Republic First 10-Q
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: June 30, 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, Pennsylvania  19103
(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.
9,742,704 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of August 4, 2006

Page 1
Exhibit index appears on page 37
 
 

 

TABLE OF CONTENTS
   
Page
   
   
 
   
   
   
 
   
   
   
   
   
   
   




 
PART I - FINANCIAL INFORMATION



ITEM 1: FINANCIAL STATEMENTS

 
Page
   
   
   
 
   
 
   
 
   
   




3


Republic First Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
As of June 30, 2006 and December 31, 2005
Dollars in thousands, except share data

ASSETS:
 
June 30, 2006
 
December 31, 2005
 
   
(unaudited)
     
Cash and due from banks
 
$
14,890
 
$
19,985
 
Interest bearing deposits with banks
   
623
   
768
 
Federal funds sold
   
37,153
   
86,221
 
Total cash and cash equivalents
   
52,666
   
106,974
 
               
Investment securities available for sale, at fair value
   
38,754
   
37,283
 
Investment securities held to maturity at amortized cost
             
   (Fair value of $566 and $570 respectively)
   
560
   
559
 
Federal Home Loan Bank stock, at cost
   
5,991
   
6,319
 
Loans receivable (net of allowance for loan losses of
             
    $7,756 and $7,617, respectively)
   
732,821
   
670,469
 
Premises and equipment, net
   
5,370
   
3,598
 
Other real estate owned
   
594
   
137
 
Accrued interest receivable
   
4,245
   
3,784
 
Business owned life insurance
   
11,103
   
10,926
 
Other assets
   
9,644
   
10,806
 
               
Total Assets
 
$
861,748
 
$
850,855
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
             
Liabilities:
             
Deposits:
             
Demand – non-interest-bearing
 
$
85,809
 
$
88,862
 
Demand – interest-bearing
   
46,389
   
69,940
 
Money market and savings
   
248,159
   
223,129
 
Time under $100,000
   
110,597
   
128,022
 
Time $100,000 or more
   
153,787
   
137,890
 
    Total Deposits
   
644,741
   
647,843
 
               
Short-term borrowings
   
132,257
   
123,867
 
Accrued interest payable
   
3,133
   
1,813
 
Other liabilities
   
6,062
   
7,469
 
Subordinated debt
   
6,186
   
6,186
 
Total Liabilities
   
792,379
   
787,178
 
               
Shareholders’ Equity:
             
Preferred Stock, par value $0.01 per share; 10,000,000 shares
             
  authorized; no shares issued as of June 30, 2006
             
  and December 31, 2005
   
-
   
-
 
Common stock par value $0.01 per share; 20,000,000 shares
             
  authorized; shares issued 9,742,704 as of
             
  June 30, 2006 and 8,753,998 as of December 31, 2005
   
97
   
88
 
Additional paid in capital
   
63,049
   
50,203
 
Retained earnings
   
8,591
   
15,566
 
Treasury stock at cost (250,555 shares)
   
(1,688
)
 
(1,688
)
Stock held by deferred compensation plan
   
(573
)
 
(573
)
Accumulated other comprehensive income (loss)
   
(107
)
 
81
 
Total Shareholders’ Equity
   
69,369
   
63,677
 
Total Liabilities and Shareholders’ Equity
 
$
861,748
 
$
850,855
 
               
               
               

(See notes to consolidated financial statements)


4

 
Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2006 and 2005
Dollars in thousands, except per share data
(unaudited) 
 
   
Three Months Ended
June 30,  
 
Six Months Ended
June 30,   
 
   
2006
 
2005
 
2006
 
2005
 
Interest Income:
                 
Interest and fees on loans
 
$
13,751
 
$
9,859
 
$
27,905
 
$
19,771
 
Interest and dividend income on federal
                         
      funds sold and other interest-earning balances
   
252
   
195
   
652
   
671
 
Interest and dividends on investment securities
   
567
   
441
   
1,076
   
885
 
Total interest income
   
14,570
   
10,495
   
29,633
   
21,327
 
                           
Interest expense:
                         
Demand interest-bearing
   
92
   
72
   
214
   
157
 
Money market and savings
   
2,245
   
1,691
   
3,944
   
2,571
 
Time under $100,000
   
1,322
   
765
   
2,471
   
1,542
 
Time $100,000 or more
   
1,280
   
492
   
3,574
   
1,746
 
Other borrowed funds
   
1,445
   
544
   
1,935
   
1,182
 
Total interest expense
   
6,384
   
3,564
   
12,138
   
7,198
 
Net interest income
   
8,186
   
6,931
   
17,495
   
14,129
 
Provision for loan losses
   
61
   
119
   
1,374
   
822
 
Net interest income after provision
                         
    for loan losses
   
8,125
   
6,812
   
16,121
   
13,307
 
                           
Non-Interest income:
                         
Loan advisory and servicing fees
   
317
   
106
   
828
   
290
 
Service fees on deposit accounts
   
405
   
457
   
858
   
986
 
Gains on sales and calls of investment securities
   
-
   
97
   
-
   
97
 
Other income
   
122
   
99
   
273
   
529
 
     
844
   
759
   
1,959
   
1,902
 
                           
Non-Interest expense:
                         
Salaries and benefits
   
2,931
   
2,425
   
5,855
   
4,650
 
Occupancy
   
430
   
402
   
865
   
781
 
Depreciation
   
208
   
261
   
408
   
581
 
Legal
   
138
   
169
   
305
   
340
 
Advertising
   
139
   
44
   
188
   
89
 
Data processing
   
108
   
85
   
238
   
204
 
Taxes, other
   
176
   
177
   
391
   
320
 
Other expenses
   
992
   
977
   
1,913
   
2,046
 
     
5,122
   
4,540
   
10,163
   
9,011
 
                           
                           
Income before income taxes
   
3,847
   
3,031
   
7,917
   
6,198
 
Provision for income taxes
   
1,320
   
997
   
2,719
   
2,042
 
Net income
 
$
2,527
 
$
2,034
 
$
5,198
 
$
4,156
 
                           
Net income per share
                         
      Basic
 
$
0.27
 
$
0.22
 
$
0.55
 
$
0.46
 
      Diluted
 
$
0.26
 
$
0.21
 
$
0.54
 
$
0.43
 
                           

(See notes to consolidated financial statements)

5

 
 Republic First Bancorp, Inc. and Subsidiary
 Consolidated Statements of Cash Flows
 For the Six Months Ended June 30, 2006 and 2005
 Dollars in thousands
 (unaudited)
 
   
Six months ended
   
June 30,
 
   
2006
 
2005
 
Cash flows from operating activities:
         
Net income
 
$
5,198
 
$
4,156
 
Adjustments to reconcile net income to net
             
cash provided by operating activities:
             
Provision for loan losses
   
1,374
   
822
 
Depreciation
   
408
   
581
 
Stock compensation expense
   
5
   
-
 
Gain on call of securities
   
-
   
(97
)
Amortization of discounts on investment securities
   
106
   
78
 
Increase in value of business owned life insurance
   
(177
)
 
(165
)
Decrease in accrued interest receivable
             
and other assets
   
244
   
1,387
 
Decrease in accrued expenses
             
and other liabilities
   
(87
)
 
(1,351
)
Net cash provided by operating activities
   
7,071
   
5,411
 
Cash flows from investing activities:
             
Purchase of securities:
             
Available for sale
   
(2,985
)
 
(150
)
Proceeds from principal receipts, calls and maturities of securities:
             
Held to maturity
   
-
   
183
 
Available for sale
   
1,219
   
3,221
 
Purchase of FHLB stock
   
-
   
(2,098
)
Proceeds from sale of FHLB stock
   
328
   
-
 
Net increase in loans
   
(63,726
)
 
(51,634
)
Decrease in other interest-earning restricted cash
   
-
   
24
 
Premises and equipment expenditures
   
(2,180
)
 
(723
)
Net cash used in investing activities
   
(67,344
)
 
(51,177
)
Cash flows from financing activities:
             
Net proceeds from exercise of stock options
   
677
   
836
 
Net increase (decrease) in demand, money market and savings deposits
   
(1,574
)
 
100,808
 
Increase of overnight borrowings
   
8,390
   
73,566
 
Repayment of long term borrowings
   
-
   
(25,000
)
Net decrease in time deposits
   
(1,528
)
 
(36,116
)
Net cash provided by financing activities
   
5,965
   
114,094
 
Increase (decrease) in cash and cash equivalents
   
(54,308
)
 
68,328
 
Cash and cash equivalents, beginning of period
   
106,974
   
36,703
 
Cash and cash equivalents, end of period
 
$
52,666
 
$
105,031
 
Supplemental disclosure:
             
Interest paid
 
$
10,818
 
$
7,775
 
Taxes paid
 
$
3,100
 
$
2,200
 
               
               
(See notes to consolidated financial statements)
 
6

 
Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the Six Months Ended June 30, 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
   
(188
)
 
-
   
-
   
-
   
-
   
-
   
(188
)
 
(188
)
Net income
   
5,198
   
-
   
-
   
5,198
   
-
   
-
   
-
   
5,198
 
Total comprehensive income 
 
$
5,010
                                           
Stock based compensation
         
-
   
5
   
-
   
-
   
-
   
-
   
5
 
Stock dividend  (885,279 shares)
         
8
   
12,165
   
(12,173
)
                   
-
 
Options exercised (113,640 shares)
         
1
   
676
   
-
   
-
   
-
   
-
   
677
 
                                                   
                                                   
Balance June 30, 2006
       
$
97
 
$
63,049
 
$
8,591
 
$
(1,688
)
$
(573
)
$
(107
)
$
69,369
 
                                                   
         
 
 
 
   
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
   
(181
)
 
-
   
-
   
-
   
-
   
-
   
(181
)
 
(181
)
Net income
   
4,156
   
-
   
-
   
4,156
   
-
   
-
   
-
   
4,156
 
Total comprehensive income
 
$
3,975
                                           
Stock dividend (924,022 shares)
         
10
   
10,968
   
(10,978
)
 
-
   
-
   
-
   
-
 
Options exercised (319,664 shares)
         
2
   
861
   
-
   
-
   
-
   
-
   
863
 
First Bank of Delaware spin-off
               
(5,158
)
 
(6,216
)
 
-
   
-
   
(22
)
 
(11,396
)
Balance June 30, 2005
       
$
86
 
$
49,165
 
$
10,829
 
$
(1,541
)
$
-
 
$
127
 
$
58,666
 
                                                   
(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 and six month periods ended June 30, 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.
 
Stock 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 were 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. As a result the impact of the adoption of SFAS 123 on operations in future periods will be the value imputed on future options grants using the methods prescribed in SFAS No. 123R.

At June 30, 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 June 30, 2006 and 2005 and changes during the six months ended June 30, 2006 and 2005 are presented below:

   
For the Six Months Ended June30,
 
   
2006
 
2005
 
   
 
 
 
Shares
 
Weighted
Average
Exercise
Price
 
 
 
 
Shares
 
Weighted
Average
Exercise
Price
 
Outstanding, beginning of year
   
709,372
 
$
5.97
   
1,018,615
 
$
4.68
 
Granted
   
11,000
   
13.35
   
150,501
   
11.03
 
Exercised
   
(113,640
)
 
(5.97
)
 
(351,630
)
 
2.45
 
Forfeited
   
-
   
-
   
(1,466)
   
6.78
 
Outstanding, end of period
   
606,732
   
6.11
   
816,020
   
5.40
 
                           
Options exercisable at period-end
   
595,732
   
5.97
   
665,519
   
4.12
 
                           
Weighted average fair value of options granted during the period
       
$
5.61
       
$
4.47
 
                           
 
The following table summarizes information about options outstanding under the Stock Option Plan as of June 30, 2006.


         
   
Options outstanding
 
 Options exercisable
 
 
Range of Exercise Prices
 
 
Number outstanding at June 30,
2006
 
Weighted
Average
remaining
contractual
life (years)
 
 
Weighted
Average
exercise
price
 
 
 
 
 
Shares
 
 
Weighted
Average
Exercise
Price
$1.99
   
103,673
   
4.5
 
$
1.99
 
103,673
 
$
1.99
$2.99 to $3.91
   
160,591
   
5.7
   
3.23
 
160,591
   
3.23
$4.14 to $5.08
   
27,193
   
5.1
   
4.39
 
27,193
   
4.39
$6.63 to $7.41
   
159,010
   
7.6
   
6.85
 
159,010
   
6.85
$10.93 to $13.35
   
156,265
   
9.0
   
11.33
 
145,265
   
11.17
     
606,732
       
$
6.11
 
595,732
 
$
5.97
                             
 
During the six months ended June 30, 2006, $5,000 was recognized in compensation expense for the Stock Option 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 11,000 options during the six months ended June 30, 2006, compensation expense is recognized on the Stock Option Plan for only the options granted during the six months ended June 30, 2006. 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
 
 
10

 
with significant assumptions used in the Black-Scholes option valuation model (dollars in thousands, except per share date).
 
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
 
2005
 
2005
 
Net Income as reported
 
$
2,034
 
$
4,156
 
Stock-based employee compensation costs determined
             
if the fair value method had been applied to all awards,
             
net of tax
   
(444
)
 
(496
)
               
Pro-forma net income
 
$
1,590
 
$
3,660
 
               
Basic Earnings per Common Share:
             
As reported
 
$
0.22
 
$
0.46
 
Pro-forma
 
$
0.17
 
$
0.40
 
               
Diluted Earnings per Common Share:
             
As reported
 
$
0.21
 
$
0.43
 
Pro-forma
 
$
0.16
 
$
0.38
 
               
 
 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 22.17%; risk-free interest rate of 4.03% and an expected life of 9.0 years
 
Note 3: Reclassifications and Restatement for 10% and 12% 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 paid on May 17, 2006.
 
Note 4:  Recent Accounting Pronouncements

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.

 
11


 
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.
 
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 July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on our 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. 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.
 
 
12

 
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 June 30, 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 June 30, 2006 and 2005.
 
       
Three months ended June 30,
 
2006
 
2005
 
                   
Net Income
 
$
2,527,000
       
$
2,034,000
       
 
   
     
   
Per 
         
Per
 
 
   
Shares 
   
Share
 
 
Shares
 
 
Share
 
Weighted average shares
                         
For period
   
9,491,357
         
9,232,964
       
Basic EPS
       
$
0.27
       
$
0.22
 
Add common stock equivalents
representing dilutive stock options
   
258,863
         
367,117
       
Effect on basic EPS of dilutive CSE
       
$
(0.01
)
     
$
(0.01
)
Equals total weighted average
   
9,750,220
         
9,600,081
       
shares and CSE (diluted)
                         
Diluted EPS
       
$
0.26
       
$
0.21
 

 
The following tables are a comparison of EPS for the six months ended June 30, 2006 and 2005.
 
       
Six months ended June 30, 
 
2006 
 
2005 
 
                   
Net Income
 
$
5,198,000
       
$
4,156,000
       
 
   
 
   
Per 
         
Per
 
 
 
 
Shares
 
 
Share
 
 
Shares
 
 
Share
 
Weighted average shares
                         
For period
   
9,441,183
         
9,073,939
       
Basic EPS
       
$
0.55
       
$
0.46
 
Add common stock equivalents
representing dilutive stock options
   
254,411
         
480,167
       
Effect on basic EPS of dilutive CSE
       
$
(.01
)
     
$
(.03
)
Equals total weighted average
                         
shares and CSE (diluted)
   
9,695,594
         
9,554,106
       
Diluted EPS
       
$
0.54
       
$
0.43
 
 
 
13

 
Note 8: Comprehensive Income

The following table displays net income and the components of other comprehensive income to arrive at total comprehensive income. The only components of other comprehensive income are those related to the unrealized gains (losses) on available for sale investment securities.  
 
(dollar amounts in thousands) 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
   
2006
 
2005
 
2006
 
2005
 
Net income
 
$
2,527
 
$
2,034
 
$
5,198
 
$
4,156
 
                           
Other comprehensive loss:
                         
             Unrealized losses on securities:
                         
    Arising during the period, net of tax benefit
       and reclassification adjustments
   
(103
)
 
(70
)
 
(188
)
 
(181
)
Comprehensive income
 
$
2,424
 
$
1,964
 
$
5,010
 
$
3,975
 
                           
 
The accumulated balances related to each component of other comprehensive income (loss) are as follows (in thousands):
 
           
   
June 30,
 
 
 
2006 
 
2005
 
           
Unrealized gains (losses) on securities
$ 
(107)  
$
127
 
               
               

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:

June 30, 2006 Compared to December 31, 2005
 
Assets increased $10.9 million to $861.7 million at June 30, 2006, versus $850.9 million at December 31, 2005. This increase reflected a $62.4 million increase in net loans partially offset by a $49.1 million decrease in federal funds sold. These loans were funded primarily by the decrease in federal funds sold as deposits decreased $3.1 million and short-term borrowings increased $8.4 million.
 
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 $62.4 million, to $732.8 million at June 30, 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 June 30, 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 $38.8 million at June 30, 2006, compared to $37.3 million at year-end 2005. The increase reflected purchases of trust preferred securities partially offset by principal payments on mortgage backed securities. At June 30, 2006 and December 31, 2005, the portfolio had net unrealized losses of $163,000 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. At June 30, 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 June 30, 2006, FHLB stock totaled $6.0 million, a decrease of $328,000 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 $54.3 million, to $52.7 million at June 30, 2006, from $107.0 million at December 31, 2005, reflecting a decrease in federal funds sold.
 
Fixed Assets:
 
Premises and equipment, net of accumulated depreciation, increased $1.8 million to $5.4 million at June 30, 2006, compared to $3.6 million at December 31, 2005, reflecting 2006 premises and equipment expenditures primarily related to branch expansion.
 
Other Real Estate Owned:
 
Other real estate owned amounted to $594,000 at June 30, 2006 compared to $137,000 December 31, 2005, reflecting the transfer of a commercial real estate property from non-accrual loans.
 
Business Owned Life Insurance:
 
The balance of business owned life insurance amounted to $11.1 million at June 30, 2006 and $10.9 million at December 31, 2005. The income earned on these policies is reflected in other income.
 
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.
 
Period end deposits decreased by $3.1 million to $644.7 million at June 30, 2006, from $647.8 million at December 31, 2005. Average core deposits for the quarter decreased 5.6% or $22.2 million from the prior year period to $376.8 million in the second quarter of 2006. Period end time deposits decreased $1.5 million, or 0.6% to $264.4 million at June 30, 2006, versus $265.9 million at the prior year-end.
 
 
16

 
Short-term Borrowings:
 
Short-term borrowings; primarily FHLB borrowings, totaled $132.3 million at June 30, 2006 and $123.9 million at December 31, 2005. The balances were comprised wholly of overnight borrowings.
 
Shareholders’ Equity:
 
Total shareholders’ equity increased $5.7 million to $69.4 million at June 30, 2006, versus $63.7 million at December 31, 2005. This increase was primarily the result of year-to-date net income of $5.2 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 June 30, 2006 Compared to June 30, 2005
Results of Operations:

Overview

The Company's net income increased to $2.5 million or $0.26 per diluted share for the three months ended June 30, 2006, compared to $2.0 million, or $0.21 per diluted share for the comparable prior year period. The improvement reflected a $4.1 million, or 38.8%, increase in total interest income, reflecting higher rates and a 21.3% increase in average loans outstanding. Interest expense increased $2.8 million, reflecting higher rates, an 8.3% increase in average deposits outstanding and an 82.1% increase in higher cost average other borrowings. Accordingly, net interest income increased $1.3 million between the periods. The provision for loan losses in the second quarter of 2006 decreased to $61,000, compared to a $119,000 provision expense in the second quarter of 2005. Non-interest income increased to $844,000 in the second quarter of 2006, compared to $759,000 for the comparable prior year period. Non-interest expenses increased $582,000 to $5.1 million compared to $4.5 million in the second quarter of 2005, primarily due to higher salaries and benefits. Increased net income resulted in a return on average assets and average equity of 1.27% and 14.87% respectively, in the second quarter of 2006 compared to 1.18% and 14.26% respectively for the same period in 2005.

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.
 
 
 
17

 
   
For the three months ended
 
For the three months ended
 
 
 
June 30, 2006
 
June 30, 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
 
$
20,656
 
$
252
   
4.89
%
$
27,900
 
$
195
   
2.80
%
Securities
   
43,131
   
567
   
5.26
%
 
45,046
   
441
   
3.92
%
Loans receivable
   
700,313
   
13,751
   
7.88
%
 
577,421
   
9,859
   
6.85
%
Total interest-earning assets
   
764,100
   
14,570
   
7.65
%
 
650,367
   
10,495
   
6.47
%
                                       
Other assets
   
36,253
               
39,793
             
                                       
Total assets
 
$
800,353
             
$
690,160
             
                                       
Interest-bearing liabilities:
                                     
Demand-non interest
                                     
bearing
 
$
84,283
             
$
86,968
             
Demand interest-bearing
   
46,953
 
$
92
   
0.79
%
 
45,791
 
$
72
   
0.63
%
Money market & savings
   
245,556
   
2,245
   
3.67
%
 
266,280
   
1,691
   
2.55
%
Time deposits
   
238,212
   
2,602
   
4.38
%
 
168,639
   
1,257
   
2.99
%
Total deposits
   
615,004
   
4,939
   
3.22
%
 
567,678
   
3,020
   
2.16
%
Total interest-bearing
                                     
deposits
   
530,721
   
4,939
   
3.73
%
 
480,710
   
3,020
   
2.52
%
                                       
Other borrowings (1)
   
107,800
   
1,445
   
5.37
%
 
59,214
   
544
   
3.68
%
                                       
Total interest-bearing
                                     
liabilities
 
$
638,521
 
$
6,384
   
4.01
%
$
539,924
 
$
3,564
   
2.65
%
Total deposits and
                                     
other borrowings
   
722,804
   
6,384
   
3.54
%
 
626,892
   
3,564
   
2.28
%
                                       
Non interest-bearing
                                     
liabilites
   
9,408
               
6,030
             
Shareholders' equity
   
68,141
               
57,238
             
Total liabilities and
                                     
shareholders' equity
 
$
800,353
             
$
690,160
             
                                       
Net interest income
       
$
8,186
             
$
6,931
       
Net interest spread
               
3.64
%
             
3.82
%
                                       
Net interest margin
               
4.30
%
             
4.27
%
                                       
(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 June 30, 2006
 
 
versus June 30, 2005
 
 
(dollars in thousands)
 
 
Due to change in:
 
 
Volume
 
Rate
 
Total
 
Interest earned on:
             
               
    Federal funds sold
 
$
(89
)
$
146
 
$
57
 
    Securities
   
(25
)
 
151
   
126
 
    Loans
   
2,412
   
1,480
   
3,892
 
Total interest-earning assets
   
2,298
   
1,777
   
4,075
 
                     
Interest expense of deposits
                   
    Interest-bearing demand deposits
   
(2
)
 
(18
)
 
(20
)
    Money market and savings
   
189
   
(743
)
 
(554
)
    Time deposits
   
(760
)
 
(585
)
 
(1,345
)
Total deposit interest expense
   
(573
)
 
(1,346
)
 
(1,919
)
      Other borrowings
   
(651
)
 
(250
)
 
(901
)
    Total interest expense
   
(1,224
)
 
(1,596
)
 
(2,820
)
Net interest income
 
$
1,074
 
$
181
 
$
1,255
 
                     
 
The Company’s net interest margin increased 3 basis points to 4.30% for the three months ended June 30, 2006, versus a comparable 4.27% in the prior year comparable period.

While yields on interest-bearing assets increased 118 basis points to 7.65% in second quarter 2006 from 6.47% in second quarter 2005, the yield on total deposits and other borrowings increased 126 basis points to 3.54% from 2.28% between those respective periods. The increase in yields on assets resulted primarily from the 250 basis points of increases in short-term interest rates between the two quarters. Increases in short-term interest rates increased yields on loans tied to prime, were offset by increases in interest paid on deposits, and higher cost borrowed funds, primarily overnight FHLB borrowings.
 
The Company's net interest income increased $1.3 million, or 18.1%, to $8.2 million for the three months ended June 30, 2006, from $6.9 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 $764.1 million for second quarter 2006 and $650.4 million for second quarter 2005. Substantially all of the $113.7 million increase resulted from loan growth.
 
The Company's total interest income increased $4.1 million, or 38.8%, to $14.6 million for the three months ended June 30, 2006, from $10.5 million for the prior year comparable period. Interest and fees on loans increased $3.9 million, or 39.5%, to $13.8 million for the three months ended June 30, 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 21.3% increase in average loan balances.
 
 
19

 
In second quarter 2006, average loan balances amounted to $700.3 million, compared to $577.4 million in the comparable prior year period. The balance of the 39.5% 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 $126,000 to $567,000 for the three months ended June 30, 2006, from $441,000 for the prior year comparable period. This increase reflected rate increases on variable rate securities that were partially offset by a $1.9 million, or 4.3%, decrease in average securities outstanding to $43.1 million for second quarter 2006 from the comparable prior year period. Interest on federal funds sold and other interest-earning assets increased $57,000, or 29.2%, as increases in short-term market interest rates more than offset the impact of the $7.2 million decrease in average balances to $20.7 million for second quarter 2006 from $27.9 million for the comparable prior year period.
 
The Company's total interest expense increased $2.8 million, or 79.1%, to $6.4 million for the three months ended June 30, 2006, from $3.6 million for the prior year comparable period. Interest-bearing liabilities averaged $638.5 million for the three months ended June 30, 2006, versus $539.9 million for the prior year comparable period, or an increase of $98.6 million. The increase reflected additional funding utilized for loan growth. Average deposit balances increased $47.3 million which necessitated a $48.6 million increase in average other borrowings. The average rate paid on interest-bearing liabilities increased 136 basis points to 4.01% for the three months ended June 30, 2006. Interest expense on time deposit balances increased $1.3 million to $2.6 million in second quarter 2006, from $1.3 million in the comparable prior year period. Money market and savings interest expense increased $554,000 to $2.2 million in second quarter 2006, from $1.7 million 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 121 basis points in second quarter 2006 compared to second quarter 2005, while short term rates increased approximately 250 basis points between those periods.

Interest expense on other borrowings increased $901,000 to $1.4 million in second quarter 2006, primarily as a result of increased average balances. Average other borrowings, primarily overnight FHLB borrowings, increased $48.6 million, or 82.1%, between those respective periods. These increases in balances reflected the reduced rate of increase in deposit balances. Rates on overnight borrowings reflected the higher short-term interest rate environment as the rate of other borrowings increased to 5.37% in second quarter 2006, from 3.68% 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 $61,000 in second quarter 2006 compared to $119,000 in second quarter 2005. The second quarter 2006 provision reflected $259,000 in net recoveries on tax refund loans. The remaining provision in second quarter 2006 primarily reflected amounts required to increase the allowance for loan growth in accordance with the Company’s methodology. The comparable second quarter 2005 provision reflected $207,000 in net recoveries on tax refund loans.
 
Non-Interest Income

Total non-interest income increased $85,000 to $844,000 for the three months ended June 30, 2006, compared to $759,000 for the prior year comparable period. An increase of $211,000 in second quarter 2006 related to loan advisory and servicing fees was offset by a $97,000 gain on call of security recorded in other income in second quarter 2005 and a decrease of $52,000 in service fees on deposit accounts.
 
 
20

 
Non-Interest Expenses
 
Total non-interest expenses increased $582,000 or 12.8% to $5.1 million for the three months ended June 30, 2006, from $4.5 million for the prior year comparable period. Salaries and employee benefits increased $506,000 or 20.9%, to $2.9 million for the three months ended June 30, 2006, from $2.4 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 $28,000, or 7.0%, to $430,000 in second quarter 2006, compared to $402,000 in second quarter 2005.
 
Depreciation expense decreased $53,000 or 20.3% to $208,000 for the three months ended June 30, 2006, versus $261,000 for the prior year comparable period. The decrease was primarily due to the write-off of assets in second quarter 2005 that were determined to have shorter lives than originally expected.
 
Legal fees decreased $31,000, or 18.3%, to $138,000 in second quarter 2006, compared to $169,000 in second quarter 2005.
 
Advertising expense increased $95,000, or 215.9%, to $139,000 in second quarter 2006, compared to $44,000 in second quarter 2005. The increase was primarily due to higher levels of TV, radio, print and direct mail advertising including advertising related to a new branch and deposit promotions.
 
Data processing expense increased $23,000, or 27.1%, to $108,000 in second quarter 2006, compared to $85,000 in second quarter 2005.
 
Taxes, other than income decreased $1,000, or 0.6%, to $176,000 for the three months ended June 30, 2006, versus $177,000 for the comparable prior year period.
 
Other expenses increased $15,000, or 1.5% to $992,000 for the three months ended June 30, 2006, from $977,000 for the prior year comparable period. Professional fees increased approximately $59,000, reflecting increases in recruiting expenses. Auditing expenses decreased $40,000 reflecting reduced expense for Sarbanes Oxley compliance.

21


Provision for Income Taxes
 
The provision for income taxes for continuing operations increased $323,000, to $1.3 million for the three months ended June 30, 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.
 
Six Months Ended June 30, 2006 Compared to June 30, 2005

Results of Operations:

Overview

The Company's net income increased to $5.2 million or $0.54 per diluted share for the six months ended June 30, 2006, compared to $4.2 million, or $0.43 per diluted share for the comparable prior year period. The improvement reflected an $8.3 million, or 38.9%, increase in total interest income, reflecting higher rates and a 22.5% increase in average loans outstanding. Total interest expense increased $4.9 million, also reflecting higher rates and a 12.4% increase in average deposits outstanding. Accordingly, net interest income increased $3.4 million between the periods. The provision for loan losses in the first six months of 2006 increased to $1.4 million, compared to $822,000 provision expense in the first six months of 2005, reflecting the impact of $259,000 of recoveries and fewer net tax refund charge-offs in 2005. Non-interest income increased to $2.0 million in the first six months of 2006, compared to $1.9 million for the comparable prior year period. Non-interest expenses increased $1.2 million to $10.2 million compared to $9.0 million in the first six months of 2005, due primarily to higher salaries and benefits. The increased net income resulted in a return on average assets and average equity of 1.30% and 15.74% respectively, in the first six months of 2006 compared to 1.17% and 14.96% respectively for the same period in 2005.

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.
 
 
22


   
For the six months ended
 
For the six months ended
 
   
June 30, 2006
 
June 30, 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
 
$
28,350
 
$
652
   
4.64
%
$
52,526
 
$
671
   
2.56
%
Securities
   
42,488
   
1,076
   
5.06
%
 
46,902
   
885
   
3.77
%
Loans receivable
   
700,603
   
27,905
   
8.03
%
 
572,106
   
19,771
   
6.93
%
Total interest-earning assets
   
771,441
   
29,633
   
7.75
%
 
671,534
   
21,327
   
6.37
%
                                       
Other assets
   
36,880
               
42,171
             
                                       
Total assets
 
$
808,321
             
$
713,705
             
                                       
Interest-bearing liabilities:
                                     
Demand-non interest
                                     
bearing
 
$
85,175
             
$
90,245
             
Demand interest-bearing
   
54,406
 
$
214
   
0.79
%
 
50,385
 
$
157
   
0.62
%
Money market & savings
   
232,875
   
3,944
   
3.42
%
 
220,507
   
2,571
   
2.34
%
Time deposits
   
287,099
   
6,045
   
4.25
%
 
225,547
   
3,288
   
2.92
%
Total deposits
   
659,555
   
10,203
   
3.18
%
 
586,684
   
6,016
   
2.06
%
Total interest-bearing
                                     
deposits
   
574,380
   
10,203
   
3.58
%
 
496,439
   
6,016
   
2.43
%
                                       
Other borrowings (1)
   
72,562
   
1,935
   
5.38
%
 
63,750
   
1,182
   
3.72
%
                                       
Total interest-bearing
                                     
liabilities
 
$
646,942
 
$
12,138
   
3.78
%
$
560,189
 
$
7,198
   
2.58
%
Total deposits and
                                     
other borrowings
   
732,117
   
12,138
   
3.34
%
 
650,434
   
7,198
   
2.22
%
                                       
Non interest-bearing
                                     
liabilites
   
9,602
               
7,235
             
Shareholders' equity
   
66,602
               
56,036
             
Total liabilities and
                                     
shareholders' equity
 
$
808,321
             
$
713,705
             
                                       
Net interest income
       
$
17,495
             
$
14,129
       
Net interest spread
               
3.97
%
             
3.79
%
                                       
Net interest margin
               
4.57
%
             
4.22
%
Net interest margin not including
                                     
tax refund loans
               
4.22
%