2 0 0 6 A N N U A L R E P O R T
REPUBLIC BANCORP
Republic Bancorp, Inc. (“Republic” or the “Company”) is a $3.0 billion bank holding company
headquartered in Louisville, Kentucky. The Company derives substantially all of its revenue from the
operation of its wholly-owned subsidiaries, Republic Bank & Trust Company, a Kentucky chartered bank and
trust company and Republic Bank, a federally chartered thrift institution headquartered in Florida,
collectively referred to as the “Bank.” Republic’s Class A Common Stock trades on the NASDAQ Global
Select Market® under the symbol “RBCAA.”
Currently, Republic Bank & Trust Company has 36 full-service banking centers, 19 of which are located in
the metropolitan Louisville area, including the Company’s principal office. There are five banking centers
located in Lexington, Kentucky, two in Frankfort, Kentucky, two in Owensboro, Kentucky and one each in
the Kentucky communities of Bowling Green, Covington, Elizabethtown, Fort Wright, Georgetown and
Shelbyville, along with banking centers in Jeffersonville and New Albany, Indiana. Republic Bank has full
service banking centers located in Port Richey and New Port Richey, Florida. Republic Bank & Trust Company
also operates three additional Loan Production Offices (“LPOs”), two are within the Louisville metropolitan
area and one is located in Wesley Chapel, Florida.
3.0
2.7
2.5
3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
2.3
2.1
2.4
2.3
2.2
2.1
2.0
1.9
1.8
1.7
1.8
2004
2005
2006
2004
2005
2006
TOTAL ASSETS ($)
In billions
TOTAL LOANS ($)
In billions
90.0
88.0
86.0
84.0
82.0
80.0
78.0
88.3
85.6
79.4
2004
2005
2006
NET INTEREST INCOME
FROM CONTINUING
OPERATIONS ($)
In millions
23.90
22.2
19.46
24.0
22.0
20.0
18.0
16.0
14.0
12.0
0.09
0.06
0.13
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
2004
2005
2006
MARKET VALUE
PER SHARE ($)
2004
2005
2006
NET LOAN CHARGE OFFS
TO AVERAGE LOANS (%)
Valued Shareholders,
It is my privilege to report that 2006 was indeed a success for our Company ending the year as the
largest Kentucky-based bank holding company, while surpassing $3.0 billion in total assets and
servicing over 80,000 households. Once again, the extraordinary commitment, skill and hard work
of the entire Republic team have resulted in exceptional asset quality, solid loan growth and strong
credit quality for the year. Although 2006 remained a challenging bank environment, our many
achievements during the year have positioned the Company for continued long-term success.
While we had many highlights during 2006, one of our most notable highlights was Republic’s
entrance into the Florida market through our acquisition of GulfStream Community Bank in Port
Richey. Republic has a long-standing commitment to providing friendly, knowledgeable service –
a core value that GulfStream, now Republic Bank, shares. We are extremely excited about our new
Florida clients and the expanded menu of products and services we can offer these clients going
forward. We are also pleased that the same friendly faces GulfStream’s clients were used to seeing
at their banking centers have remained a part of the Republic team. A foundation in providing
exceptional customer service is having great people who are accessible and responsive – a trait that
is embodied by our new associates at Republic Bank in Florida.
The GulfStream acquisition was a part of our strategic plan to expand the Company’s footprint
outside of our traditional markets. We plan to further expand our operations in Florida by adding
new locations in the Greater Tampa area over the near term. The Company also has plans for 2007
to open new banking centers in northern Kentucky and two new locations in the Greater Louisville
area, among others under consideration. In addition to our notable geographic expansion, the
Company created a “Private Banking” area on January 1, 2007 to service the banking needs of
small businesses and high net worth individuals. We have high expectations for the future success of
all of these new endeavors.
Republic Bank Building – Springhurst
For the year 2006, the Company grew total assets by $311 million while posting net income from
continuing operations of $28.1 million and diluted earnings per Class A Common Stock from
continuing operations of $1.35. This compares to net income from continuing operations of $30.1
million and diluted earnings per Class A Common Stock from continuing operations of $1.40 for
2005. The decrease in net income from continuing operations for 2006 compared to 2005 relates
primarily to a decrease in non interest income within our Tax Refund business segment. In addition,
the Company recorded a large credit to its provision for loan losses during the second quarter of
2005 as a result of a continued improvement in credit quality.
Credit quality remained strong for Republic during 2006. Our level of delinquencies and
non-performing loans remained very positive compared to peer. Republic’s overall percentage of
delinquent loans to total loans was a low 0.49% at December 31, 2006 compared to 0.35% at
December 31, 2005. In addition, the Company’s percentage of non-performing loans to total loans
was 0.28% at December 31, 2006 compared to 0.29% at December 31, 2005. It is important to
note that we were able to achieve solid loan growth during 2006 while maintaining our strict
underwriting standards. Entering 2007, we remain committed to maintaining exceptional credit
quality standards and to never sacrifice these standards for the benefit of the short-term gain
associated with higher loan volume.
Our net interest income increased to $88.3 million for 2006, a 3% increase over 2005. As was the
case with many financial institutions, Republic continued to encounter a contracting net interest
margin brought about by an inverted interest rate yield curve. Despite the negative impact from the
difficult interest rate environment, we were still able to grow net interest income year over year
thanks to the tremendous effort of our sales staff and to those behind the scenes as well through
our back-office “associate sales program.” At Republic, we firmly believe that in order for the
Company to be successful, each and every associate must contribute in multiple ways. As we’ve said
many times before, everyone sells at Republic!
Republic Bank Place – Hurstbourne
While we are focused on increasing the performance and long-term value of the Company, we also
remain committed to giving back to the communities in which we live and work. In 2006, we held
the second Annual Republic Bank WE CARE Awards in Louisville and first in Lexington to recognize
local companies that encourage employee volunteerism and exemplify Republic’s belief of giving
back to the community. The Company continues to be the proud sponsor of the Republic Bank
Kentucky Derby Festival Pegasus Parade and various high school basketball tournaments, including
being the title sponsor of the boys’ and girls’ Louisville Invitational Tournaments. We are also
contributors of both time and resources to Habitat for Humanity, Hospice, American Heart
Association, MS Society, Juvenile Diabetes Research Foundation, March of Dimes and Senior
Housing Crime Prevention, just to name a few. We are proud of the Company’s outstanding record
of community support and remain dedicated to maintaining our involvement for years to come.
As we enter 2007, we remain steadfast in our goal to increase the long-term value of Republic
Bancorp through steady and sound performance. As part of our mission, we made significant
investments for the future during 2006 to position the Company to reach another level of
performance. In addition to physical locations, the Company is also investing heavily in Treasury
Management, which will enable us to combine the best technology with 24/7 hands on service for
our commercial clients. The market acknowledged our long-term strategy during 2006 with a 23%
increase in the Company’s stock price. As always, we would like to thank all of those who have
been a part of our past success. We are grateful and dedicated to the many who have placed their
faith, confidence, and hard earned dollars in our Company’s bright future.
Steven E. Trager
President and Chief Executive Officer
Republic Corporate Center – Downtown Louisville
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
of Republic Bancorp, Inc.
We have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Republic Bancorp, Inc. as of December 31, 2006 and 2005,
and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash
flows for the years ended December 31, 2006, 2005 and 2004 (not presented herein); and in our report dated
March 2, 2007, we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed consolidated balance sheets and
statements of income is fairly stated in all material respects in relation to the consolidated financial statements
from which they have been derived.
Louisville, Kentucky
REPUBLIC BANCORP, INC. Condensed Consolidated Balance Sheets
(In thousands)
ASSETS:
Cash and cash equivalents
Securities available for sale
Securities to be held to maturity
Mortgage loans held for sale
Loans, net of allowance for loan losses of $11,218 and $11,009 (2006 and 2005)
Federal Home Loan Bank stock, at cost
Premises and equipment, net
Goodwill
Other assets and accrued interest receivable
TOTAL ASSETS
LIABILITIES:
Deposits:
Non interest-bearing
Interest-bearing
Total deposits
Securities sold under agreements to repurchase and other short-term borrowings
Federal Home Loan Bank advances
Subordinated note
Other liabilities and accrued interest payable
$
$
$
December 31,
2006
2005
81,613
503,727
58,045
5,724
2,289,670
23,111
36,560
10,016
38,321
$
77,169
447,865
64,298
6,582
2,059,599
21,595
31,786
-
26,662
3,046,787
$
2,735,556
279,026
1,413,696
1,692,722
401,886
646,572
41,240
27,019
$
286,484
1,316,081
1,602,565
292,259
561,133
41,240
24,785
Total liabilities
2,809,439
2,521,982
STOCKHOLDERS’ EQUITY:
Common Stock
Additional paid in capital
Retained earnings
Unearned shares in Employee Stock Ownership Plan
Accumulated other comprehensive loss
Total stockholders’ equity
4,683
97,394
137,673
(1,011)
(1,391)
237,348
4,475
77,295
136,381
(1,468)
(3,109)
213,574
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,046,787
$
2,735,556
REPUBLIC BANCORP, INC. Condensed Consolidated Statements of Income
(In thousands, except per share data)
INTEREST INCOME:
Loans, including fees
Taxable securities
Tax exempt securities
Federal Home Loan Bank stock and other
Total interest income
INTEREST EXPENSE:
Deposits
Securities sold under agreements to repurchase
and other short-term borrowings
Federal Home Loan Bank advances
Subordinated note
Total interest expense
NET INTEREST INCOME
Provision for loan losses
Years ended December 31,
2006
2005
2004
$
150,937
22,952
96
2,555
176,540
44,274
15,889
25,564
2,515
88,242
88,298
2,302
$
127,029
18,568
-
2,482
148,079
31,703
9,906
19,872
951
62,432
85,647
340
$
107,569
12,558
-
1,316
121,443
21,202
4,191
16,659
-
42,052
79,391
1,346
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
85,996
85,307
78,045
NON INTEREST INCOME:
Service charges on deposit accounts
Electronic refund check fees
Net RAL securitization income
Mortgage banking income
Debit card interchange fee income
Title insurance commissions
Gain on sale of securities
Other
Total non interest income
NON INTEREST EXPENSES:
Salaries and employee benefits
Occupancy and equipment, net
Communication and transportation
Marketing and development
Bankshares tax
Data processing
Debit card interchange expense
Supplies
Other
Total non interest expenses
(continued)
16,505
4,102
2,771
2,316
3,644
762
300
1,300
31,700
40,412
15,541
2,750
2,459
1,902
2,171
1,663
1,271
6,693
74,862
13,851
6,083
-
2,751
3,122
1,756
-
1,244
28,807
36,731
13,654
3,000
2,489
1,822
1,871
1,357
1,133
6,455
68,512
11,917
5,268
-
3,148
2,492
1,515
-
1,311
25,651
34,341
13,716
2,809
2,271
1,932
1,602
1,080
1,385
5,082
64,218
REPUBLIC BANCORP, INC. Condensed Consolidated Statements of Income (continued)
(In thousands, except per share data)
Years ended December 31,
2006
2005
2004
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE
$
42,834
$
45,602
$
39,478
INCOME TAX EXPENSE FROM
CONTINUING OPERATIONS
INCOME FROM CONTINUING OPERATIONS
BEFORE DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE
INCOME FROM DISCONTINUED OPERATIONS
BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE FROM
DISCONTINUED OPERATIONS
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE
14,718
15,524
13,548
28,116
30,078
25,930
359
124
235
7,561
2,574
4,987
10,004
3,433
6,571
NET INCOME
$
28,351
$
35,065
$
32,501
BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
Class A Common Stock
Class B Common Stock
$
1.38
1.35
BASIC EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS:
Class A Common Stock
Class B Common Stock
0.01
0.00
$
BASIC EARNINGS PER SHARE:
Class A Common Stock
Class B Common Stock
$
1.39
1.35
DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
Class A Common Stock
Class B Common Stock
1.35
1.32
$
DILUTED EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS:
0.00
Class A Common Stock
0.00
Class B Common Stock
$
$
$
$
$
$
1.46
1.43
0.24
0.24
1.70
1.67
1.40
1.37
0.23
0.23
DILUTED EARNINGS PER SHARE:
Class A Common Stock
Class B Common Stock
$
1.35
1.32
$ 1.63
1.60
Note: All per share data has been adjusted for stock dividends
$
$
$
$
$
$
1.25
1.23
0.32
0.32
1.57
1.55
1.20
1.18
0.31
0.30
1.51
1.48
Republic Bank & Trust Company
Senior Management
Steven E. Trager
Chairman and Chief Executive Officer
A. Scott Trager
President
David Vest
Executive Vice President and Chief Lending & Chief Deposit Officer
Kevin Sipes
Executive Vice President and Chief Financial Officer
Bank Administration
Jeff Nelson, Senior Vice President
Collections
Duane Wilson, Senior Vice President
Commercial Banking
Robert Arnold, Senior Vice President
Community Relations
Carolle Jones Clay, Vice President
Compliance
Brian Waters, Vice President
Controller
Mike Newton, Vice President
CRA
Garry Throckmorton, Senior Vice President
Facilities
Carol James, Vice President
Finance
Mike Beckwith, Senior Vice President
Human Resources
Margaret Wendler, Senior Vice President
Internal Audit
Ann Bauer, Vice President
Legal
Mike Ringswald, Senior Vice President
Marketing
Michael Sadofsky, Senior Vice President
Operations
Shannon Reid, Senior Vice President
Purchasing
Brian Sizemore, Vice President
Regional Managing Directors
Tucker Ballinger, Senior Vice President – Frankfort, Georgetown,
Lexington, and Shelbyville
Claudio Monzon, Senior Vice President – Bowling Green,
Elizabethtown, Florida and Owensboro
David Jett, Vice President - Louisville
Kathy Potts, Senior Vice President – Indiana, Louisville and
Northern Kentucky
Retail Banking
Steve DeWeese, Senior Vice President
Risk Management
John Rippy, Senior Vice President
Security
Mark Speevack, Manager
Tax Refund Solutions
Barbara Trager, Senior Vice President and
Managing Director of Tax Refund Solutions
Cathy Slider, Senior Vice President and Director of Sales
Mike Keene, Senior Vice President and Managing Director
of Business Strategy
Treasury
Greg Williams, Senior Vice President and Chief Investment Officer
Treasury Management
Andy Powell, Senior Vice President
Trust
Joe Sutter, Vice President
Republic Bancorp, Inc. Directors
Henry M. “Sonny” Altman, Jr., CPA
Owner, Altman Consulting LLC
Charles E. “Andy” Anderson
Past CEO, Anderson Insurance & Financial Services
Sandra Metts Snowden
President, Metts Company Realtors/Metts Company, Inc.
R. Wayne Stratton, CPA
Member, Jones, Nale & Mattingly PLC
Susan Stout Tamme
President and Chief Executive Officer, Baptist Hospital East
Bernard M. Trager
Chairman, Republic Bancorp, Inc.
A. Scott Trager
Vice Chairman, Republic Bancorp, Inc.
Steven E. Trager
President and Chief Executive Officer, Republic Bancorp, Inc.
Republic Bank & Trust Company Directors
Ron Barnes
Member, McCauley, Nicolas & Company, LLC
Stan Curtis
Senior Vice President, Hilliard Lyons
Laura Douglas
Director of External Communications, E.ON U.S.
George E. Fischer
Retired - Chairman, SerVend International, Inc.
Craig Greenberg
Counsel, Frost Brown Todd LLC
D. Harry Jones
President, Jones Plastic & Engineering Corp.
Thomas M. Jurich
Vice President for Athletics, University of Louisville
Michael T. Rust
President and Chief Executive Officer, Kentucky Hospital Association
Bernard M. Trager
Chairman - Executive Committee, Republic Bank & Trust Company
A. Scott Trager
President, Republic Bank & Trust Company
Steven E. Trager
Chairman and Chief Executive Officer, Republic Bank & Trust Company
Republic Bank Directors
Steven E. Trager
Chairman and Chief Executive Officer
Kevin Sipes
Executive Vice President and Chief Financial Officer
John Rippy
Senior Vice President and Risk Management Officer
Mike Beckwith
Senior Vice President and Managing Director of Finance
Phil Chesnut
Senior Vice President and Managing Director
Henry Hanff, M.D.
Orthopedic Surgeon
Republic Bancorp, Inc. Executive Officers
Bernard M. Trager
Chairman and Director
Steven E. Trager
President, Chief Executive Officer and Director
A. Scott Trager
Vice Chairman and Director
Kevin Sipes
Executive Vice President, Chief Financial Officer
and Chief Accouning Officer
David Vest
Executive Vice President and Chief Lending & Chief Deposit Officer
Mike Beckwith
Senior Vice President and Managing Director of Finance
Mike Ringswald
Senior Vice President, Secretary and General Counsel
1700 Scottsville Road, Bowling Green, KY 42104
535 Madison Avenue, Covington, KY 41011
1690 Ring Road, Elizabethtown, KY 42701
1945 Highland Pike, Fort Wright, KY 41017
1001 Versailles Road, Frankfort, KY 40601
100 Highway 676, Frankfort, KY 40601
430 Connector Road, Georgetown, KY 40324
3098 Helmsdale Place, Lexington, KY 40509
641 East Euclid Avenue, Lexington, KY 40502
2401 Harrodsburg Road, Lexington, KY 40504
651 Perimeter Drive, Lexington, KY 40517
3608 Walden Drive, Lexington, KY 40517
3950 Kresge Way, Suite 108, Louisville, KY 40207
2801 Bardstown Road, Louisville, KY 40205
11330 Main Street, Middletown, KY 40243
4921 Brownsboro Road, Louisville, KY 40222
601 West Market Street, Louisville, KY 40202
5250 Dixie Highway, Louisville, KY 40216
10100 Brookridge Village Blvd., Louisville, KY 40291
3605 Fern Valley Road, Louisville, KY 40219
3902 Taylorsville Road, Louisville, KY 40220
661 South Hurstbourne Parkway, Louisville, KY 40222
3811 Ruckriegel Parkway, Louisville, KY 40299
220 Abraham Flexner Way, Louisville, KY 40202
5125 New Cut Road, Louisville, KY 40214
4808 Outer Loop, Louisville, KY 40219
1420 Poplar Level Road, Louisville, KY 40217
9101 US Highway 42, Prospect, KY 40059
3726 Lexington Road, Louisville, KY 40207
9600 Brownsboro Road, Louisville, KY 40241
2028 West Broadway, Louisville, KY 40203
3500 Frederica Street, Owensboro, KY 42301
3332 Villa Point Drive, Owensboro, KY 42303
1614 Midland Trail, Louisville, KY 40065
3141 Highway 62, Jeffersonville, IN 47130
3001 Charlestown Crossing Way, New Albany, IN 47150
6844 Bardstown Road, Louisville, KY 40291
9128 Taylorsville Road, Louisville, KY 40299
27607 State Road 56, Wesley Chapel, FL 33543
270-782-9111
859-581-2700
270-769-6356
859-331-0888
502-695-9000
502-875-4300
502-570-8868
859-264-0990
859-255-6267
859-224-1183
859-266-1165
859-273-3933
502-897-3800
502-459-2200
502-254-7555
502-339-9700
502-584-3600
502-448-7000
502-231-5522
502-964-8848
502-451-2006
502-425-2300
502-266-5466
502-588-3115
502-363-4644
502-969-8999
502-636-2661
502-228-2755
502-893-2533
502-339-2200
502-772-7500
270-684-3333
270-683-2699
502-633-6660
812-282-1200
812-949-2600
502-420-1888
502-420-1900
(813) 929-4990
9037 U.S. Highway 19, Port Richey, FL 34668
5043 U.S. Highway 19, New Port Richey, FL 34652
(727) 846-0066
(727) 847-0066
Covington
Ft. Wright
Port Richey
New Port Richey
Wesley Chapel
Republic Bank & Trust Company
Kentucky
Bowling Green
Covington
Elizabethtown
Fort Wright
Frankfort
Georgetown
Lexington
Louisville
Owensboro
Shelbyville
Indiana
Jeffersonville
New Albany
East
West
Andover
Chevy Chase
Harrodsburg Road
Perimeter Drive
Tates Creek
Baptist Hospital East
Bardstown Road
Blankenbaker Parkway
Brownsboro Road
Corporate Center
Dixie Highway
Fern Creek
Fern Valley Road
Hikes Point
Hurstbourne Parkway
Jeffersontown
Jewish Hospital
New Cut Road
Outer Loop
Poplar Level Road
Prospect
St. Matthews
Springhurst
West Broadway
Owensboro
Owensboro Highway 54
Loan Production Offices
Louisville
Wesley Chapel
Cedar Springs
Stony Brook
Republic Bank
Port Richey
Southgate
Banking Centers
19
Louisville, KY
5
Lexington, KY
2
Frankfort, KY
2
Owensboro, KY
1
Bowling Green, KY
1
Covington, KY
1
Elizabethtown, KY
1
Fort Wright, KY
1
Georgetown, KY
1
Shelbyville, KY
1
Jeffersonville, IN
1
New Albany, IN
Port Richey, FL
1
New Port Richey, FL 1
Loan Production Offices
Louisville, KY 2
Wesley Chapel, FL 1
Indicates principal office
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission File Number: 0-24649
REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky
(State or other jurisdiction of
incorporation or organization)
601 West Market Street, Louisville, Kentucky
(Address of principal executive offices)
(I.R.S. Employer Identification No.)
61-0862051
40202
(Zip Code)
Registrant’s telephone number, including area code: (502) 584-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes XNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes XNo
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
XYes No
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
X
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.
Large accelerated filer Accelerated filer X Non-accelerated filer Y
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes XNo
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold as of June 30, 2006 (the last business day of the registrant’s most recently
completed second fiscal quarter) was approximately $186,548,240 (for purposes of this calculation, the market value of the
Class B Common Stock was based on the market value of the Class A Common Stock into which it is convertible).
The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of March 1,
2007 was 18,251,647 and 2,350,468. All share and per share data has been restated to reflect the five percent (5%) stock
dividend that was declared in January 2007.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for
identification purposes:
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2007 are incorporated by
reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS
PART I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
PART III
Item 10. Directors and Executive Officers of the Registrant, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Item 14. Principal Accounting Fees and Services.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
Signatures
Index to Exhibits
EX-21 Subsidiaries of Republic Bancorp, Inc.
EX-23 Consent of Crowe Chizek and Company LLC
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
3
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains statements relating to future results of Republic Bancorp, Inc. that are considered
“forward-looking” within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained
in Item 1 “Business,” Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” These statements relate to, among other things, expectations concerning critical accounting estimates,
loan demand, growth, performance, simulated changes in interest rates and the adequacy of the allowance for loan losses.
These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance
or achievements to be materially different from any future results, performance or achievements expressed or implied by the
forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks
and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations,
competitive product and pricing pressures within our markets, equity and fixed income market fluctuations, personal and
corporate customers’ bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological changes,
changes in law and regulations, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in
gaining regulatory approvals when required, as well as other risks and uncertainties reported from time to time in our filings
with the Securities and Exchange Commission (“SEC”). Broadly speaking, forward-looking statements include:
•
•
•
•
projections of revenue, 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 adequacy of the allowance for loan losses;
the future value of mortgage servicing rights;
the impact of new accounting pronouncements;
future short-term and long-term interest rate levels and the respective impact on net interest margin, net interest
spread, net income, liquidity and capital;
legal and regulatory matters; and,
future capital expenditures.
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 management’s 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. See
additional discussion under the sections titled Item 1 “Business,” Item 1A “Risk Factors” and Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
As used in this report, the terms “Republic,” the “Company,” “we,” “our” and “us” refer to Republic Bancorp, Inc., and,
where the context requires, Republic Bancorp, Inc. and its subsidiaries; and the term the “Bank” refers to the Company’s
subsidiary banks: Republic Bank & Trust Company and Republic Bank.
4
PART I
Item 1 Business.
Republic Bancorp, Inc. (“Republic” or the “Company”) is a Financial Holding Company (“FHC”), under the Bank Holding
Company Act of 1956, as amended (“BHCA”), headquartered in Louisville, Kentucky. Republic is the Parent Company of
Republic Bank & Trust Company and Republic Bank (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: Republic Financial Services, LLC, TRS RAL Funding, LLC and Republic Insurance
Agency, LLC. Republic Bank, a federally chartered thrift institution, includes its subsidiary, GulfStream Financial Properties,
Inc. Incorporated in Kentucky on January 2, 1974, Republic became a bank holding company when Republic Bank & Trust
Company became authorized to conduct commercial banking business in Kentucky in 1981.
The principal business of Republic is directing, planning and coordinating the business activities of the Bank. The financial
condition and results of operations of Republic are primarily dependent upon the operations of the Bank. At December 31,
2006, Republic had total assets of $3.0 billion, total deposits of $1.7 billion and total stockholders’ equity of $237 million.
Based on total assets as of December 31, 2006, Republic ranked as the largest independently owned Kentucky-based bank
holding company. The executive offices of Republic are located at 601 West Market Street, Louisville, Kentucky 40202,
telephone number (502) 584-3600. The Company’s website address is www.republicbank.com.
Website Access to Reports
The Company makes the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934,
available free of charge on or through the Internet website, www.republicbank.com, as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the SEC.
5
General Business Overview
As of December 31, 2005, the Company was 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, the deferred deposit
segment operations are presented as discontinued operations. See additional discussion under Footnote 20 “Segment
Information” and Footnote 24 “Discontinued Operations” of Item 8 “Financial Statements and Supplementary Data.” Total
assets and net income for the years ended December 31, 2006, 2005 and 2004 are presented below:
As of December 31, 2006 (in thousands)
Banking
Tax Refund
Solutions
Mortgage
Banking
Total
Continuing
Operations
Discontinued
Operations
Net income
Total assets
$
22,793
3,044,983
$
4,668
205
$
655
1,599
$
28,116
3,046,787
$
235
-
As of December 31, 2005 (in thousands)
Banking
Tax Refund
Solutions
Mortgage
Banking
Total
Continuing
Operations
Discontinued
Operations
Net income
Total assets
$
23,730
2,721,221
$
5,531
1,770
$
817
6,617
$
30,078
2,729,608
$
4,987
5,948
As of December 31, 2004 (in thousands)
Banking
Tax Refund
Solutions
Mortgage
Banking
Total
Continuing
Operations
Discontinued
Operations
Net income
Total assets
(I) Banking
$
19,187
2,432,579
$
5,406
2,012
$
1,337
16,496
$
25,930
2,451,087
$
6,571
47,835
As of December 31, 2006, Republic had a total of 38 full-service banking centers with 34 located in Kentucky, two in southern
Indiana and two in Pasco County, Florida. Republic Bank & Trust Company’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, as well as 19 banking centers. Republic’s central Kentucky market includes 15 banking centers in
the following Kentucky cities: Bowling Green (1); Covington (1); Elizabethtown (1); Fort Wright (1) Frankfort (2);
Georgetown (1); Lexington, the second largest city in Kentucky (5); Owensboro (2); and Shelbyville (1). Republic Bank &
Trust Company also has banking centers located in New Albany and Jeffersonville, Indiana. Republic Bank has locations in
Port Richey and New Port Richey, Florida. Republic also operates two Loan Production Offices (“LPOs”) in the Louisville,
Kentucky market and one additional LPO office in Pasco County, Florida. The Louisville LPOs operate under Republic
Finance, 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. The Company has announced plans to open additional
banking centers in Florence, Kentucky, Shepherdsville, Kentucky and Floyds Knobs, Indiana as well as two additional
banking centers in Florida in 2007.
In October 2006, Republic completed its acquisition of GulfStream Community Bank (“GulfStream”), a federally chartered
thrift institution headquartered in Port Richey, Florida. In December, in connection with the Company’s branding initiative,
the Company changed the name of the institution to Republic Bank. On the acquisition date, GulfStream, which began
operations in 2000, had total assets of $64 million with net loans of $44 million and total deposits of $54 million. This
acquisition did not materially impact the Company in 2006. Also during the fourth quarter of 2006, the Company merged the
Republic Bank & Trust Company of Indiana bank charter into Republic Bank & Trust Company.
6
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 Bank has historically extended credit and
provided general banking services through its banking center network to individuals and businesses. Over the past several
years, the Bank 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 Bank generally retains adjustable rate residential real estate loans with fixed terms up to ten
years. These loans are originated through the Bank’s 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 Company’s “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 Bank’s market areas. The Bank makes commercial loans to a variety of industries and promotes this business
through focused calling programs in order to broaden relationships by providing business clients with loan, deposit and
treasury management services.
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 Republic’s markets.
Treasury Management Services – The Bank provides various deposit products designed for business clients 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 Treasury Management
department. The “Premier First” product is the premium money market sweep account designed for business clients.
Internet Banking – The Bank 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, title insurance and other related financial institution products
and services.
(II) Tax Refund Solutions (“TRS”)
Republic Bank & Trust Company (“RBT”) 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. RBT facilitates the payment of these tax
refunds through three primary products: Refund Anticipation Loans (“RALs”), Electronic Refund Checks (“ERCs”) and
Electronic Refund Deposits (“ERDs”). RBT offers RALs for those taxpayers who apply and qualify and RALs are repaid
when the taxpayers’ refunds are electronically received by RBT from the government. For those taxpayers who wish to
receive their funds electronically via an ACH, RBT will provide an ERC or an ERD to the taxpayer. An ERC/ERD is issued to
the taxpayer after RBT has received the tax refund from the federal or state government.
See Footnote 5 “Securitization” of Item 8 “Financial Statements and Supplementary Data” for a description of the
securitization that RBT utilized during the first quarter of 2006. This securitization represented the sale of a portion of the
RAL portfolio to a financial institution, and except for the capital that was allocated for the small retained interest kept by
RBT, it eliminated the impact on the regulatory capital ratios of RBT. Net RAL securitization income, which represents the
gain on sale and gain/loss on securitization residual and other costs incurred by RBT on the sold loans, is classified as non
interest income under the caption “Net RAL securitization income.”
See additional discussion regarding TRS under the sections titled Item 1A “Risk Factors” and Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Footnote 24 “Segment Information” of Item
8 “Financial Statements and Supplementary Data.”
7
(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. Since 2003, the Bank historically retained servicing on substantially all loans sold into the secondary market.
Administration of loans with the servicing retained by the Bank 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 the Bank for
performing these standard servicing functions.
See additional discussion regarding mortgage banking under the sections titled: Item 1A “Risk Factors” and Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Footnote 24 “Segment
Information” of Item 8 “Financial Statements and Supplementary Data.”
(IV) Discontinued Operations (“Deferred Deposits” or “Payday Lending”)
The Company substantially exited the payday loan segment of business during February 2006. This segment has been treated
as a discontinued operation and all current period and prior period data has been restated to reflect operations absent the
payday lending segment of business. The Company ceased originating payday loans on June 30, 2006 and had no payday
loans outstanding at December 31, 2006.
See additional discussion regarding the payday lending products under the sections titled: Item 1A “Risk Factors,” Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Footnote 24 “Segment
Information” and Footnote 2 “Discontinued Operations” of Item 8 “Financial Statements and Supplementary Data.”
Employees
As of December 31, 2006, Republic had 739 full-time equivalent employees. Altogether, the Company had 722 full-time and
34 part-time employees. None of the Company’s employees are subject to a collective bargaining agreement, and Republic
has never experienced a work stoppage. The Company believes that its employee relations have been and continue to be good.
Competition
The Bank actively competes with several local and regional retail and commercial banks, credit unions and mortgage
companies for deposits, loans and other banking related financial services. There is intense competition in the Company’s
markets from other financial institutions, as well as other non-bank companies that engage in similar activities. Some of the
Company’s competitors are not subject to the same degree of regulatory review and restrictions that apply to the Company and
the Bank. In addition, the Bank must compete with much larger financial institutions that have greater financial resources than
the Bank that, while predominantly headquartered in other states, aggressively compete for market share in Kentucky, southern
Indiana and Pasco County, Florida. These competitors attempt to gain market share through their financial product mix, pricing
strategies and banking center locations. Legislative developments related to interstate branching and banking in general, by
providing large banking institutions easier access to a broader marketplace, can act to create more pressure on smaller financial
institutions to consolidate. The Bank also competes with insurance companies, consumer finance companies, investment
banking firms and mutual fund managers. Retail establishments compete for certain loans by offering credit cards and retail
installment contracts for the purchase of goods and merchandise. It is anticipated that competition from both bank and non-
bank entities will continue to remain strong in the foreseeable future.
Supervision and Regulation
Republic Bank & Trust Company is a Kentucky chartered commercial banking and trust corporation and as such, it is subject
to supervision and regulation by the FDIC and the Kentucky Office of Financial Institutions. Republic Bank is a federally
chartered thrift institution and as such, it is subject to supervision and regulation by the Office of Thrift Supervision (“OTS”)
and secondarily by the FDIC, as the deposit insurer. All deposits held by the Bank are insured by the FDIC. Such supervision
and regulation subjects the Bank to special restrictions, requirements, potential enforcement actions and periodic examination
by the FDIC, the OTS and Kentucky banking regulators. The Federal Reserve Bank (“FRB”) regulates the Company with
monetary policies and operational rules that directly affect the Bank. The Company is also a member of the Federal Home
Loan Bank System and, with respect to deposit insurance, a member of the Deposit Insurance Fund (“DIF”) managed by the
FDIC.
8
The Company files reports with the FRB, FDIC and OTS concerning business activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other
financial institutions. These agencies conduct periodic examinations to test the Company’s safety and soundness and
compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of
activities under which a bank or thrift can engage and is intended primarily for the protection of the insurance fund and
depositors. This regulatory structure also gives regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any change in regulatory requirements and policies,
whether by the FRB, the FDIC, the OTS or state or federal legislation, could have a material adverse impact on the Company
and Company operations.
Regulators have broad enforcement power over bank holding companies and banks, including, but not limited to, the power to
mandate or restrict particular actions, activities, or divestitures, impose substantial fines and other penalties for violations of
laws and regulations, issue cease and desist or removal orders, seek injunctions, publicly disclose such actions and police
unsafe or unsound practices. In addition, Republic’s non-banking subsidiaries are also subject to regulation by other agencies.
Certain regulatory requirements applicable to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to banks, thrifts and their holding companies set forth below does not purport
to be a complete description of such statutes and regulations and their effect on the Company and is qualified in its entirety by
reference to the actual laws and regulations.
The Company
The Company is a bank holding company that has elected and presently maintains the status of a FHC, subject to certain
restrictions attributable to its Community Reinvestment Act (“CRA”) rating under the BHCA. The BHCA and other federal
laws subject bank and financial holding companies to particular restrictions on the types of activities in which they may
engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of
laws and regulations. FHC status also compels the Company to maintain specified capital ratios, examination ratings and
management ratings with respect to its operations.
Bank Acquisitions by Banks and FHCs – Republic is required to obtain the prior approval of the FRB under the BHCA before
it may, among other things, acquire all or substantially all of the assets of any bank, or ownership or control of any voting
shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of any class of the
voting shares of such bank. In approving bank acquisitions by bank holding companies, the FRB is required to consider the
financial and managerial resources and future prospects of the bank holding company and the bank involved, the convenience
and needs of the communities to be served and various competitive factors. Consideration of financial resources generally
focuses on capital adequacy, which is discussed below. Consideration of convenience and needs issues includes the parties’
performance under the CRA. Under the CRA, all financial institutions have a continuing and affirmative obligation consistent
with safe and sound operation to help meet the credit needs of their entire communities, including low to moderate income
neighborhoods.
Under the BHCA, so long as it is at least adequately capitalized and adequately managed, Republic may purchase a bank,
subject to regulatory approval, located inside or outside the states of Kentucky or Florida. Similarly, an adequately capitalized
and adequately managed bank holding company located outside of Kentucky or Florida may purchase a bank located inside
Kentucky or Florida, subject to appropriate regulatory approvals. In either case, however, state law restrictions may be placed
on the acquisition of a state bank that has been in existence for a limited amount of time, or would result in specified
concentrations of deposits. For example, Kentucky law prohibits a bank holding company from acquiring control of banks
located in Kentucky, if the holding company would then hold more than 15% of the total deposits of all federally insured
depository institutions in Kentucky.
Financial Activities – The activities permissible for bank holding companies and their affiliates were substantially expanded
by the Gramm-Leach-Bliley Act (“GLBA”), effective March 11, 2000. The GLBA permits bank holding companies that
qualify as, and elect to be FHCs to engage in a broad range of financial activities, including underwriting, dealing in and
making a market in securities, insurance underwriting and agency activities without geographic or other limitation, as well as
merchant banking. To maintain its status as a FHC, the Company and all of its affiliated depository institutions must be well-
capitalized, well-managed, and have at least a “satisfactory” CRA rating.
9
FHC regulators approve certain activities as financial in nature or incidental to financial activities, as well as define the
procedures and requirements that allow a FHC to request the FRB’s approval to conduct a financial activity, or an activity that
is complementary to a financial activity. The Company is required to obtain prior FRB approval in order to engage in the
financial activities identified in the GLBA or FRB regulations. In addition, if any of its depository institution subsidiaries
ceases to be well-capitalized or well-managed, and compliance is not achieved within 180 days, the Company may be forced,
in effect, to cease conducting business as a FHC by divesting either its non-banking financial activities or its bank activities.
Moreover, the Hart-Scott-Rodino Act antitrust filing requirements may apply to certain non-bank acquisitions.
Subject to certain exceptions, insured state banks are permitted to control or hold an interest in a financial subsidiary that
engages in a broader range of activities (such as securities underwriting) than are permissible for national banks to engage in
directly, subject to any restrictions imposed on a bank under the laws of the state under which it is organized. Conducting
financial activities through a bank subsidiary can impact capital adequacy and regulatory restrictions may apply to affiliate
transactions between the bank and its financial subsidiaries.
Safe and Sound Banking Practice – The FRB does note permit bank holding companies to engage in unsafe and unsound
banking practices. The FDIC, the Kentucky Office of Financial Institutions and the OTS have similar restrictions with respect
to the Bank.
Source of Strength – Under FRB policy, a bank holding company is expected to act as a source of financial strength to each of
its banking subsidiaries and to commit resources for their support. Such support may restrict the Company’s ability to pay
dividends, and may be required at times when, absent this FRB policy, a holding company may not be inclined to provide it.
As noted below, a bank holding company may also be required to guarantee the capital restoration plan of an undercapitalized
banking subsidiary and cross guarantee provisions, as described below, generally apply to the Company. In addition, any
capital loans by the Company to its bank subsidiaries are subordinate in right of payment to deposits and to certain other
indebtedness of the bank subsidiary. In the event of a bank holding company’s bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of subsidiary banks will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
The USA Patriot Act – The USA Patriot Act was signed into law in October, 2001. The USA Patriot Act gives the federal
government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance
powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, the USA Patriot Act takes measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Among other requirements, the USA Patriot Act requires banks to establish anti-money
laundering programs, to adopt procedures and controls to detect and report money laundering, and to comply with certain
enhanced recordkeeping obligations with respect to correspondent accounts of foreign banks. Compliance with these new
requirements has not had a material effect on our operations.
The Bank
The Kentucky and federal banking statutes prescribe the permissible activities in which a Kentucky or federal savings bank
may engage and where those activities may be conducted. Kentucky’s statutes contain a super parity provision that permits a
well-rated Kentucky banking corporation to engage in any banking activity in which a national or state bank operating in any
other state or a federal savings association meeting the qualified thrift lender test and operating in any state could engage,
provided it first obtains a legal opinion from counsel specifying the statutory or regulatory provisions that permit the activity.
Branching – Kentucky law generally permits a Kentucky chartered bank to establish a branch office in any county in
Kentucky. A Kentucky bank may also, subject to regulatory approval and certain restrictions, establish a branch office outside
of Kentucky. Well capitalized Kentucky banks that have been in operation at least three years and that satisfy certain criteria
relating to, among other things, their composite and management ratings, may establish a branch in Kentucky without the
approval of the Executive Director of the Kentucky Office of Financial Institutions, upon notice to the Office and any other
state bank with its main office located in the county where the new branch will be located. Branching by all other banks
requires the approval of the Executive Director of the Kentucky Office of Financial Institutions, who must ascertain and
determine that the public convenience and advantage will be served and promoted and that there is a reasonable probability of
the successful operation of the branch. In any case, the transaction must also be approved by the FDIC, which considers a
number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the
community and consistency with corporate powers. An out of state bank is permitted to establish branch offices in Kentucky
only by merging with a Kentucky bank. De novo branching into Kentucky by an out of state bank is not permitted. This
difficulty for out of state banks to branch into Kentucky may limit the ability of a Kentucky bank to branch into many states,
as several states have reciprocity requirements for interstate branching.
10
Under federal regulations, Republic Bank may establish and operate branches in any state of the United States with the prior
approval of the OTS. Highly rated federal savings associations that satisfy certain regulatory requirements may establish
branches without prior OTS approval, provided the federal savings association publishes notice of its establishment of a new
branch, the federal savings association notifies the OTS of the establishment of the branch, and no person files a comment
with the OTS opposing the proposed branch.
Restrictions on Affiliate Transactions – Transactions between the Bank and its non-banking affiliates, including the Company,
are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such
transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to
third parties, which are collateralized by the securities, or obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain
transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as
those prevailing at the time for comparable transactions with the Bank and other non-affiliated persons.
The FRB promulgated Regulation W to implement Sections 23A and 23B. That regulation contains the foregoing restrictions
and also addresses derivative transactions, overdraft facilities and other transactions between a bank and its non-bank
affiliates.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets – Banking regulators’ may declare a dividend payment
to be unsafe and unsound even though the Bank would continue to meet its capital requirements after the dividend. Dividends
paid by Republic Bank & Trust Company have provided substantially all of the Company’s operating funds in the past.
Capital adequacy requirements and state law serve to limit the amount of dividends that may be paid by the Bank. Under
federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be undercapitalized.
Under Kentucky and federal banking law, the dividends the Bank can pay during any calendar year are generally limited to its
profits for that year, plus its retained net profits for the two preceding years, less any required transfers to surplus or to fund
the retirement of preferred stock or debt, absent approval of the respective state or federal banking regulators. Management
does not anticipate any restrictions on dividends to the Company from the Bank in the foreseeable future. In addition, Republic
Bank must notify the OTS 30 days before declaring any dividend payable to the Company.
Deposit Insurance Assessments – The Federal Deposit Insurance Reform Act of 2005 and The Federal Deposit Insurance
Reform Conforming Amendments Act of 2005 signed by the President in February, 2006 (the “Act”) revised the laws
governing federal deposit insurance by providing for changes that included: merging the Bank Insurance Fund (“BIF”) and the
Savings Association Insurance Fund (“SAIF”) into a new fund titled the Deposit Insurance Fund (“DIF”) effective March 31,
2006; coverage for certain retirement accounts was increased to $250,000 effective April 1, 2006; deposit insurance coverage
on individual accounts may be indexed for inflation beginning in 2010; the FDIC will have more discretion in managing
deposit insurance assessments; and eligible institutions will receive a one-time initial assessment credit. Under the Act, the
FDIC is authorized to revise the current risk-based assessment system. Insurance premiums will be based on a number of
factors including the risk of loss that insured institutions pose to the Deposit Insurance Fund. The legislation replaces the
current minimum 1.25% reserve ratio for the insurance funds with a range for the new insurance fund’s reserve ratio between
1.15% and 1.5% depending on projected losses, economic changes and assessment rates at the end of a calendar year,
abolishes the rule prohibiting the FDIC from charging the banks in the lowest risk category when the reserve ratio premiums is
more than 1.25% and does not limit the FDIC to changing assessment rates bi-annually.
The FDIC announced a new rule in November, 2006 regarding the risk-based assessment system for the premiums paid by
each bank. Under this risk-based system, the FDIC will evaluate an institution’s risk based on supervisory ratings for all
insured institutions, financial ratios for most institutions, and long-term debt issuer ratings for certain large institutions. The
pricing structure for 2007 sets rates with the minimum premium starting at 0.05% of insured deposits. Certain credits will be
allowed against 2007 premiums for certain eligible institutions with premium assessments prior to 1996. Management expects
premium costs to be between 0.05% and 0.07% for 2008, reduced by applicable costs.
Cross-Guarantee Provisions – The Federal Deposit Insurance Act contains a cross-guarantee provision which generally makes
commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure
of its sister depository institutions.
11
Consumer Laws and Regulations – In addition to the laws and regulations discussed herein, the Bank is also subject to certain
consumer laws and regulations that are designed to protect consumers in their transactions with banks. While the discussion
set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Real Estate
Settlement Procedures Act, the Fair Housing Act and the Fair and Accurate Transactions Act, among others. These laws and
regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with
consumers when accepting deposits or originating loans. Certain laws also limit the Bank’s ability to share information with
affiliated and unaffiliated entities. The Bank is required to comply with all applicable consumer protection laws and
regulations as part of its ongoing business operations.
Code of Ethics – The Company adopted a code of ethics that applies to all employees, including the Company’s principal
executive, financial and accounting officers. A copy of the Company’s code of ethics is available on the Company’s website.
The Company intends to disclose information about any amendments to, or waivers from, the code of ethics that are required
to be disclosed under applicable SEC regulations by providing appropriate information on the Company’s website. If at any
time the code of ethics is not available on our website, the Company will provide a copy of it free of charge upon written
request.
Qualified Thrift Lender Test – Federal law requires savings institutions to meet the qualified thrift lender test (“QTL”) found
at 12 U.S.C. §1467a(m). The QTL measures the proportion of a savings institution’s assets invested in loans or securities
supporting residential construction and home ownership. Under the QTL, a savings association is required to either qualify as
a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets”
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related
investments, including certain mortgage backed securities) in at least nine months out of each 12-month period. Qualified
thrift investments include (i) housing-related loans and investments, (ii) obligations of the FDIC, (iii) loans to purchase or
construct churches, schools, nursing homes and hospitals, (iv) consumer loans, (v) shares of stock issued by any FHLB, and
(vi) shares of stock issued by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be
considered “qualified thrift investments.” Portfolio assets consist of total assets minus (a) goodwill and other intangible assets,
(b) the value of properties used by the savings institution to conduct its business, and (c) certain liquid assets in an amount not
exceeding 20% of total assets. If the Bank fails to remain qualified under the QTL, it must either convert to a commercial bank
charter or be subject to restrictions specified under OTS regulations. A savings institution may re-qualify under the QTL if it
thereafter complies with the QTL. At December 31, 2006, Republic Bank exceeded the QTL requirements.
Federal Home Loan Bank System – The Bank is a member of the Federal Home Loan Bank (“FHLB”) System, which consists
of 12 regional Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board. The
Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the FHLB, the
Bank is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate
unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. As of December 31, 2006, the Bank was in
compliance with this requirement.
Capital Adequacy Requirements
Capital Guidelines – The FRB, FDIC and OTS have substantially similar risk based and leverage ratio guidelines for banking
organizations, which are intended to ensure that banking organizations have adequate capital related to the risk levels of assets
and off balance sheet instruments. Under the risk based guidelines, specific categories of assets are assigned different risk
weights based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset
balances to determine a risk weighted asset base. The guidelines require a minimum total risk based capital ratio of 8.0%, of
which at least 4.0% is required to consist of Tier I capital elements (generally, common shareholders’ equity, minority
interests in the equity accounts of consolidated subsidiaries, non cumulative perpetual preferred stock, less goodwill and
certain other intangible assets). Total capital is the sum of Tier I and Tier II capital. Tier II capital generally may consist of
limited amounts of subordinated debt, qualifying hybrid capital instruments, other preferred stock, loan loss reserves and
unrealized gains on certain equity securities. As of December 31, 2006, the Company’s ratio of Tier I capital to total risk-
weighted assets was 13.73% and its ratio of total capital to total risk weighted assets was 14.30%. As of December 31, 2006,
Republic Bank & Trust Company’s ratio of Tier I capital to total risk weighted assets was 11.52% and its ratio of total risk
based capital to total risk weighted assets was 13.32%. Republic Bank’s Tier I capital to total risk weighted assets was 20.00%
and its ratio of total risk based capital to total risk weighted assets was 20.68% at December 31, 2006.
12
In addition to the risk based capital guidelines, the FRB utilizes a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a company’s Tier I capital divided by its average total consolidated
assets (less goodwill and certain other intangible assets). Certain highly rated bank holding companies may maintain a
minimum leverage ratio of 3.0%, but other bank holding companies may be required to maintain a leverage ratio of up to 200
basis points above the regulatory minimum. As of December 31, 2006, the Company’s leverage ratio was 8.92%. The FDIC’s
leverage guidelines require state banks to maintain Tier I capital of no less than 5% of average total assets, except in the case
of certain highly rated banks for which the requirement is 3% of average total assets. As of December 31, 2006, Republic
Bank & Trust Company’s and Republic Bank’s leverage ratios were 7.45% and 13.12%, respectively.
The federal banking agencies’ risk based and leverage ratios are minimum supervisory ratios generally applicable to banking
organizations that meet certain specified criteria, assuming that they have the highest regulatory capital rating. Banking
organizations not meeting these criteria are required to operate with capital positions above the minimum ratios. FRB
guidelines also provide that banking organizations experiencing internal growth or making acquisitions may be expected to
maintain strong capital positions above the minimum supervisory levels, without significant reliance on intangible assets. The
FDIC may establish higher minimum capital adequacy requirements if, for example, a bank has previously received warranted
special regulatory attention or, among other factors, has a high susceptibility to interest rate risk.
Corrective Measures for Capital Deficiencies – The Banking regulators are required to take “prompt corrective action” with
respect to capital deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are
well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under
these regulations, a well-capitalized bank has a total risk based capital ratio of 10% or higher; a Tier I risk-based capital ratio
of 6% or higher; a leverage ratio of 5% or higher; and is not subject to any written agreement, order or directive requiring it to
maintain a specific capital level for any capital measure. An adequately capitalized bank has a total risk-based capital ratio of
8% or higher; a Tier I risk-based capital ratio of 4% or higher; a leverage ratio of 4% or higher (3% or higher if the bank was
rated a CAMEL 1 in its most recent examination report and is not experiencing significant growth); and does not meet the
criteria for a well-capitalized bank. A bank is undercapitalized if it fails to meet any one of the ratios required to be adequately
capitalized.
Undercapitalized institutions are required to submit a capital restoration plan, which must be guaranteed by any holding
company of the institution. In addition, agency regulations contain broad restrictions on certain activities of undercapitalized
institutions including asset growth, acquisitions, branch establishment, and expansion into new lines of business. With certain
exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons if the institution would be undercapitalized after any such
distribution or payment. A bank’s capital classification will also affect its ability to accept brokered deposits. Under banking
regulations, a bank may not lawfully accept, roll over or renew brokered deposits, unless either it is well-capitalized or it is
adequately capitalized and receives a waiver from the regulator.
If a banking institution’s capital decreases below acceptable levels, banking regulatory enforcement powers become more
enhanced. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest
rates paid and transactions with affiliates, removal of management and other restrictions. Banking regulators’ have only very
limited discretion in dealing with a critically undercapitalized institution and is normally required to appoint a receiver or
conservator.
Banks with risk based capital and leverage ratios below the required minimums may also be subject to certain administrative
actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance
without a hearing in the event the institution has no tangible capital.
13
In addition, a bank holding company that elects to be treated as a FHC may face significant consequences if its banks fail to
maintain the required capital and management ratings, including entering into an agreement with the FRB which imposes
limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank
subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. More specifically, the
FRB’s regulations require a FHC to notify the FRB within 15 days of becoming aware that any depository institution
controlled by the company has ceased to be well-capitalized or well-managed. If the FRB determines that a FHC controls a
depository institution that is not well-capitalized or well-managed, the FRB will notify the FHC that it is not in compliance
with applicable requirements and may require the FHC to enter into an agreement acceptable to the FRB to correct any
deficiencies. Until such deficiencies are corrected, the FRB may impose any limitations or conditions on the conduct or
activities of the FHC and its affiliates that the FRB determines are appropriate, and the FHC may not commence any
additional activity or acquire control of any company under Section 4(k) of the BHC Act without prior FRB approval. Unless
the period of time for compliance is extended by the FRB, if an FHC fails to correct deficiencies in maintaining its
qualification for FHC status within 180 days of entering into an agreement with the FRB, the FRB may order divestiture of
any depository institution controlled by the company. A company may comply with a divestiture order by ceasing to engage
in any financial or other activity that would not be permissible for a bank holding company that has not elected to be treated as
a FHC.
Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), each federal banking agency has prescribed,
by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal
controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be
appropriate, and standards for asset quality, earnings and stock valuation. An institution which fails to meet these standards
must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure
to submit or implement such a plan may subject the institution to regulatory sanctions. Management believes that the Bank
currently satisfies all such standards.
Legislative Initiatives
The U.S. Congress and state legislative bodies continually consider proposals for altering the structure, regulation and
competitive relationships of financial institutions. It cannot be predicted whether, or in what form, any of these potential
proposals or regulatory initiatives will be adopted, the impact they will have on the financial institutions industry or the extent
to which the business or financial condition of the Company and its subsidiaries may be affected.
Statistical Disclosures
The statistical information required by Item 1 “Business” may be found under Item 7 “Management's Discussion and
Analysis of Financial Condition and Results of Operations.”
14
Item 1A. Risk 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 other sections of this Form 10-K document.
Company Factors
The Company’s accounting policies and estimates are critical components of the Company’s presentation 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
Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” 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’s lines of business and products not typically associated with traditional banking expose the Company’s
earnings to additional risks and uncertainties. In addition to traditional banking and mortgage banking products, the Company
provides RALs, ERCs/ERDs and “Overdraft Honor” deposit accounts. The following details specific risk factors related to
these 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. The Company is one of only a few financial institutions in the U.S. 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 prior to the Company receiving 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 of
this business at any time.
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 RALs.
Exiting this line of business, either voluntarily or involuntarily, would significantly reduce the Company’s earnings.
See additional discussion about this product under the sections titled: Item 1 “Business,” Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Footnote 24 “Segment Information”
of Item 8 “Financial Statements and Supplementary Data.”
15
• Our mortgage banking activities would be significantly adversely impacted by rising long-term 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.
See additional discussion about this product under the sections titled Item 1 “Business,” Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Footnote 24 “Segment Information”
of Item 8 “Financial Statements and Supplementary Data.”
• 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. There can be no assurance that the Company’s
regulators, or others, will not impose additional limitations on this program or prohibit the Company from offering
the program. The Company offers an “Overdraft Honor” program, which permits eligible clients to overdraft their
checking accounts up to a predetermined dollar amount for the Bank’s customary overdraft fee(s). Generally, to be
eligible for the Overdraft Honor program, clients must qualify for one of the Company’s traditional checking
products when the account is opened and remain in that product for 30 days; have deposits of at least $500; and have
had no overdrafts or returned deposited items. Once the eligibility requirements have been met, the client is eligible
to participate in the Overdraft Honor program. If an overdraft is made by the client, the Company may pay the
overdraft, at its discretion, up to $500 (an account in good standing after two years is eligible for up to $750). Under
regulatory guidelines, clients utilizing the Overdraft Honor program may remain in overdraft status for no more than
45 days. Generally, an account that is overdrawn for 60 consecutive days is closed and the balance is charged off.
Overdraft balances from deposit accounts, including those overdraft balances resulting from the Company’s
Overdraft Honor program, are recorded as a component of loans on the Company’s balance sheet.
The Company assesses two types of fees related to overdrawn accounts, a fixed per item fee and a fixed daily charge
for being in overdraft status. The per item fee for 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. As such, it is classified on the
income statement in “service charges on deposits” as a component of non interest income along with per item fees
assessed to clients not in the Overdraft Honor program. A substantial majority of the per item fees in service charges
on deposits relates to clients in the Overdraft Honor program. The daily fee assessed to the client for being in
overdraft status is considered a loan fee and is thus included in interest income on loans.
The Company earns a substantial majority of its fee income related to this program from the per item fee it assesses
its clients for each insufficient funds check or electronic debit presented for payment. Both the per item fee and the
daily fee assessed to the account resulting from its overdraft status, if computed as a percentage of the amount
overdrawn, result in a high rate of interest when annualized and are thus considered excessive by some consumer
groups. The total per item fees included in service charges on deposits for the year ended December 31, 2006, 2005
and 2004 were $12.1 million, $9.9 million and $8.6 million. The total daily overdraft charges included in interest
income for the years ended December 31, 2006, 2005 and 2004 were $2.1 million, $1.7 million and $1.5 million.
Additional limitations or elimination, or adverse modifications to this program, either voluntary or involuntary, would
significantly reduce Company earnings.
The Company’s stock generally has a low average daily trading volume, which limits a shareholder’s ability to quickly
accumulate or quickly sell large numbers of shares of Republic’s stock without causing wide price fluctuations. Also,
Republic’s stock price can fluctuate widely in response to a variety of factors, such as 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.
A low average daily trading volume can lead to significant price swings even when a relatively small number of shares are
being traded.
16
The Company’s insiders hold voting rights that give them significant control over matters requiring stockholder approval.
The Company’s Chairman, President and Vice Chairman hold substantial amounts of our Class A Common Stock and Class B
Common Stock. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is
entitled to ten votes. These classes generally vote together on matters presented to stockholders for approval. Consequently,
other stockholders’ ability to influence our actions through their vote may be limited and the non-insider stockholders may not
have sufficient voting power to approve a change in control even if a significant premium is being offered for their shares. We
cannot assure you that majority stockholders will vote their shares in accordance with your interests.
Industry Factors
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 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
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
of 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.
The Company is significantly impacted by the regulatory, fiscal and monetary policies of federal and state governments which
could negatively impact the Company’s liquidity position. These 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. 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 to the Company.
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.
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.
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 FHC and related eligibility for a
streamlined review process for acquisition proposals and limit financial product diversification.
17
Our financial condition and earnings could be negatively impacted to the extent the Company relies on information that is
false, misleading or inaccurate. 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 those clients.
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 subsequent collection efforts. In certain situations where
collection efforts are unsuccessful or acceptable “work out” arrangements cannot be reached or performed, the Company may
have to charge off the loan in part or in whole.
Prepayment of loans may negatively impact Republic’s business. 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.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
The Company’s executive offices, principal support and operational functions are located at 601 West Market Street in
Louisville, Kentucky. Republic has 34 banking centers located in Kentucky, two banking centers in southern Indiana and two
in Florida. The Company also has a LPO located in Florida and two additional LPOs (“Republic Finance”) located in
Louisville, Kentucky.
18
The location of Republic’s facilities, their respective approximate square footage and their form of occupancy are as follows:
Bank Offices
Kentucky Banking Centers
Louisville Metropolitan Area
2801 Bardstown Road, Louisville
601 West Market Street, Louisville
661 South Hurstbourne Parkway, Louisville
9600 Brownsboro Road, Louisville
5250 Dixie Highway, Louisville
10100 Brookridge Village Blvd., Louisville
9101 U.S. Highway 42, Prospect
11330 Main Street, Middletown
3902 Taylorsville Road, Louisville
3811 Ruckriegel Parkway, Louisville
5125 New Cut Road, Louisville
1202 Highway 44, Shepherdsville
4921 Brownsboro Road, Louisville
4808 Outer Loop, Louisville
3950 Kresge Way, Suite 108, Louisville
3726 Lexington Road, Louisville
2028 West Broadway, Suite 105, Louisville
220 Abraham Flexner Way., Louisville
1420 Poplar Level Road, Louisville
3605 Fern Valley Road, Suite 101, Louisville
Lexington
651 Perimeter Drive
2401 Harrodsburg Road
641 East Euclid Avenue
3098 Helmsdale Place
3608 Walden Drive
Covington
535 Madison Avenue
Frankfort
100 Highway 676
1001 Versailles Road
Owensboro
3500 Frederica Street
3332 Villa Point Drive, Suite 101
Bowling Green, 1700 Scottsville Road
Elizabethtown, 1690 Ring Road
Fort Wright, 1945 Highland Pike
Georgetown, 430 Connector Road
Shelbyville, 1614 Midland Trail
Square
Footage
Owned (O)/
Leased (L)
5,000
51,000
42,000
30,000
5,000
5,000
3,000
6,000
4,000
4,000
4,000
4,000
2,000
4,000
900
4,000
3,000
971
3,000
4,000
4,000
6,000
3,000
5,000
4,000
L (1)
L (1)
L (1)
L (1)
O/L (2)
O/L (2)
O/L (2)
O/L (2)
O/L (2)
O/L (2)
O/L (2)
O/L (2) (3)
L
L
L
L
L
L
O
L
L
O
O
O/L (2)
O/L (2)
4,000
L (3)
O/L (2)
O
O
L
O
O
L
O/L (2)
O/L (2)
3,000
4,000
5,000
2,000
5,000
21,000
6,000
4,000
4,000
19
Bank Offices
Indiana Banking Centers
Square
Footage
Owned (O)/
Leased (L)
3001 Charlestown Crossing Way, New Albany
3141 Highway 62, Jeffersonville
2,000
4,000
Florida Banking Centers
9037 U.S. Highway 19, Port Richey
5043 U.S. Highway 19, New Port Richey
9100 Hudson Avenue, Hudson
GulfStream Financial Properties, Inc.
11,000
1,000
-
L
O
O
L
O (4)
3611 Little Road, New Port Richey
-
O (4)
Support and Operations
125 South Sixth Street, Louisville
1,000
Loan Production Offices (“LPOs”)
6844 Bardstown Road, Louisville, KY
9128 Taylorsville Road, Louisville, KY
27607 State Road 56, Suite 100, Wesley Chapel, FL
1,000
1,000
2,000
L
L
L
L
______________________
(1) Locations are leased from Republic’s Chairman, Bernard M. Trager, or from a partnership in which Republic’s
Chairman and Chief Executive Officer, Steven E. Trager and Vice Chairman, A. Scott Trager, are partners. See
additional discussion included under Item 13. “Certain Relationships and Related Transactions.”
(2) The banking centers at these locations are owned by Republic; however, they are located on land that is leased
through long-term agreements with third parties.
(3) Location is scheduled to open in 2007.
(4) Location represents land only.
20
Item 3. Legal Proceedings.
In the ordinary course of operations, Republic and the Bank are defendants in various legal proceedings. In the opinion of
management, there is no proceeding or litigation pending or, to the knowledge of management, in which an adverse decision
could result in a material adverse change in the business or consolidated financial position of Republic or the Bank.
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. The California Court of Appeals overturned the dismissal of the action and the Supreme Court
of California denied the motion to review. Consequently, the banks collectively filed a motion to stay the proceeding pending
a petition to the United States Supreme Court for discretionary review, which was denied. The banks are considering whether
or not to file a certiorari petition. The Clark case in San Francisco was settled. 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 some consumer advocate groups have shown a willingness to challenge the RAL cross-collection contract provisions
through litigation.
In regard to the discontinued payday loan product, Advance America North Carolina, a former Marketer/Servicer for the
Company, has litigation pending against it in the State of North Carolina regarding the delivery of payday loans through the
Company in that jurisdiction. The Plaintiffs did not name the Company in the state court action. On December 30, 2005, the
state court ruled in favor of Advance America North Carolina, concluding that the arbitration provisions in the Company’s
deferred deposit contracts with customers were not unconscionable and were enforceable. As a result, the state court action has
been stayed pending the outcome of arbitration. The Plaintiffs appealed the state court ruling and that appeal remains pending.
Prior to that ruling and in order to protect its right to arbitrate, the Company initiated action against the named Plaintiffs in the
state court action referenced above in the U.S. District Court for the Eastern District of North Carolina. The federal court
dismissed the complaint and the Company appealed. That appeal remains pending. Because the Company’s contract with
Advance America North Carolina was terminated, the Marketer/Servicer has indemnified the Company and the Company no
longer has any payday loans outstanding, management does not believe either of these North Carolina proceedings may be
material to the Company and its results of operation.
On January 10, 2006, the Attorney General of the State of Arkansas issued a request for information in the format of a Civil
Investigative Demand (“CID”) pursuant to Arkansas Code Ann. Section 4-88-111 and Arkansas Code Ann. Section 23-52-
112. The purpose of the CID is to gather information from the Company and its former payday loan Marketer/Servicer, Ace
Cash Express, Inc., to determine whether the Company and its Marketer/Servicer fully complied with applicable Arkansas
law. The Company and its Marketer/Servicer believe that the payday loans offered to Arkansas residents were in compliance
with applicable law. Republic formally replied to the CID in February of 2006 and subsequently supplemented that reply.
There have been no further developments since that supplemental reply was filed and Management does not believe these
proceedings to be material to the Company and its results of operations.
21
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of 2006.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market and Dividend Information
Republic’s Class A Common Stock is traded on The NASDAQ Global Select Stock Market® (NASDAQ) under the symbol
“RBCAA.” The following table sets forth the high and low sales prices of the Class A Common Stock and the dividends
declared on Class A Common Stock and Class B Common Stock during 2006 and 2005. All per share data has been restated
to reflect stock dividends.
Quarter Ended
March 31
June 30
September 30
December 31
Quarter Ended
March 31
June 30
September 30
December 31
2006
2005
Market Value
High
$ 19.62
20.16
21.04
24.05
Low
$ 17.33
17.50
18.17
19.52
Market Value
High
$ 23.53
21.57
21.26
20.54
Low
$ 20.13
18.27
18.72
17.37
Class A
$ 0.0798
0.0943
0.0943
0.0943
Class A
$ 0.0665
0.0798
0.0798
0.0798
Dividend
Dividend
Class B
$ 0.0726
0.0857
0.0857
0.0857
Class B
$ 0.0605
0.0726
0.0726
0.0726
There is no established public trading market for the Company’s Class B Common Stock. At February 9, 2007, the Class A
Common Stock was held by 779 shareholders of record and the Class B Common Stock was held by 154 shareholders of
record. The Company intends to continue its historical practice of paying quarterly cash dividends, however, there is no
assurance by the Board of Directors that such dividends will continue to be paid in the future. The payment of dividends in the
future is dependent upon future income, financial position, capital requirements, the discretion and judgment of the Board of
Directors and other considerations. The payment of dividends is subject to the regulatory restrictions described in Footnote 15
“Stockholders’ Equity” of Item 8 “Financial Statements and Supplementary Data.”
Republic has made available to its employees participating in its 401(k) plan the opportunity, at the employee’s sole discretion,
to invest funds held in their accounts under the plan in shares of Class A Common Stock of Republic. Shares are purchased by
the independent trustee, administering the plan, from time to time in the open market in broker’s transactions. As of December
31, 2006, the trustee held 221,546 shares of Class A Common Stock and 5,319 shares of Class B Common Stock on behalf of
the plan.
22
Details of Republic’s Class A Common Stock purchases during the fourth quarter of 2006 are included in the following table:
Total Number of
Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares
Purchased
as Part of Publicly
Announced Plans or
Programs
Maximum
Number of Shares
that May Yet Be
Purchased
Under the Plan or
Programs
-
14,806*
32,817**
47,623
$ -
22.77
24.01
$ 23.62
-
5,237
-
5,237
330,414
Period
Oct. 1– Oct. 31
Nov. 1– Nov. 30
Dec. 1 – Dec. 31
Total
* - Includes 9,113 shares repurchased by the Company in connection with stock option exercises.
** - Represents shares repurchased by the Company in connection with stock option exercises.
During 2006, the Company repurchased 35,718 shares in addition to shares exchanged for stock option exercises. During the
second quarter of 2006, the Company’s Board of Directors approved the repurchase of an additional 315,000 shares, from time
to time, if market conditions are deemed favorable to the Company. During the third quarter of 2005, the Company’s Board of
Directors approved the repurchase of 275,625 shares. The repurchase programs will remain effective until the number of
shares authorized is repurchased or until Republic’s Board of Directors terminates the program. As of December 31, 2006, the
Company had 330,414 shares which could be repurchased under the current stock repurchase programs. All share and per
share data has been restated to reflect stock dividends.
During 2006, Republic issued approximately 12,000 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.
23
Item 6. Selected Financial Data.
The following table sets forth Republic Bancorp Inc.’s selected consolidated historical financial information from 2002 through 2006.
This information should be read in conjunction with Part II Item 7 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and Part II Item 8 “Financial Statements and Supplementary Data.” Certain amounts presented in prior
periods have been reclassified to conform to the current period presentation.
(dollars in thousands, except per share data)
2006
As of and for the Years Ended December 31,
2003
2004
2005
2002
Income Statement Data:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Non interest income
Non interest expenses
Income from continuing operations before income
tax expense
Income tax expense from continuing operations
Income from continuing operations before
discontinued operations, net of income tax
expense *
Income (loss) from discontinued operations, net of
income tax expense *
Net income
Balance Sheet Data:
$ 176,540
88,242
88,298
2,302
31,700
74,862
$ 148,079
62,432
85,647
340
28,807
68,512
$ 121,443
42,052
79,391
1,346
25,651
64,218
$ 112,826 $ 106,927
41,746
65,181
2,438
23,525
53,771
36,551
76,275
6,095
29,619
61,375
42,834
14,718
28,116
235
28,351
45,602
15,524
39,478
13,548
38,424
13,662
32,497
11,485
30,078
25,930
24,762
21,012
4,987
35,065
6,571
32,501
3,441
28,203
(523)
20,489
Total securities
Total loans
Allowance for loan losses
Total assets
Total deposits
Securities sold under agreements to repurchase and
$ 561,772
2,300,888
11,218
3,046,787
1,692,722
$ 512,163
2,070,608
11,009
2,735,556
1,602,565
$ 551,593
1,789,099
13,554
2,498,922
1,417,930
$ 410,931
1,581,952
13,959
2,128,076
1,297,112
$ 288,459
1,310,063
10,148
1,752,706
1,040,190
other short-term borrowings
Federal Home Loan Bank advances
Subordinated note
Total stockholders’ equity
Per Share Data:**
Earnings per share from continuing operations:
Basic earnings per Class A Common Stock
Basic earnings per Class B Common Stock
Diluted earnings per Class A Common Stock
Diluted earnings per Class B Common Stock
Earnings per share from discontinued operations:*
Basic earnings per Class A Common Stock
Basic earnings per Class B Common Stock
Diluted earnings per Class A Common Stock
Diluted earnings per Class B Common Stock
401,886
646,572
41,240
237,348
292,259
561,133
41,240
213,574
364,828
496,387
-
196,069
220,345
420,178
-
169,379
224,929
319,299
-
150,796
$ 1.38
1.35
1.35
1.32
$ 1.46
1.43
1.40
1.37
$ 1.25
1.23
1.20
1.18
$ 1.21
1.17
1.18
1.14
$ 1.04
1.03
1.02
1.00
0.01
0.00
0.00
0.00
0.24
0.24
0.23
0.23
0.32
0.32
0.31
0.30
0.16
0.17
0.17
0.17
(0.02)
(0.03)
(0.03)
(0.02)
(continued)
24
Item 6. Selected Financial Data: (continued)
(dollars in thousands, except per share data)
2006
2005
2004
2003
2002
As of and for the Years Ended December 31,
Per Share Data: (continued)**
Earnings per share:
Basic earnings per Class A Common Stock
Basic earnings per Class B Common Stock
Diluted earnings per Class A Common Stock
Diluted earnings per Class B Common Stock
$ 1.39
1.35
1.35
1.32
$ 1.70
1.67
1.63
1.60
$ 1.57
1.55
1.51
1.48
$ 1.37
1.34
1.35
1.31
$ 1.02
1.00
0.99
0.98
Market value per share
Book value per share
Cash dividends declared per Class A Common Stock
Cash dividends declared per Class B Common Stock
23.90
11.53
0.363
0.330
19.46
10.47
0.306
0.278
22.20
9.42
0.254
0.231
16.08
8.19
0.416
0.378
9.27
7.37
0.172
0.156
Performance Ratios:
Return on average assets (ROA) from continuing
operations
Return on average assets (ROA)
Return on average equity (ROE) from continuing
operations
Return on average equity (ROE)
Efficiency ratio from continuing operations
Yield on average earning assets
Cost of average interest-bearing liabilities
Net interest spread
Net interest margin
Asset Quality Ratios:
Non performing loans to total loans
Allowance for loan losses to total loans
Allowance for loan losses to non performing loans
Net loan charge offs to average loans from
continuing operations
Delinquent loans to total loans
Capital Ratios:
0.98%
0.99
1.15%
1.33
1.14%
1.40
12.46
12.56
62
6.43
3.81
2.62
3.22
0.28%
0.49
175
0.06
0.49
14.24
16.56
60
5.91
2.97
2.94
3.42
0.29%
0.53
183
0.09
0.35
1.32%
1.47
15.16
16.88
58
6.24
2.42
3.82
4.22
1.28%
1.25
14.83
14.44
61
6.76
3.14
3.62
4.12
14.23
17.50
61
5.59
2.31
3.28
3.65
0.34%
0.76
221
0.13
0.47
0.82%
0.88
108
0.75%
0.77
103
0.19
0.82
0.15
1.21
Average stockholders’ equity to average total assets
Tier I leverage
Tier I risk based capital
Total risk based capital
Dividend payout ratio
7.90%
8.92
13.73
14.30
26
8.00%
9.47
14.41
15.03
18
8.01%
8.03
12.18
13.03
16
Other Information:
End of period full time equivalent employees
Number of banking centers
Number of Loan Production Offices (LPOs)
739
38
3
678
35
2
611
33
1
8.69%
8.08
11.99
12.99
30
645
31
-
8.65%
9.02
12.77
13.64
17
570
25
-
_______________________________________
* - Represents the Company exiting the payday loan segment of business during 2006. See additional discussion under the
sections titled Item 1 “Business,” Item 1A “Risk Factors” and Footnote 2 “Discontinued Operations” and Footnote 24
“Segment Information” of Item 8 “Financial Statements and Supplementary Data.”
** - All per share has been restated to reflect stock dividends.
25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 statements of income. Republic, a
bank holding company headquartered in Louisville, Kentucky, is the Parent Company of Republic Bank & Trust Company,
Republic Bank (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, TRS RAL Funding, LLC and Republic Insurance Agency, LLC. Republic Bank, a federally
chartered thrift institution, includes its subsidiary, GulfStream Financial Properties, Inc. Management’s Discussion and
Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Item 8 “Financial
Statements and Supplementary Data,” as well as other detailed information included in this Form 10-K.
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 revenue, 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 adequacy of the allowance for loans losses;
the future value of mortgage servicing rights;
the impact of new accounting pronouncements;
future short-term and long-term interest rate levels and the respective impact on net interest margin, net interest
spread, net income, liquidity and capital;
legal and regulatory matters; and
future capital expenditures.
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 management’s 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. See
additional discussion under the sections titled Item 1 “Business” and Item 1A “Risk Factors.”
26
OVERVIEW
Net income from continuing operations for the year ended December 31, 2006 was $28.1 million, representing a decline of $2
million, or 7%, compared to the same period in 2005. Diluted earnings per Class A Common Share from continuing
operations declined 4% from $1.40 for the year ended December 31, 2005 to $1.35 for the same period in 2006.
Overall net income for the year ended December 31, 2006 was $28.4 million, representing a decline of $6.7 million or 19%
compared to the same period in 2005. Diluted earnings per Class A Common Share declined 17% to $1.35 for the year ended
December 31, 2006 compared to $1.63 for the same period in 2005.
Highlights for the year ended December 31, 2006 consist of the following:
•
•
•
•
•
•
•
•
•
•
In February 2006, the Bank substantially exited the payday loan business. For financial reporting purposes, the
payday loan business segment has been treated as a discontinued operation. All current period and prior period
income statement data has been restated to reflect continuing operations absent of the payday loan business.
Republic ended the year with total assets of $3.0 billion, an increase of $311 million, or 11%, over the prior year.
As of December 31, 2006, Republic was the largest Kentucky-based bank holding company.
In October, Republic acquired GulfStream Community Bank (“GulfStream”) with two banking centers
headquartered in Port Richey, Florida. On the acquisition date, GulfStream, which began operations in 2000, had
total assets of $64 million with net loans of $44 million and total deposits of $54 million. Consistent with the
Company’s branding initiative, the Company changed the name of GulfStream to Republic Bank in December
2006.
Effective November 30, 2006, the Company merged Republic Bank & Trust Company of Indiana, consisting of
two banking centers located in southern Indiana, into Republic Bank & Trust Company.
Republic Bank & Trust Company opened two Northern Kentucky (Cincinnati MSA) banking centers in 2006,
representing the Company’s initial entrance into this market.
Net income from continuing operations decreased for year ended December 31, 2006 compared to the same
period in 2005 due primarily to a decrease in Electronic Refund Check (“ERC”) and Electronic Refund Deposit
(“ERD”) volume at Tax Refund Solutions (“TRS”), a higher provision for loan losses within the traditional
banking segment and higher overall non interest expenses across the Company.
Net loans, primarily consisting of secured real estate loans, increased by $230 million, or 11% for the year. The
growth in loans includes $44 million in net loans which were acquired through the acquisition of GulfStream.
The growth was primarily spread across the residential real estate, commercial real estate, real estate construction
and commercial loan portfolios.
The Company sold a portion of its Refund Anticipation Loan (“RAL”) portfolio into a securitization during the
first quarter of 2006. Historically, the Company had retained all RALs with their corresponding fees included in
interest income on loans. The Company signed an agreement in December 2006 to securitize RALs during the
2007 tax season.
Service charges on deposit accounts increased $2.7 million or 19% during 2006 compared to the same period in
2005. The increase was attributed to growth in the Company’s checking account base and an increase in the
Bank’s overdraft fee in August of 2005 and again in September of 2006.
ERC fees declined $2.0 million or 33% for the year ended December 31, 2006 compared to the same period in
2005 due primarily to the discontinuation of business with one large tax preparation software company. Because
the substantial majority of the Company’s tax business occurs during the first quarter of each year, the majority
of the decline in ERC fees relates to the first quarter of 2006.
27
OVERVIEW (continued)
•
•
The Company experienced an increase in the provision for loan losses of $2.0 million for the year ended
December 31, 2006 compared to the same period in the prior year. The increase was primarily in the traditional
banking segment and principally relates to growth in the loan portfolio during 2006 and to a large credit to the
provision recorded during the second quarter of 2005 resulting from improvements in a few large classified
loans.
Non interest expense increased $6.4 million or 9% during 2006. This increase was primarily attributable to
increases in salaries and employee benefits and occupancy and equipment expense. Salaries and employee
benefits rose due to annual merit increases, stock option compensation expense, higher health insurance expenses
and an increase in full time equivalent employees (“FTE’s”). In addition, occupancy and equipment expense
increased due to a one-time charge of $900,000 to reflect a change in the Company’s lease accounting practices.
Republic reported net income from continuing operations during 2005 of $30.1 million compared to $25.9 million for 2004, an
increase of 16%. Diluted earnings per Class A Common Share from continuing operations increased 17% to $1.40 for the year
ended December 31, 2005. The rise in earnings for 2005 was primarily due to increased net interest income, increased service
charges on deposit accounts and a lower provision for loan losses offsetting the overall increase in non interest expenses.
The following table summarizes selected financial information regarding Republic’s financial performance:
Table 1 – Summary
Year Ended December 31, (in thousands, except per share data)
2006
2005
2004
Net income from continuing operations
Diluted earnings per Class A Common Share from continuing operations
Diluted earnings per Class A Common Share from discontinued operations
Diluted earnings per Class A Common Share
Return on average assets (ROA) from continuing operations
Return on average assets (ROA)
Return on average equity (ROE) from continuing operations
Return on average equity (ROE)
$ 28,116
1.35
0.00
1.35
0.98%
0.99
12.46
12.56
$ 30,078
1.40
0.23
1.63
1.15%
1.33
14.24
16.56
$ v 25,930
1.20
0.31
1.51
1.14%
1.40
14.23
17.50
Tax Refund Solutions (“TRS”)
See Footnote 5 “Securitization” of Item 8 “Financial Statements and Supplementary Data” for a detailed description of the
securitization that the Company utilized during the first quarter of 2006. This securitization represented the sale of a portion of
the RAL portfolio to a financial institution, and except for the capital that was allocated for the small retained interest kept by
the Company, it eliminated the impact on the Company’s regulatory capital ratios. Net RAL securitization income, which
represents the gain on sale and gain on securitization residual and other costs incurred by Republic on the sold RALs, are
classified as non interest income.
Accounting for the securitization caused comparability differences among some income and expense items when comparing
2006 to 2005. The securitization had the effect of reclassifying the fee income earned and interest expense paid for securitized
RALs into non interest income. The Company signed an agreement in December 2006 to securitize RALs during the 2007 tax
season.
See additional discussion about this product under the sections titled Item 1 “Business,” Item 1A “Risk Factors” and
Footnote 5 “Securitization” and Footnote 24 “Segment Information” of Item 8 “Financial Statements and Supplementary
Data.”
28
Discontinued Operations (“Deferred Deposits” or “Payday Lending”)
The Bank substantially exited the payday loan segment of business during February 2006. As a result, the Company’s payday
loan business 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 the sections titled Item 1 “Business,” Item 1A “Risk Factors” and
Footnote 2 “Discontinued Operations” and Footnote 24 “Segment Information” of Item 8 “Financial Statements and
Supplementary Data.”
STAFF ACCOUNTING BULLETIN 108 (“SAB 108”)
In September 2006, the Securities and Exchange Commission (the “SEC” or “Commission”) issued Staff Accounting Bulletin
108 (“SAB 108”). SAB 108 provides guidance on quantifying and evaluating the materiality of unrecorded misstatements.
SAB 108 requires that a company uses both the “iron curtain” and “rollover” approaches when quantifying misstatement
amounts. Under the rollover approach, the error is quantified as the amount by which the current year income statement is
misstated. The iron curtain approach, however, quantifies the error as the cumulative amount by which the current year
balance sheet is misstated. The SEC Staff believes that companies should quantify errors using both a balance sheet and an
income statement approach – and evaluate whether either of these approaches results in quantifying a misstatement that, when
all relevant quantitative and qualitative factors are considered, is material. Prior to the issuance of SAB 108, the Company
evaluated misstatement amounts during each period using the rollover method only.
The Company has performed an analysis of its unrecorded misstatements using both the rollover and iron curtain approaches.
Using the rollover method as the Company has traditionally done, management concluded that none of its unrecorded
misstatements were material to its current period or prior periods’ financial statements. Under the iron curtain method,
however, management concluded that two of the Company’s unrecorded misstatements were material to the current period’s
financial statements, but using the rollover method were immaterial to its prior periods’ financial statements. These
misstatements were related to the overaccrual of losses on RALs and the deferral of previously recorded title insurance
commissions. The Company recorded a one-time entry to retained earnings to correct the unrecorded misstatements on the
balance sheet. The SAB 108 entries posted in 2006 and the effect on retained earnings and net income were as follows:
(in thousands)
Reversal of prior years' overaccruals related to
losses on RALs
Deferral of previously recorded title insurance
commissions in accordance with SFAS 91
Income tax effect of the items above
Net SAB 108 effect
Effect on
Effect on
Retained Earnings Current Year's Earnings
$
923
$
-
(1,764)
90
$
294
(547)
$
(31)
59
The overstatement of prior year losses on RALs resulted from operational and reconciliation problems that occurred from
2001 through 2004, which caused management to believe that losses in the RAL portfolio were higher than they actually were.
The overstatement of prior period title insurance commissions occurred because the Company was recording title insurance
commission income in accordance with Statement of Financial Accounting Standard (“SFAS”) 60 “Accounting and Reporting
by Insurance Enterprises.” The Company concluded that the commissions earned from “lender’s” policies would be more
appropriately recorded in accordance with SFAS 91 “Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases.”
Also in accordance with SAB 108, the Company will apply adjustments related to title insurance to the applicable current
year’s quarterly net income, where presented in this filing and all future filings. There is no current year effect for the
adjustment related to the reversal of prior years’ over accruals related to losses on RALs.
The applicable effect on each quarter’s balance sheet and income statement in 2006 related to title insurance and the balance
sheet impact related to the prior year overaccrual of losses on RALs is as follows:
29
Balance Sheet Comparison
(in thousands)
Effect by Quarter
Second
Quarter
First
Quarter
Third
Quarter
Loans as previously reported
$
2,225,237
$
2,206,474
$
2,122,164
Title adjustment
(1,728)
(1,741)
(1,742)
Loans adjusted for title adjustment
$
2,223,509
$
2,204,733
$
2,120,422
Other liabilities as previously reported
$
27,052
$
26,977
$
31,766
RAL and title adjustments
(1,227)
(1,212)
(1,210)
Other liabilities adjusted for RAL and title adjustments
$
25,825
$
25,765
$
30,556
Stockholders' equity as previously reported
$
232,978
$
225,614
$
222,080
Title adjustment
(501)
(529)
(532)
Stockholders' equity adjusted for title adjustment
$
232,477
$
225,085
$
221,548
Income Statement Comparison
(in thousands)
Effect by Quarter
Second
Quarter
First
Quarter
Third
Quarter
Interest income as previously reported
$
43,616
$
41,611
$
44,218
Title adjustment
162
164
155
Interest income adjusted for title adjustment
43,778
41,775
44,373
Title insurance commissions as previously reported
Title adjustment
Title insurance commissions adjusted for title adjustment
347
(119)
228
403
(159)
244
292
(134)
158
Income tax expense as previously reported
3,476
3,333
5,109
Title adjustment
Income tax expense adjusted for title adjustment
Net income as previously reported
Title adjustment
15
3,491
6,666
28
2
3,335
5,961
3
7
5,116
9,733
14
Net income adjusted for title adjustment
$
6,694
$
5,964
$
9,747
30
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The
preparation of these financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reported periods.
Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated
financial statements. In general, management’s estimates are based on historical experience, on information from regulators
and independent third party professionals and on various assumptions that are believed to be reasonable. Actual results may
differ from those estimates made by management.
Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s
financial condition and operating results and require management to make estimates that are difficult, subjective or complex.
Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered
in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among
other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability
to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of
the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under U.S.
generally accepted accounting principles. Management has discussed each critical accounting policy and the methodology for
the identification and determination of critical accounting policies with the Company’s Audit Committee.
Republic believes its critical accounting policies and estimates include the valuation of the allowance for loan losses and the
valuation of mortgage servicing rights.
Allowance for Loan Losses – Republic maintains an allowance for probable incurred credit losses inherent in the Company’s
loan portfolio, which includes overdrafts. Management evaluates the adequacy of the allowance for the loan losses on a
monthly basis and presents and discusses the analysis with the Audit Committee and the Board of Directors on a quarterly
basis. Management estimates the allowance required using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower capacity, estimated collateral values, economic conditions, regulatory requirements and
guidance and various other factors. While management estimates the allowance for loan losses, in part, based on historical
losses within each loan category, estimates for losses within the commercial and commercial real estate portfolio are more
dependent upon credit analysis and recent payment performance. Allocations of the allowance may be made for specific loans
or loan categories, but the entire allowance is available for any loan that may be charged off. Loan losses are charged against
the allowance at the point in time management deems a loan uncollectible.
Management makes allocations within the allowance for loan losses for specifically classified loans regardless of loan amount,
collateral or loan type. Loans that are past due 90 days or more and that are not specifically classified are uniformly assigned a
risk weighted percentage ranging from 15% to 100% of the loan balance based upon loan type. Management evaluates the
remaining loan portfolio by utilizing the historical loss rate for each respective loan type. Both an average five-year loss rate
and a loss rate based on heavier weighting of the previous two years’ loss experience are utilized in the analysis. Specialized
loan categories are evaluated by utilizing subjective factors in addition to a historical loss calculation to determine a loss
allocation for each of those types. As this analysis, or any similar analysis, is an imprecise measure of loss, the allowance is
subject to ongoing adjustments. Therefore, management will often take into account other significant factors as may be
necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.
Based on management’s calculation, an allowance of $11.2 million, or 0.49% of total loans was an adequate estimate of losses
within the loan portfolio as of December 31, 2006. This estimate resulted in provision for loan losses on the income statement of
$2.3 million during 2006. If the mix and amount of future charge off percentages differ significantly from those assumptions
used by management in making its determination, an adjustment to the allowance for loan losses and the resulting effect on the
income statement could be material.
31
Mortgage Servicing Rights – Mortgage servicing rights (“MSRs”) represent an estimate of the present value of future cash
servicing income, net of estimated costs that Republic expects to receive on loans sold with servicing retained by the
Company. MSRs are capitalized as separate assets when loans are sold and servicing is retained. This transaction is posted to
net gain on sale of loans, a component of mortgage banking income. Management considers all relevant factors, in addition to
pricing considerations from other servicers, to estimate the fair value of the MSRs to be recorded when the loans are initially
sold with servicing retained by the Company. The carrying value of MSRs is amortized in proportion to and over the period of
net servicing income. The amortization is recorded as a reduction to mortgage banking income. The total MSR asset, net of
amortization, recorded at December 31, 2006 was $6.1 million.
The carrying value of the MSRs asset is reviewed monthly for impairment based on the fair value of the MSRs, using
groupings of the underlying loans by interest rates. Any impairment of a grouping would be reported as a valuation allowance.
A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans
serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the
MSRs are expected to decline due to anticipated prepayments within the portfolio. Alternatively, during a period of rising
interest rates, the fair value of MSRs are expected to increase as prepayments on the underlying loans would be anticipated to
decline. Management utilizes an independent third party on a monthly basis to assist with the fair value estimate of the MSRs.
Based on the estimated fair value at December 31, 2006 and 2005, management determined no impairment of these assets
existed and no valuation allowance was necessary.
32
RESULTS OF OPERATIONS
Net Interest Income
The largest categorical 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.
Discussion of 2006 vs. 2005
For 2006, net interest income was $88.3 million, an increase of $2.7 million, or 3%, over 2005. The Company experienced a
$5.9 million, or 8% increase in net interest income within the Banking segment which was primarily related to growth in the
traditional loan portfolio, particularly within the residential real estate portfolio. Total traditional “Bank” loans increased $235
million from December 31, 2005 to December 31, 2006. The Company experienced a $3.1 million or 36% decline in net
interest income within the TRS business segment as a result of the RAL securitization, which effectively caused $2.8 million
in net RAL fees to be classified in non interest income because they were related to securitized RALs.
The Company’s net interest spread declined 32 basis points to 2.62% for the year ended December 31, 2006 compared to the
same period in 2005, while the Company’s net interest margin declined 20 basis points to 3.22% for the same period.
Approximately 15 basis points of the decline resulted from the securitization of a portion of the RAL portfolio. The remainder
of the decline in the net interest margin and net interest spread was the result of an increase in the Company’s cost of funds
without a similar corresponding increase in the Company’s yield on earning assets. More specifically, spread and margin
contraction occurred because much of the Company’s funding is derived from large commercial treasury management
accounts that are tied to immediately repricing indices, while the majority of the Company’s interest-earning assets are real
estate secured loans that reprice over a longer period. Based on the Company’s current balance sheet structure, management
believes that the net interest spread and margin in 2007 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
Company’s net interest spread and margin in the future.
In prior period financial statement filings, the Company classified daily fees associated with overdrawn deposit accounts
within service charges on deposits along with per item overdraft fees. In 2006, the Company reclassified daily overdraft fees
into loan fees, which is included as a component of interest income on loans. All prior period amounts presented have been
reclassified to conform to current period presentation. For the years ended December 31, 2006, 2005 and 2004, the amount of
fees reclassified was $2.1 million, $1.7 million and $1.5 million, respectively.
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 potential future
effect of rising short-term interest rates on Republic’s 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”
in this section of the document and Footnote 5 “Securitization” of Item 8 “Financial Statements and Supplementary Data.”
Discussion of 2005 vs. 2004
For 2005, net interest income was $85.6 million, an increase of $6.3 million, or 8%, over 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. Republic’s net interest income was negatively impacted by a flattening market yield curve,
which caused the Company’s interest bearing liabilities to reprice sooner than its interest-earning assets.
Table 2 provides detailed information as to average balances, interest income/expense and average rates by major balance
sheet category for 2006, 2005 and 2004. 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.
33
Table 2 – Average Balance Sheets and Interest Rates for Years Ended December 31,
(in thousands)
ASSETS
Earning assets:
Taxable securities(1)
Tax exempt securities(4)
Federal funds sold and other
Loans and fees(2)(3)
Average
Balance
2006
Interest
Average
Rate
Average
Balance
2005
Interest
Average
Rate
Average
Balance
2004
Interest
Average
Rate
$ 522,321
1,842
29,234
2,192,395
$ 24,755
96
752
150,937
4.74% $ 537,500
-
7.04
49,700
2.57
1,919,269
6.88
$ 19,578
-
1,472
127,029
3.64%
-
2.96
6.62
$ 445,351
-
40,725
1,686,678
$ 13,380
-
494
107,569
3.00%
-
1.21
6.38
Total earning assets
2,745,792
176,540
6.43
2,506,469
148,079
5.91
2,172,754
121,443
5.59
Less: Allowance for loan losses
(11,219)
(11,864)
(12,558)
Non-earning assets:
Cash and cash equivalents
Premises and equipment, net
Other assets(1)
Total assets
LIABILITIES AND STOCKHOLDERS’
EQUITY
Interest-bearing liabilities:
Transaction accounts
Money market accounts
Time deposits
Brokered deposits
Total deposits
Repurchase agreements and other short-term
borrowings
Federal Home Loan Bank advances
Subordinated note
45,906
33,422
40,996
$ 2,854,897
56,278
32,520
31,639
$ 2,615,042
59,225
35,428
21,043
$ 2,275,892
$ 253,798
424,431
478,837
166,930
1,323,996
$ 2,103
16,024
18,751
7,396
44,274
0.83% $ 320,506
316,938
3.78
483,403
3.92
124,470
4.43
1,245,317
3.34
$ 3,166
7,669
16,612
4,256
31,703
0.99%
2.42
3.44
3.42
2.55
$ 325,063
306,253
422,397
49,996
1,103,709
$ 2,565
3,288
13,858
1,491
21,202
0.79%
1.07
3.28
2.98
1.92
374,937
575,523
41,240
15,889
25,564
2,515
4.24
4.44
6.10
359,327
480,157
15,592
9,906
19,872
951
2.76
4.14
6.10
313,158
401,780
-
4,191
16,659
-
1.34
4.15
-
Total interest-bearing liabilities
2,315,696
88,242
3.81
2,100,393
62,432
2.97
1,818,647
42,052
2.31
Non interest-bearing liabilities and
stockholders’ equity:
Non interest-bearing deposits
Other liabilities
Stockholders’ equity
Less: Stockholders’ equity allocated to
discontinued
Operations
Total liabilities and stockholders’ equity
Net interest income
Net interest spread
Net interest margin
285,877
28,150
225,699
(525)
290,968
22,404
211,712
(10,435)
262,763
19,994
185,725
(11,237)
$ 2,854,897
$ 2,615,042
$ 2,275,892
$ 88,298
$ 85,647
$ 79,391
2.62%
3.22%
2.94%
3.42%
3.28%
3.65%
____________________________________________
(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 total interest income was $6.7 million, $10.2 million and $10.9 million for the
years ended December 31, 2006, 2005 and 2004.
(3) Average balances for loans include the principal balance of non accrual loans.
(4) Yields on tax exempt securities have been computed based on a fully tax-equivalent basis using the federal income tax rate of
35%.
34
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) 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
(in thousands)
Interest income:
Taxable securities
Tax exempt securities
Federal funds sold and other
Loans and fees
Year Ended December 31, 2006
Compared to
Year Ended December 31, 2005
Increase/(Decrease)
Due to
Year Ended December 31, 2005
Compared to
Year Ended December 31, 2004
Increase/(Decrease)
Due to
Total Net Change Volume
Rate
Total Net Change
Volume
Rate
$ 3,374
96
1,083
23,908
$ (567) $ 3,941
-
1,895
7,577
96
(812)
16,331
$ 6,198
-
978
19,460
$ 3,059
-
130
13,948
$ 3,139
-
848
5,512
Net change in interest income
28,461
15,048
13,413
26,636
17,137
9,499
Interest expense:
Transaction accounts
Money market accounts
Time deposits
Brokered deposits
Repurchase agreements and other short-term
borrowings
Federal Home Loan Bank advances
Subordinated note
(1,063)
8,355
2,139
3,140
5,983
5,692
1,564
(599)
3,151
(158)
1,682
448
4,158
1,564
(464)
5,204
2,297
1,458
601
4,381
2,754
2,765
5,535
1,534
-
5,715
3,213
951
(36)
119
2,073
2,517
698
3,244
951
637
4,262
681
248
5,017
(31)
-
Net change in interest expense
Net change in net interest income
25,810
$ 2,651
10,246
15,564
$ 4,802 $ (2,151)
20,380
$ 6,256
9,566
$ 7,571
10,814
$ (1,315)
35
Non Interest Income
Table 4 – Analysis of Non Interest Income
Year Ended December 31, (in thousands)
2006
2005
2004
2006/2005
2005/2004
Percent Increase/(Decrease)
Service charges on deposit accounts
Electronic refund check fees
Net RAL securitization income
Mortgage banking income
Debit card interchange fee income
Title insurance commissions
Gain on sale of securities
Other
Total non interest income
$ 16,505
4,102
2,771
2,316
3,644
762
300
1,300
$ 31,700
$ 13,851
6,083
-
2,751
3,122
1,756
-
1,244
$ 28,807
$ 11,917
5,268
-
3,148
2,492
1,515
-
1,311
$ 25,651
19%
(33)
100
(16)
17
(57)
NM
5
10
16%
15
-
(13)
25
16
-
(5)
12
Discussion of 2006 vs. 2005
Service charges on deposit accounts increased 19% during 2006 compared to 2005. The increase was primarily due to growth
in the Company’s checking account base in conjunction with the Bank’s “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 Bank’s customary
overdraft fee. The Company also increased its overdraft fee by 7% in August of 2005 and again by a similar amount in
September of 2006. Included in service charges on deposits are per item overdraft fees of $12.1 million and $9.9 million for
years ended December 31, 2006 and 2005. Additionally, the Company’s checking account base surpassed 80,000 at December
31, 2006.
Electronic Refund Check (“ERC”) fees decreased $2.0 million, or 33%, to $4.1 million during the year ended December 31,
2006 compared to the same period in 2005. This decrease was due to a 27% decline in ERC/ERD volume from the prior year
resulting primarily from the discontinuation of a business relationship with one large integrated software partner. The
substantial majority of the Company’s tax business occurs during the first quarter of each year; and as a result, the substantial
majority of the decline in ERC fees relates to the first quarter of 2006.
Net RAL securitization income was $2.8 million for the year ended December 31, 2006 as the Company completed its first
securitization of a portion of the RAL portfolio during the first quarter of the year. A component of net RAL securitization
income represents a gain on the securitization residual, which results from the quarterly adjustment to the carrying value of the
residual asset. The potential exists that in the future the Company may record additional gain on the 2006 securitization
residual based on its fair value. The Company believes the impact of these changes in the value of the residual interest will be
immaterial to the financial statements and will recognize such changes in subsequent quarters as they are realized.
Detail of Net RAL securitization income follows:
December 31, (in thousands)
Gain on sale of RALs
Gain on securitization residual
Net RAL securitization income
2,022
749
2,771
2006
$
$
36
Mortgage banking income decreased $435,000 during 2006 due primarily to a $682,000 decline in net gain on sale of loans
which was partially offset by a $247,000 increase in servicing income, net of amortization. The reduction in net gain on sale of
loans resulted from the decline in mortgage origination volume of 15 and 30-year fixed rate residential real estate loans from
2005 resulting primarily from an increase in longer term interest rates. As a percentage of loans sold, net gains decreased to
0.81% in 2006 compared to 0.92% in 2005. The decrease in net gain on sale of loans as a percentage of loans sold resulted
primarily from competitive pricing pressures and costs absorbed by the Company in connection with its fixed $299 closing
costs product.
Title insurance commissions declined $994,000 or 57% during 2006 due primarily to an accounting change in accordance with
SAB 108. For additional information regarding SAB 108, see the section titled “Staff Accounting Bulletin 108” in this section
of the document and Footnote 1 “Summary of Significant Accounting Principles” of Item 8 “Financial Statements and
Supplementary Data.”
During the fourth quarter of 2006, the Company sold a portion of the available for sale FHLMC preferred stock totaling $5
million, realizing a gain on sale of securities of $300,000. There were no sales of securities available for sale during 2005 or
2004.
Discussion of 2005 vs. 2004
During 2005, the Company experienced a 16% increase in service charges on deposit accounts for substantially the same
reasons as previously discussed for 2006, including an increase in the per item overdraft fee of 7% in August of 2005.
Mortgage banking income decreased nearly $397,000 during 2005 due primarily to a $596,000 decline in net gain on sale of
loans offset by a $199,000 increase in servicing income, net of amortization. The reduction in net gain on sale of loans resulted
primarily from an increase in interest rates from 2004 to 2005 causing a corresponding decline in mortgage origination volume
of 15 and 30-year fixed rate residential real estate loans. As a percentage of loans sold, net gains decreased to 0.92% in 2005
compared to 1.14% in 2004. The decrease in net gain on sale of loans as a percentage of loans sold resulted primarily from
competitive pricing pressures and costs absorbed by the Company in connection with its fixed closing costs product.
37
Non Interest Expenses
Table 5 – Analysis of Non Interest Expenses
Year Ended December 31, (dollars in thousands)
2006
2005
2004
2006/2005
2005/2004
Percent Increase/(Decrease)
Salaries and employee benefits
Occupancy and equipment, net
Communication and transportation
Marketing and development
Bankshares tax
Data processing
Debit card interchange expense
Supplies
Other
Total non interest expenses
$40,412
15,541
2,750
2,459
1,902
2,171
1,663
1,271
6,693
$74,862
$36,731
13,654
3,000
2,489
1,822
1,871
1,357
1,133
6,455
$68,512
$34,341
13,716
2,809
2,271
1,932
1,602
1,080
1,385
5,082
$64,218
10%
14
(8)
(1)
4
16
23
12
4
9
7%
-
7
10
(6)
17
26
(18)
27
7
Discussion of 2006 vs. 2005
Salaries and employee benefits increased $3.7 million or 10% from 2006 to 2005. The increase was primarily attributed to
annual merit increases, stock option compensation expense and higher costs associated with the Company’s health insurance.
In addition, end of period FTE’s increased from 678 at December 31, 2005 to 739 at December 31, 2006. The increase in
salaries and employee benefits was moderated by $1.1 million and $800,000 in credits to incentive compensation accruals
posted during the fourth quarters of 2006 and 2005. The Company recorded stock option expense of $844,000 during the year
ended December 31, 2006 related to the prospective adoption of SFAS 123R on January 1, 2006.
Occupancy and equipment expense increased $1.9 million or 14%, during the year ended December 31, 2006 compared to the
same period in 2005. Approximately $900,000 of the increase was due to a one-time charge related to a change in the
Company’s lease accounting practices. The remaining increase was attributable to increased rent and leasehold improvements
for the Company’s operations’ areas, as well as increased leasing costs and service agreements for the Company’s technology
and operating systems.
Discussion of 2005 vs. 2004
Salaries and employee benefits increased $2.4 million or 7% from 2004 to 2005. The increase was primarily attributable to
annual merit increases and associated incentive compensation, as well as additional staffing costs at TRS. The Company had
FTE’s totaling 678 at December 31, 2005 as compared to 611 at December 31, 2004. The substantial portion of the increase in
FTE’s in 2005 occurred in the technology area of TRS, as the organization revamped its delivery systems in an effort to
provide better products and services for future tax seasons.
Other expenses increased $1.4 million during 2005 primarily due to an increase in professional fees. The increase in professional
fees was primarily associated with Sarbanes-Oxley compliance, as well as consulting fees related to the modification to the delivery
system of TRS.
38
FINANCIAL CONDITION
Investment Securities
Table 6 – Investment Securities Portfolio
December 31, (in thousands)
2006
2005
2004
Securities available for sale:
U.S. Treasury and U.S Government agency
agencies
FHLMC preferred stock
Mortgage backed securities, including CMOs
Total securities available for sale
Securities to be held to maturity:
U.S. Treasury and U.S Government agency
agencies
Obligations of states and political subdivisions
Mortgage backed securities, including CMOs
Total securities to be held to maturity
Total investment securities
$ 286,272
2,064
215,391
503,727
$ 330,294
-
117,571
447,865
$ 291,697
-
161,663
453,360
8,586
383
49,076
58,045
$ 561,772
12,110
-
52,188
64,298
$ 512,163
20,112
-
78,121
98,233
$ 551,593
Securities available for sale primarily consists of U.S. Treasury and U.S. Government Agency obligations, including agency
MBSs, agency collateralized mortgage obligations (“CMOs”) and FHLMC preferred stock. The MBSs primarily consist of
hybrid mortgage securities, as well as other adjustable rate mortgage securities, underwritten and guaranteed by Ginnie Mae
(“GNMA”), Freddie Mac (“FHLMC”) and Fannie Mae (“FNMA”). CMOs held in the investment portfolio are substantially
all floating rate securities that adjust monthly. The Company primarily uses the securities portfolio as collateral for securities
sold under agreements to repurchase (“repurchase agreements”) along with FHLB advances, to mitigate its risk position from
changing interest rates. Strategies for the securities portfolio may also be influenced by economic and market conditions, loan
demand, deposit mix and liquidity needs.
Detail of Mortgage Backed Securities at December 31, 2006 was as follows
Table 7 – Mortgage Backed Securities
As of December 31, 2006 (in thousands)
Agency mortgage backed securities
Agency collateralized mortgage obligations
Total securities available for sale
Amortized
Cost
$ 159,240
105,916
$ 265,156
Fair Value
$ 157,963
107,317
$ 265,280
In addition, the Company holds agency structured notes in the investment portfolio which consist of step up bonds. These
investments are predominantly classified as available for sale. The amortized cost and fair value of structured notes is as
follows:
December 31, (in thousands)
2006 2005
Amortized cost
Fair value
$
70,784
70,529
$
70,706
70,080
During 2006, Republic purchased $2.5 billion in securities and had maturities of $2.4 billion. Approximately $2.3 billion of
the securities purchased were agency discount notes, which the Company utilized primarily for collateral purposes. The
weighted average yield on these discount notes was 4.89% with an average term of 10 days.
39
Table 8 – Securities Available for Sale
As of December 31, 2006 (in thousands)
U.S. Treasury securities and U.S. Government
agencies:
Due in one year or less
Due from one to five years
Due from five to ten years
Total U.S. Treasury securities and U.S.
Government agencies
Total FHLMC preferred stock
Total mortgage backed securities, including
CMOs*
Total securities available for sale
Table 9 – Securities to be Held to Maturity
As of December 31, 2006 (in thousands)
U.S. Treasury securities and U.S. Government
agencies:
Due in one year or less
Due from one to five years
Total U.S. Treasury securities and U.S.
Government agencies
Obligations of states and political subdivisions:
Due from five to ten years
Total obligations of states and political subdivisions
Total mortgage backed securities, including CMOs*
Total securities to be held to maturity
_____________________
Amortized
Cost
Fair Value
Weighted
Average
Yield
Average
Maturity in
Years
$ 174,586
108,334
4,869
$ 173,579
107,825
4,868
4.40%
4.79
5.43
287,789
2,000
286,272
2,064
4.48
5.87
216,080
$ 505,869
215,391
$ 503,727
5.33
4.84
0.32
1.32
4.63
0.69
23.76
8.36
4.06
Carrying
Value
Fair Value
Weighted
Average
Yield
Average
Maturity in
Years
$ 8,097
489
$ 8,047
489
4.57%
4.92
8,586
8,536
4.59
383
383
49,076
$ 58,045
399
399
49,889
$ 58,824
6.00
6.00
6.44
6.16
0.14
2.14
0.26
6.50
6.50
15.10
12.85
* The average maturity of mortgage backed securities, including CMOs, is calculated based on contractual maturity.
Loan Portfolio
Net loans, primarily consisting of secured real estate loans, increased by $230 million or 11% to $2.3 billion at December 31,
2006. Approximately $44 million of the increase was attributable to the acquisition of GulfStream Community Bank, which
occurred in October 2006. The growth in loans, exclusive of the GulfStream acquisition, was primarily in the residential real
estate and commercial real estate portfolios and resulted from continued heavy marketing of the Company’s discounted
closing costs promotions.
At December 31, 2006, commercial real estate loans comprised 28% of the total gross loan portfolio and were concentrated
primarily within the Bank’s existing markets. These loans are principally secured by multi-family investment properties, single
family developments, medical facilities, small business owner occupied offices, retail properties and hotels. These loans
typically have interest rates that are initially fixed for one to ten years with the remainder of the loan term subject to repricing
based on various market indices. In order to reduce the negative effect of refinance activity within the portfolio during a
declining interest rate environment, the Company requires an early termination penalty on substantially all commercial real
estate loans for a portion of the fixed term period. The Bank’s underwriting standards typically include personal guarantees on
most commercial real estate loans. Overall, commercial real estate loans increased $79 million or 14% from December 31,
2005.
40
Similar to commercial real estate loans, residential real estate loans that are not sold into the secondary market typically have
fixed interest rate periods of one to ten years with the remainder of the loan term subject to repricing based on various market
indices. These loans also typically carry early termination penalties during a portion of their fixed rate periods in order to
lessen the overall negative effect to the Company of refinancing in a declining interest rate environment. To increase its
competitiveness within its markets, Republic offered closing costs as low as $299 on its residential real estate products during
2006 and 2005. Overall, residential real estate loans increased $118 million or 11% from December 31, 2005.
The Company substantially exited the payday loan segment of business during February 2006 and had no loans outstanding at
December 31, 2006. The payday loan segment has been treated as a discontinued operation and all current period prior period
data has been restated to reflect operations absent the payday loan segment of business. The Company had $6 million in
payday loans outstanding at December 31, 2005 compared to $36 million at December 31, 2004.
Table 10 – Loan Portfolio Composition
As of December 31, (in thousands)
2006
2005
2004
2003
2002
Residential real estate
Commercial real estate
Real estate construction
Commercial
Consumer
Overdrafts
Deferred deposits (“Payday loans”), Discontinued
Operations
Home equity
Total loans
$1,173,813
654,773
105,318
66,559
40,408
1,377
-
258,640
$2,300,888
$1,056,175 $ 851,736
495,827
70,220
36,807
31,022
1,344
575,922
84,850
46,562
34,677
852
$ 762,000
442,083
70,897
34,553
29,462
988
$ 597,797
413,115
68,020
33,341
35,436
1,083
5,779
265,895
27,584
215,088
$2,070,712 $1,789,818 $1,582,655
35,631
267,231
2,828
159,261
$1,310,881
The table below illustrates Republic’s maturities and repricing frequency for the loan portfolio:
Table 11 – Selected Loan Distribution
As of December 31, 2006 (in thousands)
Fixed rate maturities:
Real estate:
Residential
Commercial
Construction
Commercial
Consumer, including overdrafts
Home equity
Total fixed
Variable rate repricing:
Real estate:
Residential
Commercial
Construction
Commercial
Consumer
Home equity
Total variable
Total
One Year
Or Less
Over One
Through
Five
Years
Over
Five
Years
$ 74,046 $ 209,850 $ 121,425
27,618
91
1,862
5,255
1,509
$ 162,972 $ 308,817 $ 157,760
62,392
7,629
15,763
12,228
955
36,560
21,455
10,779
19,320
812
$ 221,767 $ 535,163 $ 11,562
2,022
1,713
-
-
-
$ 810,402 $ 845,640 $ 15,297
306,604
3,873
-
-
-
219,577
70,557
38,155
4,982
255,364
$ 405,321
126,570
29,175
28,404
36,803
3,276
$ 629,549
$ 768,492
528,203
76,143
38,155
4,982
255,364
$ 1,671,339
41
Allowance for Loan Losses and Provision for Loan Losses
The allowance for loan losses as a percent of total loans declined to 0.49% at December 31, 2006 compared to 0.53% at
December 31, 2005. Management believes, based on information presently available, that it has adequately provided for loan
losses at December 31, 2006. For discussion of Republic’s methodology for determining the adequacy of the allowance for
loan losses, see section titled “Critical Accounting Policies and Estimates” in this section of the document.
Discussion of loan loss provision in 2006 vs. 2005
The Company experienced an increase in the provision for loan losses of $2.0 million for the year ended December 31, 2006
compared to the same period in the prior year. The traditional banking segment increased $2.9 million primarily due to
growth in the loan portfolio during 2006 and a large credit recorded to the provision during the second quarter of 2005
associated with improvements in a few large classified loans.
Also included in the provision for loan losses for the years ended December 31, 2006 was a $922,000 reduction in losses
associated with RALs retained by the Company. The decrease in the provision associated with RALs during 2006 resulted
primarily from the securitization of a portion of the RAL portfolio during the first quarter of 2006.
Discussion of loan loss provision in 2005 vs. 2004
The Company posted a provision for loan losses of $340,000 in 2005 compared to a provision for loan losses of $1.3 million
for 2004, resulting in a net change of $1.0 million. Included in the provision for loan losses were $956,000 and $1.4 million
for losses associated with RALs during 2005 and 2004. In addition, as mentioned above, a large credit was recorded to the
provision during the second quarter of 2005 associated with improvements in a few large classified loans. In general, the
Company experienced lower levels of charge off activity, lower delinquency trends in the portfolio and further improvements
in overall asset quality during 2005 as compared to 2004.
42
Table 12 – Summary of Loan Loss Experience
Year Ended December 31, ( in thousands)
2006
2005
2004
2003
2002
Allowance for loan losses at beginning of year
Addition resulting from the acquisition of GulfStream
$ 11,009
387
$ 13,554
-
$ 13,959
-
$ 10,148
-
$ 8,607
-
Charge offs:
Real estate:
Residential
Commercial
Construction
Commercial
Consumer
Home equity
Tax Refund Solutions
Discontinued operations
Total
Recoveries:
Real estate:
Residential
Commercial
Construction
Commercial
Consumer
Home equity
Tax Refund Solutions
Discontinued operations
Total
Net loan charge offs / recoveries
Provision for loan losses from continuing operations
Provision for loan losses from discontinued operations
Allowance for loan losses at end of year
Ratios:
Allowance for loan losses to total loans
Allowance for loan losses to non performing loans
Allowance for loan losses to non performing assets
(841)
(30)
(72)
(215)
(1,117)
(264)
(1,358)
(409)
(4,306)
181
22
86
13
425
49
1,323
82
2,181
(2,125)
2,302
(355)
$ 11,218
(448)
(162)
(84)
-
(697)
(91)
(2,213)
(212)
(3,907)
176
87
34
32
289
35
1,257
14
1,924
(1,983)
340
(902)
$ 11,009
(444)
(177)
-
(22)
(868)
(177)
(3,404)
-
(5,092)
151
284
35
43
348
56
2,022
-
2,939
(2,153)
1,346
402
$ 13,554
(670)
(1,223)
(135)
(50)
(155)
(994)
(2,300)
-
(5,527)
448
1,074
300
100
26
366
450
-
2,764
(2,763)
6,095
479
$ 13,959
(706)
(420)
(255)
(444)
(705)
(164)
(1,482)
-
(4,176)
88
159
12
271
412
2
1,435
-
2,379
(1,797)
2,438
900
$ 10,148
0.49%
175
162
0.53%
183
170
0.76%
221
200
0.88%
108
108
0.77%
103
99
43
The table below depicts management’s allocation of the allowance for loan losses by loan type. The allowance allocation is
based on management’s assessment of economic conditions, past loss experience, loan volume, past due history and other
factors. Since these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative
of future loan portfolio performance or future allowance allocation.
Table 13 – Management’s Allocation of the Allowance for Loan Losses
2006
2005
2004
2003
2002
As of December 31,
(in thousands)
Residential real estate
Commercial real estate
Real estate construction
Commercial
Consumer
Home equity
Unallocated
Total
Asset Quality
Allowance
$ 1,138
7,151
204
241
377
188
1,919
$ 11,218
Percent
of Loans
to Total
Loans
Percent
of Loans
to Total
Loans
Allowance
Percent
of Loans
to Total
Loans
Allowance
Percent
of Loans
to Total
Loans
Allowance
Percent
of Loans
to Total
Loans
Allowance
51%
28
5
3
2
11
-
100%
$ 793
7,086
101
163
761
186
1,919
$ 11,009
51% $ 761
8,100
58
107
2,422
187
1,919
100% $ 13,554
28
4
2
2
13
-
48% $ 1,009
7,804
551
237
2,104
131
as2,123
100% $ 13,959
28
4
2
4
14
-
48%
28
4
2
4
14
-
100%
$ 979
5,869
572
238
700
93
1,697
$ 10,148
46%
31
5
3
3
12
-
100%
Loans, including impaired loans under SFAS 114, but excluding consumer loans, are placed on non-accrual status when they
become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of
collection. Past due status us based on how recently payments have been received. When loans are placed on non-accrual
status, all unpaid interest is reversed from interest income and accrued interest receivable. These loans remain on non-accrual
status until the borrower demonstrates the ability to become and remain current or the loan or a portion of the loan is deemed
uncollectible and is charged off.
Consumer loans, exclusive of RALs, are not placed on non-accrual status but are reviewed periodically and charged off when
they reach 120 days past due or at any point the loan is deemed uncollectible. RALs traditionally undergo a review in March
of each year and those deemed uncollectible by management are charged off against the allowance for loan losses.
Total non performing loans to total loans decreased marginally to 0.28% at December 31, 2006, from 0.29% at December 31, 2005,
while the total balance of non performing loans increased by $373,000 for the same period.
Table 14 – Non performing Assets
As of December 31, (in thousands)
2006
2005
2004
2003
2002
Loans on non-accrual status(1)
Loans past due 90 days or more and still on accrual
Total non performing loans
Other real estate owned
Total non performing assets
$ 5,980
413
`
6,393
547
$ 6,940
$ 5,725
295
`
6,020
452
$ 6,472
$ 5,763
371
`
6,134
657
$ 6,791
$ 12,466
473
`
12,939
-
$ 12,939
$ 7,967
1,915
`
9,882
320
$ 10,202
Non performing loans to total loans
Non performing assets to total loans
_____________________
0.28% 0.29%
0.31
0.30
0.34%
0.38
0.82%
0.82
0.75%
0.78
(1) Loans on non-accrual status include impaired loans. See Footnote 4 “Loans” of Item 8 “Financial Statements and Supplementary Data” for additional
discussion regarding impaired loans.
Republic defines impaired loans to be those commercial real estate loans that management has classified as doubtful (collection of
total amount due is improbable) or loss (all or a portion of the loan has been written off or a specific allowance for loss has been
provided) or otherwise meet the definition of impaired. Republic’s policy is to charge off all or that portion of its investment in an
impaired loan upon a determination that it is probable the full amount will not be collected. Impaired loans, which are a
component of loans on non-accrual status, decreased from $1.3 million at December 31, 2005 to $525,000 at December 31, 2006.
At December 31, 2006, the impaired balance was primarily attributable to one commercial real estate lending relationship.
44
Deposits
Total deposits were $1.7 billion at December 31, 2006 compared to $1.6 billion at December 31, 2005. Approximately $54
million of the increase was attributed to the acquisition of GulfStream Community Bank which occurred in October, 2006.
Interest-bearing deposits increased $98 million or 7%, while non interest-bearing deposits decreased $7 million or 3% from
December 31, 2005 to December 31, 2006.
The increase in interest-bearing accounts occurred primarily in the money market account category. The increase in the
money market category was primarily related to growth in the Company’s Premier First business money market account,
which is Republic’s primary product offering for medium to large business clients.
The increase in money market accounts was partially offset by a decline in interest bearing consumer demand deposit
accounts, which include NOW and Super NOW accounts. Interest bearing demand accounts decreased $65 million or 25% in
2006 primarily from the loss of funds in the Company’s “High Interest Checking” product. While interest rates increased
significantly throughout 2005 and the first half of 2006, management increased the rate paid on this product minimally to
offset the rising cost of funds associated with the Company’s other deposit products. As a result, the balances in this product
declined throughout the year. Management anticipates a strategy in 2007 that includes continued moderation of the rate paid
on this product unless additional funds are needed to meet loan demand or for liquidity purposes.
Table 15 – Deposits
December 31, (in thousands)
2006
2005
2004
2003
2002
Demand (NOW and SuperNOW)
Money market accounts
Internet money market accounts
Savings
Individual retirement accounts
Certificates of deposit, $100,000 and over
Other certificates of deposit
Brokered deposits
Total interest-bearing deposits
Total non interest-bearing deposits
Total
$ 197,225
498,943
18,135
37,690
54,180
171,706
269,828
165,989
1,413,696
279,026
$ 304,264
$ 262,714
256,175
322,421
45,076
33,864
41,080
43,548
47,324
48,954
149,217
168,777
266,547
282,609
46,254
153,194
1,155,937
1,316,081
261,993
286,484
$1,692,722 $1,602,565 $1,417,930
194,353
96,034
35,735
42,073
196,026
203,893
64,655
1,103,791
193,321
$ 271,022 $ 222,316
170,827
47,824
23,993
37,530
111,204
249,798
1,238
864,730
175,460
$1,297,112 $1,040,190
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
Securities sold under agreements to repurchase and other short-term borrowings increased $110 million during 2006.
Approximately $80 million of the increase was attributable to three large treasury management accounts. Based on the
transactional nature of the Company’s treasury management accounts, repurchase agreement balances are subject to large
fluctuations on a daily basis.
Federal Home Loan Bank Advances
FHLB advances increased $85 million during the year to $647 million at December 31, 2006. The increase in advances was
primarily utilized to fund the growth in the loan portfolio.
Approximately $50 million of the FHLB advances at December 31, 2006 are 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 advances 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 2006,
the FHLB converted $40 million in advances to floating rate, overnight advances. The weighted average coupon on the $50
million remaining at December 31, 2006 was 4.98%. Based on market conditions at this time, management believes it is
likely the substantial majority of these advances could be converted to floating rate advances by the FHLB during 2007.
45
At December 31, 2006, the Company had approximately $98 million in FHLB advances, which reprice on an overnight basis.
The Company has elected to borrow these advances on an overnight basis due to the uncertainty of the current interest rate
environment and the inversion of the yield curve. Due to the continued negative impact of the large amount of overnight
advances on the Company’s interest rate risk sensitivity model, it is possible the Company may extend the maturities on a
portion of these advances during 2007. The overall effect on the Company’s current earnings from extending maturities on the
overnight advances will be minimal. This strategy if deployed, however, will lessen the negative impact of an increase in
short-term interest rates on the Company’s net interest income and will reduce the positive impact from a decrease in short-
term interest rates on the Company’s net interest income.
Liquidity
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 MBSs and proceeds realized from loans held for sale. The
Company’s liquidity is impacted by its inability to sell certain 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
December 31, 2006, these securities had a fair market value of $469 million. Republic’s banking centers and its Internet site,
www.republicbank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have
historically been a source of additional funding when needed. In addition, brokered deposits 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. On
December 31, 2006, the Company had capacity with the Federal Home Loan Bank to borrow an additional $248 million. The
Company also had $197 million in approved unsecured line of credit facilities available at December 31, 2006 through various
third party sources.
The Company’s principal source of funds for dividend payments are dividends received from the Bank. Kentucky and federal
thrift 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 December 31, 2006, Republic Bank & Trust Company could, without prior approval, declare dividends of approximately
$49 million. The Company does not plan to pay dividends from Republic Bank in the foreseeable future.
Capital
Total stockholders’ equity increased from $214 million at December 31, 2005 to $237 million at December 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 loss as a result of a increase in the
value of the available for sale securities portfolio.
See Part II, Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matter and Issuer Purchases of Equity
Securities” for additional detail regarding stock repurchases and buy back programs.
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.
Banking regulators’ have 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 Footnote 15 “Stockholders’
Equity” of Item 8 “Financial Statements and Supplementary Data.” 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 7.90% at December 31, 2006
compared to 8.00% at December 31, 2005. Formal measurements of the capital ratios for Republic and the Bank are
performed by Management at each quarter end.
46
In 2004, the Company executed an intragroup trust preferred transaction, with the purpose of providing Republic Bank &
Trust Company access to additional capital markets, if needed, in the future. On a consolidated basis, this transaction has had
no impact to the capital levels and ratios of the Company. The subordinated debentures held by Republic Bank & Trust
Company, as a result of this transaction, however, are treated as Tier 2 capital based on requirements administered by the
Bank’s federal banking agency. If Republic Bank & Trust Company’s Tier I capital ratios should not meet the minimum
requirement to be well-capitalized, the Company could immediately modify the transaction in order to maintain its well-
capitalized status.
In 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.
The TPS mature on September 30, 2035 and are redeemable at the Company’s option after ten years. The subordinated
debentures are treated as Tier I Capital for regulatory purposes. 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 including the concluded acquisition of GulfStream Community Bank.
Off Balance Sheet Items
Table 16 – Off Balance Sheet Items
December 31, 2006 (in thousands)
Maturity by Period
Greater
than one
year to
three years
Less than
one year
Greater than
three years to
five years
Greater
than five
years
Total
Standby letters of credit
FHLB letters of credit
Commitments to extend credit
$ 6,862
72,194
422,366
$ 1,106
-
34,859
$ 330
-
10,057
$ 391
-
8,895
$ 8,689
72,194
476,177
Standby letters of credit represent commitments by the Company to repay a third party beneficiary when a customer fails to
repay a loan or debt instrument. 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. In addition to credit risk, the Company also has liquidity risk
associated with standby letters of credit because funding for these obligations could be required immediately. The Company
does not deem this risk to be material.
The Company has obtained letters of credit from the FHLB to be used as collateral on public funds deposits and as credit
enhancements for client bond offerings. Approximately $12 million of these letters of credit at December 31, 2006 were used
as credit enhancements for client bond offerings. The remaining $60 million was used to collateralize a public funds deposit,
which the Company classifies as a short-term borrowing.
Commitments to extend credit generally consist of unfunded lines of credit. These commitments generally have variable rates
of interest.
47
Aggregate Contractual Obligations
Table 17 – Aggregate Contractual Obligations
December 31, 2006 (in thousands)
Deposits
Federal Home Loan Bank advances
Subordinated note
Securities sold under agreements to
repurchase
Lease commitments
Total
Maturity by Period
Greater
than one
year to
three years
$ 215,929
245,500
-
Greater than
three years to
five years
$ 41,254
42,370
-
Greater
than five
years
Total
$ 2,211 $ 1,692,722
646,572
41,240
5,702
41,240
Less than
one year
$1,433,328
353,000
-
398,844
3,828
1,500
6,536
$ 2,189,000 $ 469,465
1,542
4,331
$ 89,497
-
9,448
401,886
24,143
$ 58,601 $ 2,806,563
Deposits represent non interest-bearing accounts, transaction accounts, money market accounts, time deposits and brokered
deposits held by the Company. Amounts that have an indeterminate maturity period are included in the less than one-year
category above.
FHLB advances represent the amounts that are due to the FHLB. A portion of the advances from the FHLB, although fixed,
are subject to conversion provisions at the option of the FHLB and can be prepaid without a penalty. Management believes
these advances will likely be converted in the short-term, and therefore has not included them in their original maturity
buckets for purposes of this table.
See Footnote 12 “Subordinated Note” of Item 8 “Financial Statements and Supplementary Data” for further information
regarding the subordinated note.
Securities sold under agreements to repurchase generally have indeterminate maturity periods and are predominantly included
in the less than one-year category above.
Lease commitments represent the total minimum lease payments under non cancelable operating leases.
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.
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 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. As with the Company’s previous simulation models, the December 31, 2006 simulation
analysis continues to indicate that an increase in interest rates would have a negative effect on net interest income, while a
decrease in interest rates would have a positive effect on net interest income.
48
The following tables illustrate Republic’s projected net interest income sensitivity profile based on the asset/liability model as of
December 31, 2006 and 2005:
Table 18 – Interest Rate Sensitivity for 2006
(in thousands)
Projected interest income:
Short-term investments
Investments
Loans, excluding fees (1)
Total interest income,
excluding loan fees
Projected interest expense:
Deposits
Securities sold under
agreements to repurchase
Federal Home Loan
Bank advances
Total interest expense
Net interest income,
excluding loan fees
Change from base
% Change from base
Decrease in Rates
100
200
Basis Points
Basis Points
Base
Increase in Rates
100
Basis Points
200
Basis Points
$ 1,243
23,918
143,659
$ 1,521
28,418
151,980
$ 1,826
30,741
159,060
$ 2,005
36,167
166,494
$ 2,315
39,830
173,574
168,820
181,919
191,627
204,666
215,719
40,061
46,471
52,827
60,939
12,615
16,071
19,525
23,649
27,098
79,774
30,044
92,586
32,231
104,583
36,739
121,327
69,296
27,772
40,121
137,189
$ 89,046
$ 2,002
$ 89,333
$ 2,289
2.30%
2.63%
$ 87,044
$ 83,339
$ (3,705)
(4.26)%
$ 78,530
$ (8,514)
(9.78)%
Table 19 - Interest Rate Sensitivity for 2005
( in thousands)
Projected interest income:
Short-term investments
Investments
Loans, excluding fees (1)
Total interest income,
excluding loan fees
Projected interest expense:
Deposits
Securities sold under
agreements to repurchase
Federal Home Loan Bank
advances
Total interest expense
Net interest income,
excluding loan fees
Change from base
% Change from base
Decrease in Rates
100
200
Basis Points
Basis Points
Base
Increase in Rates
100
Basis Points
200
Basis Points
$ 200
18,795
125,135
$ 271
21,966
131,333
$ 319
23,918
136,880
$ 370
26,827
143,039
$ 439
29,482
148,690
144,130
153,570
161,117
170,236
178,611
32,582
39,232
45,893
54,206
7,102
10,339
13,576
16,009
19,539
59,223
21,248
70,819
22,556
82,025
25,805
96,020
62,186
17,367
28,317
107,870
$ 84,907
$ 5,815
$ 82,751
$ 3,659
7.35%
4.63%
$ 79,092
$ 74,216
$ (4,876)
(6.16)%
$ 70,741
$ (8,351)
(10.56)%
_______________________
(1) - The tables above do not consider the effects of increasing and decreasing interest rates on Refunds Anticipation Loans,
which is fee based and occurs substantially all in the first quarter of the year.
49
Regulatory Matters
On June 22, 2006, Republic Bank & Trust Company received a Community Reinvestment Act (“CRA”) evaluation prepared
as of April 10, 2006 in which it received a “Satisfactory” rating. Previously on July 22, 2005, Republic Bank & Trust
Company received a CRA performance evaluation dated October 4, 2004 with 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 to the Department of Justice (“DOJ”)
for review. In October 2006, the Company was notified that the DOJ has referred the Regulation B issue back to the FDIC for
administrative handling with no further corrective action required by the DOJ.
Subsequent to December 31, 2006, the FDIC notified the Company in a letter dated March 2, 2007 (the “Letter”) of “the final
corrective actions required to be performed by the bank,” with respect to the Regulation B matters. The Letter requires that
the Company take certain actions, including notification to selected applicants regarding these issues and reimbursement of
fees to a limited number of applicants from 2004. The Company does not believe these corrective actions will have a material
adverse effect on its financial condition or results of operation.
New Accounting Pronouncements
See discussion in Footnote 1 “Summary of Significant Accounting Policies” of Item 8 “Financial Statements and
Supplementary Data” for discussion of recent accounting pronouncements.
Item 7A Quantitative and Qualitative Disclosures about Market Risk.
See the section titled “Asset/Liability Management and Market Risk” included under Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Item 8. Financial Statements and Supplementary Data.
The following are included in this section:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Financial Statements
Consolidated balance sheets – December 31, 2006 and 2005
Consolidated statements of income and comprehensive income – years ended December 31, 2006, 2005 and 2004
Consolidated statements of stockholders’ equity – years ended December 31, 2006, 2005 and 2004
Consolidated statements of cash flows – years ended December 31, 2006, 2005 and 2004
Footnotes to consolidated financial statements
50
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Management of Republic Bancorp, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation
of the Company’s annual consolidated financial statements. All information has been prepared in accordance with U.S.
generally accepted accounting principles and, as such, includes certain amounts that are based on Management’s best
estimates and judgments.
Management is responsible for establishing and maintaining adequate internal control over financial reporting presented in
conformity with U.S. generally accepted accounting principles. Internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Two of the objectives of internal control are to provide reasonable assurance to Management and the Board of Directors that
transactions are properly authorized and recorded in our financial records, and that the preparation of the Company’s financial
statements and other financial reporting is done in accordance with U.S. generally accepted accounting principles.
Management has made its own assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2006, in relation to the criteria described in the report, Internal Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). This assessment excluded internal control
over financial reporting for GulfStream Community Bank (“GulfStream”), as permitted by the Securities and Exchange
Commission for current year acquisitions. GulfStream was acquired on October 3, 2006. GulfStream represented 2.8% of
consolidated assets at December 31, 2006 and 0.00% of consolidated net income for 2006. Based on our assessment,
Management concludes that as of December 31, 2006, the Company’s internal control over financial reporting is effective
based on those criteria.
There are inherent limitations in the effectiveness of internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance
with respect to reliability of financial statements. Furthermore, the effectiveness of internal control can vary with changes in
circumstances. Based on its assessment, Management believes that as of December 31, 2006, the Company’s internal control
was effective in achieving the objectives stated above. Crowe Chizek and Company LLC has provided its report of this
assessment in a separate report dated March 2, 2007.
Bernard M. Trager
Chairman of the Board
Steven E. Trager
President and
Chief Executive Officer
Kevin Sipes
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
March 2, 2007
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial
Reporting, that Republic Bancorp, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Republic Bancorp, Inc. management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
On October 3, 2006, the Company acquired GulfStream Community Bank (“GulfStream”). GulfStream’s assets represented 2.8% of
the Company’s consolidated assets at December 31, 2006, and its income represented 0.0% of the Company’s consolidated net
income for 2006. As permitted by the Securities and Exchange Commission for the year of acquisition, the Company excluded
GulfStream from its assessment of internal controls over financial reporting. Accordingly, our audit of internal control over financial
reporting also excluded GulfStream.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Republic Bancorp, Inc. maintained effective internal control over financial reporting
as of December 31, 2006 is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated
Framework issued by the COSO. Also, in our opinion, Republic Bancorp, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006 based on criteria established in Internal Control – Integrated Framework
issued by the COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Republic Bancorp, Inc. as of December 31, 2006 and 2005 and the related consolidated statements of
income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December
31, 2006 and our report dated March 2, 2007 expressed an unqualified opinion on those consolidated financial statements.
Louisville, Kentucky
March 2, 2007
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
Board of Directors and Stockholders
of Republic Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Republic Bancorp, Inc. and subsidiaries as of December
31, 2006 and 2005 and the related consolidated statements of income and comprehensive income, stockholders’ equity and
cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the
responsibility of Republic’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Republic Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005 and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As discussed in Footnote 1, the Company adopted Staff Accounting Bulletin 108, “Considering the Effect of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financials Statements” and accordingly adjusted assets and
liabilities at the beginning of 2006 with an offsetting adjustment to the opening balance of retained earnings. Also, as
discussed in Footnote 16, the Company adopted Statement of Financial Accounting Standards 123R “Share-Based Payments”
at the beginning of 2006 which requires all share based payments to employees to be recognized as compensation expense.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of Republic Bancorp, Inc.’s internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) and our report dated March 2, 2007 expressed an unqualified opinion thereon.
Louisville, Kentucky
March 2, 2007
53
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (in thousands, except share data)
ASSETS:
2006
2005
Cash and cash equivalents
Securities available for sale
Securities to be held to maturity (fair value $58,824 in 2006 and $64,402 in 2005)
Mortgage loans held for sale
Loans, net of allowance for loan losses of $11,218 and $11,009 (2006 and 2005)
Federal Home Loan Bank stock, at cost
Premises and equipment, net
Goodwill
Other assets and accrued interest receivable
$
81,613
503,727
58,045
5,724
2,289,670
23,111
36,560
10,016
38,321
$
77,169
447,865
64,298
6,582
2,059,599
21,595
31,786
-
26,662
TOTAL ASSETS
LIABILITIES:
Deposits:
Non interest-bearing
Interest-bearing
Total deposits
$ 3,046,787
$ 2,735,556
$ 279,026
1,413,696
1,692,722
$ 286,484
1,316,081
1,602,565
Securities sold under agreements to repurchase and other short-term borrowings
Federal Home Loan Bank advances
Subordinated note
Other liabilities and accrued interest payable
401,886
646,572
41,240
27,019
292,259
561,133
41,240
24,785
Total liabilities
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, 100,000 shares authorized
Series A 8.5% non cumulative convertible, none issued
Class A Common Stock, no par value, 30,000,000 shares
authorized, 18,336,946 shares (2006) and 18,185,108 shares (2005)
issued, 18,241,777 shares (2006) and 18,046,883 shares (2005)
outstanding; Class B Common Stock, no par value, 5,000,000
shares authorized, 2,350,468 shares (2006) and 2,361,858
shares (2005) issued and outstanding
Additional paid in capital
Retained earnings
Unearned shares in Employee Stock Ownership Plan
Accumulated other comprehensive loss
Total stockholders’ equity
2,809,439
2,521,982
-
-
4,683
97,394
137,673
(1,011)
(1,391)
4,475
77,295
136,381
(1,468)
(3,109)
237,348
213,574
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 3,046,787
$ 2,735,556
See accompanying footnotes to consolidated financial statements.
54
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, (in thousands, except per share data)
INTEREST INCOME:
Loans, including fees
Taxable securities
Tax exempt securities
Federal Home Loan Bank stock and other
Total interest income
INTEREST EXPENSE:
Deposits
Securities sold under agreements to repurchase and
other short-term borrowings
Federal Home Loan Bank advances
Subordinated note
Total interest expense
NET INTEREST INCOME
Provision for loan losses
2006
2005
2004
$ 150,937
22,952
96
2,555
176,540
$ 127,029
18,568
-
2,482
148,079
$ 107,569
12,558
-
1,316
121,443
44,274
15,889
25,564
2,515
88,242
88,298
2,302
31,703
9,906
19,872
951
62,432
85,647
340
21,202
4,191
16,659
-
42,052
79,391
1,346
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
85,996
85,307
78,045
NON INTEREST INCOME:
Service charges on deposit accounts
Electronic refund check fees
Net RAL securitization income
Mortgage banking income
Debit card interchange fee income
Title insurance commissions
Gain on sale of securities
Other
Total non interest income
NON INTEREST EXPENSES:
Salaries and employee benefits
Occupancy and equipment, net
Communication and transportation
Marketing and development
Bankshares tax
Data processing
Debit card interchange expense
Supplies
Other
Total non interest expenses
(continued)
16,505
4,102
2,771
2,316
3,644
762
300
1,300
31,700
40,412
15,541
2,750
2,459
1,902
2,171
1,663
1,271
6,693
74,862
13,851
6,083
-
2,751
3,122
1,756
-
1,244
28,807
36,731
13,654
3,000
2,489
1,822
1,871
1,357
1,133
6,455
68,512
11,917
5,268
-
3,148
2,492
1,515
-
1,311
25,651
34,341
13,716
2,809
2,271
1,932
1,602
1,080
1,385
5,082
64,218
55
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (continued)
YEARS ENDED DECEMBER 31, (in thousands, except per share data)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE
$
42,834
$
45,602
$
39,478
2006
2005
2004
INCOME TAX EXPENSE FROM
CONTINUING OPERATIONS
INCOME FROM CONTINUING OPERATIONS
BEFORE DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE
INCOME FROM DISCONTINUED OPERATIONS
BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE FROM
DISCONTINUED OPERATIONS
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE
14,718
15,524
13,548
28,116
30,078
25,930
359
124
235
7,561
10,004
2,574
3,433
4,987
6,571
NET INCOME
$
28,351
$
35,065
$
32,501
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gain (loss) on securities available for sale
Less: Reclassification of realized amount
Net unrealized gain (loss) recognized in comprehensive
income
$
1,913
195
1,718
$
(2,625)
-
$
(2,625)
(1,484)
-
(1,484)
COMPREHENSIVE INCOME
$
30,069
$
32,440
$
31,017
(continued)
56
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (continued)
YEARS ENDED DECEMBER 31, (in thousands, except per share data)
2006
2005
2004
BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
Class A Common Stock
Class B Common Stock
$
1.38
1.35
BASIC EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS:
Class A Common Stock
Class B Common Stock
BASIC EARNINGS PER SHARE:
Class A Common Stock
Class B Common Stock
$
$
0.01
0.00
1.39
1.35
DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
Class A Common Stock
Class B Common Stock
$
1.35
1.32
$
$
$
$
DILUTED EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS:
Class A Common Stock
Class B Common Stock
DILUTED EARNINGS PER SHARE:
Class A Common Stock
Class B Common Stock
$
$
0.00
0.00
1.35
1.32
$
$
1.46
1.43
0.24
0.24
1.70
1.67
1.40
1.37
0.23
0.23
1.63
1.60
$
$
$
$
$
$
1.25
1.23
0.32
0.32
1.57
1.55
1.20
1.18
0.31
0.30
1.51
1.48
See accompanying footnotes to consolidated financial statements.
57
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
Common Stock
Class B
Shares
Class A
Shares
(in thousands, except per share data)
Outstanding Outstanding Amount
Additional
Paid In
Capital
Unearned
Shares in
Empl. Stock
Accumulated
Other
Total
Retained Ownership Comprehensive Stockholders'
Earnings
Equity
Loss
Plan
Balance, January 1, 2004
18,300
2,379
$
4,157
$
40,260
$
126,251
$
(2,289)
$
1,000
$
169,379
Net income
Net change in accumulated other
comprehensive loss
Dividend declared Common Stock:
Class A ($0.254 per share)
Class B ($0.231 per share)
Stock options exercised, net of
shares redeemed
Repurchase of Class A Common Stock
Conversion of Class B Common Stock
to Class A Common Stock
Shares committed to be released under
the Employee Stock Ownership Plan
Stock dividend
Notes receivable on common stock, net
of cash payments
-
-
-
-
129
(22)
9
37
-
-
-
-
-
-
-
-
(9)
-
-
-
-
-
-
-
25
(4)
-
-
-
-
-
-
32,501
-
(4,653)
(548)
1,494
(725)
(62)
(317)
-
285
-
-
203
16,357
(16,560)
-
(217)
-
-
-
-
-
-
-
-
395
-
-
-
32,501
(1,484)
(1,484)
-
-
-
-
-
-
-
-
(4,653)
(548)
794
(383)
-
680
-
(217)
BALANCE, December 31, 2004
18,453
2,370
$
4,381
$
58,117
$
135,949
$
(1,894)
$
(484)
$
196,069
(continued)
58
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands, except per share data)
Outstanding Outstanding Amount
Common Stock
Class B
Shares
Class A
Shares
Additional
Paid In
Capital
Unearned
Shares in
Empl. Stock
Accumulated
Other
Total
Retained Ownership Comprehensive Stockholders'
Earnings
Equity
Loss
Plan
Balance, January 1, 2005
18,453
2,370
$
4,381
$
58,117
$
135,949
$
(1,894)
$
(484)
$
196,069
Net income
Net change in accumulated other
comprehensive loss
Dividend declared Common Stock:
Class A ($0.3060 per share)
Class B ($0.278 per share)
Stock options exercised, net of
shares redeemed
-
-
-
-
57
Repurchase of Class A Common Stock
(511)
Conversion of Class B Common Stock
to Class A Common Stock
Shares committed to be released under
the Employee Stock Ownership Plan
Stock dividend
Notes receivable on common stock, net
of cash payments
Deferred compensation expense
8
40
-
-
-
-
-
-
-
-
-
(8)
-
-
-
-
-
-
-
-
-
-
-
-
35,065
-
(5,645)
(659)
12
534
(344)
(112)
(1,948)
(7,760)
-
-
-
383
-
-
194
20,031
(20,225)
-
-
58
120
-
-
-
-
-
-
-
-
-
426
-
-
-
-
35,065
(2,625)
(2,625)
-
-
-
-
-
-
-
-
-
(5,645)
(659)
202
(9,820)
-
809
-
58
120
BALANCE, December 31, 2005
18,047
2,362
$
4,475
$
77,295
$
136,381
$
(1,468)
$
(3,109)
$
213,574
(continued)
59
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands, except per share data)
Outstanding Outstanding Amount
Common Stock
Class B
Shares
Class A
Shares
Additional
Paid In
Capital
Unearned
Shares in
Empl. Stock
Accumulated
Other
Total
Retained Ownership Comprehensive Stockholders'
Earnings
Equity
Loss
Plan
Balance, January 1, 2006
18,047
2,362
$
4,475
$
77,295
$
136,381
$
(1,468)
$
(3,109)
$
213,574
SAB 108 adjustments
Net income
Net change in accumulated other
comprehensive loss
Dividend declared Common Stock:
Class A ($0.363 per share)
Class B ($0.330 per share)
Stock options exercised, net of
shares redeemed
Repurchase of Class A Common Stock
Conversion of Class B Common Stock
to Class A Common Stock
Shares committed to be released under
the Employee Stock Ownership Plan
Stock dividend
Notes receivable on common stock, net
of cash payments
Deferred compensation expense
Stock option expense
-
-
-
-
-
176
(36)
12
43
-
-
-
-
-
-
-
-
-
-
-
(12)
-
-
-
-
-
-
-
-
-
-
39
(8)
-
-
-
-
-
-
-
(547)
28,351
-
(6,578)
(776)
1,099
(527)
(169)
(522)
-
395
-
-
177
17,932
(18,109)
-
-
-
(135)
133
844
-
-
-
-
-
-
-
-
-
-
-
457
-
-
-
-
-
-
(547)
28,351
1,718
1,718
-
-
-
-
-
-
-
-
-
-
(6,578)
(776)
611
(699)
-
852
-
(135)
133
844
BALANCE, December 31, 2006
18,242
2,350
$
4,683
$
97,394
$
137,673
$
(1,011)
$
(1,391)
$
237,348
See accompanying footnotes to consolidated financial statements.
60
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, (in thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion, net
Federal Home Loan Bank stock dividends
Provision for loan losses, including provision for loan
losses from discontinued operations
Net gain on sale of mortgage loans held for sale
Origination of mortgage loans held for sale
Proceeds from sale of mortgage loans held for sale
Net gain on sale of RALs
Cash collected on residual value of securitized RALS
Origination of refund anticipation loans sold
Proceeds from sale of refund anticipation loans
Net accretion of premiums on securities
Net realized gain on sale of available for sale securities
Net (gain) loss on sale of other real estate owned
Employee Stock Ownership Plan expense
Stock option expense
Changes in other assets and liabilities:
Accrued interest receivable
Accrued interest payable
Other assets
Other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Cash paid for acquisition of GulfStream Community Bank, net of
cash acquired
Purchases of securities available for sale
Purchases of securities to be held to maturity
Purchases of Federal Home Loan Bank stock
Proceeds from calls, maturities and paydowns of securities
available for sale
Proceeds from calls, maturities and paydowns of securities to be
held to maturity
Proceeds from sales of securities available for sale
Proceeds from sales of other real estate owned
Net increase in loans
Investment in unconsolidated subsidiary
Purchases of premises and equipment, net
Net cash used in investing activities
FINANCING ACTIVITIES:
Net change in deposits
Net change in securities sold under agreements to repurchase
and other short-term borrowings
Payments on Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Net proceeds from subordinated note
Common Stock repurchases
Net proceeds from Common Stock options exercised
Cash dividends paid
Net cash provided by financing activities
2006
2005
2004
$
28,351
$
35,065
$
32,501
7,003
(1,258)
1,947
(1,583)
(194,124)
196,565
2,022
749
213,423
(216,194)
(2,866)
(300)
(81)
852
844
(2,463)
1,466
(6,260)
(628)
27,465
7,384
(1,010)
(562)
(2,265)
(232,903)
245,071
-
-
-
-
(3,251)
-
60
809
-
(2,533)
1,448
(928)
(729)
45,656
7,984
(822)
1,748
(2,861)
(254,421)
254,529
-
-
-
-
(671)
-
(55)
680
-
(2,136)
333
473
1,877
39,159
(14,276)
(2,478,085)
(383)
(137)
-
(4,518,393)
(1,991)
(264)
-
(4,097,326)
(61,180)
(351)
2,431,481
4,523,146
3,937,964
8,583
5,000
1,314
(194,405)
-
(6,052)
(246,960)
35,880
-
962
(283,211)
(1,240)
(3,640)
(248,751)
78,292
-
1,106
(212,129)
-
(5,819)
(359,443)
36,016
184,635
120,818
109,627
(242,561)
328,000
-
(699)
611
(7,055)
223,939
(72,569)
(93,091)
157,837
41,240
(9,820)
202
(6,020)
202,414
(681)
77,850
77,169
$
144,483
(24,716)
100,925
-
(383)
794
(4,968)
336,953
16,669
61,181
77,850
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
4,444
77,169
81,613
$
$
(continued)
61
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31, (in thousands)
2006
2005
2004
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
SUPPLEMENTAL NONCASH DISCLOSURES:
$
86,752
14,266
$
61,492
16,698
$
41,981
14,366
Transfers from loans to real estate acquired in settlement of loans $ 1,328 $ 737 $ 1,652
See accompanying footnotes to consolidated financial statements.
62
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations – 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 (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: Republic
Financial Services, LLC, TRS RAL Funding, LLC and Republic Insurance Agency, LLC. Republic Bank includes its
subsidiary, GulfStream Financial Properties, Inc. All companies are collectively referred to as “Republic” or the
“Company.” All significant intercompany balances and transactions are eliminated in consolidation.
Republic operates 38 banking centers, primarily in the retail banking industry, and conducts its operations predominately in
metropolitan Louisville, Kentucky, central Kentucky, southern Indiana, Pasco County, Florida (Metropolitan Tampa) and
through an Internet banking software application. Republic also operates two Loan Production Offices (“LPOs”) in the
Louisville, Kentucky market and one additional LPO office in Pasco County, Florida. Republic’s consolidated results of
operations are dependent upon net interest income, which represents the difference between the interest income and fees on
interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning assets represent
securities and real estate mortgage, commercial and consumer loans. Interest-bearing liabilities primarily consist of interest-
bearing deposit accounts and short-term and long-term borrowings.
Other sources of banking income include service charges on deposit accounts, fees charged to customers for trust services
and revenue generated from mortgage banking activities, which represents the origination and sale of loans in the secondary
market and servicing loans for others.
Republic’s operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses,
communication and transportation costs, marketing and development expenses and other general and administrative costs.
Republic’s results of operations are significantly affected by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory agencies.
Republic Bank & Trust Company is one of a limited number of financial institutions which facilitate 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: Refund Anticipation Loans (“RALs”), Electronic Refund Checks (“ERCs”) and
Electronic Refund Deposits (“ERDs”). RALs are classified as consumer loans. ERCs and ERDs are products whereby
Republic Bank & Trust Company transmits, via a check or electronic deposit, a taxpayer’s refund once it is received from
the respective state or federal government.
Use of Estimates – Financial statements prepared in conformity with accounting principles generally accepted in the U.S.
(“U.S. generally accepted accounting principles”) require management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Material estimates that are
particularly susceptible to significant change in the short-term relate to the determination of the allowance for loan losses
and the valuation of the Company’s mortgage servicing rights (“MSRs”). These estimates are particularly subject to change
and actual results could differ from these estimates.
Significant Group Concentrations of Credit Risk – The Company does not have any significant concentrations of credit
risk to any one industry or relationship.
Earnings Concentration – For 2006, 2005 and 2004, approximately 17%, 18% and 21% of net income from continuing
operations contribution was derived from the Tax Refund Solutions (“TRS”), which if terminated, could have a materially
adverse impact on net income. See Footnote 24 “Segment Information” in this section for additional detail and discussion.
Cash Flows – For purpose of the consolidated statement of cash flows, cash and cash equivalents include cash, deposits
with other financial institutions with original maturities under 90 days and federal funds sold. Net cash flows are reported
for customer loan and deposit transactions, interest bearing deposits in other financial institutions, repurchase agreements
and income taxes.
63
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Trust Assets – Property held for customers in fiduciary or agency capacities, other than trust cash on deposit at Republic, is
not included in the consolidated financial statements since such items are not assets of Republic.
Securities – Securities to be held to maturity are those which Republic has the positive intent and ability to hold to maturity
and are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest
method over the period to maturity.
Securities available for sale, carried at fair value, consist of securities not classified as trading securities nor as held to
maturity securities. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a separate
component of stockholders’ equity until realized. Gains and losses on the sale of available for sale securities are recorded
on the trade date and determined using the specific identification method. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity.
Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other than temporary impairment losses, management considers the length of time and the
extent to which the fair value has been less than cost, the financial condition and short-term prospects of the issuer and the
intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
Mortgage Banking Activities – Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or market. Net unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings. The Company enters into loan commitments for fixed rate mortgage loans, generally lasting 45 to 90 days and are
at market rates when initiated. These commitments to originate mortgage loans that the company intends to sell are
considered derivative instruments. To deliver closed loans to the secondary market and to moderate its interest rate risk
prior to sale, Republic typically enters into non-exchange traded mandatory forward sales contracts, which are also
considered derivative instruments. These contracts are entered into for amounts and terms offsetting the interest rate risk of
loan commitment derivatives and loans held for sale, and both are carried at their fair value with changes included in
earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying
value of the related loan sold. Substantially all of the gain on sale from mortgage banking activities reported in earnings is
recorded when closed loans are delivered into the sales contracts.
MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs that Republic expects to
receive on loans sold with servicing retained by the Company. MSRs are capitalized as separate assets when loans are sold
and servicing is retained. Management considers all relevant factors, in addition to pricing considerations from other
servicers, to estimate the fair value of the MSRs to be recorded when the loans are initially sold with servicing retained.
Prior to 2003, loans sold in the secondary market had been primarily sold with servicing released, which did not result in an
MSR. The service release premium on loans sold servicing-released, and the gain recognized for MSRs on loans sold
servicing retained are included as components of mortgage banking income on the income statement. The carrying value of
MSRs is amortized in proportion to and over the weighted average remaining life of the net servicing income. The
amortization is recorded as a reduction to mortgage banking income. The total MSR asset, net of amortization, recorded at
December 31, 2006 and 2005 is $6.1 million and $6.4 million. The MSR asset is recorded as a component of other assets on
the balance sheet.
The carrying value of the MSR asset is evaluated monthly for impairment based on the fair value of the MSR, using
groupings of the underlying loans by interest rates. Any impairment of a grouping would be reported as a valuation
allowance. A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated
life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the
fair value of the MSRs generally will decline due to expected prepayments within the portfolio. Alternatively, during a
period of rising interest rates the fair value of MSRs generally will increase as prepayments on the underlying loans would
be expected to decline. Management utilizes an independent third party on a monthly basis to assist with the fair value
estimate of the MSRs. Based on the estimated fair value at December 31, 2006 and 2005, management determined no
impairment of the MSR asset existed. Further, no impairment expense was recognized during 2006, 2005 or 2004.
Loan servicing income is recorded as loan payments are collected and includes servicing fees from investors and certain
charges collected from borrowers.
See Footnote 6 “Mortgage Banking Activities” in this section of the document for additional discussion regarding mortgage
baking.
64
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans – Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or
pay-off are reported at their outstanding principal balance adjusted for any changes to the allowance for loan losses,
unearned interest and any deferred loan fees or costs.
Interest on loans is computed on the principal balance outstanding. Loan origination fees and certain direct loan origination
costs relating to successful loan origination efforts are deferred and recognized over the estimated lives of the related loans
on the level yield method.
Generally, the accrual of interest on loans, including impaired loans, is discontinued when it is determined that the
collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more,
unless such loans are well secured and in the process of collection.
Interest received on non-accrual loans generally is either applied against principal or reported as interest income, according
to management’s judgment as to the ultimate full collectibility of principal. When loans are placed on non-accrual status, all
unpaid interest is reversed from interest income and accrued interest receivable. Such loans remain on non-accrual status
until the borrower demonstrates the ability to remain current, or the loan is deemed uncollectible and is charged off.
Consumer loans, exclusive of RALs, are not placed on non-accrual status, but are reviewed periodically and charged off
when they reach 120 days past due or at any point the loan is deemed uncollectible. RALs traditionally undergo a review in
March of each year and RALs not included in the securitization deemed uncollectible by management are charged off
against the allowance for loan losses.
Securitization – The Company utilized a securitization structure to fund a portion of the RALs originated during the first
quarter of 2006. The securitization consisted of a total of $213 million in loans over a four week period in January and
February. The Company’s continuing involvement in loans sold into the securitization was limited to only servicing of the
loans. Compensation for servicing of the loans securitized is not contingent upon performance of the loans securitized.
Generally, from mid January to the end of February of each year, RALs which meet certain underwriting criteria related to
refund amount and Earned Income Tax credit amount are classified as loans held for sale upon origination and sold into the
securitization. All other RALs originated are retained by the Company. There are no loans held for sale as of any quarter
end. The Company retained a related residual value in the securitization, which was classified as a trading asset. On a
quarterly basis, the Company adjusts the carrying amount of the residual value based on its fair value.
The Company concluded that the transaction was a sale as defined in Statement of Financial Accounting Standard (“SFAS”)
140. This conclusion was based on, among other things, legal isolation of assets, the ability of the purchaser to pledge or
sell the assets, and the absence of a right or obligation of the Company to repurchase the financial assets.
Allowance for Loan Losses – The allowance for loan losses is a valuation allowance for probable incurred credit losses.
Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a monthly basis by management and is based upon management’s periodic
review of the collectibility of the loans, including overdrafts, in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to
significant revision as additional information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as
either loss, doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is
established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers non classified loans and is based on historical loss
experience adjusted for qualitative factors. There are underlying uncertainties that could affect management’s estimate of
probable losses and there is a margin of imprecision inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio.
65
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
A loan is considered impaired when, based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment history and
the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price or the fair value of the collateral, if payment from the loans is
expected solely from the collateral.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company
does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the
subject of a restructuring agreement.
Real Estate Owned – Assets acquired through loan foreclosure are initially recorded at fair value when acquired,
establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through
expense. Costs incurred after acquisition are expensed. Real estate owned totaled $546,000 and $452,000 at December 31,
2006 and 2005.
Premises and Equipment, Net – Premises and equipment are stated at cost less accumulated depreciation and amortization.
Land is carried at cost. Depreciation is computed over the estimated useful lives of the related assets on the straight-line
method. Estimated lives are 25 to 39 years for buildings and improvements, three to ten years for furniture, fixtures and
equipment and three to five years for leasehold improvements.
Federal Home Loan Bank Stock – The Company is a member of the Federal Home Loan Bank (“FHLB”) system.
Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest
in additional amounts. FHLB stock is carried at cost, classified as a restricted security and periodically evaluated for
impairment. Because this stock is viewed as long-term investment, impairment is based on ultimate recovery of par value.
Both cash and stock dividends are recorded as interest income.
Goodwill and Other Intangible Assets – Goodwill results from business acquisitions and represents the excess of the
purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is
assessed at least annually in accordance with SFAS 142 “Goodwill and Other Intangible Assets” and any such impairment
will be recognized in the period identified. Republic measures goodwill impairment for the Company as a whole by
comparing the fair value of its net assets to the carrying value. Market capitalization, which is an indication of the value the
market places on a company, is the basis for the fair value of net assets.
Other intangible assets consist of core deposit assets arising from whole bank and branch acquisitions. Core deposit assets
are initially measured at fair value and then amortized on an accelerated method over the estimated useful life of 7 years.
Long Lived Assets – Premises and equipment, core deposit and other intangible assets, and other long-term assets are
reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at fair value.
Stock Based Compensation – Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-based
Payment,” using the modified prospective transition method. Accordingly, the Company has recorded stock-based
employee compensation cost using the fair value method starting in 2006. See Footnote 16 “Stock Plans and Stock Based
Compensation” in this section of the document.
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings – Substantially all securities sold
under agreements to repurchase (“Repurchase Agreements”) liabilities represent amounts advanced by customers.
Securities are pledged to cover the majority of these liabilities, as the liabilities are not covered by Federal Deposit
Insurance Corporation (“FDIC”) insurance. Certain repurchase agreements are secured by private insurance purchased by
Republic, or FHLB letters of credit, rather than by security pledges. Other short-term borrowings primarily consist of
federal funds purchased.
66
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes – Income tax expense represents the total of the current year income tax due or refundable and the change in
the deferred tax assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Retirement Plans – 401(k) plan expense is recorded as a component of salaries and employee benefits and represents the
amount of Company matching contributions.
Employee Stock Ownership Plan (“ESOP”) – The cost of shares held by the ESOP, but not yet committed or allocated to
participants, is recorded as a reduction to stockholders’ equity. Compensation expense is based on the market price of
shares as they are committed to be released to participant accounts. The difference between market price and the cost of
shares committed to be released is recorded as an adjustment to additional paid in capital. Dividends on allocated ESOP
shares reduce retained earnings, and dividends on unearned ESOP shares reduce debt and accrued interest.
Financial Instruments – Financial instruments include off balance sheet credit instruments, such as commitments to fund
loans and standby letters of credit. The face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments such as
standby letters of credit are considered financial guarantees in accordance with the FASB Interpretation (“FIN”) No. 45 and
are recorded at fair value.
Derivatives – Republic only utilizes derivative instruments as described in Footnote 6 “Mortgage Banking Activities” in this
section of the document.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are any such matters that will have a material effect on the financial statements.
Restrictions on Cash and Cash Equivalents – Republic is required by the Federal Reserve Bank to maintain average reserve
balances. Cash and due from banks in the consolidated balance sheet includes $4.5 million and $2.4 million of reserve balances at
December 31, 2006 and 2005. The Company does not earn interest on these cash balances.
Earnings Per Share – Earnings per share is based on net income (in the case of Class B Common Stock, less the dividend
preference on Class A Common Stock), divided by the weighted average number of shares outstanding during the period.
For purposes of all earnings per share calculations, unallocated ESOP shares are not considered issued and outstanding until
earned. All share and per share data has been restated to reflect the five percent (5%) stock dividend that was declared in
January 2007.
Comprehensive Income – Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a
separate component of equity, net of tax.
Equity – Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained
earnings to common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend
date, of the stock issued from retained earnings to common stock and additional paid in capital. Fractional share amounts
are paid in cash with a reduction in retained earnings.
Dividend Restrictions – Banking regulations require maintaining certain capital levels and may limit the dividends paid by
the bank to the holding company or by the holding company to shareholders. These restrictions pose no practical limit on
the ability of the bank or holding company to pay dividends at historical levels. See Footnote 15 “Stockholders’ Equity” of
this section of the document for additional discussion.
67
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market
information and other assumptions. See Footnote 20 “Fair Value of Financial Instruments” of this section of the document
for additional discussion. Fair value estimates involve uncertainties and matters of significant judgment regarding interest
rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
Segment Information – Segments represent parts of the Company evaluated by management with separate financial
information. Republic’s internal information is primarily reported and evaluated in three lines of business – banking, Tax
Refund Solutions and mortgage banking. In February 2006, the Company substantially exited the payday loan business.
For financial reporting purposes, the payday loan business segment has been treated as a discontinued operation. All current
period and prior period income statement data has been restated to reflect continuing operations absent the payday loan
business. See Footnote 24 “Segment Information” of this section of the document for additional discussion.
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 January 2007.
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 the payday loan segment of business.
In prior period financial statement filings, the Company classified daily fees associated with overdrawn deposit accounts
within service charges on deposits along with per item overdraft fees. In 2006, the Company reclassified daily overdraft
fees into loan fees, which is included as a component of interest income on loans. All prior period amounts presented have
been reclassified to conform to current period presentation. For the years ended December 31, 2006, 2005 and 2004, the
amount of fees reclassified was $2.1 million, $1.7 million and $1.5 million.
New Accounting Pronouncements – Effective January 1, 2006, the Company adopted SFAS 123(R), “Share-based
Payment.” See Footnote 16 “Stock Plans and Stock Based Compensation” in this section of the document
In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments-an amendment to
FASB Statements No. 133 and 140.” This Statement permits fair value re-measurement for any hybrid financial instruments,
clarifies which instruments are subject to the requirements of SFAS 133, and establishes a requirement to evaluate interests
in securitized financial assets and other items. The new standard is effective January 1, 2007. Management does not expect
the adoption of this statement to have a material impact on its consolidated financial position or results of operations.
In March 2006, the FASB issued SFAS 156, “Accounting for Servicing of Financial Assets-an amendment of FASB
Statement No. 140.” This Statement provides the following: 1) revised guidance on when a servicing asset and servicing
liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair
value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon
initial adoption, permits a onetime reclassification of available for sale securities to trading securities for securities which
are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer
elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This standard
is effective January 1, 2007 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained
earnings. Management does not expect the adoption of this statement to have a material impact on its consolidated financial
position or results of operations.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This Statement defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset. The standard is effective January 1, 2008. The Company has not
completed its evaluation of the impact of the adoption of this standard.
68
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In September 2006, the Securities and Exchange Commission (the “SEC” or “Commission”) issued Staff Accounting
Bulletin 108 (“SAB 108”). SAB 108 provides guidance on quantifying and evaluating the materiality of unrecorded
misstatements. SAB 108 requires that a company uses both the “iron curtain” and “rollover” approaches when quantifying
misstatement amounts. Under the rollover approach, the error is quantified as the amount by which the current year income
statement is misstated. The iron curtain approach, however, quantifies the error as the cumulative amount by which the
current year balance sheet is misstated. The SEC Staff believes that companies should quantify errors using both a balance
sheet and an income statement approach – and evaluate whether either of these approaches results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are considered, is material. Prior to the issuance of
SAB 108, the Company evaluated misstatement amounts during each period using the rollover method only.
The Company has performed an analysis of its unrecorded misstatements using both the rollover and iron curtain
approaches. Using the rollover method as the Company has traditionally done, management concluded that none of its
unrecorded misstatements were material to its current period or prior periods’ financial statements. Under the iron curtain
method, however, management concluded that two of the Company’s unrecorded misstatements were material to the current
period’s financial statements, but using the rollover method were immaterial to its prior periods’ financial statements. These
misstatements were related to the overaccrual of losses on RALs and the deferral of previously recorded title insurance
commissions. The Company recorded a one-time entry to retained earnings to correct the unrecorded misstatements on the
balance sheet. The SAB 108 entries posted in 2006 and the effect on retained earnings and net income were as follows:
(in thousands)
Reversal of prior years' overaccruals related to
losses on RALs
Deferral of previously recorded title insurance
commissions in accordance with SFAS 91
Income tax effect of the items above
Net SAB 108 effect
Effect on
Effect on
Retained Earnings Current Year's Earnings
$
923
$
-
(1,764)
90
$
294
(547)
$
(31)
59
The overstatement of prior year losses on RALs resulted from operational and reconciliation problems that occurred from
2001 through 2004, which caused management to believe that losses in the RAL portfolio were higher than they actually
were. The overstatement of prior period title insurance commissions occurred because the Company was recording title
insurance commission income in accordance with SFAS 60 “Accounting and Reporting by Insurance Enterprises.” The
Company concluded that the commissions earned from “lender’s” policies would be more appropriately recorded in
accordance with SFAS 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases.”
Also in accordance with SAB 108, the Company will apply adjustments related to title insurance to the applicable current
year’s quarterly net income, where presented in this filing and all future filings. There is no current year effect for the
adjustment related to the reversal of prior years’ over accruals related to losses on RALs.
The applicable effect on each quarter’s balance sheet and income statement in 2006 related to title insurance and the balance
sheet impact related to the prior year overaccrual of losses on RALs is as follows:
69
Balance Sheet Comparison
(in thousands)
Effect by Quarter
Second
Quarter
First
Quarter
Third
Quarter
Loans as previously reported
$
2,225,237
$
2,206,474
$
2,122,164
Title adjustment
(1,728)
(1,741)
(1,742)
Loans adjusted for title adjustment
$
2,223,509
$
2,204,733
$
2,120,422
Other liabilities as previously reported
$
27,052
$
26,977
$
31,766
RAL and title adjustments
(1,227)
(1,212)
(1,210)
Other liabilities adjusted for RAL and title adjustments
$
25,825
$
25,765
$
30,556
Stockholders' equity as previously reported
$
232,978
$
225,614
$
222,080
Title adjustment
(501)
(529)
(532)
Stockholders' equity adjusted for title adjustment
$
232,477
$
225,085
$
221,548
Income Statement Comparison
(in thousands)
Effect by Quarter
Second
Quarter
First
Quarter
Third
Quarter
Interest income as previously reported
$
43,616
$
41,611
$
44,218
Title adjustment
162
164
155
Interest income adjusted for title adjustment
43,778
41,775
44,373
Title insurance commissions as previously reported
Title adjustment
Title insurance commissions adjusted for title adjustment
347
(119)
228
403
(159)
244
292
(134)
158
Income tax expense as previously reported
3,476
3,333
5,109
Title adjustment
Income tax expense adjusted for title adjustment
Net income as previously reported
Title adjustment
15
3,491
6,666
28
2
3,335
5,961
3
7
5,116
9,733
14
Net income adjusted for title adjustment
$
6,694
$
5,964
$
9,747
70
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The overstatement of prior year losses on RALs resulted from operational and reconciliation problems that occurred from
2001 through 2004, which caused management to believe that losses in the RAL portfolio were higher than they actually
were. The overstatement of prior period title insurance commissions occurred because the Company was recording title
insurance commission income in accordance with SFAS 60 “Accounting and Reporting by Insurance Enterprises.” Based
on consultation with the Company’s independent auditor in the fourth quarter of 2006, the Company concluded that the
commissions earned from “lender’s” policies would be more appropriately recorded in accordance with SFAS 91
“Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.”
In September 2006, the FASB Emerging Issues Task Force (“EITF”) finalized Issue No. 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” This issue
requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after
participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit
cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the
underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The Company does not
believe the adoption of this issue will have a material impact on the financial statements.
In September 2006, the FASB EITF finalized Issue No. 06-5, “Accounting for Purchases of Life Insurance - Determining
the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of
Life Insurance).” This issue requires that a policyholder consider contractual terms of a life insurance policy in determining
the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater
surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined
based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the
cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy.
This issue is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of
this issue will have a material impact on the financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement attribute
for an uncertain tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company will adopt the provisions of FIN 48 on January 1, 2007. Upon
adoption, the Company anticipates recognizing an increase in state income tax liabilities of approximately $300,000 for
unrecognized state income tax expense, which is subject to revision as management completes its analysis. The additional
liability will accounted for as a reduction to the January 1, 2007 balance of retained earnings.
2. DISCONTINUED OPERATIONS
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 Cash Express, Inc. (“ACE”) amended the agreement
regarding Republic Bank & Trust Company’s 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 ceased 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 additional costs in the future. The Company had no payday loans outstanding related to the above contract at December
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 no payday loans outstanding related to the above program at December 31, 2006.
71
2. DISCONTINUED OPERATIONS (continued)
The following table illustrates the financial statements of the discontinued operation:
Balance Sheets
December 31,
(in thousands)
2006
2005
Cash and cash equivalents
Loans
Less Allowance for loan losses
Net Loans
Premises and equipment, net
Other assets and accrued interest receivable
-
$
-
-
-
-
-
$
730
5,779
682
5,097
40
81
Total assets
$
-
$
5,948
Deposits
Federal Home Loan Bank advances
Total liabilities
Allocated equity
Total liabilities and allocated equity
-
$
-
-
-
$
-
$
459
5,320
5,779
$
169
5,948
Statements of Income
Years Ended December 31,
(in thousands)
Interest income:
Loans, including fees
Total interest income
Interest expense:
Federal Home Loan Bank advances
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Non interest income:
Service charges on deposit accounts
Other income
Total non interest income
Non interest expenses:
Salaries and employee benefits
Occupancy and equipment, net
Communication and transportation
Marketing and development
Data processing
Other
Total non interest expenses
Income before income tax expense
Income tax expense
Net income
2006
2005
2004
$
528
528
$
9,205
9,205
$
12,427
12,427
508
8,697
(902)
9,599
31
-
31
306
33
35
389
38
1,268
2,069
262
12,165
402
11,763
39
-
39
211
-
-
-
-
1,587
1,798
7,561
2,574
4,987
$
10,004
3,433
6,571
$
30
498
(355)
853
-
500
500
119
115
-
108
130
522
994
359
124
235
72
$
3. SECURITIES
The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in
accumulated other comprehensive income (loss) were as follows:
Total securities available for sale
$ 505,869
$
Securities available for sale:
December 31, 2006 (in thousands)
U.S. Treasury securities and U.S.
Government agencies
FHLMC preferred stock
Mortgage backed securities,
including CMOs
December 31, 2005 (in thousands)
U.S. Treasury securities and U.S.
Government agencies
Mortgage backed securities,
including CMOs
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 287,789
2,000
$
216,080
156
64
774
994
$
(1,673)
-
$ 286,272
2,064
(1,463)
215,391
$
(3,136)
$ 503,727
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 333,348
$
13
$
(3,067)
$ 330,294
119,300
130
143
(1,859)
117,571
$
(4,926)
$ 447,865
Total securities available for sale
$ 452,648
$
The carrying value, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
Securities to be held to maturity:
December 31, 2006 (in thousands)
U.S. Treasury securities and U.S.
Government agencies
Obligations of states and political
subdivisions
Mortgage backed securities,
including CMOs
Carrying
Value
Gross
Gross
Unrecognized Unrecognized
Gains
Losses
Fair Value
$
8,586
$
383
-
16
$
(50)
$
8,536
-
399
49,076
1,057
(244)
49,889
Total securities to be held to maturity
$
58,045
$
1,073
$
(294)
$
58,824
December 31, 2005 (in thousands)
Value Gains Losses Fair Value
Carrying
Gross
Unrecognized
Gross
Unrecognized
$
12,110
$
-
$
(131)
$
11,979
52,188
525
525
(290)
52,423
$
(421)
$
64,402
U.S. Treasury securities and U.S.
Government agencies
Mortgage backed securities,
including CMOs
Total securities to be held to maturity
$
64,298
$
73
3. SECURITIES (continued)
During the fourth quarter of 2006, the Company sold a portion of the available for sale FHLMC preferred stock totaling $5 million,
realizing a gain on sale of securities of $300,000. There were no sales of securities available for sale during 2005 or 2004. The tax
provision related to this realized gain was $105,000.
The amortized cost and fair value of securities, by contractual maturity are as follows:
Securities
available for sale
Securities to be
held to maturity
Amortized
Carrying
December 31, 2006 (in thousands)
Cost Fair Value Value
Fair Value
Due in one year or less
Due from one to five years
Due from five to ten years
FHLMC preferred stock
Mortgage backed securities, including CMOs
$
Total
$
174,586
108,334
4,869
2,000
216,080
505,869
$
$
173,579
107,825
4,868
2,064
215,391
503,727
$
$
8,097
489
383
-
49,076
58,045
$
$
8,047
489
399
-
49,889
58,824
At December 31, 2006 and 2005, there were no holdings of securities of any one issuer, other than the U.S. Government and its
agencies, in an amount greater than 10% of stockholders’ equity.
Securities with unrealized losses at December 31, 2006 and 2005, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, are as follows:
December 31, 2006 (in thousands)
U.S. Treasury securities and U.S.
Government agencies
FHLMC preferred stock
Obligations of states and political sub.
Mortgage backed securities,
including CMOs
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
$
97,098
-
-
$
(174)
-
-
$
149,645
-
-
$
(1,549)
-
-
$
246,743
-
-
$
(1,723)
-
-
44,671
(173)
68,961
(1,534)
113,632
(1,707)
Total
$
141,769
$
(347)
$
218,606
$
(3,083)
$
360,375
$
(3,430)
December 31, 2005 (in thousands)
U.S. Treasury securities and U.S.
Government agencies
Mortgage backed securities,
including CMOs
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
$
168,490
$
(600)
$
167,119
$
(2,598)
$
335,609
$
(3,198)
27,492
(302)
65,846
(1,847)
93,338
(2,149)
Total
$
195,982
$
(902)
$
232,965
$
(4,445)
$
428,947
$
(5,347)
All unrealized losses are reviewed to determine whether the losses are other than temporary. Management evaluates securities for
other than temporary impairment on a quarterly basis, and more frequently when economic or market conditions warrant such
evaluation. Factors considered include whether the securities are backed by the U.S. Government or its agencies and concerns
surrounding the recovery of full principal. While it is likely that management will hold the securities to maturity, even though
some are classified as available for sale, management believes the unrealized losses are market driven and no ultimate loss will
occur.
74
4. LOANS
December 31, (in thousands)
2006 2005
Residential real estate
Commercial real estate
Real estate construction
Commercial
Consumer
Overdrafts
Deferred deposits (“Payday loans”), Discontinued operations
Home equity
Total loans
Less:
Unearned interest income
Allowance for loan losses
Loans, net
$ 1,173,813
654,773
105,318
66,559
40,408
1,377
-
258,640
2,300,888
$ 1,056,175
575,922
84,850
46,562
34,677
852
5,779
265,895
2,070,712
-
11,218
104
11,009
$ 2,289,670
$ 2,059,599
An analysis of the Allowance for loan losses follows:
December 31, (in thousands)
2006 2005 2004
Balance, beginning of year
Addition resulting from the acquisition of
GulfStream Community Bank
Provision for loan losses from continuing operations
Provision for loans losses from discontinued operations
Charge offs – Banking
Charge offs – Tax Refund Solutions
Charge offs – Discontinued Operations
Recoveries – Banking
Recoveries – Tax Refund Solutions
Recoveries – Discontinued Operations
$
11,009
$
13,554
$
13,959
387
2,302
(355)
(2,539)
(1,358)
(409)
776
1,323
82
-
340
(902)
(1,496)
(2,213)
(212)
667
1,257
14
-
1,346
402
(1,688)
(3,404)
-
917
2,022
-
Balance, end of year
$
11,218
$
11,009
$
13,554
75
4. LOANS (continued)
Information regarding Republic’s impaired loans is as follows:
As of and for the years ended December 31, (in thousands) 2006 2005 2004
Loans with no allocated allowance for loan losses
Loans with allocated allowance for loan losses
Total
Amount of the allowance for loan losses allocated
Average investment in impaired loans
$
$
$
Interest income recognized during impairment
Interest income recognized on a cash basis on impaired loans
$
$
$
-
525
525
120
872
-
-
$
$
$
-
1,295
1,295
328
1,684
-
-
-
1,887
1,877
905
3,430
-
-
No additional funds are committed to be advanced in connection with the above impaired loan.
Detail of non performing loans is as follows:
As of December 31, (in thousands)
2006 2005 2004
Loans past due 90 days and still on accrual $ 413
5,980
Loans on non-accrual status
$ 295 $ 371
5,763
5,725
Total non performing loans
$ 6,393
$ 6,020
$ 6,134
Interest income that would have been recorded if non-accrual loans were on a current basis in accordance with their original
terms was $354,000, $268,000 and $195,000 in 2006, 2005 and 2004.
Non performing loans include impaired loans and smaller balance homogeneous loans as defined in Footnote 1 “Summary
of Significant Accounting Policies.”
5. SECURITIZATION
In January 2006, the Company established a special purpose wholly owned subsidiary corporation of Republic Bank &
Trust Company named TRS RAL Funding LLC (“TRS RAL LLC”) to securitize a portion of the RAL portfolio which was
sold to an independent third party. The Company established a two step structure to handle the sale of the assets to third
party investors. In the first step, a sale provides for TRS RAL LLC, a Special Purpose Entity, to purchase the assets from
Republic Bank & Trust Company as Originator and Servicer. TRS RAL LLC is a wholly owned subsidiary of Republic
Bank & Trust Company. In the second step, a sale and administration agreement is entered into by and among TRS RAL
LLC, a third party conduit investor and a third party administrative agent, conduit agent, and committed purchaser. The
third party conduit investor purchased all eligible loans with TRS RAL LLC retaining a residual interest in an over
collateralization. The residual value related to the securitization was insignificant at December 31, 2006.
Detail of Net RAL securitization income follows:
December 31, (in thousands)
Gain on sale of RALs
Gain on securitization residual
Net RAL securitization income
2006
$
2,022
749
2,771
$
76
6. MORTGAGE BANKING ACTIVITIES
Activity in the Mortgage loans held for sale account was as follows:
December 31, (in thousands)
2006
2005
Beginning balance
Origination of mortgage loans held for sale
Proceeds from the sale of mortgage loans held for sale
Net gain on sale of mortgage loans held for sale
Less: Allowance to adjust to lower of cost or market
Ending balance
$
6,582
194,124
(196,565)
1,583
-
$ 5,724
$
16,485
232,903
(245,071)
2,265
-
$ 6,582
Mortgage loans serviced for others are not reported as assets. Republic serviced loans for others (primarily FHLMC)
totaling $923 million and $926 million at December 31, 2006 and 2005. Servicing loans for others generally consists of
collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures.
Custodial escrow account balances maintained in connection with serviced loans were $12.3 million and $11.9 million at
December 31, 2006 and 2005.
Mortgage banking activities primarily include residential mortgage originations and servicing. The following table presents
the components of mortgage banking income:
December 31, (in thousands)
2006
2005
2004
Net gain on sale of mortgage loans held for sale
Net loan servicing income, net of amortization
Mortgage banking income
$
1,583
733
$ 2,316
$
2,265
486
$ 2,751
$
2,861
287
$ 3,148
Net loan servicing income, net of amortization reflected in the above includes amortization of mortgage servicing rights
(“MSRs”) (see below) and loan servicing income of $2,304,000, $2,173,000 and $1,965,000 for the years ended 2006, 2005
and 2004.
Activity for capitalized mortgage servicing rights is as follows:
December 31, (in thousands)
2006
2005
2004
Balance, beginning of year
Additions
Amortized to expense
Balance, end of year
Valuation allowance
$
$
$
6,370
1,273
(1,571)
6,072
-
$
$
$
5,321
2,736
(1,687)
6,370
-
$
$
$
4,823
2,176
(1,678)
5,321
-
The fair value of capitalized MSRs was $9.0 million and $8.9 million at December 31, 2006 and 2005. The fair value for
year end 2006 and 2005 was calculated using a discount rate of 10%, prepayment speeds ranging from 184% to 370%,
depending on the stratification of the specific MSR, and a weighted average default rate of 1.5%.
The weighted average estimated remaining life of the MSR portfolio is 5.33 years. Estimated amortization expense for the
next four years is approximately $1.1 million per year and a total of $1.5 million for year five and thereafter; however,
actual amortization expense will be impacted by loan payoffs and changes in estimated lives that occur during each year.
77
6. MORTGAGE BANKING ACTIVITIES (continued)
Mortgage Banking Derivatives – Mandatory forward sales contracts (“forward contracts”) and rate lock loan commitments
are used in the ordinary course of business and are considered derivatives. Forward contracts represent future commitments
to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage
loans held for sale. Rate lock commitments represent commitments to fund loans at a specific rate. These derivatives involve
underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within
90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which
do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid. The
approximate notional amounts and realized gain / (loss) are as follows:
December 31, (in thousands)
2006
2005
Forward contracts:
Notional amount
Gain/(loss) on change in market value of forward contracts
$ 14,500
93
$ 13,000
(68)
Rate lock commitments:
Notional amount
Gain/(loss) on change in market value of rate lock commitments
$ 13,443
(38)
$ 11,699
20
Forward contracts also contain an element of risk in the event that the counterparties may be unable to meet the terms of
such agreements. In the event the parties to delivery commitments are unable to fulfill their obligations, the Company would
not incur any significant additional cost by replacing the positions at current market rates. The Company minimizes its risk
of exposure by limiting the counterparties to those major banks and financial institutions that meet established credit and
capital guidelines. Management does not expect any counterparty to default on their obligations and therefore, Management
does not expect to incur any cost related to counterparty default.
The Company is exposed to interest rate risk on loans held for sale and rate lock commitments. As market interest rates
increase or decrease, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To
offset this interest rate risk, the Company enters into derivatives such as forward contracts to sell loans. The fair value of
these forward contracts will change as market interest rates change, and the change in the value of these instruments is
expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The
objective of this activity is to minimize the exposure to losses on rate lock commitments and loans held for sale due to
market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a
variety of other factors, including market interest rate volatility, the amount of rate lock commitments that close, the ability
to fill the forward contracts before expiration, and the time period required to close and sell loans.
78
7. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises and equipment follows:
December 31, (in thousands)
Land
Office buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Construction in progress
Total premises and equipment
Less: Accumulated depreciation and amortization
$
2006
2005
5,852
23,199
44,736
5,885
708
80,380
43,820
$
2,834
21,102
41,282
4,272
222
69,712
37,926
Premises and equipment, net
$
36,560
$ 31,786
Depreciation expense related to premises and equipment was $5.4 million in 2006, $5.7 million in 2005 and $6.3 million in
2004.
8. GOODWILL AND INTANGIBLE ASSETS
The change in balance for goodwill during the year is as follows:
December 31, (in thousands)
2006
2005
Beginning of year
Acquired goodwill
Impairment
End of year
$
$
-
10,016
-
$
10,016
$
-
-
-
-
Acquired intangible assets consisted of core deposit intangibles with a gross carrying amount of $601,000 and accumulated
amortization of $37,000 at December 31, 2006.
Aggregate amortization expense was $37,000, $0 and $0 for 2006, 2005 and 2004.
Estimated amortization expense is as follows:
Year
2007
2008
2009
2010
2011
2012
2013
(in thousands)
$
144
122
101
80
59
37
21
79
9. DEPOSITS
Time deposits of $100,000 or more were $172 million and $169 million at December 31, 2006 and 2005.
At December 31, 2006, the scheduled maturities of all time deposits at weighted average interest rates were as follows:
Year
2007
2008
2009
2010
2011
Thereafter
(in thousands)
$ 402,309
142,254
73,675
18,774
22,480
2,211
4.24%
4.51
4.19
4.45
4.95
4.89
Total
$ 661,703
4.33%
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of short-term excess funds from correspondent banks, repurchase
agreements and overnight liabilities to deposit customers arising from Republic’s treasury management program. While
effectively deposit equivalents, the overnight liabilities to customers are in the form of repurchase agreements or liabilities
secured by FHLB letters of credit. Repurchase agreements collateralized by securities are treated as financings;
accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the
obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under
Republic’s control.
Information concerning Securities Sold Under Agreements to Repurchase at December 31, 2006 and 2005 are as follows:
December 31, ( in thousands)
Outstanding balance at end of year
Weighted average interest at year end
Average outstanding balance during the year
Average interest rate during the year
Maximum outstanding at any month end
2006
2005
$ 401,886
4.52% 3.59%
$ 292,259
374,937
359,327
4.24% 2.76%
$ 403,003
384,147
$
At December 31, 2006, Securities Sold Under Agreements to Repurchase had maturities and weighted average interest rates
as follows:
Maturity (in thousands)
Overnight
2 – 30 days
30 – 90 days
Over 90 days
Total
$ 304,602
29,452
61,790
6,042
$ 401,886
4.76%
5.40
4.17
4.32
4.71
Securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other purposes,
as required or permitted by law are as follows:
December 31, (in thousands)
2006 2005
Carrying value
Fair value
$ 470,777
469,148
$ 400,986
397,255
80
11. FHLB ADVANCES
At year-end, FHLB advances were as follows:
(in thousands)
December 31, 2006
December 31, 2005
FHLB convertible fixed interest rate advances with a
weighted average interest rate of 4.98%(1)
$
50,000
$
90,000
Overnight FHLB advances with a interest rate of 5.18%
98,000
117,000
FHLB fixed interest rate advances with a weighted average
interest rate of 4.50% due through 2035
498,572
354,133
Total FHLB advances
__________________________
(1) Represents convertible advances with the FHLB. These advances 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. All of these advances are
currently eligible to be converted on their quarterly repricing date. Based on market conditions at this time, management believes these advances could
likely be converted in the short-term.
$
$
561,133
646,572
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. FHLB advances are
collateralized by a blanket pledge of eligible real estate loans. At December 31, 2006, Republic had available collateral to
borrow an additional $248 million from the FHLB. Republic also has unsecured lines of credit totaling $197 million
available through various financial institutions.
Aggregate future principal payments on FHLB advances, based on contractual maturity dates as of December 31, 2006 are
detailed below. Convertible fixed rate advances have been included with the 2007 maturities.
Year (in thousands)
2007
2008
2009
2010
2011
Thereafter
Total
$ 353,000
138,500
107,000
42,370
-
5,702
$ 646,572
The following table illustrates real estate loans pledged to collateralize advances and letters of credit from the FHLB:
December 31, (in thousands)
2006
2005
First lien, single family residential
Home equity lines of credit
Multi-family, commercial real estate
$ 842,000
82,000
43,000
$ 938,000
169,000
56,000
81
12. SUBORDINATED NOTE
In 2005, Republic Bancorp Capital Trust (“RBCT”), an unconsolidated trust subsidiary of Republic Bancorp, Inc., issued
$40 million in Trust Preferred Securities (“TPS”). The TPS mature on September 30, 2035 and are redeemable at the
Company’s option after ten years. The TPS pay a fixed interest rate for 10 years and adjust with LIBOR thereafter. The
subordinated debentures are currently treated as Tier 1 Capital for regulatory purposes and the related interest expense,
currently payable quarterly at the annual rate of 6.015%, is included in the consolidated financial statements.
In 2004, the Company executed an intragroup trust preferred transaction, with the purpose of providing Republic Bank &
Trust Company access to additional capital markets, if needed, in the future. On a consolidated basis, this transaction had
no impact to the capital levels and ratios of the Company. The subordinated debentures held by Republic Bank & Trust
Company, as a result of this transaction, however, are treated as Tier 2 capital based on requirements administered by the
Bank’s federal banking agency. If Republic Bank & Trust Company’s Tier I capital ratios should not meet the minimum
requirement to be well-capitalized, the Company could immediately modify the transaction in order to maintain its well -
capitalized status.
82
13. INCOME TAXES
Allocation of federal income tax between current and deferred portion is as follows:
Years Ended December 31, (in thousands)
2006
2005
2004
Current expense from continuing operations:
Federal
State
Deferred expense from continuing operations:
Federal
State
Total
$
13,216
281
$
15,077
199
$
12,145
274
1,148
73
235
13
1,217
(88)
$
14,718
$
15,524
$
13,548
The provision for income taxes differs from the amount computed at the statutory rate as follows:
Years Ended December 31, (in thousands)
2006
2005
2004
Federal statutory rate
Increase (decrease) resulting from:
State taxes, net of federal tax benefit
General business tax credits
Other, net
35.0%
35.0%
35.0%
0.5
(1.3)
0.1
0.3
(1.4)
0.1
0.5
(0.6)
(0.6)
Effective tax rate
34.3%
34.0%
34.3%
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:
December 31, (in thousands)
2006
2005
Deferred tax assets:
Allowance for loan losses
Unrealized securities losses
Net operating loss
Accrued expenses
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Federal Home Loan Bank dividends
Loan fees
Deferred loan fees
Mortgage servicing rights
Other
Total deferred tax liabilities
Net deferred tax liability
$
3,078
751
46
2,005
5,880
(907)
(3,869)
-
(1,266)
(2,145)
(441)
$
3,087
1,674
-
1,141
5,902
(570)
(3,398)
(744)
-
(2,250)
(213)
(8,628)
(7,175)
$
(2,748)
$
(1,273)
83
14. 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 cash dividend premium paid on Class A Common Stock
over that paid on Class B Common Stock as discussed in Footnote 15 “Stockholders’ Equity” of this section of the
document.
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:
Years Ended December 31, (in thousands, except per share data)
2006
2005
2004
Net income from continuing operations
Net income from discontinued operations
Net income, basic and diluted
Weighted average shares outstanding
Effect of dilutive securities
Average shares outstanding including
dilutive securities
Basic earnings per share from continuing operations:
Class A Common Share
Class B Common Share
Diluted earnings per share from continuing operations:
Class A Common Share
Class B Common Share
Basic earnings per share from discontinued operations:
Class A Common Share
Class B Common Share
Diluted earnings per share from discontinued operations:
Class A Common Share
Class B Common Share
Basic earnings per share:
Class A Common Share
Class B Common Share
Diluted earnings per share:
Class A Common Share
Class B Common Share
$
28,116
235
$
30,078
4,987
$
25,930
6,571
$
28,351
$
35,065
$
32,501
20,500
578
20,717
853
20,764
858
21,078
21,570
21,622
$
1.38
1.35
$
1.46
1.43
$
1.25
1.23
$
1.35
1.32
$
1.40
1.37
$
1.20
1.18
$
0.01
-
$
0.24
0.24
$
0.32
0.32
$
-
-
$
0.23
0.23
$
0.31
0.30
$
1.39
1.35
$
1.70
1.67
$
1.57
1.55
$
1.35
1.32
$
1.63
1.60
$
1.51
1.48
Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:
Years Ended December 31,
2006
2005
2004
Antidilutive stock options
370,512
52,424
-
84
15. STOCKHOLDERS’ EQUITY
Common Stock – The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per
share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten
votes per share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a
share for share basis. The Class A Common shares are not convertible into any other class of Republic’s capital stock.
Dividend Restrictions – The Company’s principal source of funds for dividend payments is dividends received from the
Bank. 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 December 31, 2006, Republic Bank & Trust Company could, without prior approval, declare dividends of
approximately $49 million.
Regulatory Capital Requirements – Republic Bank & Trust Company, Republic Bank and the Parent Company are each
subject to regulatory capital requirements administered by federal banking agencies. Republic Bank & Trust Company is a
Kentucky chartered commercial banking and trust corporation and as such, it is subject to supervision and regulation by the
FDIC and the Kentucky Office of Financial Institutions. Republic Bank is a federally chartered thrift institution and as
such, it is subject to supervision and regulation by the Office of Thrift Supervision (“OTS”) and secondarily by the FDIC, as
the deposit insurer. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve
quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital
requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall
financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are
required. At December 31, 2006 and 2005, the most recent regulatory notifications categorized the Bank as well-capitalized
under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that
management believes have changed the institution's category.
With regard to Republic Bank, the Qualified Thrift Lender test requires at least 65% of assets be maintained in
housing-related finance and other specified areas. If this test is not met, limits are placed on growth, branching, new
investments, FHLB advances and dividends, or Republic Bank must convert to a commercial bank charter. Management
believes that this test was met at December 31, 2006.
See Footnote 12 “Subordinated Note” in this section of the document for additional discussion regarding capital and Trust
Preferred Securities.
85
15. STOCKHOLDERS’ EQUITY (continued)
Actual
Minimum Requirement
for Capital Adequacy
Purposes
Minimum Requirement
to be Well Capitalized
Under Prompt
Corrective Action
Provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2006
Total Risk Based Capital (to Risk Weighted Assets)
Republic Bancorp, Inc.
Republic Bank & Trust Co.
Republic Bank (1)
Tier I Capital (to Risk Weighted Assets)
Republic Bancorp, Inc.
Republic Bank & Trust Co.
Republic Bank (1)
Tier I Leverage Capital (to Average Assets)
Republic Bancorp, Inc.
Republic Bank & Trust Co.
Republic Bank (1)
$
280,354
253,861
11,938
%
14.30
13.32
20.68
$
156,791
152,431
4,617
%
8
8
8
$
N/A
190,538
5,772
N/A
10
%
10
269,136
219,582
11,546
269,136
219,582
11,546
13.73
11.52
20.00
8.92
7.45
13.12
78,395
76,215
2,309
120,768
117,989
3,520
4
4
4
4
4
4
N/A
114,323
3,463
N/A
147,486
4,400
N/A
6
6
N/A
5
5
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2005
Total Risk Based Capital (to Risk Weighted Assets)
Republic Bancorp, Inc.
Republic Bank & Trust Company
Republic Bank & Trust Company of Indiana (2)
Tier I Capital (to Risk Weighted Assets)
Republic Bancorp, Inc.
Republic Bank & Trust Company
Republic Bank & Trust Company of Indiana (2)
Tier I Leverage Capital (to Average Assets)
Republic Bancorp, Inc.
Republic Bank & Trust Company
Republic Bank & Trust Company of Indiana (2)
$
267,054
220,730
11,488
%
15.03
12.78
22.76
$
142,179
138,142
4,037
%
8
8
8
$
N/A
172,678
5,047
N/A
10
%
10
256,046
186,905
10,855
256,046
186,905
10,855
14.41
10.82
21.51
9.47
7.12
13.62
71,090
69,071
2,019
108,197
105,034
3,188
4
4
4
4
4
4
N/A
103,607
3,028
N/A
131,292
3,985
N/A
6
6
N/A
5
5
________________________________
(1) - The Company acquired GulfStream Community Bank, a federally charter thrift institution in 2006 and subsequently
changed the name of the institution to Republic Bank.
(2) - Republic Bank & Trust Company of Indiana was merged into Republic Bank & Trust Company effective November 30,
2006.
86
16. STOCK PLANS AND STOCK BASED COMPENSATION
At December 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 will be made in the future. The 2005 Plan permits
the grant of stock options and stock awards for up to 3,307,500 shares, of which 2,933,700 shares remain available for issue
with 373,800 allocated at December 31, 2006. With regard to the 2005 Plan, 316,050 option grants were made in 2006. All
shares issued under the above mentioned plans came from authorized and unissued shares.
Effective January 1, 2006, the Company adopted SFAS 123R, “Share Based Payment.” The Company elected to utilize the
modified prospective transition method; therefore, prior period results were not restated. The Company recorded stock
option compensation expense of $844,000 during 2006, or $0.03 per diluted Class A Common Share adjusted for the related
tax effect. 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 (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees.” All stock options have an exercise price that is at least equal to the fair market value of the Company’s stock
on the date the options were granted.
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 the fair value of the options. Under the modified prospective method, unvested awards and 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 Republic’s Common Stock at
fair value at the date of the grant. 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 during each of the periods presented.
The following table summarizes stock option activity:
Options
Class A
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at January 1, 2006
1,770,764
$
11.05
Granted
Exercised
316,050
23.76
(210,837)
6.10
Forfeited or expired
(185,474)
11.31
Outstanding at December 31, 2006
1,690,503
$
14.01
3.37
$
16,707,000
Exercisable (vested) at December 31, 2006
12,910
$
6.17
0.17
$
229,000
87
16. STOCK PLANS AND STOCK BASED COMPENSATION (continued)
Stock option compensation expense is recorded as a component of salaries and employee benefits in the consolidated
income statement. Since the stock options are incentive stock options and there were no disqualifying dispositions and no
tax benefit related to this expense was recognized. No options were modified during the years ended December 31, 2006,
2005 and 2004.
The following table provides further detail regarding intrinsic value of options exercised, stock option compensation
expense and options granted:
December 31, (in thousands except share data)
2006
2005
2004
Intrinsic value of options exercised
Stock option compensation expense recorded
Options granted
$
$
3,032
844
316,050
$
953
$
-
45,203
1,427
$
$
-
599,553
Non executive officer employees had loans outstanding of $843,000 and $709,000 at December 31, 2006 and 2005 that
were originated to fund stock option exercises.
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 Republic’s stock and other factors. Expected
dividends are based on dividend trends and the market price of Republic’s 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 at the time of grant.
The weighted average assumptions for options granted during the year and the resulting estimated weighted average fair
values per share used in the Black-Scholes option pricing model are as follows:
Risk-free interest rate
Expected dividend yield
Expected life of options (in years)
Expected volatility
Estimated fair value per share
2006
2005
2004
4.53%
1.59
6.00
22.23%
$ 6.16
3.75%
1.48
5.55
27.92%
$ 6.17
3.70%
1.69
5.82
21.31%
$ 3.59
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.
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.
88
16. STOCK PLANS AND STOCK BASED COMPENSATION (continued)
Unrecognized stock option compensation expense related to unvested awards (net of estimated forfeitures) for 2007 and
beyond is estimated as follows:
Year (in thousands)
2007
2008
2009
2010
2011 and thereafter
$
958
789
602
372
428
Total
$
3,149
In November 2004, the Company’s Board of Directors approved a Non Qualified Deferred Compensation Plan (the
“Deferred Compensation Plan”). The Deferred Compensation 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 director compensation
account is deemed “invested” in Company stock and is immediately vested. On a quarterly basis, the Company reserves
shares of Republic’s stock within the Company’s stock option plan for ultimate distribution to Directors at the end of the
deferral period. The Deferred Compensation Plan has not and will not materially impact the Company, as director
compensation expense will continue to be recorded when incurred.
The following table presents information on director deferred compensation shares reserved for the periods shown:
Years ended December 31,
Balance, beginning of period
Awarded
Released
Balance, end of period
2006
2005
Deferred
Shares
Weighted Average
Market Price at
Date of Deferral
Deferred
Shares
Weighted Average
Market Price at Date
of Deferral
6,137
6,477
-
12,614
$
$
19.53
20.49
-
20.02
-
6,137
-
6,137
$
-
19.53
-
19.53
$
Director deferred compensation has been expensed as follows:
Years ended December 31, (in thousands)
2006
2005
Director deferred compensation expense
$
133
$
120
89
16. STOCK PLANS AND STOCK BASED COMPENSATION (continued)
The following table illustrates the effect on net income and earnings per share if stock based compensation expense were
measured using the fair value recognition provisions of SFAS 123 for year ended December 31, 2005 and 2004:
Years Ended December 31 (dollars in thousands, except per share data)
2005
2004
Net income from continuing operations, as reported
Net income from discontinued operations, as reported
Deduct: Stock based compensation expense determined
under the fair value based method, net of tax
Pro forma net income
Earnings per share from continuing operations, as reported:
Class A Common Share
Class B Common Share
Earnings per share, as reported:
Class A Common Share
Class B Common Share
Pro forma earnings per share from continuing operations:
Class A Common Share
Class B Common Share
Pro forma earnings per share:
Class A Common Share
Class B Common Share
Diluted earnings per share from continuing operations, as reported:
Class A Common Share
Class B Common Share
Diluted earnings per share, as reported:
Class A Common Share
Class B Common Share
Pro forma diluted earnings per share from continuing operations:
Class A Common Share
Class B Common Share
Pro forma diluted earnings per share:
Class A Common Share
Class B Common Share
$
30,078
4,987
$ 25,930
6,571
915
34,150
$
574
$ 31,927
$
$
$
$
$
$
$
$
1.46
1.43
1.70
1.67
1.41
1.38
1.65
1.63
1.40
1.37
1.63
1.60
1.36
1.33
1.59
1.56
$
$
$
$
$
$
$
$
1.25
1.23
1.57
1.55
1.22
1.20
1.54
1.52
1.20
1.18
1.51
1.48
1.18
1.15
1.48
1.46
90
17. BENEFIT PLANS
Republic maintains a 401(k) plan for full time employees who have been employed for 1,000 hours in a plan year and have
reached the age of 21. Participants in the plan have the option to contribute from 1% to 25% of their annual compensation.
Republic matches 50% of participant contributions up to 5% of each participant’s annual compensation. Republic’s
contribution may increase if the Company achieves certain operating goals. Republic’s matching contributions were
$549,000, $812,000 and $743,000 for the years ended December 31, 2006, 2005 and 2004. The Company did not contribute
a “bonus” 401(k) match payment in 2006 because the Company failed to achieve its required income goals to pay the match.
The bonus match totaled $300,000 and $276,000 in 2005 and 2004.
On January 29, 1999, Republic formed an Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees. The
ESOP borrowed $3.9 million from the Parent Company and directly and indirectly purchased 347,288 shares of Class A
Common Stock from Republic’s largest beneficial owner at a market value price of $10.62 per share. The purchase price,
determined by an independent pricing committee, was the average closing price for the 30 trading days immediately prior to
the transaction. Shares in the ESOP are allocated to eligible employees based on principal payments over the term of the
loan, which is ten years. Participants become fully vested in allocated shares after five years of credited service and may
receive their distributions in the form of cash or stock. At December 31, 2006, approximately 95,550 unallocated shares had
a fair value of $2.2 million.
Years Ended December 31,
2006
2005
2004
Unearned shares allocated to participants in the plan
Compensation expense
42,559
$ 852,000
40,055
$ 809,000
36,831
$ 680,000
The Company maintains a death benefit for the Chairman of the Company equal to three times the average compensation
paid for the two years proceeding death. Upon a change in control, defined as a sale or assignment of more than 55% of the
outstanding stock of the Company, the death benefit is canceled.
18. LEASES, TRANSACTIONS WITH AFFILIATES AND RELATED PARTY TRANSACTIONS
Republic leases office facilities under operating leases from Republic’s Chairman and from partnerships in which
Republic’s Chairman, Chief Executive Officer and Vice Chairman are partners. Rent expense for the years ended
December 31, 2006, 2005 and 2004 under these leases was $2,245,000, $1,997,000 and $1,888,000. Total rent expense on
all operating leases was $4,607,000; $3,324,000 and $3,113,000 for the years ended December 31, 2006, 2005 and 2004.
Total minimum lease commitments under non cancelable operating leases are as follows:
(in thousands)
Affiliate
Other
2007
2008
2009
2010
2011
Thereafter
Total
$
$
2,315
2,021
1,740
1,489
788
-
$
1,513
1,461
1,314
1,098
956
9,448
Total
3,828
3,482
3,054
2,587
1,744
9,448
$
8,353
$
15,790
$
24,143
A director of Republic Bancorp, Inc. is the President and Chief Executive Officer of a company that leases space to
Republic. Fees paid by Republic totaled $13,000, $13,000 and $14,000 for the years ended December 31, 2006, 2005 and
2004.
A director of Republic Bancorp, Inc. is the President of an insurance agency that is agent of record for the Company’s
workers compensation insurance. Commissions paid to the insurance agency totaled $55,000, $38,000 and $31,000 in 2006,
2005 and 2004.
A director of Republic Bank & Trust Company is counsel for a local law firm. Fees paid by Republic to this firm totaled
$163,000, $127,000 and $87,000 in 2006, 2005 and 2004.
91
18. LEASES, TRANSACTIONS WITH AFFILIATES AND RELATED PARTY TRANSACTIONS (continued)
Loans made to executive officers and directors of Republic and their related interests during 2006, are as follows:
(in thousands)
Beginning balance
Change in related party status
New loans
Repayments
Total
$
21,304
1,429
6,046
(8,824)
$
19,955
Deposits from executive officers, directors, and their affiliates totaled $24 million and $10.6 million at December 31, 2006
and 2005.
19. 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 Republic’s credit policies. Collateral from the customer may be required based on management’s 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 customer’s
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 December 31, 2006, exclusive of mortgage banking loan commitments discussed in Footnote 1 “Summary of
Significant Accounting Policies,” Republic had outstanding loan commitments of $476 million, which included unfunded
home equity lines of credit totaling $315 million. At December 31, 2005, Republic had outstanding loan commitments of
$409 million, which included unfunded home equity lines of credit totaling $269 million. These commitments generally
have variable rates.
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 $9 million and
$10 million at December 31, 2006 and 2005.
At December 31, 2006, Republic had $72 million in letters of credit from the FHLB issued on behalf of the Bank’s clients as
compared to $88 million at December 31, 2005. Approximately $12 million and $28 million of these letters of credit were
used as credit enhancements for client bond offerings at December 31, 2006 and 2005, respectively. The remaining $60
million letter of credit was used to collateralize a public funds deposit, which the Company classifies in short-term
borrowings at December 31, 2006 and 2005. These letters of credit reduce Republic’s available borrowing line at the FHLB.
Republic uses a blanket pledge of eligible real estate loans to secure the letters of credit.
92
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by Republic using available market information and
appropriate valuation methodologies. However, judgment of management is necessarily required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts
Republic could realize in a market exchange. The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.
December 31, (in thousands)
Assets:
Cash and cash equivalents
Securities available for sale
Securities to be held to maturity
Mortgage loans held for sale
Loans
Allowance for loan losses
Federal Home Loan Bank stock
Accrued interest receivable
Liabilities:
Deposits:
Non interest-bearing accounts
Transaction accounts
Time deposits
Securities sold under agreements to
repurchase and other short-term borrowings 401,886
41,240
646,572
6,742
Subordinated note
Federal Home Loan Bank advances
Accrued interest payable
2006
2005
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
81,613
503,727
58,045
5,724
2,300,888
11,218
23,111
14,081
$ 279,026
751,993
661,703
$
81,613
503,727
58,824
5,750
2,291,580
11,218
23,111
14,081
$ 279,026
751,996
661,597
401,886
39,991
638,251
6,742
$
77,169
447,865
64,298
6,582
2,070,608
11,009
21,595
11,379
$ 286,484
662,547
653,534
292,259
41,240
561,133
5,222
$ 77,169
447,865
64,402
6,700
2,061,341
11,009
21,595
11,379
$ 286,484
662,547
646,317
292,259
40,327
554,477
5,222
Cash and Cash Equivalents – The carrying amount represents a reasonable estimate of fair value.
Securities Available for Sale, Securities to be Held to Maturity and Federal Home Loan Bank Stock – Fair value
equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities. The carrying value of FHLB Stock approximates the fair value based on the redemption
provisions of the Federal Home Loan Bank.
Mortgage Loans Held for Sale – Estimated fair value is based on the market value of the loan including the amount of fees
deferred in accordance with SFAS 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases—an amendment of FASB Statements No. 13, 60, and 65 and a rescission
of FASB Statement No. 17.”
Loans, Net – The fair value is estimated by discounting the future cash flows using the interest rates at which similar loans
would be made to borrowers with similar credit ratings for the same remaining maturities.
Deposits – The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the interest rates
offered for deposits of similar remaining maturities.
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings – The carrying amount represents
management’s estimate of fair value.
Subordinated Note – Rates currently available to the Company with similar terms and remaining maturities are used to
establish fair value of existing debt.
93
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Federal Home Loan Bank Advances – The fair value is estimated based on the estimated present value of future cash
outflows using the rates at which similar loans with the same remaining maturities could be obtained.
Accrued Interest Receivable/Payable – The carrying amount represents management’s estimate of fair value.
Commitments to Extend Credit – The fair value of commitments to extend credit is based upon the difference between the
interest rate at which Republic is committed to make the loans and the rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities, adjusted for the estimated volume of loan
commitments expected to close. The fair value of such commitments is not considered material.
Commitments to Sell Loans and Loan Sales Contracts – The fair value of commitments to sell loans is based upon the
difference between the interest rates at which Republic is committed to sell the loans and the quoted secondary market price
for similar loans. The fair value of such commitments is not considered material.
Financial Guarantees – Estimated fair value is based on current fees or costs that would be charged to enter or terminate
such arrangements and is not material.
The fair value estimates presented herein are based on pertinent information available to management as of December 31,
2006 and 2005. Although management is not aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date
and, therefore, estimates of fair value may differ significantly from the amounts presented.
21. BUSINESS COMBINATIONS
On October 3, 2006, the Company acquired 100% of the outstanding shares of GulfStream Community Bank
(“GulfStream”) of Port Richey, Florida. Operating results of GulfStream are included in the consolidated financial
statements since the date of the acquisition. As a result of this acquisition, the Company expects to establish market share in
the greater Tampa, Florida market, expand its customer base to enhance deposit fee income, provide an opportunity to
market additional products and services to new customers, and reduce operating costs through economies of scale.
The aggregate purchase price was $18.6 million, paid in cash. The purchase price resulted in approximately $10.0 million in
goodwill, and $601,000 in core deposit intangibles. The core deposit intangible asset will be amortized over 7 years, using
an accelerated method. Goodwill will not be amortized but instead evaluated periodically for impairment. Goodwill and
intangible assets are not deducted for tax purposes.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:
(in thousands)
Securities available for sale
Securities to be held to maturity
Federal Home Loan Bank stock
Loans, net
Premises and equipment
Goodwill
Core deposit intangibles
Other assets
Total assets acquired
Deposits
Other liabilities
Total liabilities assumed
$
8,476
1,967
121
43,850
4,166
10,016
601
193
69,390
(54,140)
(974)
(55,114)
Net assets acquired
$
14,276
94
22. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
December 31, (in thousands)
2006 2005
Assets:
Cash and cash equivalents
Due from subsidiaries
Investment in subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Subordinated note
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
STATEMENTS OF INCOME
$
12,577
1,011
267,475
783
$
34,603
1,468
220,084
1,800
$ 281,846
$ 257,955
$
41,240
3,258
237,348
$
41,240
3,141
213,574
$ 281,846
$ 257,955
Years Ended December 31, (in thousands)
2006 2005 2004
Income and expenses:
Dividends from subsidiary
Interest income
Other income
Less:
Interest expense
Other expenses
Income before income taxes
Income tax benefit
Income before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
$
8,376
1,244
38
2,515
361
6,782
728
7,510
20,841
$
10,788
584
40
960
440
10,012
367
10,379
24,686
$
28,831
159
48
-
358
28,680
315
28,995
3,506
Net income
$
28,351
$
35,065
$
32,501
95
22. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (continued)
STATEMENTS OF CASH FLOWS
Years Ended December 31, (in thousands)
2006 2005 2004
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries
Director deferred compensation
Change in due from subsidiary
Change in other assets
Change in other liabilities
$
28,351
$
35,065
$
32,501
(20,841)
62
457
1,017
(317)
(24,686)
56
426
1,213
(1,394)
(3,506)
685
(2,509)
1,583
Net cash provided by operating activities
8,729
10,680
28,754
Investing activities:
Acquisition of GulfStream Community Bank (Republic Bank)
Additional investment in Republic Bank
Investment in Republic Bank & Trust Co. of Indiana
Investment in unconsolidated subsidiary
Dividends on unallocated ESOP shares
Purchase of common stock of Republic Invest Co.
(18,569)
(5,000)
-
-
(43)
-
-
-
(5,000)
(1,240)
(44)
-
-
-
-
-
(52)
(23,500)
Net cash used in investing activities
(23,612)
(6,284)
(23,552)
Financing activities:
Common Stock repurchases
Net proceeds from Common Stock options exercised
Cash dividends paid
Net proceeds from subordinated note
(699)
611
(7,055)
-
(9,820)
202
(6,020)
41,240
(383)
794
(4,968)
-
Net cash provided by (used in) financing activities
(7,143)
25,602
(4,557)
Net (decrease) increase in cash and cash equivalents
(22,026)
29,998
Cash and cash equivalents at beginning of year
34,603
4,605
645
3,960
Cash and cash equivalents at end of year
$
12,577
$
34,603
$
4,605
96
23. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and the related tax effects were as follows:
December 31, (in thousands)
2006 2005 2004
Unrealized holding gains on available for sale securities
Reclassification adjustment for losses (gains) realized in income
$
1,913
(300)
$
(2,625)
-
$
(1,484)
-
Net unrealized gains
Tax effect
Net of tax amount
24. SEGMENT INFORMATION
1,613
105
1,718
(2,625)
-
(1,484)
-
(2,625)
(1,484)
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. As discussed throughout this
document, the Company substantially exited the deferred deposit business during the first quarter of 2006; therefore, its
deferred deposit 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 RAL securitization income 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 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 years ended December 31, is as follows:
97
24. SEGMENT INFORMATION (continued)
(in thousands)
Net interest income
Provision for loan losses
Electronic Refund Check fees
Net RAL securitization income
Mortgage banking income
Other revenue
Income tax expense
Net income
Segment assets
(in thousands)
Net interest income
Provision for loan losses
Electronic Refund Check fees
Mortgage banking income
Other revenue
Income tax expense
Net income
Segment assets
(in thousands)
Net interest income
Provision for loan losses
Electronic refund check fees
Mortgage banking income
Other revenue
Income tax expense
Net income
Segment assets
2006
Banking
Tax Refund
Solutions
Mortgage
Banking
$
82,314
2,268
-
-
-
23,188
11,908
22,793
3,044,983
$
5,665
34
4,102
2,771
-
158
2,464
4,668
205
$
319
-
-
-
2,316
(835)
346
655
1,599
2005
Total
Continuing
Operations
$
88,298
2,302
4,102
2,771
2,316
22,511
14,718
28,116
3,046,787
Discontinued
Operations
$
498
(355)
-
-
500
124
235
-
Banking
Tax Refund
Solutions
Mortgage
Banking
Total
Continuing
Operations
Discontinued
Operations
$
76,403
(616)
-
-
20,860
12,247
23,730
2,721,221
$
8,807
956
6,083
-
99
2,855
5,531
1,770
$
437
-
-
2,751
(986)
422
817
6,617
$
85,647
340
6,083
2,751
19,973
15,524
30,078
2,729,608
$
8,697
(902)
-
-
31
2,574
4,987
5,948
2004
Banking
Tax Refund
Solutions
Mortgage
Banking
Total
Continuing
Operations
Discontinued
Operations
$
70,595
(36)
-
-
18,306
10,025
19,187
2,432,579
$
8,352
1,382
5,268
-
14
2,824
5,406
2,012
$
444
-
-
3,148
(1,085)
699
1,337
16,496
$
79,391
1,346
5,268
3,148
17,235
13,548
25,930
2,451,087
$
12,165
402
-
-
39
3,433
6,571
47,835
25. REGULATORY MATTERS
On June 22, 2006, Republic Bank & Trust Company received a Community Reinvestment Act (“CRA”) evaluation prepared as
of April 10, 2006 in which it received a “Satisfactory” rating. Previously on July 22, 2005, Republic Bank & Trust Company
received a CRA performance evaluation dated October 4, 2004 with 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 to the Department of Justice (“DOJ”) for review.
In October 2006, the Company was notified that the DOJ has referred the Regulation B issue back to the FDIC for administrative
handling with no further corrective action required by the DOJ.
98
Subsequent to December 31, 2006, the FDIC notified the Company in a letter dated March 2, 2007 (the “Letter”) of “the final
corrective actions required to be performed by the bank,” with respect to the Regulation B matters. The Letter requires that the
Company take certain actions, including notification to selected applicants regarding these issues and reimbursement of fees to a
limited number of applicants from 2004. The Company does not believe these corrective actions will have a material adverse
effect on its financial condition or results of operation.
26. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
In February 2006, the Bank substantially exited the payday loan business. For financial reporting purposes, the payday loan
business segment has been treated as a discontinued operation. All current period and prior period income statement data has
been restated to reflect continuing operations absent of the payday loan business.
Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2006 and 2005.
Fourth
Quarter
Third
Quarter(1)
Second
Quarter(1)
First
Quarter(1)
$ 46,614
21,024
289
20,735
$ 43,778
20,853
110
20,743
$ 41,775
21,052
573
20,479
$ 44,373
25,369
1,330
24,039
9,663
3,309
6,354
522
182
340
6,694
0.31
0.30
0.02
0.02
0.33
0.32
0.30
0.29
0.02
0.02
0.32
0.31
9,302
3,337
5,965
(3)
(2)
(1)
5,964
0.29
0.28
0.00
0.00
0.29
0.28
0.28
0.28
0.00
0.00
0.28
0.28
15,037
5,176
9,861
(174)
(60)
(114)
9,747
0.48
0.48
0.00
(0.01)
0.48
0.47
0.47
0.46
(0.01)
0.00
0.46
0.46
(in thousands, except per share data)
2006:
Interest income(2)
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Income from continuing operations before
income tax expense
Income tax expense from continuing operations
Income from continuing operations before
8,832
2,896
discontinued operations, net of income tax expense
5,936
Income (loss) from discontinued operations before
income tax expense
Income tax expense (benefit) from discontinued
Operations
Income (loss) from discontinued operations, net of
income tax expense
Net income
Basic earnings per share from continuing operations:
Class A Common Stock
Class B Common Stock
Basic earnings per share from discontinued operations:
Class A Common Stock
Class B Common Stock
Basic earnings per share:
Class A Common Stock
Class B Common Stock
Diluted earnings per share from continuing operations:
Class A Common Stock
Class B Common Stock
Diluted earnings per share from discontinued operations:
Class A Common Stock
Class B Common Stock
Diluted earnings per share:
Class A Common Stock
Class B Common Stock
14
4
10
5,946
0.29
0.28
0.00
0.00
0.29
0.28
0.28
0.27
0.00
0.00
0.28
0.27
99
26. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
(in thousands, except per share data)
2005:
Interest income(3)
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Income from continuing operations before
income tax expense
Income tax expense from continuing operations
Income from continuing operations before
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$ 38,145
19,897
(83)
19,980
$ 35,643
19,547
(300)
19,847
$ 33,810
19,375
(867)
20,242
$ 40.481
26.828
1,590
25,238
8,966
3,031
discontinued operations, net of income tax expense
5,935
Income (loss) from discontinued operations before
income tax expense
Income tax expense (benefit) from discontinued
Operations
Income (loss) from discontinued operations, net of
income tax expense
Net income
Basic earnings per share from continuing operations:
Class A Common Stock
Class B Common Stock
Basic earnings per share from discontinued operations:
Class A Common Stock
Class B Common Stock
Basic earnings per share:
Class A Common Stock
Class B Common Stock
Diluted earnings per share from continuing operations:
Class A Common Stock
Class B Common Stock
Diluted earnings per share from discontinued operations:
Class A Common Stock
Class B Common Stock
Diluted earnings per share:
Class A Common Stock
Class B Common Stock
(282)
(100)
(182)
5,753
0.29
0.28
(0.01)
0.00
0.28
0.28
0.28
0.27
(0.01)
0.00
0.27
0.27
8,742
2,965
5,777
3,445
1,172
2,273
8,050
0.28
0.27
0.11
0.11
0.39
0.38
0.27
0.26
0.10
0.11
0.37
0.37
9,899
3,318
6,581
2,057
694
1,363
7,944
0.32
0.31
0.06
0.07
0.38
0.38
0.30
0.30
0.07
0.06
0.37
0.36
17,995
6,210
11,785
2,341
808
1,533
13,318
0.57
0.56
0.07
0.07
0.64
0.63
0.54
0.54
0.07
0.07
0.61
0.61
(1) – The Company posted certain immaterial adjustments to prior period amounts in accordance with SAB 108. See Footnote 1
“Summary of Significant Accounting Policies” for additional discussion.
(2) – In prior period financial statement filings, the Company classified daily overdraft fees within service charges on deposits
along with per item overdraft fees. In 2006, the Company reclassified daily overdraft fees into loan fees, which is included as a
component of interest income on loans. All prior period amounts presented have been reclassified to conform to current period
presentation. The Company made the following quarterly reclassifications: $601,000 (December 31, 2006), $527,000
(September 30 2006), $526,000 (June 30, 2006), $450,000 (March 31, 2006).
(3) – In prior period financial statement filings, the Company classified daily overdraft fees within service charges on deposits
along with per item overdraft fees. In 2006, the Company reclassified daily overdraft fees into loan fees, which is included as a
component of interest income on loans. All prior period amounts presented have been reclassified to conform to current period
presentation. The Company made the following quarterly reclassifications: $464,000 (December 31, 2005), $460,000
(September 30 2005), $408,000 (June 30, 2005), $333,000 (March 31, 2005).
100
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. 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 fourth quarter of our fiscal year ended December
31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting, the Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on
Financial Statements, thereon are set forth under Item 8 “Financial Statements and Supplementary Data.”
Item 9B. Other Information.
None
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item appears under the headings “PROPOSAL ONE: ELECTION OF DIRECTORS,”
“SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” and “THE BOARD OF DIRECTORS AND ITS
COMMITTEES” of the Proxy Statement of Republic Bancorp, Inc. for the 2006 Annual Meeting of Shareholders to be held
April 19, 2007 (“Proxy Statement”), all of which is incorporated herein by reference.
Item 11. Executive Compensation.
Information under the sub-heading “Director Compensation” and under the headings “CERTAIN INFORMATION AS TO
MANAGEMENT” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” of the Proxy
Statement is incorporated herein by reference.
101
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table sets forth information regarding Republic’s Common Stock that may be issued upon exercise of options,
warrants and rights under all of our equity compensation plans as of December 31, 2006. There were no equity compensation
plans not approved by security holders at December 31, 2006.
(a)
(b)
Number of Securities to
be Issued Upon
Exercise of Outstanding
Options, Warrants and
Rights
Weighted-
Average Exercise
Price of
Outstanding
Options, Warrants
And Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
1,316,636 (1)
373,867 (1)
$ 11.39
$ 23.25
-
2,933,633
Plan Category
1995 Stock Option Plan
2005 Stock Incentive Plan
_______________
(1)
Represents options issued for Class A Common Stock only. Options for Class B Common Stock have been authorized but are not issued.
Additional information required by this Item appears under the heading “SHARE OWNERSHIP” of the Proxy Statement,
which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Information required by this Item is under the headings “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION” and “CERTAIN OTHER RELATIONSHIPS AND RELATED TRANSACTIONS” of the Proxy Statement,
all of which is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information required by this Item appears under the heading “INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM” of the Proxy Statement and is incorporated herein by reference.
102
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements:
The following are included under Item 8 “Financial Statements and Supplementary Data:”
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Financial Statements
Consolidated balance sheets – December 31, 2006 and 2005
Consolidated statements of income and comprehensive income – years ended December 31, 2006, 2005 and 2004
Consolidated statements of stockholders’ equity – years ended December 31, 2006, 2005 and 2004
Consolidated statements of cash flows – years ended December 31, 2006, 2005 and 2004
Notes to consolidated financial statements
(a)(2) Financial Statements Schedules:
Financial statement schedules are omitted because the information is not applicable.
(a)(3) Exhibits:
The Exhibit Index of this report is incorporated herein by reference. The management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K pursuant to Item 15(b) are noted by asterisk in the Exhibit
Index.
SIGNATURES
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.
REPUBLIC BANCORP, INC.
March 15, 2007
By: Steven E. Trager
President & Chief Executive Officer
103
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated.
/s/ Bernard M. Trager
Bernard M. Trager
Chairman of the Board & Director
March 15, 2007
/s/ Steven E. Trager
Steven E. Trager
President, Chief Executive
Officer & Director
March 15, 2007
/s/ A. Scott Trager
A. Scott Trager
/s/ Kevin Sipes
Kevin Sipes
/s/ Henry M. Altman, Jr.
Henry M. Altman, Jr.
/s/ Charles E. Anderson
Charles E. Anderson
/s/ Sandra Metts Snowden
Sandra Metts Snowden
/s/ R. Wayne Stratton
R. Wayne Stratton
/s/ Susan Stout Tamme
Susan Stout Tamme
Vice Chairman & Director
March 15, 2007
Chief Financial Officer and
Chief Accounting Officer
Director
Director
Director
Director
Director
March 15, 2007
March 15, 2007
March 15, 2007
March 15, 2007
March 15, 2007
March 15, 2007
104
INDEX TO EXHIBITS
No.
Description
3(i)
3(ii)
3(iii)
4.1
4.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Articles of Incorporation of Registrant, as amended (Incorporated by reference to Exhibit 3(i) to the
Registration Statement on Form S-1 of Registrant (Registration No. 333-56583))
Bylaws of Registrant, as amended (Incorporated by reference to Exhibit 3(ii) to the Registration
Statement on Form S-1 of Registrant (Registration No. 333-56583))
Amended Bylaws (Incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006 (Commission File Number: 0-24649))
Provisions of Articles of Incorporation of Registrant defining rights of security holders (see Articles
of Incorporation, as amended, of Registrant incorporated as Exhibit 3(i) herein)
Agreement Pursuant to Item 601 (b)(4)(iii) of Regulation S-K (Incorporated by reference to Exhibit
4.2 of the Annual Report on Form 10-K of Registrant for the year ended December 31, 1997
(Commission File Number: 33-77324))
Officer Compensation Continuation Agreement with Steven E. Trager, dated January 12, 1995
(Incorporated by reference to Exhibit 10.1 to Registrant’s Annual Report on Form 10-K for the year
ended December 31, 1995 (Commission File Number: 33-77324))
Officer Compensation Continuation Agreement with Steven E. Trager effective January 1, 2006
(Incorporated by reference to Exhibit 10.34 of Registrant’s Form 10-K for the year ended December
31, 2005 (Commission File Number: 0-24649))
Officer Compensation Continuation Agreement with A. Scott Trager, dated January 12, 1995
(Incorporated by reference to Exhibit 10.5 to Registrant’s Annual Report on Form 10-K for the year
ended December 31, 1995 (Commission File Number: 33-77324))
Officer Compensation Continuation Agreement with A. Scott Trager effective January 1, 2006
(Incorporated by reference to Exhibit 10.35 of Registrant’s Form 10-K for the year ended December
31, 2005 (Commission File Number: 0-24649))
Officer Compensation Continuation Agreement with David Vest, dated January 12, 1995
(Incorporated by reference to Exhibit 10.10 of Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2003 (Commission File Number: 0-24649))
Officer Compensation Continuation Agreement with David Vest effective January 1, 2006
(Incorporated by reference to Exhibit 10.37 of Registrant’s Form 10-K for the year ended December
31, 2005 (Commission File Number: 0-24649))
Officer Compensation Continuation Agreement with Kevin Sipes, dated June 15, 2001 (Incorporated
by reference to Exhibit 10.23 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 (Commission File Number: 0-24649))
Officer Compensation Continuation Agreement with Kevin Sipes effective January 1, 2006
(Incorporated by reference to Exhibit 10.38 of Registrant’s Form 10-K for the year ended December
31, 2005 (Commission File Number: 0-24649))
Death Benefit Agreement with Bernard M. Trager dated September 10, 1996 (Incorporated by
reference to Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year ended December
31, 1996 (Commission File Number: 33-77324))
105
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 1, 1982, relating
to 2801 Bardstown Road, Louisville (Incorporated by reference to Exhibit 10.11 of Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File Number: 0-
24649))
Lease between Republic Bank & Trust Company and Teeco Properties, dated May 1, 2002, relating to
property at 601 West Market Street (Incorporated by reference to exhibit 10.1 of Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (Commission File Number: 0-
24649))
Lease between Republic Bank & Trust Company and Teeco Properties, as of October 1, 2006, relating
to property at 601 West Market Street, Louisville, KY. (Incorporated by reference to exhibit 99.1 of
Registrant’s Form 8-K filed September 25, 2006 (Commission File Number: 0-24649))
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 (Incorporated by reference to exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated July 1, 1993, as
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to
Exhibit 10.12 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
(Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 2, 1993, as
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to
Exhibit 10.16 of Registrant's Annual Report on Form 10-K for the year ended December 31, 2004
(Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 31, 1993, as
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to
Exhibit 10.12 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
(Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 1, 1995, as
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to
Exhibit 10.18 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003
(Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 16, 1996, as
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to
Exhibit 10.19 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003
(Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated January 21, 1998, as
to
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference
Exhibit 10.20 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003
(Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 11, 1998, as
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to
Exhibit 10.21 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003
(Commission File Number: 0-24649))
106
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 2004, as
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference
to
Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
(Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 1999, as
amended, relating to 661 South Hurstbourne Parkway (Incorporated by reference to Exhibit 10.17 of
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (Commission File
Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 2000, as
amended, relating to 661 South Hurstbourne Parkway (Incorporated by reference to Exhibit 10.21 of
Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 (Commission File
Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated July 1, 2003, as
amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to
Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
(Commission File Number: 0-24649))
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 (Incorporated by reference to Exhibit 10.2 of Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2005 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 1, 1999, as
amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.18 of
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (Commission File
Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 2000, as
amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.22 of
Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 (Commission File
Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated May 1, 2003, as
amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.1 of
Registrant’s Annual Report on Form 10-K for the quarter ended June 30, 2003 (Commission File
Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated November 1, 2005, as
amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.33 of
Registrant’s Form 10-K for the year ended December 31, 2005 (Commission File Number: 0-24649))
Lease between Jaytee Properties and InsBanc, Inc., dated February 3, 2003, relating to 9600
Brownsboro Road, Louisville, KY. (Incorporated by reference to Exhibit 10.1 of Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (Commission File Number: 0-
24649))
Assignment and Assumption of Lease by Republic Bank & Trust Company with the consent of Jaytee
Properties, dated May 1, 2006, relating to 9600 Brownsboro Road, Louisville, KY. (Incorporated by
reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2006 (Commission File Number: 0-24649))
1995 Stock Option Plan (as amended to date) (Incorporated by reference to Registrant’s Form S-8
filed November 30, 2004 (Commission File Number: 333-120856))
107
10.33*
10.34
10.35*
10.36*
10.37
10.38
10.39
21
23
31.1
31.2
32.1**
32.2**
Form of Stock Option Agreement for Directors and Executive Officers (Incorporated by reference to
Exhibit 10.2 of Registrant’s Form 10-Q for the quarter ended September 30, 2004 (Commission File
Number: 0-24649))
2005 Stock Incentive Plan (Incorporated by reference to Form 8-K filed March 18, 2005 (Commission
File Number: 0-24649))
Republic Bancorp, Inc. Non-Employee Director and Key Employee Deferred Compensation Plan and
Republic Bank & Trust Company Non-Employee Director and Key Employee Deferred
Compensation Plan (Incorporated by reference to Form S-8 filed November 30, 2004 (Commission
File Number: 333-120857))
Republic Bancorp, Inc. and subsidiaries Non-Employee Director and Key Employee Deferred
Compensation (Incorporated by reference to Form S-8 filed April 13, 2005 (Commission File
Number: 333-120857))
Junior Subordinated Indenture, Amended and Restated Trust Agreement, and Guarantee Agreement
(Incorporated by reference to Exhibit 10.26 of Registrant's Form 8-K filed August 19, 2005
(Commission File Number: 0-24649))
Marketing and Servicing Agreement between Republic Bank & Trust Company and ACE Cash
Express, Inc., dated October 21, 2003, as amended (Incorporated by reference to Exhibit 10.28 of
Registrant’s Form 10-K for the year ended December 31, 2004 (Commission File Number: 0-24649))
Marketing and Servicing Agreement, as amended between Republic Bank & Trust Company and
ACE Cash Express, Inc. (Incorporated by reference to Exhibit 10.32 of Registrant’s Form 10-K for
the year ended December 31, 2005 (Commission File Number: 0-24649))
Subsidiaries of Republic Bancorp, Inc.
Consent of Crowe Chizek and Company LLC
Certification of Principal Executive Officer, pursuant to Rules 13a-14(a) of the Sarbanes-Oxley Act of
2003
Certification of Principal Financial Officer, pursuant to Rules 13a-14(a) of the Sarbanes-Oxley Act of
2003
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 2003
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 2003
_______________________
* Denotes management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K pursuant
to Item 15(b).
** 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.
108
EXHIBIT 21
Subsidiaries of Republic Bancorp, Inc.***
Name of Subsidiary
State or other Jurisdiction of Incorporation
Republic Bank & Trust Company
Kentucky
Republic Bank
Republic Invest Co.
Republic Capital LLC
Republic Bancorp Capital Trust
Subsidiaries of Republic Bank & Trust Company***
Subsidiaries of Republic Bank***
Federally chartered thrift
Delaware
Delaware
Delaware
***
Certain subsidiaries are not listed since, considered in the aggregate as a single subsidiary, they would not
constitute a significant subsidiary at December 31, 2006.
109
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Form S-8 Registration Statement No. 333-91511, 333-120856, 333-
120857 and 333-130740 of Republic Bancorp, Inc., of our reports dated March 2, 2007, with respect to the consolidated
financial statements of Republic Bancorp, Inc. and management’s assessment of the effectiveness of internal control over
financial reporting and the effectiveness of internal control over financial reporting, which reports appear in this Annual Report
on Form 10-K of Republic Bancorp, Inc. for the year ended December 31, 2006.
Louisville, Kentucky
March 15, 2007
110
EXHIBIT 31.1
SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Steven E. Trager, President and Chief Executive Officer of Republic Bancorp, Inc., certify that:
1)
I have reviewed this annual report on Form 10-K of Republic Bancorp, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the
periods presented in this annual report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Steven E. Trager
President & Chief Executive Officer
Date: March 15, 2007
111
EXHIBIT 31.2
SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Kevin Sipes, Executive Vice President, Chief Financial Officer and Chief Accounting Officer, certify that:
1)
I have reviewed this annual report on Form 10-K of Republic Bancorp, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the
periods presented in this annual report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Kevin Sipes
Executive Vice President , Chief Financial Officer and Chief Accounting Officer
Date: March 15, 2007
112
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Republic Bancorp, Inc. (the “Company”), hereby certifies that the
Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained
in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 15, 2007
Steven E. Trager
President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or
as a separate disclosure document.
113
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Republic Bancorp, Inc. (the “Company”), hereby certifies that the
Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained
in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 15, 2007
Kevin Sipes
Executive Vice President, Chief Financial Officer
and Chief Accounting Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or
as a separate disclosure document.
114
STOCK PERFORMANCE GRAPH
The following stock performance graph does not constitute soliciting material and should not be deemed filed or incorporated
by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to
the extent the Company specifically incorporates the performance graph by reference therein.
The following graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) on Republic’s Class
A Common Stock as compared to the NASDAQ Financial Stocks Index and the S&P 500. The graph covers the period
beginning December 31, 2001 and ending December 31, 2006. The calculation of cumulative total return assumes an initial
investment of $100 in Republic’s Class A Common Stock and the NASDAQ Financial Stocks Index and the S&P 500 on
December 31, 2001. The stock price performance shown on the graph below is not necessarily indicative of future stock price
performance.
December 31,
2001
December 31,
2002
December 31,
2003
December 31,
2004
December 31,
2005
December 31,
2006
Republic Bancorp Class
A Common Stock
NASDAQ Financial Stocks
S&P 500
100
100
100
85
103
78
151
139
100
212
163
111
189
166
117
236
191
135
Republic Bancorp Clas s A Com m on Stock
NASDAQ Financial Stocks
S&P 500
`
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00
Decem ber 31, 2001 Decem ber 31, 2002 Decem ber 31, 2003 Decem ber 31, 2004 Decem ber 31, 2005 Decem ber 31, 2006
115