UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ýQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
OR
oTransition 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)
Kentucky
61-0862051
(State of other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
(Address of principal executive offices)
(Zip Code)
(502) 584-3600
(Registrant’s 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.
ýYes oNo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
oYes ýNo
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
16,338,356 shares of Class A Common Stock, no par value and 2,144,933 shares of Class B Common Stock, no par value were outstanding at October 31, 2005, the latest practicable date.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Item 4.
Controls and Procedures.
PART II - OTHER INFORMATION
Legal Proceedings.
Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6.
Exhibits.
EX-10.1
Lease between Republic Bank & Trust Company and Teeco Properties
EX-10.2
Lease between Republic Bank & Trust Company and Jaytee Properties
EX-31.1
Section 302 Certification of Principal Executive Officer
EX-31.2
Section 302 Certification of Principal Financial Officer
EX-32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350
EX-32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C Section 1350
SIGNATURES
2
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS (in thousands)
September 30
December 31
2005
2004
(unaudited)
ASSETS:
Cash and cash equivalents
$
87,810
77,850
Securities available for sale
391,641
453,360
Securities to be held to maturity (fair value of $64,424 in 2005 and $98,129 in 2004)
64,157
98,233
Mortgage loans held for sale
15,616
16,485
Loans, net of allowance for loan losses of $11,123 and $13,554 (2005 and 2004)
1,955,017
1,775,545
Federal Home Loan Bank stock, at cost
21,336
20,321
Premises and equipment, net
31,683
33,843
Other assets and accrued interest receivable
36,067
23,285
TOTAL ASSETS
2,603,327
2,498,922
LIABILITIES:
Deposits:
Non-interest-bearing
284,870
261,993
Interest-bearing
1,273,707
1,155,937
Total deposits
1,558,577
1,417,930
Securities sold under agreements to repurchase and other short-term borrowings
281,562
364,828
Federal Home Loan Bank borrowings
483,673
496,387
Subordinate note
41,240
—
Other liabilities and accrued interest payable
24,354
23,708
Total liabilities
2,389,406
2,302,853
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value
Class A Common Stock and Class B Common Stock, no par value
4,517
4,381
Additional paid in capital
77,821
58,117
Retained earnings
135,365
135,949
Unearned shares in Employee Stock Ownership Plan
(1,577
)
(1,894
Accumulated other comprehensive loss
(2,205
(484
Total stockholders’ equity
213,921
196,069
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
INTEREST INCOME:
Loans, including fees
31,844
27,660
101,646
89,169
Securities
4,466
3,205
13,393
8,608
Federal Home Loan Bank stock and other
623
296
2,025
961
Total interest income
36,933
31,161
117,064
98,738
INTEREST EXPENSE:
Deposits
8,101
5,262
22,366
15,210
2,613
1,113
7,190
2,471
5,155
4,196
14,781
12,503
317
Total interest expense
16,186
10,571
44,654
30,184
NET INTEREST INCOME
20,747
20,590
72,410
68,554
Provision for loan losses
(2,585
(127
(968
1,475
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
23,332
20,717
73,378
67,079
NON-INTEREST INCOME:
Service charges on deposit accounts
4,145
3,578
11,218
9,902
Electronic refund check fees
77
61
5,905
5,253
Title insurance commissions
481
329
1,266
1,087
Mortgage banking income
797
757
2,149
2,299
Debit card interchange fee income
787
663
2,311
1,774
Other
273
210
967
870
Total non-interest income
6,560
5,598
23,816
21,185
NON-INTEREST EXPENSES:
Salaries and employee benefits
9,244
8,411
28,335
26,277
Occupancy and equipment, net
3,319
3,444
9,897
10,466
Communication and transportation
689
741
2,192
2,094
Marketing and development
728
534
1,772
1,722
Bankshares tax
600
485
1,680
1,604
Data processing
509
405
1,359
1,181
Debit card interchange fee expense
348
287
1,003
801
2,268
1,394
6,477
4,679
Total non-interest expenses
17,705
15,701
52,715
48,824
INCOME BEFORE INCOME TAX EXPENSE
12,187
10,614
44,479
39,440
INCOME TAX EXPENSE
4,137
3,632
15,167
13,552
NET INCOME
8,050
6,982
29,312
25,888
4
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Change in unrealized gain (loss) on securities
(643
(1,721
(774
Less: Reclassification of realized amount
Net unrealized gain (loss) recognized in comprehensive income
COMPREHENSIVE INCOME
7,407
8,163
27,591
25,114
BASIC EARNINGS PER SHARE:
Class A Common Share
0.43
0.37
1.56
1.38
Class B Common Share
0.42
0.36
1.53
1.36
DILUTED EARNINGS PER SHARE:
0.41
1.49
1.33
0.40
0.35
1.47
1.31
5
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Unearned
Common Stock
Shares in
Accumulated
Class A
Class B
Additional
Empl. Stock
Total
Shares
Paid In
Retained
Ownership
Comprehensive
Stockholders’
Outstanding
Amount
Capital
Earnings
Plan
Loss
Equity
BALANCE, January 1, 2005
16,738
Net Income
Net change in accumulated other comprehensive loss
Dividend declared Common Stock:
Class A ($0.249 per share)
(4,207
Class B ($0.227 per share)
(487
Stock options exercised, net of shares redeemed
28
7
412
(217
202
Repurchase of Class A Common Stock
(269
(65
(1,132
(4,760
(5,957
Conversion of Class B Common Stock to Class A Common Stock
(4
Shares committed to be released under the Employee Stock Ownership Plan
27
613
Stock dividend
194
20,031
(20,225
Note receivable on common stock, net of cash payments
Deferred compensation expense
95
BALANCE, September 30, 2005
16,528
2,145
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (in thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net
3,417
7,097
Federal Home Loan Bank stock dividends
(745
(605
Net gain on sale of mortgage loans held for sale
(1,787
(2,182
Origination of mortgage loans held for sale
(171,273
(189,163
Proceeds from sale of mortgage loans held for sale
173,929
193,324
Employee Stock Ownership Plan expense
465
Changes in other assets and liabilities:
(11,276
(2,129
147
1,092
Net cash provided by operating activities
21,369
35,262
INVESTING ACTIVITIES:
Purchases of securities available for sale
(3,339,058
(2,871,540
Purchases of securities to be held to maturity
(31,514
Purchases of Federal Home Loan Bank stock
(270
(353
Proceeds from calls, maturities and paydowns of securities available for sale
3,400,240
2,815,718
Proceeds from calls, maturities and paydowns of securities to be held to maturity
34,040
56,701
Net increase in loans
(178,796
(154,015
Investment in unconsolidated subsidiary
(1,240
Purchases of premises and equipment, net
(2,088
(6,348
Net cash used in investing activities
(87,172
(191,351
FINANCING ACTIVITIES:
Net increase in deposits
140,647
103,552
Net change in securities sold under agreements to repurchase and other short-term borrowings
(83,266
97,744
Payments on Federal Home Loan Bank borrowings
(53,047
(5,676
Proceeds from Federal Home Loan Bank borrowings
40,333
5,807
Net proceeds from subordinate note
Common Stock repurchases
(301
Proceeds from Common Stock options exercised, net
746
Cash dividends paid
(4,389
(3,601
Net cash provided by financing activities
75,763
198,271
NET CHANGE IN CASH AND CASH EQUIVALENTS
9,960
42,182
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
60,876
CASH AND CASH EQUIVALENTS AT END OF PERIOD
103,058
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
43,658
30,644
Income taxes
13,264
12,055
SUPPLEMENTAL NON-CASH DISCLOSURES:
Transfers from loans to real estate acquired in settlement of loans
294
1,158
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – SEPTEMBER 30, 2005 AND 2004
(UNAUDITED) AND DECEMBER 31, 2004
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 100%-owned unconsolidated finance subsidiary of Republic Bancorp, Inc. The consolidated financial statements also include the wholly-owned subsidiaries of Republic Bank & Trust Company: 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 accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in Republic’s Annual Report on Form 10-K for the year ended December 31, 2004.
Stock Option Plans– Employee compensation expense under stock option plans is reported using the intrinsic value method. No stock based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.
The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock Based Compensation”:
9
Three months ended
Nine months ended
(dollars in thousands, except per share data)
Net income, as reported
Deduct:
Stock based compensation expense determined under the fair value based method, net of tax
379
133
1,090
397
Pro forma net income
7,671
6,849
28,222
25,491
Earnings per share as reported:
Pro forma earnings per share:
1.52
1.35
1.50
1.34
Diluted earnings per share as reported:
Pro forma diluted earnings per share:
1.46
0.39
0.34
1.43
1.29
Options granted during the nine months ended September 30, 2005 totaled 41,000. There were no options granted during the third quarter of 2005. There were approximately 508,000 options granted during the nine month period ended September 30, 2004 with all of these options being granted during the third quarter of 2004.
In April 2005, an amendment was issued to Statement of Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004) (“SFAS No. 123R”), “Share-Based Payment” regarding the compliance date for implementation. The Company will prospectively adopt SFAS 123R on January 1, 2006, as required by this amendment.
The effect on results of operations of future option grants will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so the future impact to the results of operations cannot currently be predicted. Upon adoption, there will be no significant effect on the Company’s financial position.
Recently Adopted Accounting Standards – There are no new accounting pronouncements other than SFAS 123R discussed above in the section titled “Stock Option Plans” that will have a material impact on Republic’s consolidated financial statements.
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 2005.
10
2. SECURITIES
Securities available for sale:
Gross
Amortized
Unrealized
September 30, 2005 (in thousands)
Cost
Gains
Losses
Fair Value
U.S. Treasury securities and U.S. Government agencies
267,960
(2,321
265,639
Mortgage backed securities, including CMOs
127,073
(1,270
126,005
Total securities available for sale
395,033
(3,591
December 31, 2004 (in thousands)
292,925
29
(1,257
291,697
161,179
755
(271
161,663
454,104
784
(1,528
Securities to be held to maturity:
Unrecognized
12,110
(112
11,998
52,047
679
(300
52,426
Total securities to be held to maturity
(412
64,424
20,112
(55
20,057
78,121
131
(180
78,072
(235
98,129
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)
September 30, 2005
December 31, 2004
Amortized cost
380,368
454,483
Fair value
377,737
453,677
11
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
Three months ended September 30
Nine months ended September 30
Balance, beginning of period
13,382
13,530
13,554
13,959
Charge offs - Banking
(220
(854
(981
Charge offs - Tax Refund Solutions
(2
(2,213
(3,403
Recoveries - Banking
200
337
562
789
Recoveries - Tax Refund Solutions
346
209
1,042
1,696
Balance, end of period
11,123
13,535
Information regarding Republic’s impaired loans is as follows:
Loans with no allocated allowance for loan losses
Loans with allocated allowance for loan losses
2,713
2,687
Amount of the allowance for loan losses allocated
846
1,065
No additional funds are committed to be advanced in connection with the above impaired loans.
Detail of non-performing loans is as follows:
Non-performing loans were as follows:
Loans past due 90 days or more and still on accrual
2,484
371
Non-accrual loans
6,661
5,763
4. FEDERAL HOME LOAN BANK (“FHLB”) BORROWINGS
FHLB convertible fixed interest rate advances with a weighted average interest rate of 5.17%(1) due through 2011
115,000
FHLB fixed interest rate advances with a weighted average interest rate of 3.86% due through 2035
368,673
381,387
(1) Represents convertible advances with the FHLB. These advances have original fixed rate periods ranging from one to five years with the original maturities ranging from three to ten years if not converted earlier by the FHLB. 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 advances are collateralized by a blanket pledge of eligible real estate loans. At September 30, 2005, Republic had available collateral to borrow an additional $191 million from the FHLB.
12
5. TRUST PREFERRED SECURITIES
On August 16, 2005, Republic Bancorp Capital Trust (“RBCT”), an unconsolidated trust subsidiary of Republic Bancorp, Inc., issued $40 million in Trust Preferred Securities. The Trust Preferred Securities pay a fixed interest rate for 10 years and adjust with LIBOR thereafter. Currently treated as Tier 1 capital for regulatory purposes, the Trust Preferred Securities mature on September 30, 2035 and are redeemable at the Company’s 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 Trust Preferred Securities. 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. The proceeds obtained from the Trust Preferred Securities offering will be used to fund loan growth, support an existing stock repurchase program and for other general business purposes.
6. COMMITMENTS TO EXTEND CREDIT
As of September 30, 2005, the Company had various commitments outstanding that arose in the normal course of business, such as standby letters of credit and commitments to extend credit, which are properly not reflected in the financial statements. In management’s opinion, commitments to extend credit of $559 million, including standby letters of credit of $39 million, represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of September 30, 2005. Commitments to extend credit were $382 million, including letters of credit of $35 million, as of December 31, 2004. The Company’s exposure to credit loss in the event of nonperformance by the other parties to these commitments is represented by the contractual amount of these instruments. The Company uses the same credit and collateral policies in making commitments and conditional guarantees as it does with on-balance sheet instruments. At September 30, 2005, no amounts have been accrued in the financial statements related to these instruments.
Commitments to extend credit are agreements to lend to clients as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the client. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a client to a third party. These guarantees are primarily issued to support private borrowing arrangements.
7. 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:
13
Net Income, basic and diluted
Weighted average shares outstanding
18,838
18,854
18,876
18,817
Effect of dilutive securities
794
704
Average shares outstanding including dilutive securities
19,584
19,582
19,670
19,521
Basic earnings per share:
Diluted earnings per share:
Stock options for 47,550 shares and 44,400 shares of Class A Common Stock were respectively excluded from the three and nine months ended September 30, 2005 diluted earnings per share calculation because their impact was antidilutive. There were no antidilutive stock options during the three and nine months ended September 30, 2004.
8. SEGMENT INFORMATION
The reportable segments are determined by the types of products and services offered: (i) banking operations, (ii) mortgage banking operations, (iii) Tax Refund Solutions (“TRS”) and (iv) deferred deposits. 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; Refund Anticipation Loan (“RAL”) fees, Electronic Refund Check (“ERC”) fees and Electronic Refund Deposit (“ERD”) fees provide the majority of the revenue from TRS; and fees for providing deferred deposits represent the primary revenue source for the deferred deposit segment. Revenue from ERC/ERD fees are recorded in the financial statements in the line item “Electronic Refund Check fees”.
The accounting policies used for Republic’s 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 for the three and nine months ended September 30, 2005 and 2004 follows:
14
Three Months Ended September 30, 2005
Banking
Tax RefundSolutions
MortgageBanking
DeferredDeposits
ConsolidatedTotals
Net interest income
18,900
31
156
1,660
46
(346
(2,285
Electronic Refund Check fees
Other revenue
6,024
(355
5,686
Income tax expense
3,152
82
1,172
6,119
(502
160
2,273
Segment assets
2,578,766
3,248
15,624
5,689
Three Months Ended September 30, 2004
17,623
(341
93
3,215
(90
(207
170
Electronic Refund Check Fees
4,978
(223
4,780
2,818
(194
118
890
5,405
227
1,705
2,296,663
2,582
11,766
41,725
2,352,736
Nine Months Ended September 30, 2005
55,468
8,753
328
7,861
(748
1,171
(1,391
16,386
79
(724
21
15,762
8,917
3,256
320
2,674
17,232
6,292
619
5,169
Nine Months Ended September 30, 2004
51,337
8,321
316
8,580
(444
1,707
212
14,385
22
(803
13,633
7,592
3,189
350
2,421
14,502
6,093
669
4,624
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic Bancorp, Inc. (“Republic” or the “Company”) analyzes the major elements of Republic’s consolidated balance sheets and consolidated 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: Republic Financial Services, LLC and Republic Insurance Agency, LLC. This section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes and other detailed information.
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 Company’s interest rate sensitivity model and other financial and business matters. Broadly speaking, forward-looking statements may include:
• projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items;
• descriptions of plans or objectives of the Company’s management for future operations, products or services;
• forecasts of future economic performance; and
• descriptions of assumptions underlying or relating to any of the foregoing.
The Company may make forward-looking statements discussing management’s expectations about:
• future credit losses and non-performing assets;
• the future value of mortgage servicing rights;
• the impact of new accounting standards;
• future short-term and long-term interest rate levels and the respective impact on net interest margin, net income, liquidity and capital;
• legal and regulatory matters; and
• future capital expenditures.
Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements 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 management’s expectations about 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 after the date the statements are made. (See additional discussion under the section titled “Factors that May Affect Future Results”).
Net income for the third quarter of 2005 was $8.1 million, representing an increase of $1.1 million or 15% compared to the same period in 2004. Diluted earnings per Class A Common Share increased 14% to $0.41 for the third quarter of 2005 compared to $0.36 for the same period in 2004. The increase in net income for the quarter benefited primarily from a reduction in the allowance for loan losses. The Company also benefited from increases in net
16
interest income and service charges on deposit accounts, which were offset by higher costs primarily associated with additions to staff throughout the Company.
Net income for the first nine months of 2005 was $29.3 million, an increase of $3.4 million, or 13%, compared to the same period in 2004. Diluted earnings per Class A Common Share increased 12% for the first nine months of 2005 to $1.49. Similar to the third quarter, net income for the nine months ended September 30, 2005 benefited primarily from a reduction in the allowance for loan losses. The Company also benefited during the same period from increases in net interest income and service charges on deposit accounts, which were offset by higher costs primarily associated with additions to staff.
BUSINESS SEGMENT COMPOSITION
The Company is divided into four distinct business segments. Total assets and net income for the three and nine months ended September 30, 2005 and 2004 are presented below:
Three months ended September 30, 2005
Tax Refund
Mortgage
Deferred
Consolidated
Solutions
Totals
Total Assets
Three months ended September 30, 2004
Nine months ended September 30, 2005
Nine months ended September 30, 2004
(I) Banking
As of September 30, 2005, Republic had a total of 34 full-service banking centers with 32 located in Kentucky and two in southern Indiana. Republic’s primary market areas are located in metropolitan Louisville, central Kentucky and southern Indiana. Louisville, the largest city in Kentucky, is the location of Republic’s headquarters and the location of 19 banking centers. Republic’s 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). Republic Bank & Trust Company of Indiana has banking centers located in New Albany and Jeffersonville, Indiana. Republic also has two loan production offices (“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 Bank’s standard underwriting guidelines.
Banking related operating revenues are derived primarily from interest earned from the Bank’s loan and investment securities portfolios and fee income from loans, deposits and other banking products. The Company has historically
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extended credit and provided general banking services through its banking center network to individuals and businesses. Over the past several years, the Company expanded into new lines of business to diversify its asset mix and further enhance its profitability. The Company 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 Company’s retail banking center network and “Republic Finance” offices. 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 Company’s “Mortgage Banking” segment and are discussed below.
Commercial Lending – Commercial loans are primarily real estate secured and are generated through banking centers in the Company’s 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.
Consumer Lending – Traditional consumer loans made by the Company include home improvement and home equity loans and personal loans (secured and unsecured). 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 Republic’s 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 Company’s premium money market sweep account designed for businesses.
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 United States. The Company facilitates the payment of these tax refunds through three primary products. For those taxpayers who apply and qualify, the Company will offer a Refund Anticipation Loan (“RAL”) up to $8,000. 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 a check or 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. Revenue from ERC/ERD fees are recorded in the financial statements in the line item “Electronic Refund Check fees”.
(III) Mortgage Banking
Mortgage banking activities primarily include 15, 20 and 30-year fixed rate real estate loans that are sold into the secondary market. Republic typically retains 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.
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(IV) Deferred Deposits (commonly referred to as “Payday Lending”)
Deferred deposits are transactions whereby customers receive cash advances in exchange for a check or authorization to electronically debit the customer’s 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. Under the Company’s recently developed Internet model, the customer’s account will be electronically debited on the advance due date. If the ACH is not honored due to insufficient funds, the Company may electronically debit the customer’s account additional times in an effort to collect the amount due. These transactions are recorded as loans on the Company’s financial statements and the corresponding fees are recorded as a component of interest income on loans.
The Company originates deferred deposits under a marketing and servicing contract with ACE Cash Express, Inc. (“ACE”) in the states of Texas, Arkansas and Pennsylvania, with the substantial majority of these transactions concentrated in the state of Texas. As of September 30, 2005, Republic had deferred deposits outstanding of approximately $5 million through its contract with ACE. For the quarter ended September 30, 2005, Republic recognized net income of approximately $533,000 under the ACE contract, which represented approximately 7% of the Company’s total net income for the period.
Traditionally, the Company also operated its deferred deposit program through a marketing/servicing relationship with Advance America in Texas and North Carolina. On July 5, 2005, the Company was notified by Advance America, Cash Advance Centers, Inc. that the marketing and servicing agreements with Advance America Cash Advance Centers of North Carolina, Inc. and Advance America Servicing of Texas, L.P. (collectively referred to as “Advance America”) were terminated effective July 6, 2005. As a result, Republic did not originate any new deferred deposit transactions through Advance America stores after July 6, 2005. At September 30, 2005, the Company had no deferred deposits outstanding under the two Advance America contracts, as all previously outstanding transactions had paid off. For the third quarter of 2005, Republic recognized net income of approximately $1.9 million under the Advance America contracts, which represented approximately 23% of the Company’s total net income for the period.
Due to the termination of the Advance America contracts and, to a lesser extent, implementation of the revised FDIC guidelines on August 1, 2005, Republic experienced a $31 million decline in its payday loan portfolio during the third quarter of 2005. As a result of the decline in the payday loan portfolio, the Company had a $2.3 million reduction in the amount specifically allocated within the Company’s allowance for loan losses for payday loans. At this time, the Company cannot predict the final impact of the revised FDIC guidelines on its remaining ACE payday loan portfolio during the fourth quarter of 2005 but does expect the balances to be significantly lower than fourth quarter of 2004.
On July 11, 2005, Republic commenced offering, on a test basis, deferred deposits through its Indiana bank subsidiary without a Marketer/Servicer. On September 15, 2005, Republic transitioned into a faxless, Internet-based payday loan program offered direct to customers on a nationwide basis at www.republicbankpayday.com. Unlike deferred deposits originated through the Company’s third party Marketer/Servicer, which feature a guarantee from the Marketer/Servicer, deferred deposits originated directly by the Company are 100% unsecured and have no third party guarantee. As a result, the Company will sustain credit losses, which could be material and fluctuate significantly from period to period depending on overall volume. If overall credit losses render the Internet deferred deposit product unprofitable, the Company will cease to offer the Internet product. At this time, management cannot predict the degree of consumer demand for Republic’s Internet product or project its potential profitability, if any.
All deferred deposits originated by Republic are subject to the revised FDIC Guidance (the “Guidance”) on payday lending dated March 1, 2005, which became effective July 1, 2005. The Guidance essentially limits customers from having deferred deposits outstanding from any bank lender more than 90 days in the previous twelve months. FDIC guidance also requires that banks limit deferred deposits outstanding to the lesser of 25% of Tier I capital or the amount that actual capital levels exceed the “well capitalized” classification for Tier I and total capital. Based on the Company’s capital levels at September 30, 2005, deferred deposits outstanding were significantly below the Banks’
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regulatory limits. See additional discussion about this product under the section titled “Factors that May Affect Future Results – Company Factors”.
FACTORS THAT MAY AFFECT FUTURE RESULTS
There are factors, many beyond our control, which may significantly change the results or expectations of the Company. Some of these factors are described below in the sections titled “Company Factors”and “Industry Factors”; however, many are described in the sections that follow. There also may be other items, which are included in the Annual Report on Form 10-K for the year ended December 31, 2004. Any factor described in this report, or in the Company’s 2004 Annual Report on Form 10-K could, by itself or with other factors, adversely affect the Company’s business, results of operations or financial condition. There may also be other factors not described in this report, or in the 2004 Annual Report on Form 10-K, which could cause our expectations to differ or could produce significantly different results.
Company Factors
The Parent Company relies on dividends from its subsidiaries for substantially all of its revenue. Republic Bancorp, Inc. is a separate legal entity from its subsidiaries and it receives substantially all of its cash from dividends from its largest subsidiary, Republic Bank & Trust Company. Various federal and state laws and regulations limit the amount of dividends that may be paid to the Parent Company.
The Company’s accounting policies and estimates are critical components of the Company’s presentment of its financial statements. Our management must exercise judgment in selecting and adopting various accounting policies and in applying estimates. Actual outcomes may be materially different than amounts previously estimated. Management has identified two accounting policies as being critical to the presentation of the Company’s financial statements. These policies are described in our 2004 Annual Report on Form 10-K under the section titled “Critical Accounting Policies and Estimates” and relate to the allowance for loan losses and the valuation of mortgage servicing rights. Due to the inherent uncertainty of estimates, we cannot provide any assurance that the Company will not significantly increase its allowance for loan losses if actual losses are more than the amount reserved or recognize a significant provision for impairment of its mortgage servicing rights.
The Company has lines of business and products not typically associated with traditional banking. In addition to traditional banking products, i.e. customer loans and deposits, the Company provides RALs, ERCs/ERDs, mortgage banking products, “Overdraft Honor” deposit accounts and deferred deposits. Management believes diverse product offerings mitigate the Company’s exposure to downturns in any one segment of the banking industry; however, non-traditional banking products also expose the Company’s earnings to additional risks and uncertainties. The following details specific risk factors related to Republic’s lines of business:
• RALs represent a significant business risk, and if the Company terminated the business it would materially impact the earnings of the Company. TRS offers bank products to facilitate the payment of tax refunds for customers that electronically file their tax returns across the country. The Company is one of only a few financial institutions in the United States that provides this service to taxpayers. Under this program, the taxpayer may receive a RAL or an ERC/ERD. In return, the Company charges a fee for the service. There is credit risk associated with a RAL because the money is disbursed to the client before the Company receives the client’s refund from the Internal Revenue Service (“IRS”). There is minimal credit risk with an ERC/ERD because the Company does not disburse the funds to the client until the Company has received the refund from the state or IRS.
Various consumer groups have, from time to time, questioned the fairness of the TRS program and have accused this industry of charging excessive rates of interest, via the fee, and engaging in predatory lending practices. Consumer groups have also claimed that customers are not adequately advised that a RAL is a loan product and that alternative, less expensive means of obtaining the tax refund proceeds may be available. Pressure from these groups, regulatory or legislative changes or material litigation could result in the Company exiting this business or selected markets at any time.
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The Company’s liquidity risk is increased during the first quarter of each year due to the RAL program. The Company has committed to the electronic filers and tax preparers that it will make RALs available to their customers under the terms of its contracts with them. This requires the Company to estimate liquidity needs for the RAL program well in advance of the tax season. If management materially overestimates the need for liquidity during the tax season, a significant expense could be incurred with no offsetting revenue stream. If management materially underestimates the need for liquidity during the tax season, the Bank could experience a significant shortfall of capital needed to fund RALs and could potentially be required to stop originating new loans.
A competing RAL financial institution is defending two lawsuits in the state of California relating to the enforceability of cross-collection provisions contained in its RAL contracts with customers. The two cases are the Hood case in the Santa Barbara Superior Court (Case No. 1156354) and the Clark case in the San Francisco Superior Court (Case No. CGC-04-427959). Various companies, including the Company, previously entered into agreements to facilitate the cross-collection of unpaid RALs from prior years. The Company was not named as a Defendant by the Plaintiffs regarding its cross-collection activities with customers. The competing RAL financial institution, however, named the Company and other financial institutions as parties pursuant to the indemnity provisions of the cross-collection contracts between the various companies. The Hood case in Santa Barbara was dismissed by the trial court on federal preemption grounds, but the Plaintiff appealed the trial court ruling. That appeal remains pending. The Clark case in San Francisco remains pending at the trial court level. The issue of cross-collection provisions in RAL contracts could result in further litigation exposure for all financial institutions that offer RALs, including the Company, as consumer groups have shown a willingness to challenge the RAL cross-collection contract provisions through litigation.
Exiting this line of business, either voluntarily or involuntarily, would significantly reduce the Company’s earnings. (See additional discussion about this product under the separate section titled “Tax Refund Solutions”).
• Mortgage banking activities can be significantly impacted by interest rates. Changes in interest rates can impact the gain on sale of loans, loan origination fees and loan servicing fees, which account for a significant portion of mortgage banking income. A decline in interest rates generally results in higher demand for mortgage products, while an increase in rates generally results in reduced demand. If demand increases, mortgage banking income will be positively impacted by more gains on sale; however, the valuation of existing mortgage servicing rights will decrease and may result in a significant impairment. In addition to the previously mentioned risks, a decline in demand for mortgage banking products could also adversely impact other programs/products such as home equity lending, title insurance commissions and service charges on deposit accounts.
• Deferred deposits offered though third party Marketer/Servicers represent a significant business risk and if the Company terminated its remaining marketing/servicing contract it would further materially impact Company earnings. Deferred deposits through a marketing/servicing arrangement are transactions whereby customers receive cash advances in exchange for a check for the advanced amount plus a fixed fee. Various consumer groups have, from time to time, questioned the fairness of deferred deposits and have accused this industry of charging excessive rates of interest via the fixed fee and engaging in predatory lending practices. Various federal and state agencies have also questioned whether this business should be permitted by member banks and whether or not this business can be lawfully conducted in various states.
Recently, the Company’s two Marketing/Servicing contracts with Advance America were terminated. This will have a material adverse impact on the earnings of the Company for the remainder of 2005. In addition, there can be no assurance that the FDIC, state legislatures, or others will not impose additional limitations on, or prohibit banks from, engaging altogether in deferred deposits. The potential exists that private litigation or regulatory requirements may require the Company to cease offering the product in one or more jurisdictions. State legislation could provide the Company’s remaining Marketer/Servicer with the statutory authority to offer deferred deposits more profitably or on a direct basis. The Company’s remaining Marketer/Servicer could also elect to directly offer a more profitable alternative credit product to a payday loan, thus eliminating the current advantages of operating under a banking model for product delivery. Such developments could affect the
continuation of the Bank’s contract with its remaining Marketer/Servicer. See additional discussion regarding the termination of Republic’s contracts with Advance America under the section titled “Deferred Deposits”.
On August 26, 2004, the Attorney General of North Carolina issued an investigative demand to Advance America Cash Advance Centers of North Carolina, Inc. (“Advance America North Carolina”), the Company’s former Marketer/Servicer in the state of North Carolina. The Attorney General and the Banking Commissioner of North Carolina seek to make a determination as to whether or not the Company’s former Marketer/Servicer complied with North Carolina law. Management does not believe this proceeding will have any affect on the Company, as the Company’s contract with Advance America North Carolina was terminated and the Company was not named as a party to the proceedings. Advance America North Carolina also has litigation pending against it in the State of North Carolina regarding the delivery of deferred deposits in that jurisdiction. The Company is not a party to that litigation.
• The Company’s “Overdraft Honor” program represents a significant business risk, and if the Company terminated the program it would materially impact the earnings of the Company. Republic’s “Overdraft Honor” program permits selected clients to overdraft their checking accounts up to a predetermined dollar amount ranging from $500 to $750, for the Company’s customary fee. Clients’ checking accounts that have been current for a certain period of time are allowed to enter the program. Under regulatory guidelines, this service is not considered an extension of credit, but rather is considered a fee for paying checks when sufficient funds are not otherwise available. This fee, if computed as a percentage of the amount overdrawn, results in a high rate of interest when annualized and thus is considered excessive by some consumer groups. There can be no assurance that the Company’s regulators or others will not impose additional limitations on this program or that the Company’s ability to offer the program could be eliminated by regulatory authorities. Additional limitations or elimination, or adverse modifications to this program, either voluntarily or involuntarily, could significantly reduce Company earnings.
Republic’s stock price can be volatile. The Company’s stock price can fluctuate widely in response to a variety of factors. Factors include actual or anticipated variations in the Company’s operating results, recommendations by securities analysts, operating and stock price performance of other companies, news reports, results of litigation, regulatory actions or changes in government regulations, among other factors. The Company’s stock also generally has a low average daily trading volume, which limits a shareholder’s ability to quickly accumulate or quickly divest large blocks of Republic’s stock. In addition, a low average daily trading volume can lead to significant price swings even when a relatively small number of shares are being traded.
Republic may not be able to attract and retain banking clients. Competition in the banking industry, coupled with the size of our institution, may limit our ability to attract and retain banking clients. In particular, Republic’s competitors include major financial institutions whose greater resources may afford them a marketplace advantage by enabling them to maintain and establish numerous banking center locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries may not be subject to the same regulatory restrictions and may have larger lending limits than the Company. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits and range of services provided. Republic also faces competition from out of state financial intermediaries. Because Republic maintains a smaller staff and has fewer financial and other resources compared to larger institutions with which we compete, we may be limited in our ability to attract a broad segment of clients or dramatically increase market share. In addition, some of our current commercial banking clients may seek alternative banking sources as they develop needs for credit facilities larger than what the Company can accommodate. If Republic is unable to attract and retain clients, the Company may be unable to continue to meet growth and profit objectives.
Industry Factors
General business and economic conditions can significantly impact the Company’s earnings. General business and economic conditions in the United States and abroad can impact the Company. Conditions include short-term and long-term interest rates, inflation, monetary supply and fluctuations in both debt and equity markets and the federal and state economies in which we operate.
The Company is significantly impacted by the regulatory, fiscal and monetary policies of federal and state governments. The Board of Governors of the Federal Reserve Bank regulates the supply of money and credit in the United States. Its policies determine, in large part, our cost of funds for lending and investing and the return we earn on these loans and investments, all of which impact our net interest margin. Its policies can materially affect the value of the Company’s financial instruments and earnings and can also adversely affect the Company’s borrowers and their ability to repay their outstanding loans.
The Company and the Bank are heavily regulated at both federal and state levels. This regulatory oversight is primarily intended to protect depositors, the federal deposit insurance funds and the banking system as a whole, not the shareholders of the Company. Changes in policies, regulations and statutes could significantly impact the earnings or products of Republic. Also, failure to comply with laws, regulations or policies, or adverse examination findings, could result in significant penalties, negatively impact operations, or result in other sanctions by regulatory agencies.
Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. Various federal and state regulatory agencies possess cease and desist powers, and other authority to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulations. The Federal Reserve Bank possesses similar powers with respect to bank holding companies. These, and other restrictions, can limit in varying degrees, the manner in which Republic conducts its business.
Republic is subject to regulatory capital adequacy guidelines, and if we fail to meet these guidelines our financial condition may be adversely affected. Under regulatory capital adequacy guidelines, and other regulatory requirements, Republic and the Bank must meet guidelines that include quantitative measures of assets, liabilities and certain off balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. If Republic fails to meet these minimum capital guidelines and other regulatory requirements, Republic’s financial condition will be materially and adversely affected. Republic’s failure to maintain the status of “well capitalized” under our regulatory framework, or “well managed” under regulatory exam procedures, or regulatory violations, could compromise our status as a financial holding company and related eligibility for a streamlined review process for acquisition proposals and limit financial product diversification.
Republic’s industry is highly competitive. The Company operates in a highly competitive industry that could become even more competitive as a result of legislation, regulatory and technological changes, new market entries and acquisition activity. Many of our competitors have fewer regulatory constraints, and some have lower cost structures.
The Company relies on the accuracy and completeness of information provided by vendors, clients and other counterparties. In deciding whether to extend credit or enter into transactions with other parties, the Company relies on information furnished by, or on behalf of, clients or entities related to that client. Our financial condition and earnings could be negatively impacted to the extent the Company relies on information that is false, misleading or inaccurate.
Defaults in the repayment of loans may negatively impact our business. When borrowers default on obligations of one or more of their loans, it may result in lost principal and interest income and increased operating expenses as a result of the increased allocation of management time and resources to the collection and work out of the loans. In certain situations where collection efforts are unsuccessful or acceptable “work out” arrangements cannot be reached, the Company may have to write off the loan in part or in whole. In such situations, the Company may acquire real estate or other assets, if any, which secures the loan through foreclosure or other similar available remedies. In such cases, the amount owed under the defaulted loan often exceeds the liquidation value of the assets acquired.
Fluctuations in interest rates may negatively impact our banking business. Republic’s core source of income from operations consists of net interest income, which is equal to the difference between interest income received on interest-earning assets (usually loans and investment securities) and the interest expenses incurred in connection with
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interest-bearing liabilities (usually deposits and borrowings). These rates are highly sensitive to many factors beyond our control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities. Republic’s net interest income can be affected significantly by changes in market interest rates. Changes in relative interest rates may reduce Republic’s net interest income as the difference between interest income and interest expense decreases. As a result, Republic has adopted asset and liability management policies to minimize potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However, even with these policies in place, a change in interest rates could negatively impact the Company’s results from operations or financial position.
An increase in interest rates could also have a negative impact on Republic’s results of operations by reducing the ability of our clients to repay their outstanding loans, which could not only result in increased loan defaults, foreclosures and charge offs, but may also likely necessitate further increases to Republic’s allowance for loan losses.
Prepayment of loans may negatively impact Republic’s business. Generally, our clients may prepay the principal amount of their outstanding loans at any time. The speed at which such prepayments occur, as well as the size of such prepayments, are within our clients’ discretion. If clients prepay the principal amount of their loans, and we are unable to lend those funds to other clients or invest the funds at the same or higher interest rates, Republic’s interest income will be reduced. A significant reduction in interest income would have a negative impact on Republic’s results of operations and financial condition.
Net Interest Income
The principal source of Republic’s 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.
For the third quarter of 2005, net interest income was $20.7 million, an increase of $157,000, or 1%, over the same period in 2004. Republic was able to increase its net interest income primarily through growth in the Company’s traditional loan portfolio combined with an increase in yield on its investment portfolio. Net interest income was negatively impacted by a decrease of $1.6 million in net interest income from the deferred deposit business segment resulting primarily from the termination of the two Advance America contracts. Republic’s net interest income was also negatively impacted by increasing short-term interest rates which have caused the Company’s interest bearing liabilities to reprice sooner than its interest earning assets.
For the first nine months of 2005, net interest income was $72.4 million, an increase of $3.9 million, or 6%, over the same period in 2004. Consistent with the quarterly increase, the Company was able to increase its net interest income for the first nine months of 2005 primarily through growth in the Company’s traditional loan portfolio combined with an increase in yield on its investment portfolio. Net interest income for the first nine months of 2005 was negatively impacted by the decrease of $719,000 in net interest income from the deferred deposit business segment during the third quarter. Republic’s net interest income was also negatively impacted during the first nine months of 2005 by increasing short-term interest rates which have caused the Company’s interest bearing liabilities to reprice sooner than its interest earning assets. (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 document.)
Management believes, based on current economic indicators regarding short-term interest rates, that the Company will likely continue to experience contraction in its net interest spread and margin through the remainder of 2005. Management is unable to precisely determine the impact of continued contraction on the Company’s net interest
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spread and margin in the future. (For additional information on the futureeffect of rising short-term interest rates on Republic’s net interest income, see section titled “Interest Rate Sensitivity” in this document.)
In addition to the contraction described above, the Company’s net interest spread and margin have been and will continue to decline as a direct result of the termination of the Company’s contracts with Advance America, as well as the impact of the recent Guidance on Republic’s deferred deposit transactions originated through its relationship with ACE. Republic’s net interest spread and margin was 2.81% and 3.31% for the three months ended September 30, 2005. Republic’s net interest spread and margin, excluding the fee income recognized through the Advance America relationship, would have been 2.01% and 2.52% for the quarter ended September 30, 2005. Management is unable to determine the actual impact of the FDIC Guidance on Republic’s loans originated through ACE, however net interest spread and margin, exclusive of other factors, will be negatively impacted by the FDIC Guidance.
Table 1 and Table 2 provide detailed information as to average balances, interest income/expense and rates by major balance sheet category for the three and nine month periods ended September 30, 2005 and 2004, respectively. Table 3 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.
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Table 1 – Average Balance Sheets and Interest Rates for the Three Months Ended September 30, 2005 and 2004
September 30, 2004
(dollars in thousands)
AverageBalance
AverageRate
ASSETS
Earning assets:
Investment securities(1)
507,848
4,746
3.74
%
450,172
3,419
3.04
Federal funds sold and other
38,226
343
3.59
21,097
1.55
Total loans and fees(2)
1,959,910
6.50
1,718,513
6.44
Total earning assets
2,505,984
5.90
2,189,782
5.69
Less: Allowance for loan losses
13,376
13,533
Non-earning assets:
61,517
74,521
31,980
35,277
Other assets(1)
32,420
17,499
Total assets
2,618,525
2,303,546
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction accounts
309,088
758
0.98
333,256
651
0.78
Money market accounts
326,020
2,033
2.49
303,911
1.03
Time deposits
489,856
4,287
3.50
415,782
3,466
3.33
Brokered deposits
117,255
1,023
3.49
46,362
361
3.11
Repurchase agreements and other short-term borrowings
336,302
325,114
1.37
498,109
4.14
420,995
3.99
20,620
6.15
Total interest-bearing liabilities
2,097,250
3.09
1,845,420
2.29
Non-interest-bearing liabilities and stockholders’ equity:
Non-interest-bearing deposits
281,033
245,736
Other liabilities
24,543
23,754
Stockholders’ equity
215,699
188,636
Total liabilities and stockholders’ equity
Net interest spread
2.81
3.40
Net interest margin
3.31
3.76
(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 fee income included in interest on loans was $2.1 million and $3.8 million for the three months ended September 30, 2005 and 2004.
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Table 2 – Average Balance Sheets and Interest Rates for the Nine Months Ended September 30, 2005 and 2004
534,369
14,138
3.53
421,150
9,212
2.92
60,370
1,280
2.83
44,818
357
1.06
1,910,474
7.09
1,691,424
7.03
2,505,213
6.23
2,157,392
6.10
13,934
14,120
71,968
76,187
32,742
35,755
30,427
19,321
2,626,416
2,274,535
327,715
2,382
0.97
323,332
1,845
0.76
302,718
4,668
2.06
303,572
2,184
0.96
477,954
12,111
3.38
410,377
10,050
3.27
127,496
3.35
51,234
1,131
2.94
366,041
2.62
299,360
1.10
486,697
4.05
423,371
3.94
6,949
6.08
2,095,570
2.84
1,811,246
2.22
294,629
257,272
25,496
25,651
210,721
180,366
3.39
3.88
3.85
4.24
(2) The amount of fee income included in interest on loans was $18.1 million and $19.2 million for the nine months ended September 30, 2005 and 2004.
Table 3 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 3 – Volume/Rate Variance Analysis
Three months ended September 30, 2005Compared toThree months ended September 30, 2004
Nine months ended September 30, 2005compared toNine months ended September 30, 2004
Increase/(Decrease)Due to
Increase/(Decrease)due to
Total NetChange
Volume
Rate
Interest income:
Investment securities
1,327
474
853
4,926
2,768
2,158
261
100
161
923
763
Total loans and fees
4,184
3,920
264
12,477
11,647
830
Net change in interest income
5,772
4,494
1,278
18,326
14,575
3,751
Interest expense:
107
(50
157
538
512
1,248
1,187
2,483
(6
2,489
822
642
180
2,062
1,703
359
662
614
48
2,075
1,898
177
1,500
40
1,460
4,717
656
4,061
959
793
166
2,278
1,915
363
Net change in interest expense
5,615
2,417
3,198
14,470
6,509
7,961
Increase (decrease) in net interest income
2,077
(1,920
3,856
8,066
(4,210
Non-interest Income
Non-interest income increased $962,000, or 17%, for the third quarter ended September 30, 2005 compared to the same period in 2004. A significant component of the increase related to service charges on deposit accounts which increased $567,000, or 16%, during the third quarter of 2005 compared to the same period in 2004. The increase was due primarily to growth in the Company’s checking account base supported by the Bank’s “Overdraft Honor” program, which permits selected clients to overdraft their accounts up to $750 for the Bank’s customary fee. Total overdraft fees increased $483,000, or 18%, while the total number of accounts eligible for the “Overdraft Honor” program increased to 54,000 from 48,000 at September 30, 2004. Additionally, the Company increased its overdraft fee by 7% in July 2005.
Non-interest income increased $2.6 million, or 12%, for the first nine months of 2005 compared to the same period in 2004. Service charges on deposit accounts increased $1.3 million, or 13%, during the first nine months of 2005 compared to the same period in 2004. Total overdraft fees increased $874,000, or 12%, for the first nine months of the year. The increase in service charges on deposit accounts for the year was primarily related to the same reasons stated in the preceding paragraph.
Non-interest Expense
Non-interest expenses increased $2.0 million during the quarter ended September 30, 2005 compared to the same period in 2004. Salaries and employee benefits increased $833,000 during the quarter, primarily attributable to the increase in full time equivalent employees (“FTE’s”) from 587 at September 30, 2004 to 667 at September 30, 2005. The substantial portion of the increase in FTE’s occurred in the technology area of Tax Refund Solutions due to the development of a new, more efficient operating system for the upcoming tax season.
Non-interest expenses increased $3.9 million during the nine months ended September 30, 2005 compared to the same period in 2004. Salaries and employee benefits increased $2.1 million for the nine months ended September 30, 2005 primarily attributable to the same reasons stated in the preceding paragraph.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
Residential real estate
987,156
851,736
Commercial real estate
542,947
495,827
Real estate construction
80,906
70,220
Commercial
46,303
36,807
Consumer
39,363
67,997
Home equity
269,573
267,231
Total loans
1,966,248
1,789,818
Less:
Unearned interest income and amortized loan fees
108
719
Allowance for loan losses
Loans, net
Net loans, primarily consisting of secured real estate loans, increased by $179 million to $2.0 billion at September 30, 2005. This growth is primarily attributable to the residential real estate portfolio, which increased $133 million as a result of the Company’s promotional “$299 Closing Cost” products. This growth was offset by a decline in the
consumer loan portfolio. (For the discussion related to the decline in consumer loan balances, see section titled “Deferred Deposits” under “Business Segment Composition”.)
Allowance for Loan Losses and Provision for Loan Losses
The Company posted a net credit to the provision for loan losses of $2.6 million for the quarter ended September 30, 2005, compared to a net credit of $127,000 for the same period in 2004. A decrease in Republic’s payday loan portfolio of $31 million during the quarter led to a significant reduction in the amount specifically allocated within the Company’s allowance for loan losses for payday loans, resulting in an overall net credit to the provision for the quarter of $2.3 million for the deferred deposit segment. The reduction in the Company’s payday loan portfolio was primarily due to the termination of its contracts with Advance America as described previously in this document, as well as a reduction in the balance of loans outstanding at ACE due to the FDIC Guidance which effectively limited the number of times a customer may have a payday loan.
The Company posted a net credit to the provision for loan losses of $968,000 for the nine months ended September 30, 2005 compared to a provision for loan losses of $1.5 million for the same period in 2004, resulting in a net change of $2.4 million for the period. As with the third quarter, the primary reason for the change in the provision for the nine months ended September 30, 2005 related to the net change in the amount specifically allocated within the Company’s allowance for loan losses for payday loans.
An analysis of the changes in the allowance for loan losses and selected ratios follows:
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Table 5 - Summary of Loan Loss Experience
Allowance for loan losses at beginning of period
Charge offs:
Real estate:
Residential
(31
(71
(214
(192
(33
(135
Construction
(8
(156
(233
(450
(662
(108
(115
Tax Refund Solutions
(414
(3,067
(4,384
Recoveries:
114
63
201
83
281
33
35
34
78
229
277
546
2,485
Net loan charge offs / recoveries
327
132
(1,462
(1,899
Allowance for loan losses at end of period
Ratios:
Allowance for loan losses to total loans
0.57
Provision for loan losses to average loans*
(0.52
(0.03
(0.07
0.11
Net loan charge offs to average loans outstanding*
0.10
0.15
Allowance for loan losses to non-performing loans
122
159
* - Calculations are annualized
Republic 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 Mortgage Backed Securities (“MBSs”) and proceeds realized from loans held for sale. The Company’s 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 September 30, 2005, these securities had a fair market value of $378 million.
Republic’s 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. The
Company also utilized brokered deposits during 2004 and the first nine months of 2005 to partially fund RALs and to fund anticipated loan growth.
Traditionally, the Company has also utilized secured and unsecured borrowing lines to supplement its funding requirements. On September 30, 2005, the Company had capacity with the Federal Home Loan Bank to borrow an additional $191 million. The Company also had $175 million in approved unsecured line of credit facilities available at September 30, 2005 through various third party sources.
The Company’s 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 year’s net profits, combined with the retained net profits of the preceding two years. At September 30, 2005, Republic Bank & Trust Company and Republic Bank & Trust Company of Indiana could, without prior approval, declare dividends of approximately $41 million and $1 million, respectively. The Company does not plan to pay dividends from Republic Bank & Trust Company of Indiana in the foreseeable future.
CAPITAL
Total stockholders’ equity increased from $196 million at December 31, 2004 to $214 million at September 30, 2005. The increase in stockholders’ equity was primarily attributable to net income earned during the first nine months of 2005 reduced by dividends declared 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.
During the third quarter of 2005 the Company purchased 260,000 shares for $5.8 million. For the nine months ended September 30, 2005, the Company purchased 269,300 shares for $6.0 million. During the third quarter the Company’s Board of Directors also approved the repurchase from time-to-time of an additional 250,000 shares 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 Republic’s Board of Directors terminates the program. As of September 30, 2005, the Company had 240,000 shares which could be repurchased under the current stock buyback 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 Republic’s 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 Company’s 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.
On August 16, 2005, Republic Bancorp Capital Trust, an unconsolidated trust subsidiary of Republic Bancorp, Inc., issued $40 million in Trust Preferred Securities. The Trust Preferred Securities pay a fixed interest rate for 10 years and adjust with LIBOR thereafter. Treated as Tier 1 capital for regulatory purposes, the Trust Preferred Securities mature on September 30, 2035 and are redeemable at the Company’s 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 Trust Preferred Securities. 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 Trust Preferred Securities offering will be used to fund loan growth, support an existing stock repurchase program and for other general business purposes.
Quantitative measures established by regulation to ensure capital adequacy require the Parent Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in
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the regulations) to risk weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). As of September 30, 2005, the Parent Company and the Bank met all capital adequacy requirements.
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 as set forth in the table. 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. Republic’s average capital to average assets ratio was 8.02% for the nine months ended September 30, 2005 compared to 8.01% for the year ended December 31, 2004. Republic has elected and successfully maintains financial holding company status. Formal measurements of the capital ratios for the Company and Republic Bank & Trust Company are performed at each quarter end.
The following table sets forth the Company’s risk based capital amounts and ratios as of September 30, 2005 and December 31, 2004.
As of September 30, 2005
As of December 31, 2004
Actual
Ratio
Total Risk Based Capital (to Risk Weighted Assets)
Republic Bancorp, Inc.
266,651
15.67
209,575
13.03
Republic Bank & Trust Co.
215,096
13.01
198,146
12.61
Republic Bank & Trust Co. of Indiana
11,461
23.64
6,193
16.46
Tier I Capital (to Risk Weighted Assets)
255,528
15.01
196,021
12.18
181,054
10.95
161,579
10.28
10,930
22.54
5,756
15.30
Tier I Leverage Capital (to Average Assets)
9.76
8.03
7.11
6.78
15.12
10.53
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. Republic Bank & Trust Company was assigned a “Needs to Improve” rating due in part to alleged violations of Regulation B related to its RAL line of business. Republic Bank & Trust Company voluntarily changed certain procedures and processes to address the Regulation B issues raised by the FDIC during the CRA Evaluation. By statute, the FDIC will refer 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 affect on the Company’s current business plans. At this time, there has been no corrective action 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 Republic’s 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 then evaluated. 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 Republic’s 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 model’s 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 yield curve. The September 30, 2005 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.
Table 8 illustrates Republic’s estimated annualized earnings sensitivity profile based on the asset/liability model as of September 30, 2005:
Table 8 – Interest Rate Sensitivity
Net Interest
Income Change
Increase 200 basis points
-9.31
Increase 100 basis points
-4.27
Decrease 100 basis points
1.64
Decrease 200 basis points
2.33
Information required by this item is included under Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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 fiscal 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 INFORMATION
In regard to Tax Refunds Solutions, a competing RAL financial institution is defending two lawsuits in the state of California relating to the enforceability of cross-collection provisions contained in its RAL contracts with customers. The two cases are the Hood case in the Santa Barbara Superior Court (Case No. 1156354) and the Clark case in the San Francisco Superior Court (Case No. CGC-04-427959). Various companies, including the Company, previously entered into agreements to facilitate the cross-collection of unpaid RALs from prior years. The Company was not named as a Defendant by the Plaintiffs regarding its cross-collection activities with customers. The competing RAL financial institution, however, named the Company and other financial institutions as parties pursuant to the indemnity provisions of the cross-collection contracts between the various companies. The Hood case in Santa Barbara was dismissed by the trial court on federal preemption grounds, but the Plaintiff appealed the trial court ruling. That appeal remains pending. The Clark case in San Francisco remains pending at the trial court level. The issue of cross-collection provisions in RAL contracts could result in further litigation exposure for all financial institutions that offer RALs, including the Company, as consumer groups have shown a willingness to challenge the RAL cross-collection contract provisions through litigation.
In regard to the deferred deposit product, on August 26, 2004, the Attorney General of North Carolina issued an investigative demand to Advance America Cash Advance Centers of North Carolina, Inc. (“Advance America North Carolina”), the Company’s former Marketer/Servicer in the state of North Carolina. The Attorney General and the Banking Commissioner of North Carolina seek to make a determination as to whether or not the Company’s former Marketer/Servicer complied with North Carolina law. Management does not believe this proceeding will have any affect on the Company, as the Company’s contract with Advance America North Carolina was terminated and the Company was not named as a party to the proceedings. Advance America North Carolina also has litigation pending against it in the State of North Carolina regarding the delivery of deferred deposits in that jurisdiction. The Company is not a party to that litigation.
Details of Republic’s Common Stock purchases during the third quarter of 2005 are included in the following table:
Period
Total Number of SharesPurchased
Average PricePaid per Share
Total Number of SharesPurchasedas Part of PubliclyAnnounced Plans or Programs
MaximumNumber of Sharesthat May Yet Be PurchasedUnder the Plan or Programs
July 1– July 31
4,433
*
21.99
240,378
August 1– August 31
150,000
21.96
Sept. 1 – Sept. 30
110,000
22.48
264,433
22.14
* - Represents shares repurchased by the Company in connection with stock option exercises.
During the third quarter of 2005 the Company purchased 260,000 shares for $5.8 million. For the nine months ended September 30, 2005, the Company purchased 269,300 shares for $6.0 million. During the third quarter the Company’s Board of Directors also approved the repurchase of an additional 250,000 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 Republic’s Board of Directors terminates the program. As of September 30, 2005, the Company had 240,000 shares which could be repurchased under the current stock buyback program.
There were no equity securities of the registrant sold without registration during the quarter covered by this report.
ITEM 6. EXHIBITS.
(a) Exhibits
The following exhibits are filed or furnished as a part of this report:
Exhibit Number
Description of Exhibit
10.1
Lease between Republic Bank & Trust Company and Teeco Properties, dated October 1, 2005, relating to property at 601 West Market Street, Louisville, KY, amending and modifying previously filed exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10.2
Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 1, 2005, as amended, relating to 661 South Hurstbourne Parkway, Louisville, KY, amending and modifying previously filed exhibit 10.12 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
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.
36
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.
37
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
Principal Executive Officer:
Date: November 8, 2005
By:
/s/ Steven E. Trager
Steven E. Trager
President & Chief Executive Officer
Principal Financial Officer:
/s/ Kevin Sipes
Kevin Sipes
Executive Vice President, Chief FinancialOfficer & Chief Accounting Officer
38