. Period end time deposits increased $24.8 million, or 9.3% to $290.8 million at March 31, 2006, versus $265.9 million at the prior year-end. The increase resulted primarily from the addition of institutional deposits which were the least costly funding alternative available.

16

FHLB Borrowings:

FHLB borrowings totaled $105.0 million at March 31, 2006 and $123.9 million at December 31, 2005. The balances were comprised wholly of overnight borrowings.

Shareholders’ Equity:

Total shareholders’ equity increased $3.3 million to $66.9 million at March 31, 2006, versus $63.7 million at December 31, 2005. This increase was primarily the result of year-to-date net income of $2.7 million, with the balance of the increase resulting from the exercise of stock options partially offset by a minimal reduction in accumulated other comprehensive income (loss).

Three Months Ended March 31, 2006 compared to March 31, 2005

Results of Operations:

Overview

The Company's net income increased to $2.7 million or $0.28 per diluted share for the three months ended March 31, 2006, compared to $2.1 million, or $0.22 per diluted share for the comparable prior year period. There was a $4.2 million, or 39.1%, increase in total interest income, reflecting higher rates and a 23.6% increase in average loans outstanding while interest expense increased $2.1 million, also reflecting higher rates and a 16.3% increase in average deposits outstanding. Accordingly, net interest income increased $2.1 million between the periods. Increases in short term interest rates also increased yields on loans tied to prime, which exceeded increases in interest paid on certain deposits, contributing to the increased margin. The provision for loan losses in the first quarter of 2006 increased to $1.3 million, compared to $703,000 provision expense in the first quarter of 2005, reflecting the impact of $259,000 of recoveries and fewer tax refund charge-offs in that quarter. Non-interest income remained at $1.1 million for the three months ended March 31, 2006, compared to the prior year period. Non-interest expenses increased $570,000 to $5.0 million compared to $4.5 million in the first quarter of 2005, primarily due to higher salaries and benefits. Return on average assets and average equity from continuing operations of 1.33% and 16.63% respectively, in the first quarter of 2006 compared to 1.15% and 15.48% respectively for the same period in 2005.

17

Analysis of Net Interest Income

Historically, the Company's earnings have depended significantly upon 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 impacted by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities.

	For the three months ended							For the three months ended
	March 31, 2006							March 31, 2005
Interest-earning assets:
			Interest							Interest
(Dollars in thousands)	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate
Federal funds sold
and other interest-
earning assets	$	36,130	$	400		4.49	%	$	77,425	$	476		2.50	%
Securities		41,663		509		4.89	%		48,779		444		3.64	%
Loans receivable		700,896		14,154		8.19	%		567,247		9,912		7.09	%
Total interest-earning assets		778,689		15,063		7.85	%		693,451		10,832		6.33	%
Other assets		37,689							43,694
Total assets	$	816,378						$	737,145
Interest-bearing liabilities:
Demand-non interest
bearing	$	86,076						$	93,558
Demand interest-bearing		61,943	$	122		0.80	%		55,029	$	85		0.63	%
Money market & savings		220,053		1,698		3.13	%		174,225		880		2.05	%
Time deposits		336,529		3,444		4.15	%		283,087		2,031		2.91	%
Total deposits		704,601		5,264		3.03	%		605,899		2,996		2.01	%
Total interest-bearing
deposits		618,525		5,264		3.45	%		512,341		2,996		2.37	%
Other borrowings (1)		36,932		490		5.38	%		68,336		638		3.79	%
Total interest-bearing
liabilities	$	655,457	$	5,754		3.56	%	$	580,677	$	3,634		2.54	%
Total deposits and
other borrowings		741,533		5,754		3.15	%		674,235		3,634		2.19	%
Non interest-bearing
liabilites		9,701							8,077
Shareholders' equity		65,144							54,833
Total liabilities and
shareholders' equity	$	816,378						$	737,145
Net interest income			$	9,309						$	7,198
Net interest spread						4.29	%						3.79	%
Net interest margin						4.85	%						4.20	%
(1) Includes $6.2 million of trust preferred securities

18

The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volumes and rates during the period. 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.

Rate/Volume Table

	Three months ended March 31, 2006
	versus March 31, 2005
	(dollars in thousands)
	Due to change in:
	Volume			Rate			Total
Interest earned on:
Federal funds sold	$	(464	)	$	388		$	(76	)
Securities		(86	)		151			65
Loans		2,699			1,543			4,242
Total interest-earning assets		2,149			2,082			4,231
Interest expense of deposits
Interest-bearing demand deposits		(14	)		(23	)		(37	)
Money market and savings		(354	)		(464	)		(818	)
Time deposits		(547	)		(866	)		(1,413	)
Total deposit interest expense		(915	)		(1,353	)		(2,268	)
Other borrowings		417			(269	)		148
Total interest expense		(498	)		(1,622	)		(2,120	)
Net interest income	$	1,651		$	460		$	2,111

The Company’s net interest margin increased 65 basis points to 4.85% for the three months ended March 31, 2006, versus 4.20% in the prior year comparable period. Excluding the impact of tax refund loans, which are substantially all a first quarter event, the net interest margin was 4.25% in first quarter 2006 and 3.69% in first quarter 2005. 

While yields on interest-bearing assets increased 152 basis points to 7.85% in first quarter 2006 from 6.33% in first quarter 2005, the yield on total deposits and other borrowings increased 96 basis points to 3.15% from 2.19% between those respective periods. The increase in yields on assets resulted primarily from the 250 basis point increase in short-term interest rates between the two quarters. The increases in short-term interest rates that increased yields on loans tied to prime, exceeded increases in interest paid on deposits.

The Company's net interest income increased $2.1 million, or 29.3%, to $9.3 million for the three months ended March 31, 2006, from $7.2 million for the prior year comparable period. As shown in the Rate Volume table above, the increase in net interest income was due primarily to the increased volume of loans. Higher rates on loans resulted primarily from variable rate loans which immediately adjust to increases in the prime rate. Interest expense increased primarily as a result of higher rates which lagged the general increase in short-term market rates. Average interest-earning assets amounted to $778.7 million for first quarter 2006 and $693.5 million for first quarter 2005. Substantially all of the $85.2 million increase resulted from loan growth.

19

The Company's total interest income increased $4.2 million, or 39.1%, to $15.1 million for the three months ended March 31, 2006, from $10.8 million for the prior year comparable period. Interest and fees on loans increased $4.2 million, or 42.8%, to $14.2 million for the three months ended March 31, 2006, from $9.9 million for the prior year comparable period. The majority of the increase in both commercial loan interest and total interest income resulted from a 23.6% increase in average loan balances. In first quarter 2006, average loan balances amounted to $700.9 million, compared to $567.2 million in the comparable prior year period. The balance of the 42.8% increase in interest on loans resulted primarily from the repricing of the variable rate portfolio to higher short term market interest rates. Interest and dividends on investment securities increased $65,000 to $509,000 for the three months ended March 31, 2006, from $444,000 for the prior year comparable period. This increase reflected rate increases on variable rate securities that were partially offset by a $7.1 million, or 14.6%, decrease in average securities outstanding to $41.7 million for first quarter 2006 from the comparable prior year period. Interest on federal funds sold and other interest-earning assets decreased $76,000, or 16.0%, as increases in short-term market interest rates were more than offset by the $41.3 million decrease in average balances to $36.1 million for first quarter 2006 from $77.4 million for the comparable prior year period.

The Company's total interest expense increased $2.1 million, or 58.3%, to $5.8 million for the three months ended March 31, 2006, from $3.6 million for the prior year comparable period. Interest-bearing liabilities averaged $655.5 million for the three months ended March 31, 2006, versus $580.7 million for the prior year comparable period, or an increase of $74.8 million. The increase reflected additional funding utilized for loan growth. Average deposit balances increased $98.7 million which facilitated a $31.4 million decrease in average other borrowings. The average rate paid on interest-bearing liabilities increased 102 basis points to 3.56% for the three months ended March 31, 2006. Interest expense on time deposit balances increased $1.4 million to $3.4 million in first quarter 2006, from $2.0 million in the comparable prior year period. Money market and savings interest expense increased $0.8 million to $1.7 million in first quarter 2006, from $880,000 in the comparable prior year period. The majority of the increase in interest expense on deposits reflected the higher short-term interest rate environment, which while increased, lagged the general increase in short-term market rates. Accordingly, rates on total interest-bearing deposits increased 108 basis points in first quarter 2006 compared to first quarter 2005, while short term rates increased approximately 250 basis points between those periods.

Interest expense on other borrowings decreased $148,000 to $490,000 in first quarter 2006, as a result of decreased average balances. Average other borrowings, primarily overnight FHLB borrowings, decreased $31.4 million, or 46.0%, between those respective periods. These reductions in balances reflected the increases in deposit balances, which were utilized as a less costly funding source for loan growth. Rates on overnight borrowings reflected the higher short-term interest rate environment as the rate of other borrowings increased to 5.38% in first quarter 2006, from to 3.79% in the comparable prior year period. Interest expense on other borrowings also includes the impact of $6.2 million of trust preferred securities.

Provision for Loan Losses

The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that reflects the known and estimated inherent losses in the portfolio. The provision for loan losses amounted to $1.3 million in first quarter 2006 compared to $703,000 in first quarter 2005. The first quarter 2006 provision reflected $1.1 million for losses on tax refund loans, which were more than offset by $1.5 million in related revenues. The remaining provision in first quarter 2006 primarily reflected amounts required to increase the allowance for loan growth in accordance with the Company’s methodology. The comparable first quarter 2005 provision reflected $919,000 for losses on tax refund loans, which were more than offset by $1.1 million in related revenues. In addition, the first quarter 2005 provision was reduced as a result of an approximate $252,000 recovery on a commercial loan, which had been charged off in the prior year. That recovery resulted in a reserve balance which exceeded that determined by the Company’s methodology. The quarterly provision was reduced accordingly.

20

Non-Interest Income

Total non-interest income remained at $1.1 million for the three months ended March 31, 2006, compared to the prior year comparable period. An increase of $327,000 in first quarter 2006 related to loan advisory and servicing fees was offset by a one-time $251,000 award in a lawsuit recorded in other income in first quarter 2005.

Non-Interest Expenses

Total non-interest expenses increased $570,000 or 12.7% to $5.0 million for the three months ended March 31, 2006, from $4.5 million for the prior year comparable period. Salaries and employee benefits increased $699,000 or 31.4%, to $2.9 million for the three months ended March 31, 2006, from $2.2 million for the prior year comparable period. That increase reflected additional salary expense related to commercial loan and deposit production including related support staff. It also reflected annual merit increases which are targeted at approximately 3.5%.

Occupancy expense increased $56,000, or 14.8%, to $435,000 in first quarter 2006, compared to $379,000 in first quarter 2005. The increase reflected higher repairs and maintenance expense.

Depreciation expense decreased $120,000 or 37.5% to $200,000 for the three months ended March 31, 2006, versus $320,000 for the prior year comparable period. The decrease was primarily due to the write-off of assets in first quarter 2005 that were determined to have shorter lives than originally expected.

Legal fees decreased $4,000, or 2.3%, to $167,000 in first quarter 2006, compared to $171,000 in first quarter 2005.

Advertising expense increased $4,000, or 8.9%, to $49,000 in first quarter 2006, compared to $45,000 in first quarter 2005.

Data processing expense increased $11,000, or 9.2%, to $130,000 in first quarter 2006, compared to $119,000 in first quarter 2005.

Taxes, other increased $72,000, or 50.3%, to $215,000 for the three months ended March 31, 2006, versus $143,000 for the comparable prior year period. The increase reflected an increase in Pennsylvania shares tax, which is assessed at an annual rate of 1.25% on a 6 year moving average of regulatory capital. The full amount of the increase resulted from increased capital.

Other expenses decreased $148,000, or 13.8% to $920,000 for the three months ended March 31, 2006, from $1.1 million for the prior year comparable period. Professional fees decreased approximately $76,000, reflecting reductions in recruiting expenses. Auditing expenses decreased $44,000 reflecting reduced expense for Sarbanes Oxley compliance.

21

Provision for Income Taxes

The provision for income taxes for continuing operations increased $354,000, to $1.4 million for the three months ended March 31, 2006, from $1.0 million for the prior year comparable period. That increase was primarily the result of the increase in pre-tax income. The effective tax rates in those periods were 34% and 33% respectively.

Share-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R (revised 2004), “Share-Based Payment”, which revises SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS No. 123R are effective January 1, 2006.

In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107 which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term.

In 2005, the Company vested all previously issued unvested options. For those vested options granted prior to January 1, 2006, there is no impact on operations in future periods. The accelerated vesting increased pro forma expense in 2005 by approximately $107,000, and therefore this expense did not impact net income in 2006 upon adoption of SFAS No. 123R. The impact on operations in future periods will be the value imputed on future options grants using the methods prescribed in SFAS No. 123R.

At March 31, 2006, the Company maintains a Stock Option Plan under which the Company grants options to its employees and directors. See Note 2 in the Notes to Consolidated Financial Statements herein for a further description of this plan.

During the three months ended March 31, 2006, $0 was recognized in compensation expense for the Stock Options Plan. Prior to January 1, 2006, the Company accounted for the Stock Option Plan under the recognition and measurement principles of APB No. 25 and related interpretations. Share-based employee compensation costs were not reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. Since, in 2005, the Company vested all previously issued unvested options and the Company has granted no options during the three months ended March 31, 2006, there is no compensation expense to be recognized on the Stock Option Plan during the three months ended March 31, 2006. As of March 31, 2006, no additional compensation expense will be recognized over the remaining life of the options granted prior to January 1, 2006 due to the vesting of all previously issued unvested options in 2005.

22

Commitments, Contingencies and Concentrations

Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $210.1 million and $203.0 million and standby letters of credit of approximately $4.5 million and $5.8 million at March 31, 2006, and December 31, 2005, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Republic evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.

Standby letters of credit are conditional commitments that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding quarantees.

23

Regulatory Matters

The following table presents the Company’s and Republic’s capital regulatory ratios at March 31, 2006, and December 31, 2005:

			Actual		For Capital Adequacy purposes		To be well capitalized under FRB capital guidelines
			Amount	Ratio	Amount	Ratio	Amount	Ratio
Dollars in thousands
At March 31, 2006
	Total risk based capital
		Republic	$79,392	11.72%	$54,182	8.00%	$67,727	10.00%
		Company	80,736	11.90%	$54,271	8.00%	-	N/A
	Tier one risk based capital
		Republic	71,589	10.57%	27,091	4.00%	40,636	6.00%
		Company	72,933	10.75%	27,136	4.00%	-	N/A
	Tier one leveraged capital
		Republic	71,589	8.78%	40,756	5.00%	40,756	5.00%
		Company	72,933	8.93%	40,819	5.00%	-	N/A

			Actual		For Capital Adequacy purposes		To be well capitalized under FRB capital guidelines
			Amount	Ratio	Amount	Ratio	Amount	Ratio
At December 31, 2005
	Total risk based capital
		Republic	$76,537	11.71%	$52,234	8.00%	$65,292	10.00%
		Company	77,213	11.81%	52,299	8.00%	-	N/A
	Tier one risk based capital
		Republic	68,920	10.56%	26,117	4.00%	39,175	6.00%
		Company	69,596	10.65%	26,149	4.00%	-	N/A
	Tier one leveraged capital
		Republic	68,920	8.81%	39,102	5.00%	39,102	5.00%
		Company	69,596	8.89%	39,152	5.00%	-	N/A

Dividend Policy

The Company has not paid any cash dividends on its common stock, but may consider dividend payments in the future.

Liquidity

Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, time investment purchases to market conditions and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. The most liquid assets consist of cash, amounts due from banks and federal funds sold.

Regulatory authorities require the Company to maintain certain liquidity ratios such that Republic maintains available funds, or can obtain available funds at reasonable rates, in order to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, the Company has formed an Asset/Liability Committee (“ALCO”), comprised of selected members of the board of directors and senior management, which monitors such ratios. The purpose of the Committee is in part, to monitor Republic’s liquidity and adherence to the ratios in addition to managing relative interest rate risk. The ALCO meets at least quarterly.

24

Republic’s most liquid assets, consisting of cash due from banks, deposits with banks and federal funds sold, totaled $97.4 million at March 31, 2006, compared to $107.0 million at December 31, 2005, due primarily to a decrease in federal funds sold. Loan maturities and repayments, if not reinvested in loans, also are immediately available for liquidity. At March 31, 2006, Republic estimated that in excess of $50.0 million of loans would mature or be repaid in the six month period that will end September 30, 2006. Additionally, the majority of its securities are available to satisfy liquidity requirements through pledges to the FHLB to access Republic’s line of credit.

Funding requirements have historically been satisfied primarily by generating transaction accounts and certificates of deposit with competitive rates, and utilizing the facilities of the FHLB. At March 31, 2006 Republic had $132.5 million in unused lines of credit readily available under arrangements with the FHLB and correspondent banks compared to $84.8 million at December 31, 2005. These lines of credit enable Republic to purchase funds for short or long-term needs at rates often lower than other sources and require pledging of securities or loan collateral. The amount of available credit has been decreasing with the prepayment of mortgage backed loans and securities.

At March 31, 2006, Republic had aggregate outstanding commitments (including unused lines of credit and letters of credit) of $214.6 million. Certificates of deposit scheduled to mature in one year totaled $233.4 million at March 31, 2006. There were no FHLB advances outstanding at March 31, 2006, and short-term borrowings of $105.0 million consisted wholly of overnight FHLB borrowings. The Company anticipates that it will have sufficient funds available to meet its current commitments.

Republic’s target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of its interest-earning assets and projected future outflows of deposits and other liabilities. Republic has established a line of credit with a correspondent bank to assist in managing Republic’s liquidity position. That line of credit totaled $15.0 million and was unused at March 31, 2006. Republic has established a line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $222.5 million. As of March 31, 2006, Republic had borrowed $105.0 million under that line of credit. Securities also represent a primary source of liquidity. Accordingly, investment decisions generally reflect liquidity over other considerations.

Republic’s primary short-term funding sources are certificates of deposit and its securities portfolio. The circumstances that are reasonably likely to affect those sources are as follows. Republic has historically been able to generate certificates of deposit by matching Philadelphia market rates or paying a premium rate of 25 to 50 basis points over those market rates. It is anticipated that this source of liquidity will continue to be available; however, its incremental cost may vary depending on market conditions. Republic’s securities portfolio is also available for liquidity, usually as collateral for FHLB advances. Because of the FHLB’s AAA rating, it is unlikely those advances would not be available. But even if they are not, numerous investment companies would likely provide repurchase agreements up to the amount of the market value of the securities.

Republic’s ALCO is responsible for managing its liquidity position and interest sensitivity. That committee’s primary objective is to maximize net interest income while configuring interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity.

Investment Securities Portfolio

At March 31, 2006, the Company had identified certain investment securities that are being held for indefinite periods of time, including securities that will be used as part of the Company’s asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as available for sale and are intended to increase the flexibility of the Company’s asset/liability management. Available for sale securities consisted of U.S. Government Agency securities and other investments. The book and market values of investment securities available for sale were $36.4 million and $36.4 million as of March 31, 2006, respectively. The net unrealized loss on investment securities available for sale as of that date was approximately $6,000.

25

Loan Portfolio

The Company’s loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, loans secured by one-to-four family residential property, commercial construction and residential construction loans as well as residential mortgages, home equity loans, short-term consumer and other consumer loans. Commercial loans are primarily 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 $5,000,000 but customers may borrow significantly larger amounts up to Republic’s combined legal lending limit of approximately $11.5 million at March 31, 2006. Individual customers may have several loans often secured by different collateral.

Net loans increased $23.6 million, to $694.1 million at March 31, 2006, from $670.5 million at December 31, 2005. Commercial and construction growth comprised substantially all of that increase.

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

(dollars in thousands)	As of March 31, 2006						As of December 31, 2005
	Balance			% of Total			Balance			% of Total
Commercial:
Real estate secured	$	448,363			63.9	%	$	446,383			65.8	%
Construction and land development		162,072			23.1			141,461			20.9
Non real estate secured		53,278			7.6			49,515			7.3
Non real estate unsecured		8,508			1.2			10,620			1.6
		672,221			95.8			647,979			95.6
Residential real estate		6,658			0.9			7,057			1.0
Consumer & other		23,031			3.3			23,050			3.4
Total loans, net of unearned income		701,910			100.0	%		678,086			100.0	%
Less: allowance for loan losses		(7,803	)					(7,617	)
Net loans	$	694,107					$	670,469

Credit Quality

Republic’s written lending policies require specified underwriting, loan documentation and credit analysis standards to be met prior to funding, with independent credit department approval for the majority of new loan balances. A committee of the Board of Directors oversees the loan approval process to monitor that proper standards are maintained and approves the majority of commercial loans.

Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt.

26

Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms.

While a loan is classified as non-accrual or as an impaired loan and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

The following summary shows information concerning loan delinquency and other non-performing assets at the dates indicated.

	March 31, 2006	December 31, 2005
(dollars in thousands)
Loans accruing, but past due 90 days or more	$         -	$         -
Non-accrual loans	3,556	3,423
Total non-performing loans (1)	3,556	3,423
Other real estate owned	137	137
Total non-performing assets (2)	$3,693	$3,560
Non-performing loans as a percentage of total loans net of unearned Income	0.51%	0.50%
Non-performing assets as a percentage of total assets	0.43%	0.42%

(1) Non-performing loans are comprised of (i) loans that are on a nonaccrual basis; (ii) accruing loans that are 90 days or more past due and (iii) restructured loans.

(2) Non-performing assets are composed of non-performing loans and other real estate owned (assets acquired in foreclosure).

Non accrual-loans increased $0.1 million, to $3.6 million at March 31, 2006, from $3.4 million at December 31, 2005. The increase reflected the transition of two loans totaling $425,000 to non accrual status in first quarter 2006 from 30 to 59 days past due at December 31, 2005.

Problem loans consist of loans that are included in performing loans, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms. At March 31, 2006, all identified problem loans are included in the preceding table or are classified as substandard or doubtful, with a specific reserve allocation in the allowance for loan losses (see “Allowance For Loan Losses”). Management believes that the appraisals and other estimates of the value of the collateral pledged against the non-accrual loans generally exceed the amount of its outstanding balances.

27

The recorded investment in loans which are impaired totaled $3.6 million at March 31, 2006, and $3.4 million at December 31, 2005, and the amount of related valuation allowances were $1.5 million and $1.6 million respectively at those dates. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein.

At March 31, 2006, compared to December 31, 2005, internally classified substandard loans had increased to $1.0 million from $710,000; while doubtful loans increased by $765,000 to approximately $2.9 million from $2.2 million. There were no loans classified as loss at those dates. The $340,000 increase in substandard loans reflected the transfer of delinquent, but still accruing, loans to a single customer totaling $307,000. The $765,000 increase in doubtful loans reflected the transfer of delinquent, but still accruing, loans to a single customer totaling $1.0 million.

Republic had delinquent loans as follows: (i) 30 to 59 days past due, in the aggregate principal amount of $3.5 million at March 31, 2006 and $441,000 at December 31, 2005; and (ii) 60 to 89 days past due, at March 31, 2006 and December 31, 2005, in the aggregate principal amount of $165,000 and $62,000, respectively. The increase in the loans delinquent 30 to 59 days reflects the $1.0 million loan transferred to doubtful and another unrelated loan of $786,000.

Other Real Estate Owned:

The balance of other real estate owned amounted to $137,000 at March 31, 2006 and December 31, 2005. There was no activity during 2006.

At March 31, 2006, the Company had no credit exposure to "highly leveraged transactions" as defined by the Federal Reserve Bank.

Allowance for Loan Losses

An analysis of the allowance for loan losses for the three months ended March 31, 2006, and 2005, and the twelve months ended December 31, 2005 is as follows:

	For the three months ended	For the twelve months ended	For the three months ended
(dollars in thousands)	March 31, 2006	December 31, 2005	March 31, 2005
Balance at beginning of period	$ 7,617	$6,684	$6.684
Charge-offs:
Commercial and construction	67	29	1
Tax refund loans	1,060	1,113	920
Consumer	-	21	14
Total charge-offs	1,127	1,163	935
Recoveries:
Commercial and construction	-	287	259
Tax refund loans	-	617	-
Consumer	-	6	2
Total recoveries	-	910	261
Net charge-offs	1,127	253	674
Provision for loan losses	1,313	1,186	703
Balance at end of period	$7,803	$7,617	$6,713
Average loans outstanding (1)	$700,896	$602,031	$567,247
As a percent of average loans (1):
Net charge-offs (annualized)	0.65%	0.04%	0.48%
Provision for loan losses (annualized)	0.76%	0.20%	0.50%
Allowance for loan losses	1.11%	1.27%	1.18%
Allowance for loan losses to:
Total loans, net of unearned income at period end	1.11%	1.12%	1.19%
Total non-performing loans at period end	219.43%	222.52%	209.00%

(1) Includes nonaccruing loans.

28

Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan losses that is management’s best estimate of known and inherent losses. The Company’s Board of Directors periodically reviews the status of all non-accrual and impaired loans and loans classified by the Republic’s regulators or internal loan review officer, who reviews both the loan portfolio and overall adequacy of the allowance for loan losses. The Board of Directors also considers specific loans, pools of similar loans, historical charge-off activity, economic conditions and other relevant factors in reviewing the adequacy of the loan loss reserve. Any additions deemed necessary to the allowance for loan losses are charged to operating expenses.

The Company has an existing loan review program, which monitors the loan portfolio on an ongoing basis. Loan review is conducted by a loan review officer who reports quarterly, directly to the Board of Directors.

Estimating the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. In management’s opinion, the allowance for loan losses was appropriate at March 31, 2006. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required.

Republic’s management is unable to determine in which loan category future charge-offs and recoveries may occur. The entire allowance for loan losses is available to absorb loan losses in any loan category. The majority of the Company's loan portfolio represents loans made for commercial purposes, while significant amounts of residential property may serve as collateral for such loans. The Company attempts to evaluate larger loans individually, on the basis of its loan review process, which scrutinizes loans on a selective basis and other available information. Even if all commercial purposeloans could be reviewed, there is no assurance that information on potential problems would be available. The Company's portfolios of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. At March 31, 2006, loans made for commercial and construction, residential mortgage and consumer purposes, respectively, amounted to $672.2 million, $6.7 million and $23.0 million.

Effects of Inflation

The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is the Company’s need and ability to react to changes in interest rates. As discussed previously, management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations.

29

ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation in the 2005 Annual Report on Form 10-K filed with the SEC.

ITEM 4: CONTROLS AND PROCEDURES

(a)  Evaluation of disclosure controls and procedures. 

Our Chief Executive Officer and Chief Financial Officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. 

(b)  Changes in internal controls. 

There has not been any change in our internal control over financial reporting during our quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

30

PART II OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

None

ITEM 1A: RISK FACTORS

No material changes from risk factors as previously disclosed in the Company’s Form 10-K in response to Item 1A in Part 1 of Form 10-K.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5: OTHER INFORMATION

None

ITEM 6: EXHIBITS

The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for an annual report on Form 10-K)

Exhibit No.

31.1 Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act

31.2 Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act

32.1 Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act

32.2 Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act

31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Republic First Bancorp, Inc.

/s/Harry D. Madonna

Chairman, President and Chief Executive Officer

/s/Paul Frenkiel

Executive Vice President and Chief Financial Officer

Dated: May 9, 2006

32