[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-24649
REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
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61-0862051 | |
(State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
601 West Market Street, Louisville, Kentucky | 40202 | |
(Address of principal executive offices) | (Zip Code) |
(502) 584-3600
(Registrants telephone number, including
area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] 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]
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Non-accelerated filer [_]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
17,266,998 shares of Class A Common Stock, no par value and 2,246,654 shares of Class B Common Stock, no par value were outstanding at April 30, 2006, the latest practicable date. All share and per share data has been restated to reflect the five percent (5%) stock dividend declared in January 2006.
1
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1.
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Financial Statements. |
Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Item 3.
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Quantitative and Qualitative Disclosures about Market Risk. |
Item 4.
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Controls and Procedures. |
PART II OTHER INFORMATION
Item 1.
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Legal Proceedings. |
Item 1A. |
Risk Factors. |
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 4.
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Submission of Matters to a Vote of Security Holders. |
Item 6.
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Exhibits. |
EX-31.1
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Section 302 Certification of Principal Executive Officer |
EX-31.2
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Section 302 Certification of Principal Financial Officer |
EX-32.1
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Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350 |
EX-32.2
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Certification of Principal Financial Officer Pursuant to 18 U.S.C Section 1350 |
SIGNATURES |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
REPUBLIC BANCORP, INC. | ||||||
CONSOLIDATED BALANCE SHEETS (in thousands) | ||||||
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ASSETS: | ||||||
Cash and cash equivalents | $ | 74,952 | $ | 77,169 | ||
Securities available for sale | 398,764 | 447,865 | ||||
Securities to be held to maturity (fair value of $63,894 | ||||||
in 2006 and $64,402 in 2005) | 63,847 | 64,298 | ||||
Mortgage loans held for sale | 6,756 | 6,582 | ||||
Loans, net of allowance for loan losses of | ||||||
$11,023 and $11,009 (2006 and 2005) | 2,099,189 | 2,049,647 | ||||
Federal Home Loan Bank stock, at cost | 21,905 | 21,595 | ||||
Premises and equipment, net | 32,198 | 31,786 | ||||
Other assets and accrued interest receivable | 43,054 | 36,614 | ||||
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TOTALASSETS | $ | 2,740,665 | $ | 2,735,556 | ||
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LIABILITIES: | ||||||
Deposits: | ||||||
Non-interest-bearing | $ | 300,142 | $ | 286,484 | ||
Interest-bearing | 1,336,253 | 1,316,081 | ||||
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Total deposits | 1,636,395 | 1,602,565 | ||||
Securities sold under agreements to repurchase and other short-term borrowings | 314,671 | 292,259 | ||||
Federal Home Loan Bank borrowings | 494,513 | 561,133 | ||||
Subordinated note | 41,240 | 41,240 | ||||
Other liabilities and accrued interest payable | 31,766 | 24,785 | ||||
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Total liabilities | 2,518,585 | 2,521,982 | ||||
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STOCKHOLDERS EQUITY: | ||||||
Preferred stock, no par value | - | - | ||||
Class A Common Stock and Class B Common Stock, no par value | 4,667 | 4,475 | ||||
Additional paid in capital | 95,964 | 77,295 | ||||
Retained earnings | 126,075 | 136,381 | ||||
Unearned shares in Employee Stock Ownership Plan | (1,357 | ) | (1,468 | ) | ||
Accumulated other comprehensive loss | (3,269 | ) | (3,109 | ) | ||
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Total stockholders equity | 222,080 | 213,574 | ||||
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY | $ | 2,740,665 | $ | 2,735,556 | ||
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3
REPUBLIC BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
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INTEREST INCOME: | ||||||
Loans, including fees | $ | 37,859 | $ | 34,901 | ||
Securities | 5,135 | 4,465 | ||||
Federal Home Loan Bank stock and other | 774 | 782 | ||||
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Total interest income | 43,768 | 40,148 | ||||
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INTEREST EXPENSE: | ||||||
Deposits | 10,007 | 6,892 | ||||
Securities sold under agreements to repurchase and | ||||||
other short-term borrowings | 3,268 | 2,127 | ||||
Federal Home Loan Bank borrowings | 5,109 | 4,634 | ||||
Subordinated note | 620 | - | ||||
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Total interest expense | 19,004 | 13,653 | ||||
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NET INTEREST INCOME | 24,764 | 26,495 | ||||
Provision for loan losses | 1,330 | 1,590 | ||||
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NET INTEREST INCOME AFTER PROVISION | ||||||
FOR LOAN LOSSES | 23,434 | 24,905 | ||||
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NON INTEREST INCOME: | ||||||
Service charges on deposit accounts | 4,113 | 3,262 | ||||
Electronic refund check fees | 3,428 | 4,995 | ||||
Net gain on sale of refund anticipation loans | 2,014 | - | ||||
Mortgage banking income | 455 | 626 | ||||
Debit card interchange fee income | 840 | 730 | ||||
Title insurance commissions | 292 | 350 | ||||
Other | 281 | 382 | ||||
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Total non-interest income | 11,423 | 10,345 | ||||
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NON INTEREST EXPENSES: | ||||||
Salaries and employee benefits | 11,368 | 9,535 | ||||
Occupancy and equipment, net | 3,723 | 3,356 | ||||
Communication and transportation | 707 | 870 | ||||
Marketing and development | 580 | 531 | ||||
Bankshares tax | 556 | 430 | ||||
Data processing | 530 | 419 | ||||
Debit card interchange fee expense | 388 | 311 | ||||
Supplies | 348 | 241 | ||||
Other | 1,641 | 1,562 | ||||
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Total non-interest expenses | 19,841 | 17,255 | ||||
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(continued)
4
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME (UNAUDITED) (Continued)
(in thousands, except
per share data)
INCOME FROM CONTINUING OPERATIONS | ||||||
BEFORE INCOME TAX EXPENSE | 15,016 | 17,995 | ||||
INCOME TAX EXPENSE FROM | ||||||
CONTINUING OPERATIONS | 5,169 | 6,210 | ||||
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INCOME FROM CONTINUING OPERATIONS | ||||||
BEFORE DISCONTINUED OPERATIONS | 9,847 | 11,785 | ||||
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS | ||||||
BEFORE INCOME TAX EXPENSE | (174 | ) | 2,341 | |||
INCOME TAX EXPENSE (BENEFIT) FROM DISCONTINUED | ||||||
OPERATIONS | (60 | ) | 808 | |||
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX | (114 | ) | 1,533 | |||
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NET INCOME | $ | 9,733 | $ | 13,318 | ||
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OTHER COMPREHENSIVE INCOME, NET OF TAX: | ||||||
Change in unrealized loss on securities available for sale | $ | (160 | ) | $ | (2,337 | ) |
Less: Reclassification of realized amount | - | - | ||||
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Net unrealized loss recognized in comprehensive income | (160 | ) | (2,337 | ) | ||
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COMPREHENSIVE INCOME | $ | 9,573 | $ | 10,981 | ||
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BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS: | ||||||
Class A Common Stock | $ | 0.51 | $ | 0.59 | ||
Class B Common Stock | 0.50 | 0.59 | ||||
BASIC EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS: | ||||||
Class A Common Stock | $ | (0.01 | ) | $ | 0.08 | |
Class B Common Stock | (0.01 | ) | 0.07 | |||
BASIC EARNINGS PER SHARE: | ||||||
Class A Common Stock | $ | 0.50 | $ | 0.67 | ||
Class B Common Stock | 0.49 | 0.67 | ||||
DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS: | ||||||
Class A Common Stock | $ | 0.49 | $ | 0.57 | ||
Class B Common Stock | 0.49 | 0.56 | ||||
DILUTED EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS: | ||||||
Class A Common Stock | $ | (0.01 | ) | $ | 0.07 | |
Class B Common Stock | (0.01 | ) | 0.07 | |||
DILUTED EARNINGS PER SHARE: | ||||||
Class A Common Stock | $ | 0.49 | $ | 0.64 | ||
Class B Common Stock | 0.48 | 0.64 |
See accompanying notes to consolidated financial statements.
5
REPUBLIC BANCORP, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)
(in
thousands, except
per share data)
Common Stock | Unearned | ||||||||||||||||||
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Shares in | |||||||||||||||
Employee | Accumulated | ||||||||||||||||||
Class A | Class B | Additional | Stock | Other | Total | ||||||||||||||
Shares | Shares | Paid In | Retained | Ownership | Comprehensive | Stockholders' | |||||||||||||
(in thousands, except per share data) | Outstanding | Outstanding | Amount | Capital | Earnings | Plan | Loss | Equity | |||||||||||
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BALANCE, January 1, 2006 | 17,188 | 2,249 | $ | 4,475 | $ | 77,295 | $ | 136,381 | $ | (1,468 | ) | $ | (3,109 | ) | $ | 213,574 | |||
Net Income | - | - | - | - | 9,733 | - | - | 9,733 | |||||||||||
Net change in accumulated other | |||||||||||||||||||
comprehensive loss | - | - | - | - | - | - | (160 | ) | (160 | ) | |||||||||
Dividend declared Common Stock: | |||||||||||||||||||
Class A ($0.084 per share) | - | - | - | - | (1,447 | ) | - | - | (1,447 | ) | |||||||||
Class B ($0.076 per share) | - | - | - | - | (171 | ) | - | - | (171 | ) | |||||||||
Stock options exercised, net of | |||||||||||||||||||
shares redeemed | 64 | - | 15 | 381 | (308 | ) | - | - | 88 | ||||||||||
Repurchase of Class A Common Stock | - | - | - | - | - | - | - | - | |||||||||||
Conversion of Class B Common Stock | |||||||||||||||||||
to Class A Common Stock | 2 | (2 | ) | - | - | - | - | - | - | ||||||||||
Shares committed to be released under | |||||||||||||||||||
the Employee Stock Ownership Plan | 10 | - | - | 84 | - | 111 | - | 195 | |||||||||||
Stock dividend | - | - | 177 | 17,936 | (18,113 | ) | - | - | - | ||||||||||
Note receivable on common stock, net | |||||||||||||||||||
of cash payments | - | - | - | 9 | - | - | - | 9 | |||||||||||
Deferred compensation expense | - | - | - | 43 | - | - | - | 43 | |||||||||||
Stock option expense | - | - | - | 216 | - | - | - | 216 | |||||||||||
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BALANCE, March 31, 2006 | 17,264 | 2,247 | $ | 4,667 | $ | 95,964 | $ | 126,075 | $ | (1,357 | ) | $ | (3,269 | ) | $ | 222,080 | |||
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See accompanying notes to consolidated financial statements.
6
REPUBLIC BANCORP, INC. | ||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | ||||||
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (in thousands) | ||||||
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2006 |
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OPERATING ACTIVITIES: | ||||||
Net income | $ | 9,733 | $ | 13,318 | ||
Adjustments to reconcile net income to net cash provided | ||||||
by operating activities: | ||||||
Depreciation and amortization, net | 1,035 | 1,177 | ||||
Federal Home Loan Bank stock dividends | (310 | ) | (215 | ) | ||
Provision for loan losses, including provision from discontinued operations | 1,037 | 1,820 | ||||
Net gain on sale of mortgage loans held for sale | (278 | ) | (464 | ) | ||
Origination of mortgage loans held for sale | (26,454 | ) | (44,650 | ) | ||
Proceeds from sale of mortgage loans held for sale | 26,558 | 50,505 | ||||
Stock option expense | 216 | - | ||||
Employee Stock Ownership Plan expense | 195 | 213 | ||||
Deferred compensation plan expense | 43 | 33 | ||||
Changes in other assets and liabilities: | ||||||
Other assets and accrued interest receivable | (4,231 | ) | (8,695 | ) | ||
Other liabilities and accrued interest payable | 6,795 | 14,898 | ||||
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Net cash provided by operating activities | 14,339 | 27,940 | ||||
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INVESTING ACTIVITIES: | ||||||
Purchases of securities available for sale | (650,450 | ) | (1,425,305 | ) | ||
Purchases of Federal Home Loan Bank stock | - | (2 | ) | |||
Proceeds from calls, maturities and paydowns of securities available for sale | 700,112 | 1,437,813 | ||||
Proceeds from calls, maturities and paydowns of securities to be held to maturity | 444 | 19,162 | ||||
Net increase in loans | (50,920 | ) | (69,712 | ) | ||
Investment in new market tax credits | (2,000 | ) | (8,992 | ) | ||
Purchases of premises and equipment, net | (1,843 | ) | (580 | ) | ||
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Net cash used in investing activities | (4,657 | ) | (47,616 | ) | ||
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FINANCING ACTIVITIES: | ||||||
Net change in deposits | 33,830 | 156,712 | ||||
Net change in securities sold under agreements to repurchase and other short-term borrowings | 22,412 | 6,087 | ||||
Payments on Federal Home Loan Bank borrowings | (182,120 | ) | (22,545 | ) | ||
Proceeds from Federal Home Loan Bank borrowings | 115,500 | 194 | ||||
Net proceeds from Common Stock options exercised | 88 | - | ||||
Cash dividends paid | (1,609 | ) | (1,370 | ) | ||
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Net cash (used in) financing activities | (11,899 | ) | 139,078 | |||
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NET CHANGE IN CASH AND CASH EQUIVALENTS | (2,217 | ) | 119,402 | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 77,169 | 77,850 | ||||
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CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 74,952 | $ | 197,252 | ||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||
Cash paid during the year for: | ||||||
Interest | $ | 19,578 | $ | 13,373 | ||
Income taxes | 34 | 111 | ||||
SUPPLEMENTAL NONCASH DISCLOSURES: | ||||||
Transfers from loans to real estate acquired in settlement of loans | $ | 350 | $ | - |
7
REPUBLIC BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2006 AND 2005 (UNAUDITED)
AND DECEMBER 31, 2005
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the Parent Company) and its wholly-owned subsidiaries: Republic Bank & Trust Company and Republic Bank & Trust Company of Indiana (together referred to as the Bank), Republic Funding Company, Republic Invest Co. and Republic Bancorp Capital Trust. Republic Invest Co. includes its subsidiary, Republic Capital LLC. Republic Bancorp Capital Trust is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc. The consolidated financial statements also include the wholly-owned subsidiaries of Republic Bank & Trust Company: TRS RAL Funding LLC, Republic Financial Services, LLC and Republic Insurance Agency, LLC. All companies are collectively referred to as Republic or the Company. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. 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 three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in Republics Form 10-K for the year ended December 31, 2005.
New Accounting Standards In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156 Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140, that changes the accounting for all servicing rights which are recorded as the result of purchasing a servicing right or selling a loan with servicing retained. SFAS No. 156 amends the current accounting guidance for servicing rights in that it allows companies to carry their servicing rights at fair value, where presently servicing rights are assessed for impairment based on their fair value at each reporting date, using lower of cost or market value. This pronouncement is effective January 1, 2007, although earlier adoption is permitted during the first quarter of 2006. The Company currently plans to adopt this standard on January 1, 2007.
See Footnote 2 regarding the new accounting pronouncement related to stock options that impacted Republics consolidated financial statements during the period.
Reclassifications Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. All prior period share and per share data have been restated to reflect the five percent (5%) stock dividend that was declared in the first quarter of 2006.
In February 2006, the Company substantially exited the payday loan segment of business. This has been treated as a discontinued operation for financial reporting purposes in accordance with SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets and all applicable current period and prior period data has been restated to reflect operations absent of the payday loan segment of business.
8
2. STOCK PLANS AND STOCK BASED COMPENSATION
At March 31, 2006, the Company had two stock option plans and a director deferred compensation plan. The stock option plans consist of the 1995 Stock Option Plan (1995 Plan) and the 2005 Stock Incentive Plan (2005 Plan). With regard to the 1995 Plan, no additional grants were made in 2006 and none are expected to be made in the future. The 2005 Plan permits the grant of stock options and restricted stock awards for up to 3,150,000 shares, of which 3,099,000 shares remain available for issue with 51,000 allocated at March 31, 2006. All shares issued under the above mentioned plans came from authorized and unissued shares.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share Based Payment. The Company elected to utilize the modified prospective transition method; therefore, prior period results were not restated. Prior to the adoption of SFAS 123R, stock-based compensation expense related to stock options was not recognized in the results of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. As a result, the recognition of stock-based compensation expense was limited to the expense attributed to the director deferred compensation plan.
SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. For options with graded vesting, we value the stock option grants and recognize compensation expense as if each vesting portion of the award was a separate award. Under the modified prospective method, unvested awards, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with SFAS 123R. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.
Under the stock option plans, certain key employees are granted options to purchase shares of Republics Common Stock at fair value at the date of the grant. All stock options have an exercise price that is at least equal to the fair market value of the Companys stock on the date the options were granted. Options granted generally become fully exercisable at the end of five to six years of continued employment and must be exercised within one year from the date they become exercisable. There were no Class B stock options outstanding at March 31, 2006 and December 31, 2005.
The following table summarizes stock option activity:
Three Months Ended | Three Months Ended | |||||||||
March 31, 2006 | March 31, 2005 | |||||||||
Weighted | Weighted | |||||||||
Options | Average | Options | Average | |||||||
Class A | Price | Class A | Price | |||||||
Shares | Per Share | Shares | Per Share | |||||||
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Outstanding at beginning of period | 1,686,442 | $ | 11.60 | 1,760,805 | $ | 11.29 | ||||
Granted | - | - | - | - | ||||||
Exercised | (84,046 | ) | 5.73 | (7,233 | ) | 11.23 | ||||
Forfeited | (5,097 | ) | 12.35 | (6,943 | ) | 9.03 | ||||
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Outstanding at year of period | 1,597,299 | 11.91 | 1,746,629 | 11.30 | ||||||
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9
The following table details stock options outstanding:
(dollars in thousands except per share data) | March 31, 2006 | |||
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Stock options vested and currently exercisable: | ||||
Number | 54,825 | |||
Weighted average exercise price | $ | 6.86 | ||
Aggregate intrinsic value | $ | 738 | ||
Weighted average remaining life (in years) | 0.65 | |||
Total Options Outstanding: | ||||
Aggregate intrinsic value | $ | 13,520 | ||
Weighted average remaining life (in years) | 3.24 |
The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The intrinsic value of options exercised during the first quarter of 2006 and 2005 was $1.2 million and $97,000. The Company recorded $216,000 in stock option compensation expense during the three months ended March 31, 2006 to salaries and employee benefits. Since the stock options are incentive stock options and there were no disqualifying dispositions, no tax benefit related to this expense was recognized. There were no options granted or modified during the three month periods ended March 31, 2006 and 2005.
Non executive officer employees had loans outstanding of $699,000 and $709,000 at March 31, 2006 and December 31, 2005 that were originated to fund stock option exercises. To the extent of unpaid loan balance, shares from exercises funded by loans from Company are not included as outstanding shares for financial reporting purposes.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of Republics stock, and other factors. Expected dividends are based on dividend trends and the market price of Republics stock price at grant. Republic uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no grants during the three months ended March 31, 2006 and 2005.
SFAS 123R requires the recognition of stock based compensation for the number of awards that are ultimately expected to vest. As a result, recognized stock option compensation expense was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates of approximately 3%. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances. Prior to January 1, 2006, actual forfeitures were accounted for as they occurred for purposes of required pro forma stock compensation disclosures.
Unrecognized stock option compensation expense related to unvested awards (net of estimated forfeitures) for the remainder of 2006 and beyond is estimated as follows:
Year | (in thousands) | |
April 2006 December 2006 | $ | 637 |
2007 | 685 | |
2008 | 505 | |
2009 | 383 | |
2010 | 163 | |
2011 | 19 | |
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Total | $ | 2,392 |
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10
In November 2004, the Companys Board of Directors approved a Non Qualified Deferred Compensation Plan. The Plan governs the deferral of board and committee fees of non-employee members of the Board of Directors. Members of the Board of Directors may defer up to 100% of their board and committee fees for a specified period ranging from two to five years. The value of the deferred compensation account is deemed invested in Company stock and is immediately vested. On a quarterly basis, the Company reserves shares of Republics stock within the Companys stock option plan for ultimate distribution to Directors at the end of the deferral period. The Plan has not and will not materially impact the Company, as Director compensation expense will continue to be recorded when incurred. The expense recorded for deferred compensation totaled $43,000 and $33,000 during the three months ended March 31, 2006 and 2005.
The following table presents information on director deferred compensation shares outstanding for the periods shown:
Three Months Ended | Three Months Ended | |||||||
March 31, 2006 | March 31, 2005 | |||||||
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Weighted | Weighted | |||||||
Average Market | Average Market | |||||||
Deferred Shares | Price at Date of | Deferred Shares | Price at Date of | |||||
Deferral | Deferral | |||||||
|
||||||||
Balance, beginning of period | 5,845 | $ | 20.51 | - | $ | - | ||
Awarded | 2,106 | 20.32 | 1,529 | 21.16 | ||||
Released | - | - | - | - | ||||
|
|
|||||||
Balance, end of period | 7,951 | 20.46 | 1,529 | 21.16 | ||||
|
|
11
The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of SFAS 123R as of March 31, 2005.
Three Months Ended | |||
March 31, | |||
(dollars in thousands, except per share data) | 2005 | ||
|
|
|
|
Net income, as reported |
$ |
13,318 | |
Deduct: Stock based compensation expense | |||
determined under the fair value based | |||
method, net of related tax effect | 226 | ||
|
|
||
Pro forma net income |
$ |
13,092 | |
Earnings per share from continuing operations, as reported: | |||
Class A Common Stock |
$ |
0.59 | |
Class B Common Stock | 0.59 | ||
Earnings per share, as reported: | |||
Class A Common Stock |
$ |
0.67 | |
Class B Common Stock | 0.67 | ||
Pro forma basic earnings per share from continuing operations: | |||
Class A Common Stock |
$ |
0.58 | |
Class B Common Stock | 0.58 | ||
Pro forma basic earnings per share: | |||
Class A Common Stock |
$ |
0.66 | |
Class B Common Stock | 0.65 | ||
Diluted earnings per share from continuing operations, as reported: | |||
Class A Common Stock |
$ |
0.57 | |
Class B Common Stock | 0.56 | ||
Diluted earnings per share, as reported: | |||
Class A Common Stock |
$ |
0.64 | |
Class B Common Stock | 0.64 | ||
Pro forma diluted earnings per share from continuing operations: | |||
Class A Common Stock |
$ |
0.56 | |
Class B Common Stock | 0.55 | ||
Pro forma diluted earnings per share: | |||
Class A Common Stock |
$ |
0.63 | |
Class B Common Stock | 0.63 |
12
By letter to Republic Bank & Trust Company dated February 17, 2006, the FDIC cited inherent risks associated with payday lending activities and requested that the Board of Directors consider terminating this line of business. Consequently, on February 24, 2006, Republic Bank & Trust Company and ACE amended the agreement regarding Republic Bank & Trust Companys payday loan activities in Texas, Pennsylvania and Arkansas. With respect to Texas, Republic Bank & Trust Company ceased offering payday loans the week of February 27, 2006. With respect to Arkansas and Pennsylvania, Republic Bank & Trust Company will cease offering payday loans on June 30, 2006. The Company did not incur any additional costs related to the termination of the ACE contract and does not anticipate incurring any costs in the future once the program is terminated. The Company had payday loans outstanding of $575,000 related to the above contract at March 31, 2006.
By letter to Republic Bank & Trust Company of Indiana dated February 17, 2006, the FDIC cited inherent risks associated with payday lending activities and asked the Board of Directors to consider terminating this line of business. Republic Bank & Trust Company of Indiana voluntarily elected to terminate its Internet payday loan program the week of February 20, 2006. The Internet payday loan program began operating in July 2005 and remained in a developmental stage until its termination date. The Company had payday loans outstanding of $3,000 related to the above program at March 31, 2006.
13
The following table illustrates the financial statements of the discontinued operation:
Balance Sheets | ||||||
(dollars in thousands) | March 31, 2006 | December 31, 2005 | ||||
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 237 | $ | 730 | ||
Loans | 578 | 5,779 | ||||
Less Allowance | 44 | 682 | ||||
Net Loans | 534 | 5,097 | ||||
Premises and equipment, net | - | 40 | ||||
Other assets and AIR | 319 | 81 | ||||
Total Assets | $ | 1,090 | $ | 5,948 | ||
|
|
|
|
|
|
|
Deposits | $ | 11 | $ | 459 | ||
Federal Home Loan Bank borrowings | 567 | 5,320 | ||||
Total Liabilities | 578 | 5,779 | ||||
Allocated equity | 512 | 169 | ||||
Total liabilities and allocated equity | $ | 1,090 | $ | 5,948 | ||
|
|
|
|
|
|
|
Statements of Income | Three Months Ended March 31, | |||||
(dollars in thousands) | 2006 | 2005 | ||||
Interest Income: | ||||||
Loans, including fees | $ | 507 | $ | 3,261 | ||
|
|
|
|
|
|
|
Total interest income | 507 | 3,261 | ||||
Interest Expense: | ||||||
FHLB borrowings | 26 | 169 | ||||
Total interest expense | 26 | 169 | ||||
Net interest income | 481 | 3,092 | ||||
Provision | 293 | (230 | ) | |||
Net interest income after provision | 774 | 2,862 | ||||
Service charges on deposit accounts | - | 10 | ||||
Total non interest income | - | 10 | ||||
Salaries and employee benefits | 112 | 64 | ||||
Occupancy and equipment, net | 115 | - | ||||
Marketing and development | 108 | - | ||||
Data processing expense | 130 | - | ||||
Other | 483 | 467 | ||||
Total non interest expenses | 948 | 531 | ||||
Gross operating profit | (174 | ) | 2,341 | |||
Income tax expense (benefit) | (60 | ) | 808 | |||
Net income (loss) | $ | (114 | ) | $ | 1,533 | |
|
|
|
|
|
|
14
4. SECURITIES
Securities available for sale:
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | ||||||||||
March 31, 2006 (in thousands) | Cost | Gains | Losses | Fair Value | ||||||||
|
||||||||||||
U.S. Treasury securities and U.S. | ||||||||||||
Government agencies | $ | 269,671 | $ | 13 | $ | (3,019 | ) | $ | 266,665 | |||
Mortgage backed securities, | ||||||||||||
including CMOs | 134,122 | 105 | (2,128 | ) | 132,099 | |||||||
|
|
|
|
|
|
|
|
|
||||
Total securities available for sale | $ | 403,793 | $ | 118 | $ | (5,147 | ) | $ | 398,764 | |||
|
|
|
|
|
|
|
|
|||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | ||||||||||
December 31, 2005 (in thousands) | Cost | Gains | Losses | Fair Value | ||||||||
|
||||||||||||
U.S. Treasury securities and U.S. | ||||||||||||
Government agencies | $ | 333,348 | $ | 13 | $ | (3,067 | ) | $ | 330,294 | |||
Mortgage backed securities, | ||||||||||||
including CMOs | 119,300 | 130 | (1,859 | ) | 117,571 | |||||||
|
|
|
|
|
|
|
|
|||||
Total securities available for sale | $ | 452,648 | $ | 143 | $ | (4,926 | ) | $ | 447,865 | |||
|
|
|
|
|
|
|
|
|||||
Securities to be held to maturity: | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrecognized | Unrecognized | ||||||||||
March 31, 2006 (in thousands) | Cost | Gains | Losses | Fair Value | ||||||||
|
||||||||||||
U.S. Treasury securities and U.S. | ||||||||||||
Government agencies | $ | 12,110 | $ | - | $ | (113 | ) | $ | 11,997 | |||
Mortgage backed securities, | ||||||||||||
including CMOs | 51,737 | 487 | (327 | ) | 51,897 | |||||||
|
|
|
|
|
|
|
|
|||||
Total securities to be held to maturity | $ | 63,847 | $ | 487 | $ | (440 | ) | $ | 63,894 | |||
|
|
|
|
|
|
|
|
|||||
Gross | Gross | |||||||||||
Amortized | Unrecognized | Unrecognized | ||||||||||
December 31, 2005 (in thousands) | Cost | Gains | Losses | Fair Value | ||||||||
|
||||||||||||
U.S. Treasury securities and U.S. | ||||||||||||
Government agencies | $ | 12,110 | $ | - | $ | (131 | ) | $ | 11,979 | |||
Mortgage backed securities, | ||||||||||||
including CMOs | 52,188 | 525 | (290 | ) | 52,423 | |||||||
|
|
|
|
|
|
|
|
|||||
Total securities to be held to maturity | $ | 64,298 | $ | 525 | $ | (421 | ) | $ | 64,402 | |||
|
|
|
|
|
|
|
|
Securities pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law are as follows:
(in thousands) | March 31, 2006 | December 31, 2005 | ||||
|
|
|
|
|
||
Amortized cost | $ | 398,792 | $ | 400,986 | ||
Fair value | 394,493 | 397,255 |
15
March 31, | December 31, | |||||
(in thousands) | 2006 | 2005 | ||||
|
|
|
|
|
||
Residential real estate | $ | 1,081,887 | $ | 1,056,175 | ||
Commercial real estate | 589,083 | 565,970 | ||||
Real estate construction | 88,005 | 84,850 | ||||
Commercial | 50,980 | 46,562 | ||||
Consumer | 40,039 | 35,529 | ||||
Deferred deposits (Payday loans), Discontinued Operations | 578 | 5,779 | ||||
Home equity | 259,647 | 265,895 | ||||
|
|
|
|
|||
Total loans | 2,110,219 | 2,060,760 | ||||
Less: | ||||||
Unearned interest income and unamortized loan fees | 7 | 104 | ||||
Allowance for loan losses | 11,023 | 11,009 | ||||
|
|
|
|
|||
Loans, net | $ | 2,099,189 | $ | 2,049,647 | ||
The following table illustrates real estate loans pledged to collateralize advances and letters of credit from the FHLB:
|
|
|
|||||
(in thousands) | |
|
|
||||
|
|
|
|
|
|
|
|
First lien, single family residential | $ | 960,000 | $ | 938,000 | |||
Home equity lines of credit | 165,000 | 169,000 | |||||
Multi-family, commercial real estate | 39,000 | 56,000 | |||||
An analysis of the Allowance for loan losses follows: | |||||||
March 31, (in thousands) | 2006 | 2005 | |||||
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | 11,009 | $ | 13,554 | |||
Provision for loan losses from continuing operations | 1,330 | 1,590 | |||||
Provision for loan losses from discontinued operations | (293 | ) | 230 | ||||
Charge offs Banking | (475 | ) | (346 | ) | |||
Charge offs Tax Refund Solutions | (876 | ) | (1,928 | ) | |||
Charge offs Discontinued operations | (409 | ) | - | ||||
Recoveries Banking | 198 | 121 | |||||
Recoveries Tax Refund Solutions | 475 | 600 | |||||
Recoveries Discontinued operations | 64 | - | |||||
|
|
|
|
||||
Balance, end of period | $ | 11,023 | $ | 13,821 | |||
|
|
|
|
16
Information regarding Republics impaired and non performing loans is as follows: | ||||||
|
|
|
||||
(in thousands) |
|
|
|
|||
Loans with no allocated allowance for loan losses | $ | - | $ | - | ||
Loans with allocated allowance for loan losses | 1,744 | 1,856 | ||||
|
|
|
|
|||
Total | $ | 1,744 | $ | 1,856 | ||
|
|
|
|
No additional funds are committed to be advanced in connection with the above impaired loans. Detail of non performing loans and non performing assets is as follows: |
|
|
|
|
|||||
(dollars in thousands) |
|
|
|
||||
|
|
|
|
|
|
||
Non-accrual loans | $ | 5,530 | $ | 5,725 | |||
Loans past due 90 days or more and still on accrual | 470 | 295 | |||||
|
|
|
|
|
|
||
` | ` | ||||||
Total non performing loans | 6,000 | 6,020 | |||||
Other real estate owned | 499 | 452 | |||||
|
|
|
|
|
|
||
Total non performing assets | $ | 6,499 | $ | 6,472 | |||
|
|
|
|||||
Non performing loans to total loans | 0.28 | % | 0.29 | % | |||
Non performing assets to total loans | 0.31 | 0.31 |
|
|
|
||||
(in thousands) |
|
|
|
|||
|
|
|
|
|
||
Demand (NOW and SuperNOW) | $ | 251,841 | $ | 262,714 | ||
Money market accounts | 275,410 | 262,611 | ||||
Internet money market accounts | 23,512 | 33,864 | ||||
Savings | 63,784 | 43,548 | ||||
Money market certificates of deposit | 73,539 | 59,810 | ||||
Individual retirement accounts | 50,242 | 48,954 | ||||
Certificates of deposit, $100,000 and over | 148,278 | 168,777 | ||||
Other certificates of deposit | 271,868 | 282,609 | ||||
Brokered certificates of deposit | 177,779 | 153,194 | ||||
|
|
|
|
|||
Total interest-bearing deposits | 1,336,253 | 1,316,081 | ||||
|
|
|
|
|||
Total non interest-bearing deposits | 300,142 | 286,484 | ||||
|
|
|
|
|||
Total | $ | 1,636,395 | $ | 1,602,565 | ||
|
|
|
17
7. FEDERAL HOME LOAN BANK (FHLB) BORROWINGS
(in thousands) |
|
|
|
|||
|
|
|
|
|
||
FHLB convertible fixed interest rate advances with a | ||||||
weighted average interest rate of 4.86%(1) due through 2011 | $ | 75,000 | $ | 90,000 | ||
FHLB fixed interest rate advances with a weighted average | ||||||
interest rate of 4.03% due through 2010 | 419,513 | 471,133 | ||||
|
|
|
|
|||
Total FHLB borrowings | $ | 494,513 | $ | 561,133 | ||
|
|
|
|
(1) Represents convertible borrowings with the FHLB. These borrowings have original fixed rate periods ranging from one to five years with original maturities ranging from three to ten years if not converted earlier by the FHLB. At the end of their respective fixed rate periods, the FHLB has the right to convert the borrowings to floating rate advances tied to LIBOR or the Company can prepay the borrowings at no penalty. The Company has $90 million in these advances that are currently eligible to be converted on their quarterly repricing date. Based on market conditions at this time, management does not believe these advances are likely to be converted in the short-term. FHLB borrowings are collateralized by a blanket pledge of eligible real estate loans. At March 31, 2006, Republic had available collateral to borrow an additional $223 million from the FHLB. Republic also has unsecured lines of credit totaling $175 million available through various financial institutions. Aggregate future principal payments on FHLB borrowings, based on contractual maturity dates as of March 31, 2006 are as follows: |
Year |
(in thousands) |
|
2006 | $ | 150,636 |
2007 | 60,000 | |
2008 | 88,500 | |
2009 | 82,000 | |
2010 | 42,370 | |
Thereafter | 71,007 | |
|
|
|
Total | $ | 494,513 |
|
|
8. | SUBORDINATED NOTE |
Republic Bancorp Capital Trust (RBCT), an unconsolidated trust subsidiary of Republic Bancorp, Inc., issued $40 million in Trust Preferred Securities (TPS). The TPS pay a fixed interest rate for 10 years and adjust with LIBOR thereafter. Currently treated as Tier 1 capital for regulatory purposes, the TPS matures on September 30, 2035 and are redeemable at the Companys option after ten years. The subordinated debentures and the related interest expense, currently payable quarterly at the annual rate of 6.015%, are included in the consolidated financial statements. |
18
9. | OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES |
Republic is a party to financial instruments with off balance sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of Republic pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case by case basis in accordance with Republics credit policies. Collateral from the customer may be required based on managements credit evaluation of the customer and may include business assets of commercial customers, as well as personal property and real estate of individual customers or guarantors. Republic also extends binding commitments to customers and prospective customers. Such commitments assure the borrower of financing for a specified period of time at a specified rate. The risk to Republic under such loan commitments is limited by the terms of the contracts. For example, Republic may not be obligated to advance funds if the customers financial condition deteriorates or if the customer fails to meet specific covenants. An approved but unfunded loan commitment represents a potential credit risk once the funds are advanced to the customer. This is also a liquidity risk since the customer may demand immediate cash that would require funding and interest rate risk as market interest rates may rise above the rate committed. In addition, since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding. As of March 31, 2006, exclusive of mortgage banking loan commitments, Republic had outstanding loan commitments totaling $485 million, which included unfunded home equity lines of credit totaling $279 million. As of December 31, 2005, exclusive of mortgage banking loan commitments, Republic had outstanding loan commitments totaling $475 million, which included unfunded home equity lines of credit totaling $269 million. Standby letters of credit are conditional commitments issued by Republic to guarantee the performance of a customer to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. Commitments outstanding under standby letters of credit totaled $10 million at March 31, 2006 and December 31, 2005. At March 31, 2006 and December 31, 2005 Republic had $88 million in letters of credit from the FHLB issued on behalf of the Banks clients. Approximately $28 million of these letters of credit were used as credit enhancements for client bond offerings. The remaining $60 million letter of credit was used to collateralize a public funds deposit, which the Company classifies in short-term borrowings. These letters of credit reduce Republics available borrowing line at the FHLB by the above total amount. Republic uses a blanket pledge of eligible real estate loans to secure the letters of credit. |
|
10. | EARNINGS PER SHARE |
Class A and Class B shares participate equally in undistributed earnings. The difference in earnings per share between the two classes of common stock results solely from the 10% per share dividend premium paid on Class A Common Stock over that paid on Class B Common Stock. A reconciliation of the combined Class A and Class B Common Stock numerators and denominators of the earnings per share and diluted earnings per share computations is presented below: |
19
|
|
||||||
(in thousands, except per share data) |
|
|
|
||||
|
|
|
|
|
|||
Net income from continuing operations | $ | 9,847 | $ | 11,785 | |||
Net income from discontinued operations | (114 | ) | 1,533 | ||||
|
|
|
|
||||
Net income, basic and diluted | 9,733 | 13,318 | |||||
|
|
|
|
||||
Weighted average shares outstanding | 19,483 | 19,838 | |||||
Effect of dilutive securities | 539 | 885 | |||||
|
|
|
|
||||
Average shares outstanding including | |||||||
dilutive securities | 20,022 | 20,723 | |||||
|
|
|
|
||||
Basic earnings per share from continuing operations: | |||||||
Class A Common Share | $ | 0.51 | $ | 0.60 | |||
Class B Common Share | 0.50 | 0.59 | |||||
Diluted earnings per share from continuing operations: | |||||||
Class A Common Share | $ | 0.49 | $ | 0.57 | |||
Class B Common Share | 0.49 | 0.56 | |||||
Basic earnings per share from discontinued operations: | |||||||
Class A Common Share | $ | (0.01 | ) | $ | 0.08 | ||
Class B Common Share | (0.01 | ) | 0.07 | ||||
Diluted earnings per share from discontinued operations: | |||||||
Class A Common Share | $ | (0.01 | ) | $ | 0.08 | ||
Class B Common Share | (0.01 | ) | 0.07 | ||||
Basic earnings per share: | |||||||
Class A Common Share | $ | 0.50 | $ | 0.67 | |||
Class B Common Share | 0.49 | 0.67 | |||||
Diluted earnings per share: | |||||||
Class A Common Share | $ | 0.49 | $ | 0.64 | |||
Class B Common Share | 0.48 | 0.64 |
Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows: | |
Three Months Ended March 31, | 2006 |
|
||
|
|
|
||
Stock Options | 226,033 |
|
20
11. SEGMENT INFORMATION
The reportable segments are determined by the type of products and services offered, distinguished between banking operations, mortgage banking operations, Tax Refund Solutions and Deferred Deposits or Payday Loans. As discussed throughout this document, the Company substantially exited the deferred deposit business during the first quarter of 2006; therefore, segment operations are presented as discontinued operations. Loans, investments and deposits provide the majority of revenue from banking operations; servicing fees and loan sales provide the majority of revenue from mortgage banking operations; RAL fees, ERC fees and Net gain on the sale of Refund Anticipation Loans provide the majority of the revenue from tax refund services; and fees for providing deferred deposits or payday loans have historically represented the primary revenue source for the deferred deposit segment. All Company segments are domestic.
The accounting policies used for Republics reportable segments are the same as those described in the summary of significant accounting policies. Income taxes are allocated based on income before income tax expense. Transactions among reportable segments are made at fair value.
Segment information follows:
Three Months Ended March 31, 2006 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest income | $ | 19,507 | $ | 5,211 | $ | 46 | $ | 24,764 | $ | 481 | |||||
Provision for loan losses | 447 | 883 | - | 1,330 | (293 | ) | |||||||||
Electronic Refund Check fees | - | 3,428 | - | 3,428 | - | ||||||||||
Net gain on sale of Refund Anticipation Loans | - | 2,014 | - | 2,014 | - | ||||||||||
Mortgage banking income | - | - | 455 | 455 | - | ||||||||||
Other revenue | 5,656 | 2 | (132 | ) | 5,526 | - | |||||||||
Income tax expense | 2,512 | 2,600 | 57 | 5,169 | (60 | ) | |||||||||
Net income | 4,784 | 4,954 | 109 | 9,847 | (114 | ) | |||||||||
Segment assets | 2,726,565 | 7,414 | 5,596 | 2,739,575 | 1,090 | ||||||||||
Three Months Ended March 31, 2005 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||
Total | |||||||||||||||
Tax Refund | Mortgage | Continuing | Discontinued | ||||||||||||
(in thousands) | Banking | Solutions | Banking | Operations | Operations | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest income | $ | 17,955 | $ | 8,437 | $ | 103 | $ | 26,495 | $ | 3,092 | |||||
Provision for loan losses | 29 | 1,561 | - | 1,590 | 230 | ||||||||||
Electronic Refund Check Fees | - | 4,995 | - | 4,995 | - | ||||||||||
Mortgage banking income | - | - | 626 | 626 | - | ||||||||||
Other revenue | 4,865 | 43 | (184 | ) | 4,724 | 10 | |||||||||
Income tax expense | 2,658 | 3,436 | 116 | 6,210 | 808 | ||||||||||
Net income | 5,043 | 6,521 | 221 | 11,785 | 1,533 | ||||||||||
Segment assets | 2,594,080 | 3,931 | 11,103 | 2,609,114 | 46,172 |
21
In January 2006, the Company established a special purpose wholly owned subsidiary corporation of Republic Bank & Trust Company named TRS RAL Funding LLC to securitize a portion of the RAL portfolio to an independent third party. The securitization consisted of a total of $213 million in loans over a four week period in January and February. At March 31, 2006, all loans sold into the securitization had been either fully repaid or charged-off and no securitization related balances were outstanding. Republic Bank & Trust Company acted as the servicer for all such RALs during the securitization period. The potential exists that the Company will post recoveries on loans charged-off in the securitization during the remainder of the year. The Company believes the impact of these recoveries will be immaterial to the financial statements and will recognize such recoveries in subsequent quarters along with recoveries of other charged off RALs not sold in securitization as they are realized.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Managements Discussion and Analysis of Financial Condition and Results of Operations of Republic Bancorp, Inc. (Republic or the Company) analyzes the major elements of Republics consolidated balance sheets and statements of income. Republic, a bank holding company headquartered in Louisville, Kentucky, is the Parent Company of Republic Bank & Trust Company, Republic Bank & Trust Company of Indiana (together referred to as the Bank), Republic Funding Company, Republic Invest Co. and Republic Bancorp Capital Trust. Republic Invest Co. includes its subsidiary, Republic Capital LLC. Republic Bancorp Capital Trust is a Delaware statutory business trust that is a 100%-owned unconsolidated finance subsidiary of Republic Bancorp, Inc. The consolidated financial statements also include the wholly-owned subsidiaries of Republic Bank & Trust Company: TRS RAL Funding LLC, Republic Financial Services, LLC and Republic Insurance Agency, LLC. Managements Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part I., Item 1. Financial Statements.
This discussion includes various forward-looking statements with respect to credit quality, including but not limited to, delinquency trends and the adequacy of the allowance for loan losses, banking products, corporate objectives, the Companys interest rate sensitivity model and other financial and business matters. Broadly speaking, forward-looking statements may include:
The Company may make forward-looking statements discussing managements expectations about:
Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, they often include words such as anticipate, believe, estimate, expect, intend, plan, project, target, can, could, may, should, will, would, or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail managements expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date they are made and management may not update them to reflect changes that occur subsequent to the date the statements are made.
23
Net income from continuing operations for the first quarter of 2006 was $9.8 million, representing a decline of $1.9 million or 16% compared to the same period in 2005. Diluted earnings per Class A Common Share from continuing operations declined 14% to $0.49 for the first quarter of 2006 compared to $0.57 for the same period in 2005.
Net income for the first quarter of 2006 was $9.7 million, representing a decline of $3.6 million or 27% compared to the same period in 2005. Diluted earnings per Class A Common Share declined 23% to $0.49 for the first quarter of 2006 compared to $0.64 for the same period in 2005.
Highlights for the first quarter 2006 consist of the following:
The Company is divided into four distinct business operating segments: Banking, Tax Refund Solutions, Mortgage Banking and Deferred Deposits or Payday Loans. As discussed throughout this document, the Company substantially exited the deferred deposit business during the first quarter of 2006; therefore, its segment operations are presented as discontinued. Total assets and net income by segment for the three months ended March 31, 2006 and 2005 are presented below:
24
Three Months Ended March 31, 2006 | |||||||||||||||
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Net income | $ | 4,784 | $ | 4,954 | $ | 109 | $ | 9,847 | $ | (114 | ) | ||||
Segment assets | 2,726,565 | 7,414 | 5,596 | 2,739,575 | 1,090 | ||||||||||
Three Months Ended March 31, 2005 | |||||||||||||||
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Total | |||||||||||||||
Tax Refund | Mortgage | Continuing | Discontinued | ||||||||||||
(in thousands) | Banking | Solutions | Banking | Operations | Operations | ||||||||||
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Net income | $ | 5,043 | $ | 6,521 | $ | 221 | $ | 11,785 | $ | 1,533 | |||||
Segment assets | 2,594,080 | 3,931 | 11,103 | 2,609,114 | 46,172 |
As of March 31, 2006, Republic had a total of 34 full-service banking centers with 32 located in Kentucky and two in southern Indiana. Republics primary market areas are located in metropolitan Louisville, central Kentucky and southern Indiana. Louisville, the largest city in Kentucky, is the location of Republics headquarters, as well as 18 additional banking centers. Republics central Kentucky market includes 13 banking centers in the following Kentucky cities: Bowling Green (1); Elizabethtown (1); Frankfort (2); Georgetown (1); Lexington, the second largest city in Kentucky (5); Owensboro (2); and Shelbyville (1). The Company opened a Loan Production Office (LPO) in Fort Wright, Kentucky in January 2006 and announced plans to open an additional LPO in Tampa, Florida in 2006. These LPOs will represent the Companys first entrance into these markets. Republic Bank & Trust Company of Indiana has banking centers located in New Albany and Jeffersonville, Indiana. Republic also has two LPOs (Republic Finance) located in Louisville, Kentucky that operate as a division of Republic Bank & Trust Company. Republic Finance offers an array of loan products to individuals who may not qualify under the Banks standard underwriting guidelines.
Republic has developed a community banking network, with most of its banking centers located either in separate communities or portions of urban areas that represent distinct communities. Each of Republics banking centers is managed by one or more officers with the decentralized authority to make loan decisions within Bank mandated policies, procedures and guidelines.
Banking related operating revenues are derived primarily from interest earned from the Banks loan and investment securities portfolios and fee income from loans, deposits and other banking products. The Company has historically extended credit and provided general banking services through its banking center network to individuals and businesses. Over the past several years, the Company has expanded into new lines of business to diversify its asset mix and further enhance its profitability. The Bank principally markets its banking products and services through the following delivery channels:
Mortgage Lending The Company generally retains adjustable rate residential real estate loans with fixed terms up to ten years. These loans are originated through the Companys retail banking center network and LPOs. Fixed rate residential real estate loans that are sold into the secondary market, and their accompanying servicing rights, which may be either sold or retained, are included as a component of the Companys Mortgage Banking segment and are discussed throughout this document. Commercial Lending Commercial loans are primarily real estate secured and are generated through banking centers in the Companys market areas. The Company makes commercial loans to a variety of industries and intends to promote this business through focused calling programs, in order to broaden relationships by providing business clients with loan, deposit and cash management services. |
25
Consumer Lending Traditional
consumer loans made by the Bank include home improvement and home equity
loans, as well as secured and unsecured personal loans. With the exception
of home equity loans, which are actively marketed in conjunction with
single family first lien mortgage loans, traditional consumer loan products
are not actively promoted in Republics markets.
Cash Management Services Republic provides various deposit products designed for businesses located throughout its market areas. Lockbox processing, business online banking, account reconciliation and Automated Clearing House (ACH) processing are additional services offered to businesses through the Cash Management department. The Premier First product is the Companys premium money market sweep account designed for business clients. Internet Banking Republic expands its market penetration and service delivery by offering clients Internet banking services and products through its Internet site, www.republicbank.com. Other Banking Services The Bank also provides trust services, title insurance products and other related financial institution lines of business. |
(II) Tax Refund Solutions (TRS)
Republic Bank & Trust Company is one of a limited number of financial institutions that facilitates the payment of federal and state tax refunds through tax preparers located throughout the U.S.. The Company facilitates the payment of these tax refunds through three primary products. For those taxpayers who apply and qualify, the Company offers a Refund Anticipation Loan (RAL). RALs are repaid when the taxpayers refunds are electronically received by the Company from the government. For those taxpayers who wish to receive their funds electronically via an ACH, the Company will provide an Electronic Refund Check (ERC) or an Electronic Refund Deposit (ERD) to the taxpayer. An ERC/ERD is issued to the taxpayer after the Company has received the tax refund from the federal or state government.
See Footnote 12 of Item 1. Financial Statements for a description of the securitization that the Company utilized during the first quarter of 2006. This securitization represents the sale of a portion of the RAL portfolio to a financial institution, and except for the capital that must be allocated for the small retained interest kept by the Company, it eliminates the funding impact on the regulatory capital ratios of the Company. The net gain on this securitization, which represents the net amount of the fees from the loans, the fees paid by Republic, and the recourse obligation or provision expense incurred by Republic on the sold loans, is classified as non interest income under the caption Net gain on sale of RALs.
See additional discussion about this product below under the section titled Results of Operations, as well as under Footnote 11 Segment Information of Item 1. Financial Statements.
(III) Mortgage BankingMortgage banking activities primarily include 15, 20 and 30-year fixed rate real estate loans that are sold into the secondary market. Since 2003, Republic has retained servicing on substantially all loans sold into the secondary market. Administration of loans with the servicing retained by the Company includes collecting principal and interest payments, escrowing funds for taxes and insurance and remitting payments to the secondary market investors. A fee is received by Republic for performing these standard servicing functions. See additional discussion about this product under Footnote 11 Segment Information of Item 1. Financial Statements.
(IV) Discontinued Operations (Deferred Deposits or Payday Lending)
Payday loans are transactions whereby customers receive cash advances in exchange for a check or authorization to electronically debit the customers checking account for the advanced amount plus a fixed fee. Under the Marketer/Servicer model, customers can reclaim their checks in cash for the amount of the advance plus the fee, on or before the due date of the advance. If the customer does not reclaim the check in cash by the advance due date, the check is deposited. Payday loan transactions are recorded as loans on the Companys financial statements. The
26
corresponding fees are recorded as a component of income from discontinued operations. The Company had $578,000 in payday loans outstanding at March 31, 2006, or less than one half of one percent of total loans outstanding.
The Bank substantially exited the payday loan segment of business during February 2006. This has been treated as a discontinued operation and all current period and prior period data has been restated to reflect operations absent of the payday loan segment of business.
See additional discussion about this product under Footnote 3 Discontinued Operations and Footnote 11 Segment Information of Item 1. Financial Statements.
RESULTS OF OPERATIONSFor 2006, TRS generated $4.9 million in RAL fee income, compared to $8.4 million for the same period in 2005. TRS also received $3.4 million in Electronic Refund Check (ERC) and Electronic Refund Deposit (ERD) revenue during 2006, compared to $5 million during 2005. The total volume of tax return refunds processed during the 2006 tax season was $1.2 billion, a moderate decline from the $1.4 billion processed for the 2005 tax season.
The Company signed an agreement in January 2006 to securitize RALs during the 2006 tax season. The Company implemented the securitization to provide an alternative liquidity vehicle to brokered deposits, which also allowed the Company to maintain a well-capitalized status. Approximately $213 million in loans were sold through the above mentioned securitization during the first quarter of 2006. Republic Bank & Trust Company used its liquid assets and borrowed overnight funds to fund the remainder of RALs. Income from the securitization recorded under non interest income as net gain on sale of RALs totaled $2 million for 2006.
The accounting for the securitization caused substantial comparability differences between some items of income and expense in comparing the first quarter of 2006 to the same period in 2005. The securitization had the effect of reclassifying fee income, interest expense, fees paid by Republic and recourse obligation expense related to the sold loans and recognizing the net amount as a gain on sale of loans as a component of non interest income.
Detail of Net gain on sale of refund anticipation loans follows:
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Refund anticipation loan fees on securitized RALs | $ | 4,230 | |
Recourse obligation expense on securitized RALs | (1,608 | ) | |
Other securitization costs | (608 | ) | |
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Net gain on sale of refund anticipation loans | $ | 2,014 | |
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See additional discussion about this product under Footnote 11 Segment Information of Item 1. Financial Statements.
Net Interest IncomeThe principal source of Republics revenue is net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
27
For the first quarter of 2006, net interest income was $24.8 million, a decline of $1.7 million or 7%, over the same period in 2005. Net interest income within the TRS segment decreased $3.2 million while net interest income within the traditional Banking Segment increased $1.6 million for the first quarter of 2006 compared to the same period in 2005. The decline in net interest income within TRS was the direct result of the RAL securitization, which effectively caused $4.2 million in RAL fees to be classified in non interest income because they were related to securitized RALs. The rise in net interest income within the Banking segment was primarily related to growth in the traditional loan portfolio, particularly within the residential real estate portfolio. Traditional Bank loans increased $274 million from March 31, 2005 to March 31, 2006.
The Companys net interest spread from continuing operations declined 64 basis points for the first quarter of 2006 compared to the same period in 2005 while net interest margin from continuing operations declined 50 basis points for the same period. Approximately 61 basis points of the decline in the net interest margin was the result of the fees on the securitized RALs now being classified in non-interest income while in past years all RALs were retained and their corresponding fees were included as a component of interest income on loans. The remainder of the decline in the net interest margin and net interest spread was the result of an increase in the Companys cost of funds without a corresponding increase in its yield on earning assets. More specifically, this contraction primarily occurred because much of the Companys funding is derived from large commercial cash management accounts that are tied to immediately repricing indices, while the majority of the Companys interest earning assets are real estate secured loans that reprice over a longer period. Based on the Companys current balance sheet structure, management believes that the net interest spread and margin in 2006 will continue to contract unless short-term rates decline significantly from current levels. Management is unable to precisely determine the negative impact of continued contraction on the Companys net interest spread and margin in the future.
For additional information on the past effect of rising short-term interest rates on Republic's net interest income, see section titled Volume/Rate Variance Analysis in this section of the document. For additional information on the future effect of rising short-term interest rates on Republics net interest income, see section titled Interest Rate Sensitivity in this section of the document. For additional discussion regarding the securitization, see the section titled Tax Refund Solutions and Footnote 12 of Item 1. Financial Statements.
Table 1 provides detailed information as to average balances, interest income/expense and rates by major balance sheet category for the three month period ended March 31, 2006 and 2005. Table 2 provides an analysis of the changes in net interest income attributable to changes in rates and changes in volume of interest-earning assets and interest-bearing liabilities.
28
Table 1 Average Balance Sheets and Interest Rates for the Three Months Ended March 31, 2006 and 2005
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(dollars in thousands) |
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ASSETS | |||||||||||||||||
Earning assets: | |||||||||||||||||
Investment securities(1) | $ | 524,139 | $ | 5,852 | 4.47 | % | $ | 560,389 | $ | 4,678 | 3.34 | % | |||||
Federal funds sold and other | 5,713 | 57 | 3.99 | 91,970 | 569 | 2.47 | |||||||||||
Total loans and fees(2) | 2,103,869 | 37,859 | 7.20 | 1,836,603 | 34,901 | 7.60 | |||||||||||
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Earning assets of continuing operations | 2,633,721 | 43,768 | 6.65 | 2,488,962 | 40,148 | 6.45 | |||||||||||
Earning assets of discontinued operations | 3,079 | 507 | 65.87 | 28,713 | 3,261 | 45.43 | |||||||||||
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Total earning assets | 2,636,800 | 44,275 | 6.72 | 2,517,675 | 43,409 | 6.90 | |||||||||||
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Less: Allowance for loan losses from continuing operations | 11,702 | 12,691 | |||||||||||||||
Less: Allowance for loan losses from discontinued operations | 261 | 2,085 | |||||||||||||||
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Less: Total Allowance for loan losses | 11,963 | 14,776 | |||||||||||||||
Non-earning assets: | |||||||||||||||||
Cash and cash equivalents | 53,344 | 59,323 | |||||||||||||||
Premises and equipment, net | 32,305 | 33,588 | |||||||||||||||
Other assets(1) | 39,089 | 25,704 | |||||||||||||||
Non-earning assets of discontinued operations | 1,088 | 26,193 | |||||||||||||||
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Assets of continuing operations | 2,746,757 | 2,594,886 | |||||||||||||||
Assets of discontinued operations | 3,906 | 52,821 | |||||||||||||||
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Total assets | $ | 2,750,663 | $ | 2,647,707 | |||||||||||||
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LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||
Transaction accounts | $ | 293,620 | $ | 824 | 1.12 | % | $ | 341,904 | $ | 826 | 0.97 | % | |||||
Money market accounts | 376,549 | 3,111 | 3.30 | 300,974 | 1,202 | 1.60 | |||||||||||
Time deposits | 483,414 | 4,395 | 3.64 | 467,263 | 3,839 | 3.29 | |||||||||||
Brokered certificates of deposit | 165,353 | 1,677 | 4.06 | 128,021 | 1,025 | 3.20 | |||||||||||
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Total deposits | 1,318,936 | 10,007 | 3.03 | 1,238,162 | 6,892 | 2.23 | |||||||||||
Repurchase agreements and other short-term borrowings | 329,233 | 3,268 | 3.97 | 387,046 | 2,127 | 2.20 | |||||||||||
Federal Home Loan Bank borrowings | 504,719 | 5,109 | 4.05 | 456,543 | 4,634 | 4.06 | |||||||||||
Subordinate note | 41,240 | 620 | 6.01 | - | - | - | |||||||||||
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Interest-bearing liabilities of continuing operations | 2,194,128 | 19,004 | 3.46 | 2,081,751 | 13,653 | 2.62 | |||||||||||
Interest-bearing liabilities of discontinued operations | 2,555 | 26 | 4.07 | 27,719 | 169 | 2.44 | |||||||||||
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Total interest-bearing liabilities | 2,196,683 | 19,030 | 3.47 | 2,109,470 | 13,822 | 2.62 | |||||||||||
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Non-interest-bearing liabilities and stockholders equity: | |||||||||||||||||
Non-interest-bearing deposits | 302,954 | 311,824 | |||||||||||||||
Other liabilities | 31,179 | 19,736 | |||||||||||||||
Non-interest-bearing liabilities of discontinued operations | - | 5,075 | |||||||||||||||
Stockholders' equity | 219,847 | 201,602 | |||||||||||||||
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Total liabilities and stockholders' equity | $ | 2,750,663 | $ | 2,647,707 | |||||||||||||
Net interest income from continuing operations | 24,764 | 26,495 | |||||||||||||||
Net interest income from discontinued operations | 481 | 3,092 | |||||||||||||||
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Net interest income | $ | 25,245 | $ | 29,587 | |||||||||||||
Net interest spread from continuing operations | 3.19 | % | 3.83 | % | |||||||||||||
Net interest spread from discontinued operations | 61.80 | % | 42.99 | % | |||||||||||||
Net interest spread | 3.25 | % | 4.28 | % | |||||||||||||
Net interest margin from continuing operations | 3.76 | % | 4.26 | % | |||||||||||||
Net interest margin from discontinued operations | 62.49 | % | 43.07 | % | |||||||||||||
Net interest margin | 3.83 | % | 4.70 | % |
(1) | For the purpose of this calculation, the fair market value adjustment on investment securities resulting from SFAS 115 is included as a component of other assets. |
(2) | The amount of loan fee income included in interest income from continuing operations was $5.1 million and $8.8 million for the three months ended March 31, 2006 and 2005. The amount of loan fee income included in interest income from discontinued operations was $507,000 and $3.3 million for the three months ended March 31, 2006 and 2005. |
29
The following table illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected Republic's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 2 Volume/Rate Variance Analysis
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Interest income: | |||||||||
Investment securities | $ | 1,174 | $ | (319 | ) | $ | 1,493 | ||
Federal funds sold and other | (512 | ) | (732 | ) | 220 | ||||
Loans and fees | 2,958 | 4,882 | (1,924 | ) | |||||
Discontinued operations | (2,754 | ) | (3,782 | ) | 1,028 | ||||
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Net change in interest income | 866 | 49 | 817 | ||||||
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Interest expense: | |||||||||
Transaction accounts | (2 | ) | (126 | ) | 124 | ||||
Money market accounts | 1,909 | 363 | 1,546 | ||||||
Time deposits | 556 | 136 | 420 | ||||||
Brokered certificates of deposit | 652 | 340 | 312 | ||||||
Repurchase agreements and other short-term | |||||||||
borrowings | 1,141 | (358 | ) | 1,499 | |||||
Federal Home Loan Bank borrowings | 475 | 488 | (13 | ) | |||||
Subordinated note | 620 | 620 | - | ||||||
Discontinued operations | (143 | ) | (213 | ) | 70 | ||||
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Net change in interest expense | 5,208 | 1,250 | 3,958 | ||||||
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Net change in net interest income | $ | (4,342 | ) | $ | (1,201 | ) | $ | (3,141 | ) |
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30
Non interest income increased $1.1 million or 10% during the three months ended March 31, 2006 compared to the same period in 2005, due primarily to the net gain on sale of RALs and an increase in service charges on deposit accounts.
Service charges on deposit accounts increased $851,000, or 26%, during the three months ended March 31, 2006 compared to the same period in 2005, due primarily to growth in the Companys checking account base supported by the Banks Overdraft Honor program, which permits selected clients to overdraft their accounts up to a predetermined dollar amount (up to a maximum of $750) for the Banks customary overdraft fee. The Company also increased its overdraft fee by 7% in August 2005 while the total number of accounts eligible for the Overdraft Honor program increased to 57,000 at March 31, 2006 from 51,000 at March 31, 2005.
ERC/ERD fees decreased $1.6 million, or 31%, to $3.4 million during the first quarter of 2006. This decrease was due to a 27% decrease in ERC/ERD volume from prior year resulting primarily from the discontinuation of business with one large integrated software partner.
Net gain on sale of RALs was $2 million for the first quarter of 2006 as the Company completed its first securitization ever of a portion of the RAL portfolio. See additional discussion above under Tax Refund Solutions and under Footnote 11 Segment Information of Item 1. Financial Statements.
Non-interest ExpensesNon-interest expenses increased $2.6 million during the quarter ended March 31, 2006 compared to the same period in 2005. Salaries and employee benefits increased $1.8 million during the quarter, attributable to annual merit increases and increased incentive compensation accruals and stock option compensation expense. The Company recorded stock option expense of $216,000 in 2006 related to the adoption of SFAS 123R, while full time equivalent employees (FTEs) increased from 641 at March 31, 2005 to 662 at March 31, 2006.
Occupancy and equipment expense increased $367,000, or 11%, during the first quarter of 2006. The increase in occupancy and equipment was primarily attributable to general maintenance and repairs, increased rent for the Companys operations areas, and relocation expenses of several departments within the Company.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2006 AND DECEMBER 31, 2005
LoansNet loans, primarily consisting of secured real estate loans, increased by $50 million to $2.1 billion at March 31, 2006. This growth is partly attributable to the residential real estate portfolio, which increased $26 million during the first quarter of 2006 as a result of the Companys promotional $299 Closing Cost products.
Allowance for Loan Losses and Provision for Loan Losses
The Company posted a provision for loan losses of $1.3 million for the quarter ended March 31, 2006, compared to a provision of $1.6 million for the same period in 2005. Also included in the provision for loan losses were $883,000 and $1.6 million for losses associated with RALs during the three months ended March 31, 2006 and 2005, respectively. The banking segment provision for loan losses increased $418,000 during the first quarter of 2006 primarily due to loan growth.
The allowance for loan losses as a percent of total loans declined slightly to 0.52% at March 31, 2006 as compared to 0.53% as of December 31, 2005. Management believes, based on information presently available, that it has adequately provided for loan losses at March 31, 2006.
31
An analysis of the changes in the allowance for loan losses and selected ratios follows:
Table 3 - Summary of Loan Loss Experience
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Allowance for loan losses at beginning of period | $ | 11,009 | $ | 13,554 | ||
Charge offs: | ||||||
Real estate: | ||||||
Residential | (300 | ) | (77 | ) | ||
Commercial | (30 | ) | (102 | ) | ||
Construction | - | - | ||||
Commercial | - | - | ||||
Consumer | (91 | ) | (126 | ) | ||
Home equity | (54 | ) | (41 | ) | ||
Tax Refund Solutions | (876 | ) | (1,928 | ) | ||
Discontinued operations | (409 | ) | - | |||
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Total | (1,760 | ) | (2,274 | ) | ||
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Recoveries: | ||||||
Real estate: | ||||||
Residential | 28 | 7 | ||||
Commercial | 5 | 4 | ||||
Construction | 79 | - | ||||
Commercial | 4 | 10 | ||||
Consumer | 79 | 7 | ||||
Home equity | 3 | 93 | ||||
Tax Refund Solutions | 475 | 600 | ||||
Discontinued operations | 64 | - | ||||
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Total | 737 | 721 | ||||
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Net loan charge offs / recoveries | (1,023 | ) | (1,553 | ) | ||
Provision for loan losses from continuing operations | 1,330 | 1,590 | ||||
Provision for loan losses from discontinued operations | (293 | ) | 230 | |||
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Allowance for loan losses at end of period | $ | 11,023 | $ | 13,821 | ||
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Ratios: | ||||||
Allowance for loan losses to total loans | 0.52 | % | 0.74 | % | ||
Net loan charge offs to average loans outstanding (annualized) | 0.13 | 0.34 | ||||
Allowance for loan losses to non-performing loans | 184 | 203 |
Deposits
Total deposits increased $34 million from December 31, 2005 to $1.6 billion at March 31, 2006. Interest-bearing deposits increased $20 million while non interest-bearing deposits increased $14 million from December 31, 2005 to March 31, 2006.
The increase in non interest-bearing accounts relates primarily to short-term funds received from TRS. Due to the seasonality of the business, the non interest-bearing funds from TRS are expected to decline to near $0 by the end of the second quarter of 2006.
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
Securities sold under agreements to repurchase and other short-term borrowings increased $22 million during the first quarter of 2006 to $315 million. The majority of this increase was attributable to one large cash management account which increased $23 million. Based on the transactional nature of the Companys cash management accounts, repurchase agreement balances are subject to large fluctuations on a daily basis.
32
FHLB Borrowings decreased $67 million, or 12%, to $495 million at March 31, 2006. Maturing advances were paid off during the quarter as the Company utilized excess cash from maturing available for sale securities.
Approximately $115 million of the Companys advances have overnight maturities with a weighted average coupon rate of 4.99% . Approximately $304 million of the Companys advances are fixed, with maturities ranging from less than one to five years. The current weighted average maturity of the fixed FHLB advances at March 31, 2006 is 2 years with a weighted average coupon rate of 4.03% .
The remaining FHLB borrowings consist of convertible advances with original fixed rate periods ranging from one to five years and original maturities ranging from three to ten years. At the end of their respective fixed rate periods, the FHLB has the right to convert the borrowings to floating rate advances tied to LIBOR. If the FHLB elects to convert the debt to a floating rate instrument, Republic has the right to pay off the advances without penalty. During the first quarter of 2006, the FHLB converted $15 million in advances to floating rate, overnight borrowings. At March 31, 2006, the Company still had $75 million of these borrowings with a weighted average coupon of 4.86% that were eligible to be converted by the FHLB. Based on market conditions at this time, management believes it is likely these advances could be converted to floating rate borrowings by the FHLB during 2006.
LIQUIDITYRepublic maintains sufficient liquidity to fund loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of securities available for sale, principal paydowns on loans and MBSs and proceeds realized from loans held for sale. The Companys liquidity is impacted by its ability to sell securities, which is limited, due to the level of securities that are needed to secure public deposits, securities sold under agreements to repurchase and for other purposes, as required by law. At March 31, 2006, these securities had a fair market value of $394 million. Republics banking centers and its Internet site, www.republicbank.com, provide access to retail deposit markets. These retail deposits, if offered at attractive rates, have historically been a source of additional funding when needed. In addition, brokered certificates of deposit have provided a source of liquidity to the Company when needed to fund loan growth.
Traditionally, the Company has also utilized secured and unsecured borrowing lines to supplement its funding requirements. At March 31, 2006, the Company had capacity with the Federal Home Loan Bank to borrow an additional $223 million. The Company also had $175 million in approved unsecured line of credit facilities available at March 31, 2006 through various third party sources.
The Companys principal source of funds for dividend payments is dividends received from the Bank. Kentucky and Indiana banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current years net profits, combined with the retained net profits of the preceding two years. At March 31, 2006, Republic Bank & Trust Company and Republic Bank & Trust Company of Indiana could, without prior approval, declare dividends of approximately $38 million and $241,000, respectively. The Company does not plan to pay dividends from Republic Bank & Trust Company of Indiana in the foreseeable future.
Also, see section titled Tax Refund Solutions for discussion of the securitization of the RAL portfolio and its impact on liquidity.
CAPITALTotal stockholders equity increased from $214 million at December 31, 2005 to $222 million at March 31, 2006. The increase in stockholders equity was primarily attributable to net income earned during 2006 reduced by dividends declared, the repurchase of Company stock and the decline in accumulated other comprehensive income/(loss) as a result of a decrease in the value of the available for sale securities portfolio.
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During the first quarter of 2006 the Company did not purchase any shares of its common stock except for shares acquired through stock option exercises. During the third quarter of 2005, the Companys Board of Directors approved the repurchase of an additional 262,500 shares, from time to time, if market conditions are deemed favorable to the Company. The repurchase program will remain effective until the number of shares authorized is repurchased or until Republics Board of Directors terminates the program. As of March 31, 2006, the Company had 48,697 shares which could be purchased under the current program.
Regulatory Capital Requirements The Parent Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republics financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Companys assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The FDIC has categorized the Bank as well capitalized. To be categorized as well capitalized, the Bank must maintain minimum Total Risk Based, Tier I Risk Based and Tier I Leverage ratios. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Republic continues to exceed the regulatory requirements for Tier I leverage, Tier I risk based and total risk based capital. Republic and the Bank intend to maintain a capital position that meets or exceeds the well capitalized requirements as defined by the Federal Reserve and FDIC. Republics average capital to average assets ratio was 7.99% at March 31, 2006 compared to 8.00% at December 31, 2005. Formal measurements of the capital ratios for the Company and Republic Bank & Trust Company are performed at each quarter end.
In August 2005, Republic Bancorp Capital Trust (RBCT), an unconsolidated trust subsidiary of Republic Bancorp, Inc., issued $40 million in Trust Preferred Securities (TPS). The TPS pay a fixed interest rate for 10 years and adjust with LIBOR thereafter. Treated as Tier I capital for regulatory purposes, the TPS mature on September 30, 2035 and are redeemable at the Companys option after ten years. The sole asset of RBCT represents the proceeds of the offering loaned to Republic Bancorp, Inc. in exchange for subordinated debentures which have terms that are similar to the TPS. The subordinated debentures and the related interest expense, which are payable quarterly at the annual rate of 6.015%, are included in the consolidated financial statements. The proceeds obtained from the TPS offering have been and will continue to be utilized to fund loan growth, support an existing stock repurchase program and for other general business purposes.
The following table sets forth the Companys risk based capital amounts and ratios as of March 31, 2006 and December 31, 2005.
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Table 4 Capital Ratios
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(dollars in thousands) |
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Total Risk Based Capital (to Risk Weighted Assets) | |||||||||||
Republic Bancorp, Inc. | $ | 277,543 | 15.40 |
% |
$ | 267,054 | 15.03 |
% |
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Republic Bank & Trust Co. | 230,993 | 13.25 | 220,730 | 12.78 | |||||||
Republic Bank & Trust Co. of Indiana | 11,384 | 19.35 | 11,488 | 22.76 | |||||||
Tier I Capital (to Risk Weighted Assets) | |||||||||||
Republic Bancorp, Inc. | 266,520 | 14.79 | 256,046 | 14.41 | |||||||
Republic Bank & Trust Co. | 197,108 | 11.31 | 186,905 | 10.82 | |||||||
Republic Bank & Trust Co. of Indiana | 10,796 | 18.35 | 10,855 | 21.51 | |||||||
Tier I Leverage Capital (to Average Assets) | |||||||||||
Republic Bancorp, Inc. | 266,520 | 9.69 | 256,046 | 9.47 | |||||||
Republic Bank & Trust Co. | 197,108 | 7.22 | 186,905 | 7.12 | |||||||
Republic Bank & Trust Co. of Indiana | 10,796 | 14.72 | 10,855 | 13.62 |
REGULATORY MATTERS
On July 22, 2005 Republic Bank & Trust Company received its most recent Community Reinvestment Act (CRA) performance evaluation prepared as of October 4, 2004. The FDIC concluded that Republic Bank & Trust Company violated Regulation B related to its RAL line of business and assigned a Needs to Improve rating. Republic Bank & Trust Company voluntarily changed certain procedures and processes to address the Regulation B issues raised by the FDIC during the CRA Evaluation. As required by statute, the FDIC referred their conclusions regarding the Regulation B violations to the Department of Justice (DOJ). Also by statute, a financial holding company, such as the Company, that controls a Bank with a less than satisfactory CRA rating, has limitations on certain future business activities until the CRA rating improves. Management does not believe these limitations will have any material effect on the Companys current business plans. At this time, there has been no corrective action recommended or imposed by the FDIC or the DOJ.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Asset/liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards and achieve acceptable net interest income. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. Management, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be Republics most significant market risk in a fluctuating rate environment.
The interest sensitivity profile of Republic at any point in time will be affected by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by market interest rates, deposit growth, loan growth and other factors.
Republic utilizes an earnings simulation model to analyze net interest income sensitivity. Potential changes in market interest rates and their subsequent effects on net interest income are evaluated with the model. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis point increments equally across all points on the yield curve. These projections are computed based on various assumptions, which are used to determine the 100 and 200 basis point increments, as well as the base case (which is a twelve month projected amount) scenario. Assumptions based on growth expectations and on the historical behavior of Republics deposit and loan rates and their related balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the models simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the
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yield curve. The March 31, 2006 simulation analysis indicates that an increase in interest rates would have a negative effect on net interest income, and a decrease in interest rates would have a positive effect on net interest income.
The following table illustrates Republic's estimated annualized earnings sensitivity profile based on the asset/liability model as of March 31, 2006:
Table 5 Interest Rate Sensitivity
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Increase 200 basis points | -9.20 | % |
Increase 100 basis points | -4.95 | |
Decrease 100 basis points | 3.93 | |
Decrease 200 basis points | 7.57 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Information required by this item is included under Part I, Item 2., Managements Discussion and Analysis of Financial Condition and Results of Operation and Item 1A. Risk Factors.
Item 4. Controls and Procedures.As of the end of the period covered by this report, an evaluation was carried out by Republic Bancorp, Inc.s management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the first quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATIONIn the ordinary course of operations, Republic and the Bank are defendants in various legal proceedings. In the opinion of management, there is no proceeding pending or, to the knowledge of management, threatened litigation in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic or the Bank.
Item 1A.Information regarding risk factors appears in the Companys Form 10-K for the year ending December 31, 2005, under the heading titled Cautionary Statement Regarding Forward-Looking Statements and in the Form 10-K Part I, Item 1A. Risk Factors. There has been no material changes from the risk factors previously disclosed in our Form 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Details of Republics Class A Common Stock purchases during the first quarter of 2006 are included in the following table:
Total Number of | Maximum | |||||||||
Shares | Number of Shares | |||||||||
Purchased | that May Yet Be | |||||||||
Total Number of | as Part of Publicly | Purchased | ||||||||
Shares |
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Announced Plans or | Under the Plan or | |||||||
Period | Purchased |
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Programs | Programs | ||||||
January 1 January 31 | 12,200 | * | $ | 20.77 | - | 48,697 | ||||
Feb. 1 Feb. 28 | 840 | * | 20.27 | - | 48,697 | |||||
March 1 March 31 | - | - | - | 48,697 | ||||||
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Total | 13,040 | $ | 20.74 | |||||||
* - Represents shares repurchased by the Company in connection with stock option exercises. |
During the first quarter of 2006 the Company did not repurchase any shares in addition to the stock option exercises detailed above. During the third quarter of 2005, the Companys Board of Directors approved the repurchase of an additional 262,500 shares, from time to time, if market conditions are deemed favorable to the Company. The repurchase program will remain effective until the number of shares authorized is repurchased or until Republics Board of Directors terminates the program. As of March 31, 2006, the Company had 48,697 shares which could be repurchased under the current stock repurchase program.
During the first quarter of 2006, Republic issued approximately 2,000 shares of Class A Common Stock upon conversion of shares of Class B Common Stock by shareholders of Republic in accordance with the share-for-share conversion provision option of the Class B Common Stock. The exemption from registration of the newly issued Class A Common Stock relied upon was Section (3)(a)(9) of the Securities Act of 1933.
There were no equity securities of the registrant sold without registration during the quarter covered by this report.
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Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the shareholders of Republic Bancorp, Inc. was held on April 25, 2006. The following item was considered:
Election of the following nominees to the Companys Board of Directors for the ensuing year:
Nominee | For |
Withheld |
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Bernard M. Trager |
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40,632 | ||
Steven E. Trager |
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40,024 | ||
A. Scott Trager |
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39,230 | ||
Bill Petter |
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38,733 | ||
R. Wayne Stratton |
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87,582 | ||
Henry M. Altman, Jr. |
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304,241 | ||
Sandra Metts Snowden |
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41,354 | ||
Susan Stout Tamme |
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431,556 | ||
Charles E. Anderson |
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24,612 |
As previously disclosed in the Form 8-K dated April 7, 2006, Mr. Petter announced his retirement as Vice Chairman of Republic Bancorp, Inc. and as Executive Vice President and Chief Operating Officer of Republic Bank & Trust Company effective May 1, 2006. At its next scheduled board meeting in May, it is expected that the Board of Directors will reduce the number of Holding Company directors to eight.
Item 6. Exhibits.
(a) Exhibits
The following exhibits are filed or furnished as a part of this report:
Exhibit Number |
Description of Exhibit | |
31.1 |
Certification of Principal Executive Officer, pursuant to Rules 13a-14(a) of | |
the Sarbanes-Oxley Act of 2002. | ||
31.2 |
Certification of Principal Financial Officer, pursuant to Rules 13a-14(a) of | |
the Sarbanes-Oxley Act of 2002. | ||
32.1* |
Certification of Principal Executive Officer, pursuant to 18 U.S.C Section | |
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2* |
Certification of Principal Financial Officer, pursuant to 18 U.S.C Section | |
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | This certification shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REPUBLIC BANCORP, INC. (Registrant) Principal Executive Officer: |
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May 9, 2006 | By: | Steven E. Trager
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Principal Financial Officer: | ||
May 9, 2006 | By: |
Kevin Sipes |
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