repfirst10q.htm
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, 2007

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

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

215-735-4422
(Registrant's telephone number, including area code)

Former Address: 1608 Walnut Street, Philadelphia, PA 19103
(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 latestpracticable date.
10,337,409 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of August 8, 2007

Page 1

Exhibit index appears on page 36





TABLE OF CONTENTS
 
   
Part I:                      Financial Information
Page
   
3
   
15
 
   
35
   
35
   
Part II: Other Information
 
   
36
   
36
   
36
   
36
   
36
   
36
   
36


2


PART I - FINANCIAL INFORMATION



ITEM 1: FINANCIAL STATEMENTS

 
Page
   
   
4
   
 
5
   
 
6
   
 
7
   
8
   


3


Republic First Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
As of June 30, 2007 and December 31, 2006
Dollars in thousands, except per share data
 
ASSETS:
 
June 30, 2007
   
December 31, 2006
 
             
Cash and due from banks
  $
14,249
    $
19,454
 
Interest bearing deposits with banks
   
353
     
426
 
Federal funds sold
   
57,537
     
63,247
 
Total cash and cash equivalents
   
72,139
     
83,127
 
                 
Investment securities available for sale, at fair value
   
78,971
     
102,039
 
Investment securities held to maturity, at amortized cost
               
     (Fair value of $294 and $338,  respectively)
   
291
     
333
 
Restricted stock, at cost
   
7,620
     
6,804
 
Loans receivable (net of allowance for loan losses of
               
     $7,661 and $8,058, respectively)
   
828,937
     
784,002
 
Premises and equipment, net
   
8,513
     
5,648
 
Other real estate owned, net
   
499
     
572
 
Accrued interest receivable
   
5,154
     
5,370
 
Bank owned life insurance
   
11,497
     
11,294
 
Other assets
   
10,959
     
9,635
 
Total Assets
  $
1,024,580
    $
1,008,824
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Liabilities:
               
Deposits:
               
Demand – non-interest-bearing
  $
83,049
    $
78,131
 
Demand – interest-bearing
   
38,942
     
47,573
 
Money market and savings
   
274,946
     
260,246
 
Time less than $100,000
   
146,397
     
138,566
 
Time over $100,000
   
254,836
     
230,257
 
    Total Deposits
   
798,170
     
754,773
 
                 
Short-term borrowings
   
121,791
     
159,723
 
Accrued interest payable
   
7,039
     
5,224
 
Other liabilities
   
8,770
     
8,184
 
Subordinated debt
   
11,341
     
6,186
 
Total Liabilities
   
947,111
     
934,090
 
Shareholders’ Equity:
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized;
               
    no shares issued
   
-
     
-
 
Common stock par value $0.01 per share, 20,000,000 shares authorized;
               
    shares issued 10,735,720 as of June 30, 2007
               
    and 9,746,312 as of December 31, 2006
   
107
     
97
 
Additional paid in capital
   
74,896
     
63,342
 
Retained earnings
   
6,114
     
13,511
 
Treasury stock at cost (320,111 and 250,555 shares, respectively)
    (2,124 )     (1,688 )
Stock held by deferred compensation plan
    (810 )     (810 )
Accumulated other comprehensive income (loss)
    (714 )    
282
 
Total Shareholders’ Equity
   
77,469
     
74,734
 
Total Liabilities and Shareholders’ Equity
  $
1,024,580
    $
1,008,824
 

(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, 2007 and 2006
Dollars in thousands, except per share data
(unaudited)
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,   
 
   
2007
 
 
2006
   
2007
   
2006
 
Interest income:
                       
   Interest and fees on loans
  $
15,657
    $
13,751
    $
30,957
    $
27,905
 
   Interest and dividends on taxable investment securities
   
1,236
     
567
     
2,654
     
1,076
 
   Interest and dividends on tax-exempt investment securities
   
125
     
-
     
249
     
-
 
   Interest on federal funds sold and other interest-earning assets
   
169
     
252
     
404
     
652
 
   Total interest income
   
17,187
     
14,570
     
34,264
     
29,633
 
                                 
Interest expense:
                               
   Demand interest-bearing
   
118
     
92
     
218
     
214
 
   Money market and savings
   
3,532
     
2,245
     
6,554
     
3,944
 
   Time less than $100,000
   
1,861
     
1,322
     
3,681
     
2,471
 
   Time over $100,000
   
2,789
     
1,280
     
5,240
     
3,574
 
   Other borrowings
   
1,377
     
1,445
     
3,496
     
1,935
 
   Total interest expense
   
9,677
     
6,384
     
19,189
     
12,138
 
Net interest income
   
7,510
     
8,186
     
15,075
     
17,495
 
Provision for loan losses
   
63
     
61
     
143
     
1,374
 
Net interest income after provision
                               
     for loan losses
   
7,447
     
8,125
     
14,932
     
16,121
 
                                 
Non-interest income:
                               
    Loan advisory and servicing fees
   
347
     
317
     
559
     
828
 
    Service fees on deposit accounts
   
280
     
405
     
582
     
858
 
    Gain on sale of other real estate owned
   
2
     
-
     
2
     
-
 
    Bank owned life insurance
   
102
     
90
     
203
     
177
 
    Other income
   
24
     
32
     
49
     
96
 
     
755
     
844
     
1,395
     
1,959
 
Non-interest expenses:
                               
   Salaries and employee benefits
   
2,545
     
2,931
     
5,161
     
5,855
 
   Occupancy
   
604
     
430
     
1,141
     
865
 
   Depreciation and amortization
   
355
     
208
     
689
     
408
 
   Legal
   
195
     
138
     
272
     
305
 
   Other real estate
   
17
     
2
     
20
     
3
 
   Advertising
   
159
     
139
     
244
     
188
 
   Data processing
   
155
     
108
     
314
     
238
 
   Insurance
   
94
     
84
     
187
     
165
 
   Professional fees
   
124
     
146
     
250
     
266
 
   Taxes, other
   
211
     
176
     
414
     
391
 
   Other expenses
   
824
     
760
     
1,586
     
1,479
 
     
5,283
     
5,122
     
10,278
     
10,163
 
                                 
Income before provision for income taxes
   
2,919
     
3,847
     
6,049
     
7,917
 
Provision for income taxes
   
951
     
1,320
     
1,977
     
2,719
 
                                 
Net income
  $
1,968
    $
2,527
    $
4,072
    $
5,198
 
                                 
Net income per share (1):
                               
Basic
  $
0.19
    $
0.24
    $
0.39
    $
0.50
 
Diluted
  $
0.18
    $
0.24
    $
0.38
    $
0.49
 
                                 
(1) 2006 amounts adjusted for 10% stock dividend paid on April 17, 2007            
 
 
(See notes to consolidated financial statements)

5

 Consolidated Statements of Cash Flows
 For the Six Months Ended June 30, 2007 and 2006
 Dollars in thousands   
 (unaudited)    

   
Six months ended
 
   
June 30,   
 
   
2007
   
2006
 
Cash flows from operating activities:
           
Net income
  $
4,072
    $
5,198
 
Adjustments to reconcile net income to net
               
cash provided by operating activities:
               
Provision for loan losses
   
143
     
1,374
 
Gain on sale of other real estate owned
    (2 )    
-
 
Depreciation  and amortization
   
689
     
408
 
Stock based compensation
   
59
     
5
 
Amortization of (discounts) premiums on investment securities
    (72 )    
106
 
Increase in value of bank owned life insurance
    (203 )     (177 )
(Increase) decrease in accrued interest receivable
               
and other assets
    (595 )    
244
 
Increase (decrease) in accrued interest payable
               
and other liabilities
   
2,401
      (87 )
Net cash provided by operating activities
   
6,492
     
7,071
 
Cash flows from investing activities:
               
Purchase of securities:
               
Available for sale
    (886 )     (2,985 )
Proceeds from maturities and calls of securities:
               
Held to maturity
   
42
     
-
 
Available for sale
   
22,517
     
1,219
 
Purchase of restricted stock
    (816 )    
-
 
Proceeds from sale of restricted stock
   
-
     
328
 
Net increase in loans
    (45,078 )     (63,726 )
Net proceeds from sale of other real estate owned
   
75
     
-
 
Premises and equipment expenditures
    (3,554 )     (2,180 )
Net cash used in investing activities
    (27,700 )     (67,344 )
Cash flows from financing activities:
               
Net proceeds from exercise of stock options
   
36
     
677
 
Purchase of treasury shares
    (436 )    
-
 
Net increase (decrease) in demand, money market and savings deposits
   
10,987
      (1,574 )
(Repayment) increase of short term borrowings
    (37,932 )    
8,390
 
Issuance of subordinated debt
   
5,155
     
-
 
Net increase (decrease) in time deposits
   
32,410
      (1,528 )
Net cash provided by financing activities
   
10,220
     
5,965
 
Decrease in cash and cash equivalents
    (10,988 )     (54,308 )
Cash and cash equivalents, beginning of period
   
83,127
     
106,974
 
Cash and cash equivalents, end of period
  $
72,139
    $
52,666
 
Supplemental disclosure:
               
Interest paid
  $
17,374
    $
10,818
 
Taxes paid
  $
2,150
    $
3,100
 
 
(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, 2007 and 2006
Dollars in thousands
(unaudited)
 
   
Comprehensive
Income
   
Common
Stock
   
Additional
Paid in
Capital
   
Retained
Earnings
   
Treasury Stock, at Cost
   
Stock Held by
Deferred
Compensation
Plan
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders’
Equity
 
                                                 
                                                 
Balance January 1, 2007
        $
97
    $
63,342
    $
13,511
    $ (1,688 )   $ (810 )   $
282
    $
74,734
 
 
Total other comprehensive loss, net of taxes of $(513)
    (996 )    
     
     
     
     
      (996 )     (996 )
Net income
   
4,072
     
     
     
4,072
     
     
     
     
4,072
 
Total comprehensive income
  $
3,076
                                                         
Stock based compensation
           
     
59
     
     
     
     
     
59
 
Stock dividend
(974,441 shares)
           
10
     
11,459
      (11,469 )    
     
     
     
 
Options exercised
(15,067 shares)
           
     
36
     
     
     
     
     
36
 
Purchase of treasury shares
(44,500 shares)
           
     
     
      (436 )    
     
      (436 )
Balance June 30, 2007
          $
107
    $
74,896
    $
6,114
    $ (2,124 )   $ (810 )   $ (714 )   $
77,469
 
                                                                 
   
Comprehensive
Income
   
Common
Stock
   
Additional
Paid in
Capital
   
Retained
Earnings
   
Treasury Stock, at Cost
   
Stock Held by
Deferred
Compensation
Plan
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders’
Equity
 
                                                                 
                                                                 
Balance January 1, 2006
          $
88
    $
50,203
    $
15,566
    $ (1,688 )   $ (573 )   $
81
    $
63,677
 
 
Total other comprehensive loss, net of taxes of ($97)
    (188 )    
     
     
     
     
      (188 )     (188 )
Net income
   
5,198
     
     
     
5,198
     
     
     
     
5,198
 
Total comprehensive income
  $
5,010
                                                         
Stock based compensation
           
     
5
     
     
     
     
     
5
 
Stock dividend declared
(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
 
                                                                 
 (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”) is 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, Delaware, and Camden counties.
 
Both Republic and First Bank of Delaware ("FBD"), a former subsidiary, 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 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, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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, other than temporary impairment of investment securities and the realization of deferred tax assets. Consideration is given to a variety of factors in establishing these estimates. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since these estimates 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 could differ materially in the near term.  In estimating the carrying values of other real estate owned, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fait value, less the cost to sell.  In estimating other than temporary impairment of investment securities, securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary.  To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value.  The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of investment.  Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.  In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income.  In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business.  Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.  An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
 
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:

At June 30, 2007, 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 have a
 
9

maximum term of 10 years.  The Black-Sholes option pricing model is utilized to determine the fair market value of stock options.  In 2007 the following assumptions were utilized; a cash dividend yield of 0%; expected volatility of 25.24%; a risk-free interest rate of 4.70% and an expected life of 7.0 years.  A dividend yield of 0% is utilized, because cash dividends have never been paid.  The expected life reflects a 3 to 4 year “all or nothing” vesting period, the maximum ten year term and review of historical behavior.  The volatility was based on Bloomberg’s seven year volatility calculation for “FRBK” stock.  The risk-free interest rate is based on the seven year Treasury bond.  No shares vested in the first six months of 2007, but expense is recognized ratably over the period required to vest.  There were 12,100 unvested options at January 1, 2007 with a fair value of $61,710 with $46,282 of that amount remaining to be recognized as expense.  At June 30, 2007, there were 105,050 unvested options with a fair value of $486,885 with $412,591 of that amount remaining to be recognized as expense. At that date, the intrinsic value of the 739,332 options outstanding was $2,373,256, while the intrinsic value of the 634,282 exercisable (vested) was $2,600,556. During the first six months of 2007, 6,050 options were forfeited, with a weighted average grant fair value of $30,855.

A summary of the status of the Company’s stock options under the Stock Option Plan as of June 30, 2007 and 2006 and changes during the six months ended June 30, 2007 and 2006 are presented below:

   
For the Six Months Ended June 30,
 
   
2007
   
2006
 
   
Shares
   
Weighted
Average
Exercise
Price
   
Shares
   
Weighted
Average
Exercise
Price
 
Outstanding, beginning of year
   
661,449
    $
5.55
     
780,309
    $
5.43
 
Granted
   
99,000
     
11.77
     
12,100
     
12.14
 
Exercised
    (15,067 )     (2.42 )     (125,004 )     (5.43 )
Forfeited
    (6,050 )     (12.14 )    
 -
     
-
 
Outstanding, end of period
   
739,332
     
6.39
     
667,405
     
5.55
 
Options exercisable at period-end
   
634,282
     
5.50
     
655,305
     
5.43
 
Weighted average fair value of options granted during the period
          $
4.61
            $
5.10
 

   
For the Six Months Ended
 June 30,
 
   
2007
   
2006
 
Number of options exercised
   
15,067
     
125,004
 
Cash received
  $
36,413
    $
677,118
 
Intrinsic value
   
115,589
     
855,103
 
Tax benefit
   
40,456
     
299,286
 


10

The following table summarizes information about options outstanding under the Stock Option Plan as of June 30, 2007.
 
 
Options outstanding
   
Options exercisable
 
Range of Exercise Prices
Shares
 
Weighted
Average
remaining
contractual
life (years)
 
Weighted
Average
exercise
price
     
 
Shares
 
Weighted
Average
Exercise
Price
$1.81
106,586
 
3.5
 
$ 1.81
     
106,586
 
$ 1.81
$2.72 to $3.55
170,687
 
4.7
 
2.94
     
170,687
 
2.94
$3.76  to $4.62
27,275
 
4.3
 
4.00
     
27,275
 
4.00
$6.03  to $6.74
169,942
 
6.6
 
6.23
     
169,942
 
6.23
$9.94 to $12.14
264,842
 
8.5
 
10.81
     
159,792
 
10.16
 
739,332
     
$ 6.39
     
634,282
 
$5.50
 
   
For the Six Months Ended,
 
   
June 30, 2007
 
   
Number of shares
   
Weighted average grant date fair value
 
Nonvested at beginning of year
   
12,100
    $
5.10
 
Granted
   
99,000
     
4.61
 
Vested
   
-
     
-
 
Forfeited
    (6,050 )     (5.10 )
Nonvested at end of period
   
105,050
    $
4.64
 
 
    During the three months ended June 30, 2007, $33,000 was recognized in compensation expense, with a 35% assumed tax benefit for the Stock Option Plan.  During the six months ended June 30, 2007, $59,000 was recognized in compensation expense, with a 35% assumed tax benefit, for the Stock Option Plan.  During the three months and six months ended June 30, 2006, $5,000 was recognized in compensation expense for the Stock Option Plan.

 
Note 3:                      Reclassifications and Restatement for 10% Stock Dividend

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 share information) have been restated for a 10% stock dividend paid on April 17, 2007.


Note 4:                      Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. This Statement 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 adopted this guidance on January 1, 2007. The adoption did not have any effect on the Company’s financial position or results of operations.

11

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Asset- An Amendment of FASB Statement No. 140. This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. The Company adopted this statement effective January 1, 2007. The adoption did not have a material effect on the Company’s financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The adoption did not have any impact on the Company’s financial position or results of operations.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 applies to life insurance arrangements that provide an employee with a specified benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company is continuing to evaluate the impact of this consensus, which may require the Company to recognize an additional liability and compensation expense related to its deferred compensation agreements.

In September 2006, the FASB ratified the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. Technical Bulletin No. 85-4 states that an entity should report as an asset in the statement of financial position the amount that could be realized under the insurance contract.  EITF 06-5 clarifies certain factors that should be considered in the determination of the amount that could be realized. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted under certain circumstances. The Company adopted this guidance on January 1, 2007.  The adoption did not have any effect on the Company’s financial position or results of operations.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company is currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position or results of operations.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB No. 108, companies might evaluate the materiality of financial-statement misstatements using either the
 
12

income statement or balance sheet approach, with the income statement approach  focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB No. 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company adopted this guidance on January 1, 2007.  The adoption did not have any effect on the Company’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No.157. The Company is currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 159 on our consolidated financial position or results of operations.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact of EITF 06-10 on its consolidated financial position and results of operations.

In March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its financial position, results of operations or cash flows.
 
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
 
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.
 
13


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, 2007, there were 130,460 stock options to purchase common stock, which were excluded from the computation of earnings per share because the option price was greater than the average market price.  No stock options were anti-dilutive at June 30, 2006.  The following tables are a comparison of EPS for the three months ended June 30, 2007 and 2006.  EPS has been restated for a stock dividend paid on April 17, 2007 (See Note 3).
 
Three months ended June 30,
 
 2007    
   
2006   
 
                         
Net Income
  $
1,968,000
          $
2,527,000
       
           
Per
           
Per
 
   
Shares
   
Share
   
Shares
   
Share
 
Weighted average shares
                           
for period
   
10,448,394
           
10,440,493
       
Basic EPS
          $
0.19
            $
0.24
 
Add common stock equivalents
representing dilutive stock options
   
289,924
             
284,750
         
Effect on basic EPS of dilutive CSE
          $ (0.01 )           $
-
 
Equals total weighted average
                               
shares and CSE (diluted)
   
10,738,318
             
10,725,243
         
Diluted EPS
          $
0.18
            $
0.24
 

The following tables are a comparison of EPS for the six months ended June 30, 2007 and 2006.  EPS has been restated for a stock dividend paid on April 17, 2007 (See Note 3).

Six months ended June 30,
 
2007
   
2006
 
                             
Net Income
  $
4,072,000
          $
5,198,000
       
           
Per
           
Per
 
   
Shares
   
Share
   
Shares
   
Share
 
Weighted average shares
                           
for period
   
10,447,236
           
10,385,301
       
Basic EPS
          $
0.39
            $
0.50
 
Add common stock equivalents
representing dilutive stock options
   
301,692
             
279,852
         
Effect on basic EPS of dilutive CSE
          $ (0.01 )           $ (0.01 )
Equals total weighted average
                               
shares and CSE (diluted)
   
10,748,928
             
10,665,153
         
Diluted EPS
          $
0.38
            $
0.49
 


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, 2006, Quarterly Reports on Form 10-Q, filed by the Company in 2007 and 2006, and any Current Reports on Form 8-K filed by the Company, as well as other filings.

Financial Condition:

June 30, 2007 Compared to December 31, 2006
 
Assets increased $15.6 million to $1.03 billion at June 30, 2007, versus $1.01 billion at December 31, 2006. This increase reflected a $44.9 million increase in net loans partially offset by a $23.1 million decrease in investment securities and an $11.0 million decrease in cash and cash equivalents.
 
15

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 $44.9 million, to $828.9 million at June 30, 2007, versus $784.0 million at December 31, 2006. 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 typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to the legal lending limit of approximately $13.3 million at June 30, 2007. Individual customers may have several loans that are secured by different collateral, which were in total subject to that lending limit.
 
Investment Securities:
 
Investment securities available-for-sale are investments which may be sold in response to changing market and interest rate conditions and for liquidity and other purposes. The Company’s investment securities available-for-sale consist primarily of U.S. Government debt securities, U.S. Government agency issued mortgage-backed securities, municipal securities, and debt securities which include corporate bonds and trust preferred securities. Available-for-sale securities totaled $79.0 million at June 30, 2007, compared to $102.0 million at year-end 2006. The decrease reflected principal payments on U.S. government agency and mortgage backed securities. At June 30, 2007 and December 31, 2006, the portfolio had net unrealized losses of $1.1 million and net unrealized gains of $427,000, 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 June 30, 2007, securities held to maturity totaled $291,000, compared to $333,000 at year-end 2006.
 
Restricted Stock:
 
Republic is required to maintain FHLB stock in proportion to its outstanding debt to FHLB.  When the debt is repaid, the purchase price of the stock is refunded.  At June 30, 2007, FHLB stock totaled $7.5 million, an increase of $816,000 from $6.7 million at December 31, 2006.
 
Republic is also required to maintain ACBB stock as a condition of a rarely used contingency line of credit.  At June 30, 2007 and December 31, 2006, ACBB stock totaled $143,000.
 
Cash and Cash Equivalents:
 
Cash and due from banks, interest bearing deposits and federal funds sold comprise this category which consists of the Company’s most liquid assets. The aggregate amount in these three categories decreased by $11.0 million, to $72.1 million at June 30, 2007, from $83.1 million at December 31, 2006, primarily reflecting decreases in federal funds sold and cash and due from banks.
 
Fixed Assets:
 
The balance in premises and equipment, net of accumulated depreciation, was $8.5 million at June 30, 2007, compared to $5.6 million at December 31, 2006, reflecting primarily main office relocation expenditures.
 
16

Other Real Estate Owned:
 
Other real estate owned amounted to $499,000 at June 30, 2007 compared to $572,000 at December 31, 2006, as a result of a sale of a parcel of land in second quarter 2007.
 
Bank Owned Life Insurance:
 
The balance of bank owned life insurance amounted to $11.5 million at June 30, 2007 and $11.3 million at December 31, 2006. The income earned on these policies is reflected in non-interest income.
 
Other Assets:
 
Other assets increased by $1.3 million to $11.0 million at June 30, 2007, from $9.6 million at December 31, 2006, principally resulting from increases in the deferred tax asset related to market value changes in investment securities, prepaid taxes and prepaid insurance.
 
Deposits:
 
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits including some brokered deposits, are the Company’s major source of funding. Deposits are generally solicited from the Company’s market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.  Total deposits increased by $43.4 million to $798.2 million at June 30, 2007 from $754.8 million at December 31, 2006.  Average transaction account balances increased 12.8% or $48.3 million more than the prior year period to $425.1 million in the second quarter of 2007. Period end time deposits increased $32.4 million, or 8.8% to $401.2 million at June 30, 2007, versus $368.8 million at the prior year-end.  In addition, period end transaction deposits increased $11.0 million, or 2.8% to $396.9 million at June 30, 2007 versus $386.0 million at December 31, 2006.
 
FHLB Borrowings and Overnight Advances:
 
FHLB borrowings and overnight advances are utilized as additional funding sources.   The Company had no term borrowings at June 30, 2007 and December 31, 2006.  The Company had short-term borrowings (overnight) of $121.8 million at June 30, 2007 versus $159.7 million at the prior year-end.
 
Subordinated debt:
 
Subordinated debt amounted to $11.3 million at June 30, 2007, compared to $6.2 million at December 31, 2006, as a result of a $5.2 million issuance of  trust preferred securities in June 2007 at a rate of LIBOR plus 1.55%.
 
Shareholders’ Equity:
 
Total shareholders’ equity increased $2.7 million to $77.5 million at June 30, 2007, versus $74.7 million at December 31, 2006. This increase was primarily the result of year-to-date net income of $4.1 million and first quarter other comprehensive income of $58,000, partially offset by a second quarter other comprehensive loss of $1.1 million and $436,000 in stock repurchases.

 
Three Months Ended June 30, 2007 compared to June 30, 2006
Results of Operations:

Overview

The Company's net income decreased to $2.0 million or $0.18 per diluted share for the three months ended June 30, 2007, compared to $2.5 million, or $0.24 per diluted share for the comparable prior year period.  There was a $2.6 million, or 18.0%, increase in total interest income, reflecting a 17.3% increase in average loans outstanding and a 125.7% increase in average investment securities while interest expense increased $3.3 million, reflecting a 32.3% increase in average interest-bearing deposits
 
17

outstanding and higher rates thereon.   Accordingly, net interest income decreased $676,000 between the periods.  Contributing to the $676,000 decrease in net interest income was the impact of $356,000 in interest income reductions due to the increase in non-performing loans in the second quarter of 2007 and the impact of $181,000 in net interest income related to tax refund loans in 2006 which was not earned in the second quarter of 2007 due to the discontinuation of the program. The provision for loan losses in the second quarter of 2007 increased to $63,000, compared to $61,000 provision expense in the second quarter of 2006.  Non-interest income decreased $89,000 to $755,000 in second quarter 2007 compared to $844,000 in second quarter 2006 due to a decrease in fees on deposit accounts.  Non-interest expenses increased $161,000 to $5.3 million compared to $5.1 million in the second quarter of 2006 relecting the impact of two new branches. Return on average assets and average equity of 0.81% and 10.18% respectively, in the second quarter of 2007 compared to 1.27% and 14.87% respectively for the same period in 2006.
 

18

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.  Yields are adjusted for tax equivalency for tax exempt municipal securities income in second quarter 2007.  Republic had no tax exempt income on securities in second quarter 2006.

   
For the three months ended   
   
For the three months ended   
 
   
June 30, 2007      
   
June 30, 2006      
 
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
  $
12,785
    $
169
      5.30 %   $
20,656
    $
252
      4.89 %
Securities
   
97,328
     
1,428
      5.87 %    
43,131
     
567
      5.26 %
Loans receivable
   
821,173
     
15,657
      7.65 %    
700,313
     
13,751
      7.88 %
Total interest-earning assets
   
931,286
     
17,254
      7.43 %    
764,100
     
14,570
      7.65 %
                                                 
Other assets
   
39,124
                     
36,253
                 
                                                 
Total assets
  $
970,410
                    $
800,353
                 
                                                 
Interest-bearing liabilities:
                                               
Demand-non interest
                                               
bearing
  $
77,010
                    $
84,283
                 
Demand interest-bearing
   
40,577
    $
118
      1.17 %    
46,953
    $
92
      0.79 %
Money market & savings
   
307,512
     
3,532
      4.61 %    
245,556
     
2,245
      3.67 %
Time deposits
   
353,792
     
4,650
      5.27 %    
238,212
     
2,602
      4.38 %
Total deposits
   
778,891
     
8,300
      4.27 %    
615,004
     
4,939
      3.22 %
Total interest-bearing
                                               
deposits
   
701,881
     
8,300
      4.74 %    
530,721
     
4,939
      3.73 %
                                                 
Other borrowings (1)
   
99,873
     
1,377
      5.53 %    
107,800
     
1,445
      5.37 %
                                                 
Total interest-bearing
                                               
liabilities
  $
801,754
    $
9,677
      4.84 %   $
638,521
    $
6,384
      4.01 %
Total deposits and
                                               
other borrowings
   
878,764
     
9,677
      4.42 %    
722,804
     
6,384
      3.54 %
                                                 
Non interest-bearing
                                               
liabilites
   
14,086
                     
9,408
                 
Shareholders' equity
   
77,560
                     
68,141
                 
Total liabilities and
                                               
shareholders' equity
  $
970,410
                    $
800,353
                 
                                                 
Net interest income
          $
7,577
                    $
8,186
         
Net interest spread
                    2.59 %                     3.64 %
                                                 
Net interest margin
                    3.26 %                     4.30 %
                                                 
(1) Includes $6.4 million of trust preferred securities                    
 


19

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, 2007
 
   
versus June 30, 2006
 
   
(dollars in thousands)
 
   
Due to change in:
 
   
Volume
   
Rate
   
Total
 
Interest earned on:
                 
                   
          Federal funds sold
  $ (104 )   $
21
    $ (83 )
          Securities (1)
   
793
     
68
     
861
 
          Loans
   
2,304
      (398 )    
1,906
 
     Total interest-earning assets (1)
   
2,993
      (309 )    
2,684
 
                         
Interest expense of deposits
                       
         Interest-bearing demand deposits
   
19
      (45 )     (26 )
         Money market and savings
    (712 )     (575 )     (1,287 )
         Time deposits
    (1,519 )     (529 )     (2,048 )
     Total deposit interest expense
    (2,212 )     (1,149 )     (3,361 )
         Other borrowings
   
109
      (41 )    
68
 
              Total interest expense
    (2,103 )     (1,190 )     (3,293 )
Net interest income (1)
  $
890
    $ (1,499 )   $ (609 )
                         
(1) As adjusted for tax equivalency for tax exempt municipal securities income    
 

The Company’s tax equivalent net interest margin decreased 104 basis points to 3.26% for the three months ended June 30, 2007, versus 4.30% in the prior year comparable period.

While yields on interest-bearing assets decreased 22 basis points to 7.43% in second quarter 2007 from 7.65% in second quarter 2006, the yield on total deposits and other borrowings increased 88 basis points to 4.42% from 3.54% between those respective periods. The decrease in yields on assets resulted primarily from interest income reductions due to the increase in non-performing loans in second quarter 2007 and the high yield tax refund loans recorded in second quarter 2006.  The increase in yields on deposits was due to the repricing of maturing time deposits at higher rates and increases in rates on money market and savings deposits.
 
The Company's tax equivalent net interest income decreased $609,000, or 7.4%, to $7.6 million for the three months ended June 30, 2007, from $8.2 million for the prior year comparable period. As shown in the Rate Volume table above, the decrease in net interest income was due primarily to higher rates on deposits and lower rates on loans as discussed in the previous paragraph.  These factors more than offset the increased income from growth in average interest-earning assets, primarily loans. Average interest-earning assets amounted to $931.3 million for second quarter 2007 and $764.1 million for second quarter 2006.  The $167.2 million increase resulted from loan growth of $120.9 million and securities growth of $54.2 million.
 
The Company’s total tax equivalent interest income increased $2.7 million, or 18.4%, to $17.3 million for the three months ended June 30, 2007, from $14.6 million for the prior year comparable period.  Interest and fees on loans increased $1.9 million, or 13.9%, to $15.7 million for the three months ended June 30, 2007, from $13.8 million for the prior year comparable period.  A total gross increase in interest and fees on loans reflected a 17.3% increase in average commercial loans outstanding less $356,000 in interest reductions due to an increase in non-performing loans in the second quarter of 2007.  In second quarter 2006, $190,000 in interest on short-term tax refund loans was realized.  Interest and dividends on investment securities increased $861,000 to $1.4 million for the three months ended June 30, 2007, from $567,000 for the prior year comparable period.  This increase reflected an increase in average securities outstanding of $54.2 million, or 125.7%, to $97.3 million from $43.1 million for the prior year comparable period.  Interest on federal funds sold and other interest-earning assets decreased $83,000, or 32.9%, as increases in short-term market interest rates were
 
20

more than offset by the $7.9 million decrease in average balances to $12.8 million for second quarter 2007 from $20.7 million for the comparable prior year period.
 
The Company's total interest expense increased $3.3 million, or 51.6%, to $9.7 million for the three months ended June 30, 2007, from $6.4 million for the prior year comparable period. Interest-bearing liabilities averaged $801.8 million for the three months ended June 30, 2007, versus $638.5 million for the prior year comparable period, or an increase of $163.2 million. The increase reflected additional funding utilized for loan growth and securities growth. Average deposit balances increased $163.9 million while there was a $7.9 million decrease in average other borrowings. The average rate paid on interest-bearing liabilities increased 83 basis points to 4.84% for the three months ended June 30, 2007. Interest expense on time deposit balances increased $2.0 million to $4.7 million in second quarter 2007, from $2.6 million in the comparable prior year period.  Money market and savings interest expense increased $1.3 million to $3.5 million in second quarter 2007, from $2.2 million in the comparable prior year period. The increase in interest expense on deposits reflected higher average deposit balances as well as the higher short-term interest rate environment, as detailed in the rate/volume table. Accordingly, rates on total interest-bearing deposits increased 101 basis points in second quarter 2007 compared to second quarter 2006.

Interest expense on other borrowings decreased $68,000 to $1.4 million in second quarter 2007, as a result of decreased average balances. Average other borrowings, primarily overnight FHLB borrowings, decreased $7.9 million, or 7.4%, between those respective periods. These decreases in balances reflected the growth in average deposit balances of 26.6%.  Rates on other borrowings,  reflecting the higher short-term interest rate environment, increased to 5.53% in second quarter 2007, from 5.37% in the comparable prior year period. Interest expense on other borrowings also includes the expense from $6.4 million of average 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 $63,000 in second quarter 2007 compared to $61,000 in second quarter 2006.  The second quarter 2007 provision reflected $48,000 in recoveries on tax refund loans.  The comparable second quarter 2006 provision reflected $259,000 for recoveries on tax refund loans.  The  provision in both periods also reflected amounts required to increase the allowance for loan growth in accordance with the Company’s methodology.  Total non-accrual loans increased from $9.1 million at March 31, 2007 to $16.6 million at June 30, 2007.  This increase did not necessitate an increase in the provision for loan losses because collateral was estimated as adequate to recover principal.

Non-Interest Income

Total non-interest income decreased $89,000 to $755,000 for second quarter 2007 compared to $844,000 for the three months ended June 30, 2006, primarily due to a $125,000 decrease in service fees on deposit accounts partially offset by a $30,000 increase in loan advisory and service fees.  The decrease in service fees on deposit accounts reflected the termination of services to several large customers.

Non-Interest Expenses
 
Total non-interest expenses increased $161,000 or 3.1% to $5.3 million for the three months ended June 30, 2007, from $5.1 million for the prior year comparable period. Salaries and employee benefits decreased $386,000 or 13.2%, to $2.5 million for the three months ended June 30, 2007, from $2.9 million for the prior year comparable period. That decrease primarily reflected a reduction in bonus and incentive expense.
 
21

Occupancy expense increased $174,000, or 40.5%, to $604,000 in second quarter 2007, compared to $430,000 in second quarter 2006. The increase reflected two additional branches which opened in the second and third quarters of 2006 as well as the corporate headquarters move in second quarter 2007.
 
Depreciation expense increased $147,000 or 70.7% to $355,000 for the three months ended June 30, 2007, versus $208,000 for the prior year comparable period.  The increase was primarily due to the impact of the two additional branch locations and the corporate headquarters move.
 
Legal fees increased $57,000, or 41.3%, to $195,000 in second quarter 2007, compared to $138,000 in second quarter 2006, resulting from increased fees on a number of different matters.
 
Advertising expense increased $20,000, or 14.4%, to $159,000 in second quarter 2007, compared to $139,000 in second quarter 2006.  The increase was primarily due to higher levels of print advertising.
 
Data processing expense increased $47,000, or 43.5%, to $155,000 in second quarter 2007, compared to $108,000 in second quarter 2006, primarily due to Check 21 related expenses and other system enhancements.
 
Insurance expense increased $10,000, or 11.9%, to $94,000 in second quarter 2007, compared to $84,000 in second quarter 2006, resulting from the overall growth of the Company.
 
Professional fees decreased $22,000, or 15.1%, to $124,000 in second quarter 2007, compared to $146,000 in second quarter 2006, reflecting decreases in recruiting expenses.
 
Taxes, other increased $35,000, or 19.9%, to $211,000 for the three months ended June 30, 2007, versus $176,000 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 increased $64,000, or 8.4% to $824,000 for the three months ended June 30, 2007, from $760,000 for the prior year comparable period, reflecting the impact of the two additional branch locations.
 
22


Provision for Income Taxes
 
The provision for income taxes decreased $369,000, to $951,000 for the three months ended June 30, 2007, from $1.3 million for the prior year comparable period. That decrease was primarily the result of the decrease in pre-tax income.  The effective tax rates in those periods were 33% and 34% respectively.

Six Months Ended June 30, 2007 compared to June 30, 2006
Results of Operations:

Overview

The Company's net income decreased to $4.1 million or $0.38 per diluted share for the six months ended June 30, 2007, compared to $5.2 million, or $0.49 per diluted share for the comparable prior year period.  There was a $4.6 million, or 15.6%, increase in total interest income, reflecting a 15.6% increase in average loans outstanding and a 143.4% increase in average investment securities while interest expense increased $7.1 million, reflecting a 17.0% increase in average interest-bearing deposits outstanding, a 75.7% increase in average borrowings outstanding and higher rates thereon.   Accordingly, net interest income decreased $2.4 million between the periods.  Contributing to the $2.4 million decrease in net interest income was the impact of $1.6 million in net interest income related to tax refund loans in 2006 which was not earned in the first six months of 2007 due to the discontinuation of the program. Also there were $425,000 in interest reductions due to the increase in non-performing loans in the first six months of 2007. The provision for loan losses in the first six months of 2007 decreased to $143,000, compared to $1.4 million provision expense in the first six months of 2006, reflecting the impact of $256,000 of net tax refund recoveries in first six months of 2007 and $800,000 in net tax refund charge-offs in first six months of 2006.  Non-interest income decreased $564,000 to $1.4 million in first six months of 2007 compared to $2.0 million in first six months of 2006 reflecting decreases in advisory fees on loans and service charges on deposit accounts.  Non-interest expenses increased $115,000 to $10.3 million compared to $10.2 million in the first six months of 2006. Return on average assets and average equity of 0.85% and 10.71% respectively, in the first six months of 2007 compared to 1.30% and 15.74% respectively for the same period in 2006.


23

 
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.  Yields are adjusted for tax equivalency for tax exempt municipal securities income in the first six months of 2007.  Republic had no tax exempt income on securities in first six months of 2006.
 
   
For the six months ended        
 
For the six months ended   
 
   
June 30, 2007      
   
June 30, 2006      
 
Interest-earning assets: