-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P5isKE+o2btNlkJMnj5YuHB//dog0AoMuSypAmXbjm8MKtMkeODby4NIbkw/ZomS PpdEj2PA59lB/tYicKDm8w== 0000921557-99-000003.txt : 19990413 0000921557-99-000003.hdr.sgml : 19990413 ACCESSION NUMBER: 0000921557-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REPUBLIC BANCORP INC /KY/ CENTRAL INDEX KEY: 0000921557 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 610862051 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24649 FILM NUMBER: 99584084 BUSINESS ADDRESS: STREET 1: REPUBLIC CORPORATE CENTER STREET 2: 601 WEST MARKET ST CITY: LOUISVILLE STATE: KY ZIP: 40202 BUSINESS PHONE: 5025843600 10-K 1 ANNUAL REPORT ON FORM 10K. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File Number 0-24649 REPUBLIC BANCORP, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0862051 - - ------------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 601 W. Market Street, Louisville, Kentucky 40202 --------------------------------------------------------------------- (Address of Principal Executive Offices) (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 Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] 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. [ ] The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of March 29, 1999 was approximately $84,054,00 (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 29, 1999 was 14,903,610 and 2,203,659, respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Shareholders for the year ended December 31, 1998 are incorporated by reference into Parts I and II. Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 21, 1999 are incorporated by reference into Part III. TABLE OF CONTENTS PART I 1. Business 3 2. Properties 12 3. Legal Proceedings 13 4. Submission of Matters to a Vote of Security Holders 14 PART II 5. Market for Registrant's Common Equity And Related Security Holder Matters 14 6. Selected Financial Data 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 7A. Quantitative and Qualitative Disclosures about Market Risk 16 8. Financial Statements and Supplementary Data 16 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure 16 PART III 10. Directors and Executive Officers of the Registrant 17 11. Executive Compensation 17 12. Security Ownership of Certain Beneficial Owners and Management 17 13. Certain Relationships and Related Transactions 17 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19 Signatures 20 CAUTIONARY STATEMENT This Annual Report on Form 10-K contains and incorporates by reference statements relating to future results of Republic Bancorp, Inc. ("Republic" or the "Company") that are considered "forward-looking" within the meaning of the Private Securities Litigation and Reform Act of 1995. These statements relate to, among other things, expectations concerning loan demand and growth, simulated changes in interest rates, the adequacy of the Company's allowance for loan losses, and the Year 2000 issue. 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 the Company's markets, equity and fixed income market fluctuations, personal and corporate customers' bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological changes, changes in law, 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 the filings of the Company with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS. Republic Bancorp, Inc. ("Republic" or the "Company") is a registered bank holding company headquartered in Louisville, Kentucky. Republic's principal subsidiary is Republic Bank & Trust Company, a Kentucky banking corporation (the "Bank"). Incorporated in Kentucky on January 2, 1974, Republic became a bank holding company when the Bank became authorized to conduct a 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, 1998, Republic had total assets of $1.2 billion, total deposits of $747 million and total stockholders' equity of $104 million. Based on total assets as of December 31, 1998, Republic ranked as the fourth largest independent bank holding company in Kentucky. 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. GENERAL BUSINESS OVERVIEW As of March 29, 1999, Republic had a total of 19 banking centers, including a banking center under construction in Louisville, serving seven Kentucky communities. Its two primary market areas are located in North Central and Central Kentucky. The North Central Kentucky market includes Louisville, the largest city in Kentucky, where Republic is headquartered and has 9 banking centers. Republic's Central Kentucky market includes ten banking centers in the following Kentucky cities: Bowling Green (1); Elizabethtown (1); Frankfort (2); Lexington, the second largest city in Kentucky (4); Owensboro (1); and Shelbyville (1). Republic has developed a super community banking network, with most of its banking centers located either in separate communities or portions of urban areas that represent distinct communities. Each of Republic's banking centers is managed by an officer with the authority to make pricing and loan decisions within Company policies and guidelines. The Bank also has local advisory boards of directors that enhance Republic's awareness of the particular needs of the communities served. Republic continues to seek and evaluate additional expansion opportunities, either through the establishment of de novo banking centers and/or through acquisitions of existing institutions in the financial services industry and ancillary nonbanking businesses. The Company intends to continue to consider various strategic acquisitions of banks, banking assets or financial services entities related to banking in those geographical areas that management believes would complement and increase Republic's existing business lines, or expansion in new market areas or product lines that management determines would be in the best interest of the Company and its shareholders. The Company has historically extended credit and provided general banking services through its banking center network to individuals, professionals, and businesses. Over the past several years the Company began to seek new lines of business to diversify its asset mix and further enhance its profitability. While each new line of business reflects the Company's efforts to enrich its asset mix, each of these lines of business is an outgrowth of the basic community banking concepts that the Company has traditionally engaged. The Company principally markets its services through the following: MORTGAGE LENDING. The Company utilizes its banking centers and commissioned originators to offer a complete line of single family residential mortgage products. The Company generally retains mortgage loans with variable rates or adjustable rates with up to 10 year fixed rate terms, and sells its longer term fixed rate loans into the secondary market. Once closed, the secondary market loans are sold without recourse principally to the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and other institutional investors. Generally, fixed rate loans in process are covered by forward commitments to these investors that limits Republic's interest rate risk. Republic does not retain the servicing on the majority of its loans sold in the secondary market, a practice dating back to 1995. Management's decision to retain or release servicing rights is largely dependent upon market conditions. When administering loans with the servicing retained by the Company, the responsibility of collecting principal and interest payments, escrowing for taxes and insurance, and remitting payments to the secondary market investors remains with Republic. A fee is received by Republic for performing these standard servicing functions. PREFERRED CLIENT SERVICES. Republic has established extensive long standing relationships with the medical communities in its primary markets. Special loan and deposit products have been tailored to meet the needs of physicians and their practices. Republic intends to expand these services to other business groups. CONSUMER LENDING. Consumer loans made by the Company include automobile loans, home improvement and home equity loans, operating lines of credit, and personal loans (both secured and unsecured). Republic is currently emphasizing home equity loans in its consumer marketing, in place of two unsecured consumer loan products which were marketed through the mail and Republic's banking center network prior to 1997. COMMERCIAL LENDING. In 1997, the Company established a separate commercial lending unit as an outgrowth of the Company's historical business of originating loans for small and medium-sized businesses from its various locations. Commercial loans are generated at each banking center through solicitations of potential clients primarily in the Company's market areas. The Company makes commercial loans to a variety of industries. The Company intends to expand this business through focused calling programs, seeking to broaden relationships with commercial clients with both loan and deposit accounts and cash management services. SPECIALIZED LENDING. Republic has pursued specialized lending opportunities to complement its traditional lending programs. These specialized product lines include Refunds Now, a program offering tax refund anticipation services. Republic began offering these services through a joint venture arrangement with Refunds Now, Inc. In October 1998, the Company acquired Refunds Now, Inc. as a subsidiary, in a stock merger transaction accounted for as a pooling of interests. Other specialized lending services include public sector lending, and the origination of sub-prime loans, which are immediately sold to finance companies or other sub-prime loan originators, without recourse and with servicing released. OTHER BANKING SERVICES. The Bank also provides, on a limited basis, trust services and engages in credit life insurance sales, item processing, and other related financial institution lines of business. Deposits are also a key component to the Company's banking business, serving as a source of funding for lending as well as increasing client account relationships. Borrowings, principally from the Federal Home Loan Bank ("FHLB"), and repurchase agreements, provide other sources of liquidity. In addition, the Company's investment securities, together with cash and cash equivalents, provide an important source of liquidity. The Company uses its investments as collateral for borrowings and to secure public fund deposits. Republic's operating revenues are derived primarily from interest earned from its loan and investment securities portfolios and fee income from loan and deposit products. For information about Republic's loan loss reserve, and the allocation of the allowance for loan losses by loan type, see the discussion under the sub-heading "Asset Quality" included on pages 26 to 28 of Republic's 1998 Annual Report to Shareholders, which is incorporated herein by reference. YEAR 2000 PROJECT For a discussion of Republic's year 2000 project, see page 32 of the Company's 1998 Annual Report to Shareholders, which discussion is incorporated herein by reference. EMPLOYEES As of December 31, 1998, the Bank had 489 employees of which 405 were full-time and 84 part-time. None of the Bank's employees are subject to a collective bargaining agreement, and neither Republic nor the Bank has ever experienced a work stoppage. COMPETITION The Company actively competes with several local and regional commercial banks, thrifts, credit unions and mortgage companies for deposits, loans and other banking related financial services. There is intense competition in the Bank's markets from other financial institutions as well as other "non-bank" companies which engage in similar activities. Some of the Company's competitors are not subject to the same degree of regulatory review and restrictions which apply to the Bank. In addition, the Company must compete with much larger financial institutions which have greater financial resources than the Company and, while predominantly headquartered in other states, aggressively compete for market share in Kentucky. These competitors attempt to gain market share through their financial products 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, are creating more pressure on smaller financial institutions to consolidate. The Company also competes with insurance companies, consumer finance companies, investment banking firms, brokerage houses, mutual fund managers and investment advisors. Retail establishments compete for 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 near future. SUPERVISION AND REGULATION Republic and the Bank are subject to the policies of various regulatory authorities. In particular, bank holding companies and their subsidiaries are affected by the credit and monetary policies of the Federal Reserve Board. Republic and the Bank are subject to numerous federal and state laws and regulations affecting their business and also must undergo periodic examination by federal and state financial institution examiners. The earnings of the Bank, and the earnings of Republic, are affected not only by the laws and regulations applicable to the banking business, but also by the policies and interpretations of regulatory authorities. The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the deposit insurance funds of the FDIC and the banking system as a whole, and not for the protection of the bank holding company shareholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks including the power to impose substantial fines and other penalties for violations of laws and regulations, to issue cease and desist or removal orders, to seek injunctions, and publicly disclose such actions; and extensive authority to police unsafe or unsound practices. The following description summarizes some of the laws to which the Company and the Bank are subject. References herein to applicable statutes and regulations are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. THE COMPANY The Company is a bank holding company registered under the BHCA, and it is subject to supervision, regulation and examination by the Federal Reserve Board. The BHCA and other federal laws subject bank 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. ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may 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 the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors. Consideration of convenience and needs issues includes the parties' performance under the Community Reinvestment Act of 1977, as amended. Under the Community Reinvestment Act, 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. By virtue of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the geographic location of the bank is no longer a factor. Under that Act, a well-capitalized and well-managed bank holding company may acquire a bank located in any state, subject to certain deposit percentage limitations and aging requirements. ACTIVITIES "CLOSELY RELATED" TO BANKING. The BHCA prohibits a bank holding company, with certain limited exceptions, from acquiring direct or indirect ownership or control of any voting shares of any company which is not a bank or from engaging in any activities other than those of banking, managing or controlling banks and certain other subsidiaries, or furnishing services to or performing services for its subsidiaries. One principal exception to these prohibitions allows the acquisition of interests in companies whose activities are found by the Federal Reserve Board, by order or regulation, to be so closely related to banking or managing or controlling banks, as to be a proper incident to banking. In approving acquisitions by bank holding companies of companies engaged in banking-related activities, the Federal Reserve Board considers a number of factors, and weighs the expected benefits to the public (such as greater convenience and increased competition or gains in efficiency) against the risks of possible adverse effects (such as undue concentration of resources, decreased or unfair competition or conflicts of interest). Despite prior approval, the Federal Reserve may order a holding company or its subsidiaries to terminate any activity, or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of the bank holding company. SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board may prohibit a bank holding company from engaging in an activity if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. The FDIC and the Kentucky Department of Financial Institutions have similar authority with respect to the Bank. SOURCE OF STRENGTH. Under Federal Reserve Board 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 to their support. Such support may be required at times when, absent this Federal Reserve Board 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. CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies. Under the 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 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 1998, the Company's ratio of Tier 1 capital to total risk-weighted assets was 14.63% and its ratio of total capital to total risk-weighted assets was 15.68%. See Note 13 to the Consolidated Financial Statements. In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company's Tier 1 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, 1998, the Company's leverage ratio was 9.29%. 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 rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. THE BANK The Bank is a Kentucky chartered banking corporation, the deposits of which are insured by the Bank Insurance Fund (BIF) and the Savings Association Fund (SAIF) of the FDIC. The Bank is not a member of the Federal Reserve System; the Bank is subject to supervision and regulation by the FDIC and the Kentucky Department of Financial Institutions. Such supervision and regulation subjects the Bank to special restrictions, requirements, potential enforcement actions and periodic examination by the FDIC and the Kentucky Department of Financial Institutions. Because the Federal Reserve Board regulates the bank holding company parent of the Bank, the Federal Reserve Board also has supervisory authority which directly affects the Bank. BRANCHING. Kentucky law permits a Kentucky chartered bank, with prior regulatory approval, to establish a branch office in any county in which the bank's principal office or an existing branch is located. In addition, a Kentucky chartered bank is permitted to combine with a commonly controlled bank or thrift regardless of its location in Kentucky, provided both of the institutions have been in operation for at least five years. The Kentucky banking statutes also permit a Kentucky bank, with prior regulatory approval, to engage in an interstate merger transaction, and thereby establish a branch office outside of Kentucky. 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 by merging with a Kentucky bank, provided the Kentucky bank has been in operation for at least 5 years. De novo branching into Kentucky by an out-of-state bank is not permitted by the Kentucky banking statutes. RESTRICTIONS ON AFFILIATE TRANSACTIONS. Transactions between the Bank and its nonbanking 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 or involving other nonaffiliated persons. RESTRICTIONS ON DISTRIBUTION OF SUBSIDIARY BANK DIVIDENDS AND ASSETS. Dividends paid by the Bank have provided a substantial part of the Company's operating funds, and for the foreseeable future it is anticipated that dividends paid by the Bank to the Company will continue to be the Company's principal source of operating funds. Capital adequacy requirements 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." The FDIC may declare a dividend payment to be unsafe and unsound even though the Bank would continue to meet its capital requirements after the dividend. Under Kentucky 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 of debt, absent approval of the Commissioner of the Kentucky Department of Financial Institutions. Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company (such as the Company) or any shareholder or creditor thereof. CAPITAL ADEQUACY REQUIREMENTS. The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured institutions. The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. The FDIC's risk-based capital guidelines generally require state banks to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4% and a ratio of total capital to total risk-weighted assets of 8%. The capital categories generally have the same definitions for the Bank as for the Company. As of December 31, 1998, the Bank's ratio of Tier 1 capital to total risk-weighted assets was 14.59% and its ratio of total capital to total risk-weighted assets was 15.63%. See Note 13 to the Consolidated Financial Statements. The FDIC's leverage guidelines require state banks to maintain Tier 1 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, 1998, the Bank's ratio of Tier 1 capital to average total assets (leverage ratio) was 9.26%. See Note 14 to the Consolidated Financial Statements. CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The federal 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 1 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 1 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 the FDIC 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 FDIC. As an institution's capital decreases, the FDIC's 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. The FDIC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually 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. DEPOSIT INSURANCE ASSESSMENTS. Currently, the FDIC maintains two funds for the insurance of deposits of financial institutions - the Bank Insurance Fund (BIF) for deposits originated by banks and the Savings Association Insurance Fund (SAIF) for deposits originated by savings associations, including savings association deposits acquired by banks. The Bank must pay assessments to the FDIC for federal deposit insurance protection. The FDIC has adopted a risk based assessment system as required by amendments made to the Federal Deposit Insurance Act. Under this system, FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher-risk classifications (that is, institutions that pose a greater risk of loss to their respective deposit insurance funds) pay assessments at higher rates than institutions that pose a lower risk. An institution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances. The Deposit Insurance Funds Act of 1996 provided for the recapitaliza- tion of the SAIF through a one time special assessment in 1996 on SAIF-insured deposits. After that special assessment, the assessment rate disparity between BIF and SAIF members was eliminated. The current range of BIF and SAIF assessments is between 0% and .27% of deposits. Institutions which qualify for the 0% assessment category such as the Bank do, however, still have to pay the $1,000 minimum semi-annual assessment required by federal statute. The Deposit Insurance Funds Act of 1996 also addressed the payment of the Financing Corporation's ("FICO") bond obligations, requiring both BIF and SAIF insured institutions to share the cost of the FICO bond through additional assessments on insured deposits. Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") 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 a commonly controlled depository institution. 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 transactions with banks. While the list 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, and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with clients when taking deposits or making loans. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing business operation. LEGISLATIVE INITIATIVES Various legislation, including proposals to overhaul the bank regulatory system, expand the powers of banking institutions and bank holding companies and change the way they are regulated, and to permit affilations between banking organizations, securities firms and insurance companies, is from time to time introduced in Congress. Such legislation may change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways. Republic cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon the financial condition or results of operations of the Company or its subsidiaries. STATISTICAL DISCLOSURES The statistical information required by Item 1 may be found in the Company's 1998 Annual Report to Shareholders (Exhibit 13 hereto) which, to the extent indicated, is hereby incorporated herein by reference, as follows:
Page in the Company's Guide 3 Disclosures 1998 Annual Report to Shareholders I. Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential A. Average Balance Sheet 19 B. Net Interest Earnings Analysis 19 C. Rate/Volume Analysis 20 II. Investment Portfolio A. Book Value of Investment Securities 27 B. Maturities of Investment Securities 27 C. Investment Securities Concentrations 27 III. Loan Portfolio A. Types of Loans 24 B. Maturities and Sensitivity of Loans to Changes in Interest Rates 24 C. Risk Elements 1. Nonaccrual, Past Due 90 Days or More, and Restructured Loans 26 2. Potential Problem Loans 44 3. Foreign Outstandings N/A 4. Loan Concentrations 24 D. Other Interest-Bearing Assets N/A IV. Summary of Loan Loss Experience A. Analysis of Allowance for Loan Losses 25 B. Allocation of the Allowance for Loan Losses 26 V. Deposits A. Average Balances 19 B. Maturities of Large Denomination Certificates of Deposit 44 C. Foreign Deposit Liability Disclosure N/A VI. Return on Equity and Assets A. Return on Average Assets 16 B. Return on Average Equity 16 C. Dividend Payout Ratio 16 D. Equity to Assets Ratio 16 VII. Short-Term Borrowings 45
ITEM 2. PROPERTIES The Company's executive offices, principal support and operational functions are located at 601 West Market Street in Louisville, Kentucky. All of Republic's banking centers are located in Kentucky. The location of the 19 banking centers, their respective approximate square footage and their form of occupancy is described in the following table:
BANKING CENTERS Square Owned (O)/ Footage Leased (L) LOUISVILLE 3726 Lexington Road, Louisville 4,000 L 601 West Market Street, Louisville 43,000 L 2801 Bardstown Road, Louisville 5,000 L 661 South Hurstbourne Parkway, Louisville 21,000 L 4921 Brownsboro Road, Louisville 2,000 L 5320 Dixie Highway, Louisville 5,000 O 4655 Outer Loop, Louisville 3,000 L 9600 Brownsboro Road, Louisville 1,300 L 3950 Kresge Way, Louisville 400 L LEXINGTON 651 Perimeter Drive, Lexington 4,000 L 2401 Harrodsburg Road, Lexington 4,000 O 641 East Euclid Avenue, Lexington 3,500 O 3098 Helmsdale Place, Lexington 4,000 O FRANKFORT 100 Highway 676, Frankfort 4,000 O 1001 Versailles Road, Frankfort 4,000 O BOWLING GREEN, 1700 Scottsville Road 4,000 O OWENSBORO, 3500 Frederica Street 5,000 O ELIZABETHTOWN, 1690 Ring Road 21,000 O SHELBYVILLE, 1641 Midland Trail 5,000 O
The Louisville locations comprised of West Market Street, Bardstown Road, 9600 Brownsboro Road and South Hurstbourne Parkway are leased from Republic's Chairman, Mr. Bernard M. Trager, and partnerships in which Republic's Chairman (Bernard M. Trager) and Chief Executive Officer (Steven E. Trager) are partners. See Item 13 of this Report. 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 pending or, to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic or the Bank. ITEM 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 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS CLASS A COMMON STOCK. The Company's Class A Common Stock is traded on the Nasdaq National Market under the symbol RBCAA. At February 8, 1999, the approximate number of record holders of Class A Common Stock holders was 852. The following table summarizes transactions in Class A Common Stock since July 22, 1998, the date the Class A Common Stock began trading on Nasdaq. Prior to that time, there was no established public trading market for the Class A Common Stock. The trading price information reflects the range of actual closing sales prices for the Class A Common Stock as reported by Nasdaq.
Quarter Ended High Low - - ------------------------- -------------- ------------ September 30, 1998 $16.44 $12.63 December 31, 1998 14.13 11.88
CLASS B COMMON STOCK. At February 8, 1999, the approximate number of record holders of Class B Common Stock was 392. There is no established public trading market for the Class B Common Stock. DIVIDENDS. Holders of Class A and Class B Common Stock are entitled to receive dividends when, as and if declared by Republic's board of directors out of funds legally available. Under Republic's Articles of Incorporation, if cash dividends are paid on Class B Common Stock, shares of Class A Common Stock are entitled to cash dividends equal to 110% of the cash dividend paid per share on the Class B Common Stock. During 1997 and 1998, Republic declared and paid the following quarterly cash dividends per share on its Common Stock: First Second Third Fourth Quarter Quarter Quarter Quarter 1998 Class A Common Stock $.0275 $.0275 $.0275 $.0275 Class B Common Stock $.0250 $.0250 $.0250 $.0250 1997 Class A Common Stock $.0275 $.0275 $.0275 $.0275 Class B Common Stock $.0250 $.0250 $.0250 $.0250 Republic currently intends to continue to pay regular quarterly cash dividends on the Class A and Class B Common Stock, subject to Republic's needs for funds. However, payment of dividends is also subject to the discretion of Republic's board of directors and regulatory requirements. In determining whether to continue such dividend payments and in establishing the amount of any dividends to be paid, the board of directors will consider Republic's earnings, capital requirements and financial condition, prospects for future earnings, federal economic and regulatory policies, general business conditions and other relevant factors, certain of which are beyond the control of Republic. The primary source of funds for dividends paid by Republic to its shareholders is the dividend income received from the Bank. Although management believes that the Bank will be able to generate sufficient earnings to pay dividends to Republic in amounts sufficient to continue Republic's current dividend policy with respect to the Class A and Class B Common Stock, there can be no assurance that the Bank will be able to generate such earnings or to pay such dividends in the future. The instruments under which the Trust Preferred securities of Republic's subsidiary, Republic Capital Trust, are outstanding prohibit the payment of dividends on the Class A and Class B Common Stock if the Company elects to defer payments of those securities, as permitted by those instruments. Unregistered sales of shares during the fourth quarter. On October 28, 1998, the Company issued 230,000 shares of Class B Common Stock. The shares were issued to the 2 shareholders of Refunds Now, Inc. in connection with the Company's acquisition of Refunds Now, Inc. The acquisition was accomplished by the merger of Refunds Now, Inc. with a subsidiary of the Company. In the merger, all of the outstanding shares of Refunds Now, Inc. were converted into shares of Class B Common Stock; by virtue of the merger, Refunds Now, Inc. became a wholly owned subsidiary of the Company. The Company relied on the exemption from registration under Section 4(2) of the Securities Act of 1933. The Company believes each shareholder of Refunds Now, Inc. had such knowledge and experience in financial and business matters that he was capable of evaluating the merits and risks of the investment in shares of the Company; each was afforded access to material information about the Company, represented that he was acquiring the shares for investment and acknowledged the restrictions on transferability of the shares; and the certificates representing the shares issued were legended to provide notice of the restrictions on transferability under applicable securities laws. The shares of Class B Common Stock are convertible into shares of Class A Common Stock on a one share-for-one share basis. During the fourth quarter, the Company also issued 259,000 shares of Class A Common Stock upon conversion of shares of Class B Common Stock by existing shareholders of the Company in accordance with the share-for-share conversion terms of the Class B Common Stock. The exemption from registration relied upon was Section 3(a)(9) of the Securities Act of 1933. In December 1998, the Company issued 22,500 shares of Class A Common Stock and 4,500 shares of Class B Common Stock to Steven Trager upon the exercise of stock options which had been granted to him as an executive officer of the Company under a compensatory stock option plan. The exemption from registration relied on by the Registrant was Section 4(2) of the Securities Act of 1933. Steven Trager is the President, Chief Executive Officer and a director of the Company and had access to material information concerning the Company. ITEM 6. SELECTED FINANCIAL DATA The information captioned "Selected Consolidated Financial Data" included on page 16 of the Company's annual report to shareholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operations included on pages 17 through 32 of the Company's annual report to shareholders for the year ended December 31, 1998, is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information included under the caption "Asset/Liability Management and Market Risk" included on pages 30 through 31 of the Company's annual report to shareholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item, Report of Independent Public Accountants and Consolidated Financial Statements and related notes, appears on pages 33 through 57 of the Company's annual report to shareholders for the year ended December 31, 1998 and is incorporated herein by reference. The Selected Quarterly Financial Data appears in Note 24 on page 57 of the Company's annual report to shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item appears under the heading "PROPOSAL ONE ELECTION OF DIRECTORS" on pages 6 through 9 of the Proxy Statement, dated March 12, 1998, of Republic Bancorp, Inc. for the 1999 Annual Meeting of Shareholders to be held April 21, 1999 ("Proxy Statement"), and under the heading "SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 17 of the Proxy Statement, all of which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information under the sub-heading "Directors Compensation" on page 9 of the Proxy Statement and under the heading "CERTAIN INFORMATION AS TO MANAGEMENT" on pages 9 to 13 of the Proxy Statement is incorporated herein by reference. In addition, the information under the heading "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" on pages 15 and 16 of the Proxy Statement is incorporated herein by reference, provided that information in the Proxy Statement under the heading "COMPENSATION COMMITTEE REPORT" is not incorporated in this Report and shall not be deemed to be a part of this Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by this item is contained on pages 2 to 6 under the heading "SHARE OWNERSHIP" of the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. LEASING ARRANGEMENTS. Within the Louisville, Kentucky, metropolitan area, the Bank leases space in three buildings, as well as land owned by Bernard Trager, Chairman of Republic, and Jean Trager, his wife, and partnerships in which they own controlling interests, including Jaytee Properties Limited Partnership ("Jaytee"), a shareholder of Republic. Relatives of Bernard Trager, including Steven Trager and Scott Trager, directors and executive officers of Republic, are also partners in Jaytee. See notes to the table under "SHARE OWNERSHIP" appearing on pages 3 to 6 of the Proxy Statement. The buildings include Republic Corporate Center, which serves as both the Bank's main office and administrative headquarters in Louisville, Kentucky, and is owned and leased by TEECO Properties, which is owned by Bernard Trager, as well as the Hurstbourne Parkway and Bardstown Road banking centers, which are owned and leased by Jaytee. The leased land is located on U.S. Highway 22 where Republic currently has a temporary banking center and is owned and leased by Jaytee. Altogether, these affiliate leases approximate 69,000 square feet and the Bank pays approximately $104,000 per month, including $5,000 related to the land lease, with lease terms expiring through June 30, 2008. Each of the above transactions were obtained on terms comparable to those which could have been obtained from an unaffiliated party. RELATIONSHIPS WITH DIRECTORS. The law firm of Wyatt, Tarrant & Combs provides legal services to Republic. A. Wallace Grafton, Jr., a director of the Bank and Republic, was a partner in Wyatt, Tarrant & Combs, until his retirement in September, 1998. Fees paid by Republic to Wyatt, Tarrant & Combs totaled $207,000 in 1998. OTHER TRANSACTIONS. Steven Trager, a director and executive officer, and Shelley Trager Lerner, the daughter of Bernard Trager, and Jean Trager, Bernard Trager's wife, are directors of Bankers Insurance Agency, Inc., a title insurance agency which provides title insurance coverage to clients of Republic. These services resulted in commissions to Bankers Insurance Agency of approximately $1,000,000 in 1998. The majority owner of Bankers Insurance Agency is Shelley Trager Lerner. Minority shareholders in Bankers Insurance Agency include Steven Trager, Jean Trager, and the grandchildren of Bernard Trager: Michael Kusman, Andrew Kusman, Brett Kusman, Kevin Trager and Emily Trager. Steven Trager and Shelley Trager Lerner are children of Bernard Trager. Prior to July, 1998, the Kentucky banking statutes prohibited a majority shareholder of a state bank (including a bank holding company and, by extension, the subsidiary bank itself) from acting as agent for title insurance. These statutory limitations were removed effective July 15, 1998. After the removal of the statutory limitations, Republic's Board of Directors reexamined the appropriateness of the Bank acting as a title insurance agent. The Board concluded that the Bank should not enter the title insurance business at this time, but should continue to evaluate the feasibility of entering this business in the future. In connection with the formation of an employee stock ownership plan to promote stock ownership by employees, the Company loaned the ESOP $3,873,000. The ESOP used these funds to purchase 300,000 shares of Class A Common Stock. The ESOP purchased 200,000 shares from the Company's Chairman and largest shareholder, Bernard Trager, for $2,582,000, and 100,000 shares from Bankers Insurance Agency, Inc., in which members of Bernard Trager's family, including Steven Trager, are directors and shareholders (see above discussion), for $1,291,000. The price of these shares was determined by a committee of the ESOP based on the 30 day average trading price of the Company's shares. INDEBTEDNESS OF MANAGEMENT. Federal banking laws require that all loans or extensions of credit by the Bank to its executive officers and directors be made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to Bank directors must be approved in advance by a majority of the disinterested members of the Board of Directors. The Bank has made loans to executive officers, holders of ten percent (10%) or more of the shares of any class of its common stock and affiliates and directors in the ordinary course of business, on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, which loans do not involve more than the normal risk of collectibility or present other unfavorable features. As of December 31, 1998, directors and executive officers of Republic had loans outstanding of $3.5 million. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements. The following consolidated financial statements of the registrant and report of independent public accountants are included in the Annual Report to Shareholders for the fiscal year ended December 31, 1998, on the pages indicated and are incorporated herein by reference. Description Page - - ------------------------------------------------------------- ---------------- Report of Independent Auditors 33 Consolidated balance sheets - December 31, 1998 and 1997 34 Consolidated statements of income and comprehensive income - years ended December 31 1998, 1997, and 1996 35 Consolidated statements of changes in stockholders' equity - years ended December 31, 1998, 1997 and 1996 36-37 Consolidated statements of cash flows - years ended December 31, 1998, 1997 and 1996 38 Notes to consolidated financial statements 39-57 (a)(2) Financial Statements Schedules: Schedules are omitted because the information is not applicable. (a)(3) Exhibits: The Exhibit Index on page 21 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 14(c) are noted by asterisk in the Exhibit Index. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of 1998. 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 31, 1999 By: /s/ Steven E. Trager ------------------------------ Steven E. Trager President & Chief Executive Officer 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 Chairman of the Board March 31, 1999 - - -------------------------------- & Director Bernard M. Trager /s/ Steven E. Trager President, Chief Executive March 31, 1999 - - -------------------------------- Officer & Director Steven E. Trager /s/ Scott Trager Vice Chairman & Director March 31, 1999 - - -------------------------------- Scott Trager /s/ Bill Petter Vice Chairman, Chief March 31, 1999 - - ----------------------------- Operating Officer & Director Bill Petter /s/ Mark A. Vogt Chief Financial Officer March 31, 1999 - - ------------------------------ Chief Accounting Officer Mark A. Vogt /s/ R. Wayne Stratton Director March 31, 1999 - - ---------------------------- R. Wayne Stratton /s/ Larry M. Hayes Director March 31, 1999 - - ------------------------------ Larry M. Hayes /s/ A. Wallace Grafton, Jr. Director March 31, 1999 - - --------------------------- A. Wallace Grafton, Jr. /s/ Samuel G. Swope Director March 31, 1999 - - --------------------------- Samuel G. Swope /s/ D. Harry Jones Director March 31, 1999 - - ------------------------------ D. Harry Jones INDEX TO EXHIBITS No. Description 2.1 Agreement to Purchase Assets and Assume Liabilities dated April 1, 1997 by and between United Commonwealth Bank, FSB and Republic Bank & Trust Company (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Registrant as of November 7, 1997 (Commission File Number: 33-77324)) 2.2 Purchase and Assumption Agreement dated July 18, 1997 between The Paducah Bank & Trust Company and Republic Bank & Trust Company (Incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K of Registrant as of November 7, 1997 (Commission File Number: 33-77324)) 2.3 Purchase and Assumption Agreement dated July 21, 1997 between Peoples First National Bank & Trust Company and Republic Bank & Trust Company (Incorporated by reference to Exhibit 2.3 to the Current Report on Form 8-K of Registrant as of November 7, 1997 (Commission File Number: 33-77324)) 2.4 Purchase and Assumption Agreement dated September 12, 1997 between First Federal Savings Bank of Leitchfield and Republic Bank & Trust Company (Incorporated by reference to Exhibit 2.4 to the Current Report on Form 8-K of Registrant as of November 7, 1997 (Commission File Number: 33-77324)) 3(i) 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)) 3(ii) 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)) 4.1 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) 4.2 Agreement Pursuant to Item 601 (b)(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)) 10.1* 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)) 10.2* Stock Option Plan Agreement with Steven E. Trager, dated January 12, 1996 (Incorporated by reference to Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324)) 10.3* Officer Compensation Continuation Agreement with L. Lee Kinsolving, Jr., dated January 12, 1995 (Incorporated by reference to Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324)) 10.4* Stock Option Plan Agreement with L. Lee Kinsolving, Jr. dated January 12, 1996 (Incorporated by reference to Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324)) 10.5* 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)) 10.6* Stock Option Plan Agreement with A. Scott Trager dated January 12, 1996 (Incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324)) 10.7* Officer Compensation Continuation Agreement with E. William Petter, Jr., dated January 12, 1995 (Incorporated by reference to Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324)) 10.8* Stock Option Plan Agreement with E. William Petter, Jr., dated January 12, 1996 (Incorporated by reference to Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324)) 10.9* 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)) 10.10 Lease between Republic Bank & Trust Company and TEECO Properties dated October 1, 1996, relating to 601 West Market Street, Louisville (Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 of Registrant (Registration No. 333-56583)) 10.11 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: 33-77324)) 10.12 Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 3, 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: 33-77324)) 10.13 Lease between Republic Bank & Trust Company and Jaytee Properties, dated November 17, 1997, relating to 9600 Brownsboro Road, Louisville (Incorporated by reference to Exhibit 10.13 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File Number: 33-77324)) 10.14* Officer Compensation Continuation Agreement with Mark A. Vogt, dated October 16, 1997 (Incorporated by reference to Exhibit10.14 to the Registration Statement on Form S-1 of Registrant (Registration No. 333-56583)) 10.15* Stock Option Plan Agreement with Mark Vogt, dated April 15, 1996 (Incorporated by reference to Exhibit10.15 to the Registration Statement on Form S-1 of Registrant (Registration No. 333-56583)) 10.16* Summary of Directors Stock Options (Incorporated by reference to Exhibit 10.16 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (Commission File Number: 000-24649)) 11 Statement regarding Computation of Per Share Earnings 13 Excerpts from the 1998 Annual Report to Shareholders incorporated by reference 21 Subsidiaries of the Registrant 27 Financial Data Schedule * Denotes management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K pursuant to Item 14(c). EX-11 2 EX-11 Exhibit 11. Statement Regarding Computation of Per Share Earnings See Item 8 Note 12 "Earnings Per Share" for calculations. EX-13 3 EX-13 Exhibit 13 Excerpts from the 1998 Annual Report to Shareholders SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth Republic's selected historical financial information from 1994 through 1998. This information should be read in conjunction with the Consolidated Financial Statements and the related Notes. Factors affecting the comparability of certain indicated periods are discussed in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
dollars in thousands, Years Ended December 31, except per share data) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Income Statement Data: Interest income......... $92,667 $91,194 $81,986 $71,133 $47,375 Interest expense........ 50,174 50,856 43,855 37,720 22,513 Net interest income..... 42,493 40,338 38,131 33,413 24,862 Provision for loan losses 3,110 7,251 9,149 4,268 537 Non-interest income..... 11,396 7,743 7,097 7,520 6,997 Gain on sale of deposits 4,116 7,527 Gain on sale of Bankcard 3,660 Non-interest expense.... 33,533 32,880 31,409 24,505 22,216 Income before taxes..... 21,362 19,137 4,670 12,160 9,106 Net income.............. 13,756 12,259 2,727 7,788 6,170 Balance Sheet Data: Total assets............ $1,207,684 $1,054,950 $1,140,882 $891,347 $736,009 Total securities........ 216,921 192,372 281,855 114,654 100,705 Total loans, net........ 870,031 794,939 759,424 668,193 571,950 Allowance for loan losses 7,862 8,176 6,241 3,695 1,827 Total deposits.......... 747,147 731,598 783,141 734,443 590,036 Repurchase agreements and other short-term borrowings............ 148,659 111,137 181,634 21,729 12,732 Other borrowed funds.... 190,222 124,405 106,974 68,063 77,060 Total stockholders' equity 103,842 68,386 59,019 58,502 47,045 Per Share Data:(1) Basic Class A common earnings per share.... $0.87 $0.82 $0.16 $N/A $N/A Basic Class B common earnings per share.... 0.86 0.81 0.15 N/A N/A Net income per common... N/A N/A N/A 0.52 0.43 Book value.............. 6.03 4.58 3.74 3.71 3.28 Cash dividends per Class A common................ 0.11 0.11 0.11 N/A N/A Cash dividends per Class B common................ 0.10 0.10 0.10 N/A N/A Cash dividend per common N/A N/A N/A 0.0850 N/A Performance ratios: Return on average assets 1.20% 1.12% .29% .95% .93% Return on average common equity................ 15.82 18.81 4.57 14.46 13.71 Net interest margin..... 3.84 3.85 4.21 4.25 3.96 Efficiency ratio........ 62(2) 68(3) 64(4) 60 70 Asset quality ratios: Nonperforming assets to total loans........... 0.63% 0.90% 1.06% 0.41% 0.46% Net loan charge-offs to average loans......... 0.40 0.66 0.91 0.38 0.06 Allowance for loan losses to total loans........ 0.89 1.02 0.81 0.55 0.32 Allowance for loan losses to non-performing loans 158 115 78 168 97 Capital ratios: Leverage ratio.......... 9.29% 6.99% 5.76% 6.62% 6.40% Average stockholders' equity to average total assets................ 7.58 5.97 6.30 6.56 6.65 Tier 1 risk-based capital 14.63 10.57 9.14 10.29 10.19 ratio................. Total risk-based capital ratio................. 15.68 11.73 10.10 10.96 10.60 Dividend payout ratio... 13 13 68 16 N/A - - ----------- (1) In 1996 the Company's common stock was replaced by Class A Common Stock and Class B Common Stock. (2) Excludes pre-tax gain on sale of deposits of $4.1 million. (3) Excludes pre-tax gain on sale of deposits of $7.5 million and pre-tax gain on sale of Bankcard of $3.7 million. (4) Excludes one time Savings Association Insurance Fund ("SAIF") assessment of $2.3 million.
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 balance sheets and statements of income. Republic, a bank holding company headquartered in Louisville, Kentucky, is the parent of Republic Bank & Trust Company (the "Bank"). This section should be read in conjunction with the Company's Consolidated Financial Statements and accompanying Notes and other detailed information. This discussion includes various forward-looking statements with respect to credit quality (including delinquency trends and the allowance for loan losses), corporate objectives and other financial and business matters. When used in this discussion the words "anticipate," "project," "expect," "believe," and similar expressions are intended to identify forward-looking statements. Republic cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from forward-looking statements. In addition to factors disclosed by Republic elsewhere in this discussion, the following factors, among others, could cause actual results to differ materially from such forward-looking statements: pricing pressures on loan and deposit products; competition; changes in economic conditions both nationally and in the Bank's markets; the extent and timing of actions of the Federal Reserve Board; clients' acceptance of the Bank's products and services; Year 2000 issues experienced by Republic or by governmental or private entities; and the extent and timing of legislative and regulatory actions and reforms. HIGHLIGHTS Republic reported record earnings of $13.8 million in 1998, an increase from $12.3 million reported in 1997. On a per share basis, Class A Common Stock diluted earnings per share for 1998 were $0.83 up from $0.79 per share in 1997. The increase in earnings for 1998 reflects strong performance in many areas of the Company. The favorable interest rate environment resulted in record loan origination volume for Republic. Total loan originations at the banking centers and the mortgage banking operations increased to a record $770 million for 1998 compared to $563 million during 1997. The increased loan origination volume resulted in additional interest income from those loans retained in the Bank's portfolio, as well as increased fee income realized from the sale of loans into the secondary market. Gain on sale of securities was significant during 1998 as a result of active management of the investment portfolio and favorable market conditions. Earnings also improved as a result of a significant decrease in the provisions required for the loan loss allowance due to reduced loss experience in the unsecured consumer loan portfolio. The following table summarizes selected financial information regarding Republic's financial performance. Table 1 - Summary
For the Years Ended December 31, (dollars in thousands) 1998 1997 1996 ------------------------------------- Net income $ 13,756 $ 12,259 $ 2,727 Net income excluding asset dispositions 11,122 5,099 2,727 Diluted Class A earnings per share 0.83 0.79 0.16 Diluted Class B earnings per share 0.82 0.78 0.15 ROA 1.20% 1.12% 0.29% ROA excluding asset dispositions 0.97 0.47 0.29 ROE 15.82 18.81 4.57 ROE excluding asset dispositions 13.19 8.11 4.57
During 1998, Republic's total assets grew 14% to a record $1.2 billion. Republic's loan portfolio increased by $75 million or 9% since December 31, 1997. This growth was achieved despite the scheduled paydowns of the unsecured consumer loan portfolio and paydowns of loans by customers in the communities where the Western Kentucky banking centers were sold. Overall, Republic experienced healthy loan demand in its markets and had further development of the commercial and business banking initiatives. Loan growth was funded by retail deposits and additional advances from the Federal Home Loan Bank. Republic achieved an overall increase in total deposits, even though $66 million in deposits from the Mayfield banking center were sold during 1998. In July of 1998 Republic sold 2 million shares of its Class A Common Stock at an initial offering price of $13 per share and received approximately $23.6 million in proceeds. The stock offering proceeds are being utilized for continued banking center expansion, the broadening of existing business lines and other general corporate purposes. Republic's Class A Common Stock is traded on the NASDAQ National Market under the symbol "RBCAA". During 1998, Republic completed its program, initiated in 1997, of refocusing its resources on its North Central and Central Kentucky markets. Under this program, Republic sold its banking centers and their associated deposits in the Western Kentucky cities of Murray, Benton, Paducah, and Mayfield. The Murray, Benton and Paducah sales were closed in the second half of 1997. During the first quarter of 1998, Republic completed the sale of deposits and fixed assets at the Mayfield banking center, realizing a pre-tax gain of approximately $4.1 million. This sale was comprised of approximately $66 million in deposits and certain other fixed assets. Republic retained substantially all of its Mayfield banking center loan portfolio in that transaction. The Mayfield transaction represented the final Western Kentucky banking center sale. Management funded these transactions with additional advances from the Federal Home Loan Bank, deposits at its existing retail banking centers and liquidation of selected investment securities and overnight federal funds. Also during 1997, Republic sold its $17 million Bankcard portfolio, its merchant processing assets and its $6 million, 50% interest in a joint venture Bankcard arrangement. Collectively, these asset sales resulted in a pre-tax gain of $3.7 million. Under the terms of the joint venture Bankcard arrangement, Republic was subject to a recourse provision of $1.2 million. During 1998, Republic settled all of its obligations under the joint venture arrangement for approximately $272,000. Republic had previously expensed $18,000 under the arrangement prior to the final settlement. RESULTS OF OPERATIONS NET INTEREST INCOME The principal source of Republic's revenue is net interest income. Net interest income is the difference between interest income on interest-earning assets such as loans and securities and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities and market interest rates. The change in net interest income is typically measured by changes in net interest spread and net interest margin. Net interest spread is the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin is determined by dividing net interest income by average interest-earning assets. Average interest-earning assets increased 6% in 1998, compared to a 16% increase in 1997. The 1998 and 1997 growth resulted from increased loan volume supported by an increase in investment securities. During 1998, average interest-bearing liabilities grew $20 million to $965 million, an increase of 2% over 1997. The increase was primarily in money market accounts and other borrowings. In 1997, average interest-bearing liabilities grew 15% over 1996. The increase of $127 million during 1997 was primarily in certificates of deposit, other time deposits and overnight repurchase agreements. For 1998, net interest income was $42 million, up $2 million over the $40 million attained during 1997. Overall, the net interest rate spread decreased from 3.33% during 1997 to 3.18% in 1998. The Bank's net interest margin decreased slightly from 3.85% in 1997 to 3.84% in 1998. The decrease in the net interest spread and margin in 1998 occurred because the yield on interest earning assets decreased 33 basis points while the rate paid on liabilities only decreased 18 basis points. As a result of an overall decline in market interest rates during 1998, Republic's yield on interest earning assets and the rate paid on interest bearing liabilities both declined during the period. The average rate on earning assets decreased faster than the average rate paid on liabilities due, in part, to Republic's higher yielding unsecured consumer loans being replaced with lower yielding real estate secured loans. Net interest margin declined at a slower rate than net interest spread because during 1998 Republic was able to fund a greater portion of its interest earning assets through equity and non-interest bearing deposits. Net interest income increased 6% in 1997, following a 14% increase in 1996. The increase in 1997 was attributable to Republic's loan growth, particularly residential and home equity lending. The increase in 1996 was due to substantial growth in the unsecured consumer loan portfolio which also favorably impacted the Bank's net interest spread. Table 2 provides detailed information as to average balances, interest income/expense, and rates by major balance sheet category for 1996 through 1998. 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. Table 2 - Average Balance Sheets and Rates for December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- Average Average Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ASSETS Earning assets: U.S. Treasury and U.S. Government Agency Securities............... $168,862 $9,798 5.80% $209,599 $12,473 5.95% $147,376 $9,040 6.13% State and political subdivision securities...................... 4,195 368 8.77 4,447 381 8.57 4,557 390 8.56 Mortgage-backed securities........ 42,572 2,591 6.09 4,415 263 5.96 705 36 5.11 Other investments................. 15,365 1,061 6.91 6,952 497 7.15 5,303 414 7.79 Federal funds sold................ 16,472 930 5.65 12,452 691 5.55 23,847 1,275 5.35 Total loans and fees(1)(2)........ 858,420 77,919 9.08 809,700 76,889 9.50 724,669 70,831 9.77 Total earning assets.............. 1,105,886 92,667 8.38 1,047,565 91,194 8.71 906,457 81,986 9.04 Less: Allowance for loan losses... (8,150) (6,278) (6,196) Non-earning assets: Cash and due from banks........... 19,942 20,338 20,830 Bank premises and equipment, net.. 14,123 16,793 14,391 Other assets...................... 14,934 13,198 10,974 Total assets...................... $1,146,735 $1,091,616 $946,456 LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Transaction accounts.............. $102,231 $3,263 3.19 $124,062 $4,250 3.43 $149,383 $5,163 3.46 Money market accounts............. 105,668 4,977 4.71 47,036 2,329 4.95 35,557 1,622 4.56 Individual retirement accounts.... 22,549 1,316 5.84 35,641 2,090 5.86 34,956 2,156 6.17 Certificates of deposits and other time deposits................... 425,721 24,665 5.79 512,260 30,271 5.91 450,759 27,143 6.02 Repurchase agreements and other borrowings...................... 308,744 15,953 5.17 226,400 11,916 5.26 148,026 7,771 5.25 Total interest bearing liabilities 964,913 50,174 5.20 945,399 50,856 5.38 818,681 43,855 5.36 Non-interest bearing liabilities: Non-interest bearing deposits..... 79,636 68,184 57,041 Other liabilities................. 15,218 12,875 11,090 Stockholders' equity.............. 86,968 65,158 59,644 Total liabilities and stockholders' $1,146,735 $1,091,616 $946,456 equity.......................... Net interest income............... $42,493 $40,338 $38,131 Net interest spread............... 3.18% 3.33% 3.68% Net interest margin............... 3.84% 3.85% 4.21% - - ----------- (1) The amount of fee income included in interest on loans was $1,367,000, $837,000, and $520,000 for the years ended December 31, 1998, 1997, and 1996, respectively. (2) Calculations include non-accruing loans in the average loan amounts outstanding
The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected Republic's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Table 3 - Volume/Rate Variance Analysis
1998 compared to 1997 1997 compared to 1996 Total Net Total Net (dollars in thousands) Change Volume Rate Change Volume Rate Interest income: U.S. Treasury and Government Agency Securities..... $(2,675) $(2,424) $(251) $3,433 $3,817 $(384) State and political subdivision securities......... (13) (22) 9 (9) (10) 1 Mortgage backed securities......................... 2,328 2,273 55 227 189 38 Other investments.................................. 564 601 (37) 83 127 (44) Federal funds sold................................. 239 223 16 (584) (609) 25 Total loans and fees(1)(2)......................... 1,030 4,626 (3,596) 6,058 8,311 (2,253) Total increase (decrease) in interest income....... 1,473 5,277 (3,804) 9,208 11,825 (2,617) Interest expense: Interest bearing transaction accounts.............. (987) (748) (239) (913) (875) (38) Money market accounts.............................. 2,648 2,903 (255) 707 524 183 Individual retirement accounts..................... (774) (768) (6) (66) 42 (108) Certificates of deposit and other time deposits.... (5,606) (5,114) (492) 3,128 3,703 (575) Repurchase agreements and other borrowings......... 4,037 4,334 (297) 4,145 4,114 31 Total increase (decrease) in interest expense...... (682) 607 (1,289) 7,001 7,508 (507) Increase (decrease) in net interest income......... $2,155 $4,670 $(2,515) $2,207 $4,317 $(2,110) - - ----------- (1) Interest income for loans on non-accrual status has been excluded from interest income. (2) The amount of fee income included in interest on loans was $1,367,000, $837,000, and $520,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
NON-INTEREST INCOME Non-interest income was $15.5 million during 1998, $18.9 million during 1997, and $7.1 million during 1996. The decrease from 1997 to 1998 was primarily due to the gains from the sale of deposits and Bankcard during 1997 of $11.2 million. Excluding the sale of deposits and Bankcard during 1998 and 1997, non-interest income increased by $3.7 million. The increase during 1998 was principally a result of gains generated from sales of loans into the secondary market and sales of investment securities. The $11.8 million increase in non-interest income in 1997 from 1996 was due primarily to the sale of Western Kentucky deposits and Bankcard.
Table 4 - Analysis of Non-Interest Income Percent Increase (Decrease) Year Ended December 31,(dollars in thousands) 1998 1997 1996 1998/97 1997/96 ---- ---- ---- ------- ------- Service charges on deposit accounts................ $3,255 $3,284 $2,642 (1%) 24% Other service charges and fees..................... 821 661 445 24 49 Bankcard services.................................. 508 1,010 NM (50) Net gain on available for sale securities.......... 1,139 81 1,306 NM Net gain on sale of loans.......................... 4,326 1,852 1,212 134 53 Loan servicing income.............................. 598 734 829 (19) (12) Other.............................................. 1,257 623 959 102 (35) Subtotal........................................ 11,396 7,743 7,097 47 9 Net gain on sale of deposits....................... 4,116 7,527 45 NM Net gain on sale of Bankcard....................... 3,660 NM NM Total........................................... $15,512 $18,930 $7,097 (18%) 167%
Service charges on deposit accounts were constant at $3.3 million for 1998 and 1997, even with the sale of five banking centers in Western Kentucky. Republic continues to open additional transaction accounts at its existing banking centers which has minimized the impact of the banking center sales on deposit fee income. Other service charges and fees increased from $661,000 to $821,000 for 1998 due to increased volume associated with Republic's participation in a rapid tax refund joint venture with Refunds Now, Inc. Revenues generated from this joint venture are primarily realized during the first quarter of the year, the tax-filing season. During the fourth quarter of 1998, Refunds Now, Inc. was merged into Republic. Republic issued 230,000 shares of Class B Common Stock for the stock of Refunds Now, Inc. in a business combination accounted for as a pooling of interest. During the first quarter of 1999, Republic expects to realize additional fee income resulting from its ownership of Refunds Now, Inc. Revenue from mortgage banking activities during 1996 through 1998 has been positively influenced by increases in originations, sales volume, and the sale of most loans with servicing released. Proceeds from sales of loans were $272 million, $124 million, and $104 million in 1998, 1997, and 1996, respectively. Secondary market residential loan originations are heavily influenced by the favorable interest rate environment, which is the primary factor for increased volume. Net gains from sales of loans closely track loan origination volume. Net gains as a percentage of loans sold were 1.59%, 1.49%, and 1.16% in 1998, 1997, and 1996, respectively. Management changed from selling loans with servicing retained to servicing released in 1995 in order to offset downward market pressure on loan pricing. The sale of a significant number of loans with servicing released, coupled with normal loan paydowns and payoffs, has resulted in a continued decline in the size of the loan servicing portfolio and a corresponding decline in loan servicing income. As of December 31, 1998, Republic was servicing $220 million in mortgage loans for other investors, compared to $263 million at December 31, 1997. Management cannot determine how long the strong loan originations and sales may continue. Relatively low interest rates are a key factor in consumer decisions to acquire new homes and to refinance existing home loans. However, as rates continue to remain low, the number of consumers who stand to benefit financially from refinancing decisions declines. Further, certain lenders, including secondary market investors, now offer current borrowers the option to reduce their rate for a one-time fee, bypassing the underwriting process, thus preempting an opportunity for Republic to provide refinancing. NON-INTEREST EXPENSE As shown in Table 5, total non-interest expense increased by 2% to $33.5 million in 1998, compared to $32.9 million in 1997, and $31.4 million in 1996. Republic received the benefit from reduced non-interest expenses during 1998 following the Western Kentucky banking center sales. However, the costs associated with Republic's addition of seven new banking centers since 1996 and continued technology enhancements during 1997 resulted in an overall increase in non-interest expense during 1997 and 1998. Non-interest expense levels are often measured using an efficiency ratio (non-interest expense divided by the sum of net interest income and non-interest income). Excluding its one-time gains from the sale of deposits and related fixed assets and Bankcard, Republic's efficiency ratio was 62% in 1998 compared to 68% in 1997 and 69% in 1996 (64% exclusive of a one-time SAIF deposit insurance assessment).
Table 5 - Analysis of Non-Interest Expense Percent Increase/(Decrease) Year Ended December 31,(dollars in thousands) 1998 1997 1996 1998/97 1997/96 ---- ---- ---- ------- ------- Salaries and employee benefits............. $16,968 $15,444 $13,236 10% 17% Occupancy and equipment.................... 7,423 8,562 6,623 (13) 29 Communication and transportation........... 1,703 1,796 1,548 (5) 16 Marketing and development.................. 1,372 1,299 1,620 6 (20) FDIC deposit insurance..................... 307 107 3,277 187 (97) Supplies................................... 1,066 1,013 973 5 4 Other...................................... 4,694 4,659 4,132 1 13 Total...................................... $33,533 $32,880 $31,409 2% 5%
Salary and employee benefits expense increased approximately 10% and 17% in 1998 and 1997, respectively. This rise in 1998 was primarily due to increased staffing and commissions paid for Republic's mortgage banking activities as a result of higher loan volumes. Also in 1998 Republic had increases in the number of higher salaried technical and lending staff additions and annual merit salary increases. Occupancy and equipment expenses declined 13% in 1998 following a 29% increase during 1997. The 1998 decrease was primarily due to reduced depreciation and maintaince expenses resulting from the sale of Western Kentucky banking centers. The $1.9 million increase in 1997 reflects a full year of operating expenses associated with the opening of five new banking centers in 1996 in Louisville (3), Frankfort and Paducah. FDIC deposit insurance expense decreased $3.2 million from 1996 to 1997. This decrease is principally a result of the federally mandated one-time assessment of $2.3 million on the Bank's deposits insured in the FDIC's Savings Association Insurance Fund (SAIF) during 1996. The 1996 federal legislation which mandated the one-time assessment provided for a future ongoing reduction in the FDIC's insurance rate premiums on SAIF insured deposits. Republic benefited from this one time charge as it resulted in a reduction of the FDIC's overall insurance rate premium charges during 1997 and 1998. FINANCIAL CONDITION LOAN PORTFOLIO Republic experienced record loan growth throughout its markets in 1998. Total loans increased 9% to $879 million at December 31, 1998 compared to $805 million at December 31, 1997. The increase in lending was primarily in residential and commercial loans. The residential real estate lending portfolio increased $40 million to $521 million at December 31, 1998. The rise in residential real estate loan volume was a result of a continued favorable rate environment. During 1998, Republic introduced two new adjustable rate mortgage products with initial 5 and 10 year fixed rate terms. At December 31, 1998 Republic had $58 million outstanding in these products. These portfolio products were specifically designed to compete effectively with secondary market products. Management determined that the interest rate risk associated with fixed rate features of these adjustable-rate assets was acceptable, particularly since Republic has historically been asset-sensitive. Republic's commercial real estate loan portfolio increased by 55% to $118 million at December 31, 1998. Republic's commercial banking initatives are directed by seasoned senior loan executives and are targeted principally toward the Bank's existing customer base. As a result of increased client demand, Republic allocated additional resources to the commercial lending function. Commercial real estate lending remains primarily concentrated within the Bank's existing markets, which are principally comprised of multifamily investment properties and small business owner-occupied office and warehouse facilities. In conjunction with its commercial real estate lending, emphasis has also been placed on acquiring the associated deposit relationships from these clients. Republic's consumer loans decreased from $86 million at December 31, 1997 to $60 million at December 31, 1998. The consumer loan portfolio consists of both secured and unsecured loans. Republic's consumer portfolio includes the "All Purpose" and "Pre Approved" unsecured loan products. Republic's "All Purpose" loans, with total outstandings of $8 million at December 31, 1998 and $13 million at December 31 1997, are originated through Republic's banking centers. "Pre Approved" loans decreased from $25 million at December 31, 1997 to $12 million at December 31, 1998. These loans were originated through direct mail. Management plans to continue to allow the "All Purpose" and "Pre Approved" portfolios to reduce. Republic's home equity portfolio increased slightly from $103 million at December 31, 1997 to $107 million at December 31, 1998. Following strong origination in this product during 1997, credit utilization by existing customers has moderated. Loan originations have grown with total lines available of $202 million at December 31, 1998 compared to $184 million at December 31, 1997. Republic expects overall loan originations to continue at strong levels in the near term based on current interest rates. The rate of loan growth on the balance sheet may, however, slightly lag behind the rate of originations. Republic's loan portfolio is comprised primarily of adjustable rate single family loans which are subject to refinancing pressures in a declining interest rate environment. Also, Republic anticipates that the loan portfolio retained from the Western Kentucky deposit sales will continue to be subjected to a higher level of prepayments than its overall loan portfolio in general. During 1998, loans associated with Republic's Western Kentucky banking centers decreased from $142 million at December 31, 1997 to $87 million at December 31, 1998. Republic will continue to provide service to these clients through its centralized loan operations, but a number of these clients will elect to refinance with other local institutions. Republic is not able to predict the rate at which the Western Kentucky loan portfolio will pre-pay.
Table 6 - Loans by Type As of December 31, (dollars in thousands) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Real estate: Residential............................ $520,583 $480,874 $457,204 $371,846 $346,649 Construction........................... 47,396 37,940 32,130 31,230 21,919 Commercial............................. 118,293 76,306 59,086 75,648 76,725 Commercial............................... 26,381 21,552 25,115 21,042 18,542 Consumer................................. 59,874 86,061 124,974 127,735 72,684 Home Equity.............................. 106,845 102,512 69,572 48,244 42,309 Total Loans.............................. $879,372 $805,245 $768,081 $675,745 $578,828
The mortgage banking operation provides for the origination and the sale of first mortgage residential loans into the secondary market. This operation primarily sells fixed rate originations in the secondary market without recourse. During 1998, Republic sold $272 million of residential mortgage loans into the secondary market compared to $124 million in 1997. At the end of 1998, Republic was servicing $220 million in mortgage loans for other investors compared to $263 million in 1997 and $297 million in 1996. The decline in the mortgage banking servicing portfolio from 1996 to 1998 resulted from management's election to sell a majority of its originations on a servicing released basis combined with regular loan principal paydowns. Table 7 illustrates Republic's fixed rate maturities and repricing frequency for the loan portfolio:
Table 7 - Selected Loan Distribution One Over One Over Year Through Five Five As of December 31, 1998(dollars in thousands) Total or Less Years Years Fixed rate maturities............................. $181,396 $55,986 $66,594 $58,816 Variable rate repricing frequency................. 697,976 405,763 226,549 65,664 Total............................................. $879,372 $461,749 $293,143 $124,480
Allowance and Provision for Loan Losses The provision for loan losses was $3.1 million for the year ended December 31, 1998, compared to $7.3 million for 1997 and $9.1 million for 1996. Net charge-offs were $3.4 million during 1998 compared to $5.3 million and $6.6 million for 1997 and 1996, respectively. Republic's unsecured consumer loan portfolio accounted for 57% of total net charge-offs for the year ended December 31, 1998. The net charge-offs in the unsecured loan portfolio were primarily comprised of $654,000 in the "All Purpose" program compared to $1.8 million during 1997 and $1.3 million in the "Pre-Approved" program compared to $2.3 million during 1997 (see description of programs under "Loan Portfolio). These unsecured consumer loan portfolio's outstandings, consisting primarily of fully amortizing loans with initial terms of 5 years, are expected to continue to reduce. The allowance for loan losses decreased slightly from $8.2 million at December 31, 1997 to $7.9 million at December 31, 1998. Republic's allowance to total loan ratio was .89% at December 31, 1998 compared to 1.02% at December 31, 1997. This change in the allowance reflects a reduction in overall portfolio risk due to the decreased outstandings in the Bank's unsecured consumer loan portfolio and Republic's sale of its Bankcard portfolio during 1997. Both of these portfolios had higher than expected loan losses in 1996 and 1997. In addition to the decrease in the level of the unsecured consumer loan portfolio, management believes that the average quality of the remaining balance of the portfolio has steadily improved. While the overall loan portfolio balance has increased, higher risk unsecured consumer loans have been principally replaced by lower risk, secured residential real estate loans. There has also been an increase in commercial real estate lending, which is generally considered to carry greater risk of loss than residential real estate. Management is monitoring this portfolio closely, and believes it has provided an adequate component within the allowance for this expanded activity. The allowance for loan losses is regularly evaluated by management and maintained at a level believed to be adequate to absorb loan losses in the Bank's lending portfolios. Periodic provisions to the allowance are made as needed. The amount of the provision for loan losses necessary to maintain an adequate allowance is based upon an assessment of current economic conditions, analysis of periodic internal loan reviews, delinquency trends and ratios, changes in the mixture and levels of the various categories of loans, historical charge-offs, recoveries, and other information. Management believes, based on information presently available, that it has adequately provided for loan losses at December 31, 1998. Although management believes it uses the best information available to make allowance provisions, future adjustments which could be material may be necessary if management's assumptions differ significantly from the loan portfolio's actual performance. Table 8 - Summary of Loan Loss Experience
Year Ended December 31,(dollars in thousands) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Allowance for loan losses at beginning of year................... $8,176 $6,241 $3,695 $1,827 $1,627 Charge-offs: Real estate.................................................... (1,017) (358) (242) (313) (83) Commercial..................................................... (79) (43) (22) (107) (14) Consumer....................................................... (2,828) (5,458) (6,865) (2,069) (362) Total.......................................................... (3,924) (5,859) (7,129) (2,489) (459) Recoveries: Real estate................................................... 7 23 290 22 Commercial.................................................... 4 25 29 Consumer...................................................... 489 520 236 42 93 Total......................................................... 500 543 526 89 122 Net loan charge-offs............................................ (3,424) (5,316) (6,603) (2,400) (337) Provision for loan losses....................................... 3,110 7,251 9,149 4,268 537 Allowance for loan losses at end of year........................ $7,862 $8,176 $6,241 $3,695 $1,827 Ratios: Allowance for loan losses to total loans...................... .89% 1.02% .81% .55% .32% Net loan charge-offs to average loans outstanding for the .40 .66 .91 .38 .06 period................................................... Allowance for loan losses to non-performing loans............. 158 115 78 168 97
The following table is management's allocation of the allowance for loan losses by loan type. Allowance funding and allocation is based on management's assessment of economic conditions, past loss experience, loan volume, past due history and other factors. Since these factors are subject to change, the allocation is not necessarily predictive of future portfolio performance. Table 9 - Management's Allocation of the Allowance for Loan Losses
1998 1997 1996 ---- ---- ---- Percent Percent Percent of Loans of Loans of Loans to Total to Total to Total Allowance Loans Allowance Loans Allowance Loans As of December 31,(dollars in thousands) Real estate....................... $5,729 78% $3,590 74% $1,771 71% Commercial........................ 265 3 46 3 46 3 Consumer.......................... 1,868 19 4,540 23 4,424 25 Total............................. $7,862 100% $8,176 100% $6,241 100%
Asset Quality Loans (including impaired loans under SFAS 114 and 118 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. When loans are placed on non-accrual status, all unpaid accrued interest is reversed. These 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 are not placed on non-accrual status, but are reviewed and charged off when they reach 120 days past due. At December 31, 1998, Republic had $256,000 in consumer loans 90 days or more past due compared to $497,000 at December 31, 1997. Table 10 provides information related to non-performing assets and loans 90 days or more past due. Total non-performing loans decreased from $7.1 million at December 31, 1997, to $5.0 million at December 31, 1998. These loans are primarily secured 1-4 family residential loans. Should the underlying collateral be determined to be insufficient to satisfy the obligation, the loan is classified and the Bank's allowance is increased accordingly. Historically, Republic's security in residential loans has been generally adequate and has acted to limit the Bank's exposure to loss. Table 10 - Non-Performing Assets
As of December 31, (dollars in thousands) 1998 1997 1996 1995 1994 Loans on non-accrual status(1)(2)..................... $3,258 $2,676 $3,055 $742 $1,285 Loans past due 90 days or more........................ 1,731 4,459 4,955 1,463 606 Total non-performing loans............................ 4,989 7,135 8,010 2,205 1,891 Other real estate owned............................... 540 22 104 552 791 Total non-performing assets........................... $5,529 $7,157 $8,114 $2,757 $2,682 Percentage of non-performing loans to total loans..... .57% .90% 1.04% .33% .33% Percentage of non-performing assets to total loans.... .63% .90% 1.06% .41% .46% - - ----------- (1) Loans on non-accrual status include impaired loans. See note 4 to the Consolidated Financial Statements for additional discussion on impaired loans. (2) The interest income that would have been earned and received on non-accrual loans was not material.
Republic defines impaired loans to be those commercial real estate and other commercial loans greater than $499,999 that management has classified as doubtful (collection of all amounts due is highly questionable or improbable) or loss (all or a portion of the loan has been written off or a specific allowance for loss has been provided). 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 decreased from $1.6 million at December 31, 1997 to $1.1 million at December 31, 1998. Investment Securities Table 11 - Securities Portfolio
As of December 31(in thousands) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Securities Available for Sale: U.S. Treasury and government agencies........ $123,976 $44,559 $107,937 Agency mortgage-backed securities............ 47,806 49,267 Corporate bonds.............................. 15,154 Total Securities Available for Sale.... $186,936 $93,826 $107,937 Securities Held to Maturity: U.S. Treasury and government agencies........ $25,422 $93,693 $168,797 $109,282 $96,014 States and political subdivisions............ 4,077 4,270 4,458 4,629 4,691 Agency mortgage-backed securities............ 486 583 663 743 Total Securities Held to Maturity...... $29,985 $98,546 $173,918 $114,654 $100,705 Total............................... $216,921 $192,372 $281,855 $114,654 $100,705
The investment portfolio primarily consists of U.S. Treasury and U.S. Government Agency Obligations, corporate bonds and mortgage-backed securities. The mortgage-backed securities (MBS's) consist of 15 year fixed and 7.5 year balloon mortgage securities, underwritten and guaranteed by FNMA, a government-sponsored agency. Republic sold $143 million in securities during 1998 compared to $83 million in 1997. The change resulted from continued efforts to actively manage the investment portfolio. Securities available for sale increased from $94 million at December 31, 1997 to $187 million at December 31, 1998. Republic elected to invest funds from maturing securities previously held to maturity into securities available for sale in order to provide for more flexibility in administering the investment portfolio in changing market conditions. Securities available for sale have a weighted average maturity of 5.2 years. Table 12 - Investment Securities Available For Sale
Average Weighted Amortized Maturity Average As of December 31, 1998(dollars in thousands) Cost Fair Value in Years Yield U.S. Treasury and U.S. Government Agencies: Within one year $52,171 $52,416 0.68 5.58% Over one through five years.......................... 71,349 71,560 2.54 5.49% Total U.S. Treasury and Government Agencies 123,520 123,976 1.75 5.53% Corporate Bonds Over one through five years.......................... 10,104 10,041 4.18 5.81% Over five through ten years.......................... 5,222 5,113 5.54 5.19% Total corporate bonds................................ 15,326 15,154 4.64 5.61% Mortgage-backed securities............................. 47,771 47,806 5.97% Total available for sale investment securities......... $186,617 $186,936 5.18 5.65%
Securities to be held to maturity decreased from $99 million at December 31, 1997 to $30 million at December 31, 1998. The decrease was due to management's decision to reinvest maturing securities into securities available for sale. Securities to be held to maturity have a weighted average maturity of 2.6 years. Table 13 -Investment Securities Held to Maturity
Average Weighted Amortized Maturity Average As of December 31, 1998(dollars in thousands) Cost Fair Value in Years Yield U.S. Treasury and U.S. Government Agencies: Within one year...................................... $18,120 $18,152 0.15 6.33% Over one through five years.......................... 7,302 7,191 1.70 4.86% Total U.S. Treasury and Government Agencies.......... 25,422 25,343 0.59 5.91% Obligations of states and political subdivision: Within one year 85 85 0.00 7.76% Over one through five years.......................... 658 684 2.50 8.87% Over five through ten years.......................... 700 821 6.84 11.44% Over ten years....................................... 2,634 2,646 17.09 10.01% Total obligations of state and political subdivisions 4,077 4,236 12.63 10.03% Mortgage-Backed Securities............................. 486 460 7.75% Total held to maturity investment securities........... $29,985 $30,039 2.59 6.50%
Deposits Total deposits were $747 million at December 31, 1998 compared to $732 million at December 31, 1997. The slight increase in deposits was achieved even though $66 million in deposits at the Mayfield banking center were sold during the first quarter of 1998. Excluding the sale of deposits at the Mayfield banking center, total deposits would have reflected an increase of $81 million, or 11%. Republic was also successful in changing its deposit mix by increasing its low cost deposits (Checking, NOW and Money Market). Republic's growth in deposits was the result of management's emphasis on retail deposit gathering and its commercial cash management program. Republic's commercial cash management program has added approximately 890 accounts representing $27 million in demand and non-interest-bearing deposits from 1997 to 1998. Republic plans to continue its deposit gathering initiatives by utilizing aggressive pricing strategies and offering competitive products in its existing markets. Table 14 - Deposits
As of December 31(in thousands) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Demand (NOW, SuperNOW and Money Market)........... $179,804 $118,870 $116,180 $103,744 $84,957 Savings........................................... 12,330 12,165 14,840 15,395 15,905 Money market certificates of deposit.............. 35,139 41,307 63,423 58,599 85,388 Individual retirement accounts.................... 23,353 30,167 35,845 34,275 22,636 Certificates of deposit, $100,000 and over........ 77,365 63,045 60,890 55,708 43,321 Other certificates of deposit..................... 309,938 352,478 374,864 355,344 279,019 Brokered deposits................................. 28,873 47,653 50,130 48,074 0 Total interest bearing deposits................... 666,802 665,685 716,172 671,139 531,226 Total non-interest bearing deposits............... 80,345 65,913 66,969 63,304 58,795 Total............................................. $747,147 $731,598 $783,141 $734,443 $590,021
Republic's $48 million in brokered deposits at the end of 1997 decreased $19 million during 1998 due to maturities. Republic did not solicit or add any additional brokered deposits during 1998. The brokered deposits have stated rates ranging from 5.35% to 6.15% and original contractual maturities ranging from 3 to 5 years. The entire balance of brokered deposits matures in the next two years, $12.5 million in 1999 and $16.4 million in 2000. Securities Sold Under Agreements to Repurchase and Other Short-Term Borrowings Short-term borrowings consist of short term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit clients arising from Republic's cash management program. During 1998, short-term borrowings increased from $111 million at December 31, 1997, to $149 million at December 31, 1998. Other Borrowed Funds Other borrowed funds which consist principally of FHLB advances, increased from $124 million at December 31, 1997 to $190 million at December 31, 1998. These additional advances from the FHLB were primarily used to replace deposits associated with the sale of the Mayfield banking center. Additional borrowings were also used to fund loan growth and purchase investment securities that were used to collateralize deposits due to the bank's growth in public funds and high balance commercial accounts. Republic's management expects to continue to use FHLB borrowings as a source of funds in addition to retail deposits. The need for additional FHLB borrowings above current levels will be evaluated by management, with consideration given to the growth of the Bank's loan portfolio, liquidity needs, cost of retail deposits, market conditions and other factors. As of December 31, 1998, Republic had the capacity to increase its borrowings from the FHLB an additional $130 million. Liquidity Republic maintains sufficient liquidity in order to fund loan demand and deposit withdrawals. Liquidity is managed by retaining sufficient liquid assets in the form of investment securities and core deposits to meet demand. Funding and cash flows can also be realized from the investment portfolio and paydowns from within the loan portfolio. Republic's banking centers also provide access to the retail deposit market. In addition, Republic has established lines of credit with other financial institutions, the FHLB and brokerage firms. While Republic utilizes numerous funding sources in order to meet its liquidity requirements, FHLB borrowings remain a material component of management's balance sheet strategies. Republic's objectives include preserving an adequate liquidity position. Asset/liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve an acceptable net interest margin. Republic continues to experience strong loan demand and management continues to monitor interest rate and liquidity risk while implementing appropriate funding and balance sheet strategies. Capital In July of 1998 Republic sold 2 million shares of its Class A Common Stock at an initial offering price of $13 per share and received approximately $23.6 million in proceeds. The stock offering proceeds strengthened Republic's capital base and are being utilized for continued banking center expansion, broadening existing business lines and other general corporate purposes To further enhance Republic's capital position, management has utilized alternative capital sources. During 1997, Republic issued $6.4 million in 8.5% Quarterly Income Trust Preferred Securities (the "Trust Preferred securities") through a subsidiary, Republic Capital Trust. The effective cost of these securities is 5.5%. The interest paid on these securities is deductible to Republic. Each Trust Preferred security, par value $100, can be converted to ten shares of Class A Common Stock. Holders of the Trust Preferred securities are entitled to the payments made on Republic's subordinated convertible debentures issued to that subsidiary which have a thirty year maturity with a right of redemption at par after five years, subject to certain restrictions. On December 31, 1997, Republic redeemed its $5 million outstanding Series A Convertible Preferred stock. At the option of each shareholder, each security was either convertible into 10 shares of Class A Common Stock and 2 shares of Class B Common Stock, or redeemable in cash for the initial offering price of $100 per share plus a 20% premium. As a result of this redemption approximately 80% of the outstanding securities were converted to Common Stock. The remaining securities were redeemed for cash. The $1.2 million payout to those shareholders included the 20% premium of $203,000 which was charged to retained earnings. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Republic improved its capital position during 1998 and 1997 due to capital raised during the offerings mentioned above and increased retained earnings achieved during the periods. As a result of the improved capital position, Republic's capital to average assets ratio increased to 7.58% at December 31, 1998 compared to 5.97% and 6.30% at year end 1997 and 1996. Republic continues to exceed the regulatory requirements for Tier I, Tier I leverage and total risk-based capital. The Bank intends to maintain a capital position that meets or exceeds the "well capitalized" requirements as defined by the FDIC. See Note 13 to the Consolidated Financial Statements. 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. Management considers interest rate risk to be Republic's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income as a result of market fluctuations in interest rates. Management regularly monitors interest rate risk in relation to prospective market and business conditions. The Bank's board of directors sets policy guidelines establishing maximum limits on the Bank's interest rate risk exposure. Republic's management monitors and adjusts exposure to interest rate fluctuations as influenced by the Bank's loan and deposit portfolios. Republic uses an earnings simulation model to analyze net interest income sensitivity. Potential changes in market interest rates and their subsequent effect on interest income are then evaluated. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. Assumptions based on the historical behavior of Republic's deposit rates and 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 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 of various management strategies. Interest rate risk management focuses on maintaining acceptable net interest income within policy limits approved by the board of directors. The Bank's Asset/Liability Management Committee monitors and manages interest rate risk to maintain an acceptable level of change to net interest income resulting from market interest rate changes. Tables 15 & 16 illustrate Republic's estimated annualized earnings sensitivity profile: Table 15 - Interest Rate Sensitivity for 1998
Decrease in Rates Increase in Rates As of December 31, 1998 200 100 BASE 100 200 dollars in thousands) Basis Points Basis Points Basis Points Basis Points Projected interest income Loans........................ $63,043 $68,835 $75,394 $81,537 $86,959 Investments.................. 11,111 12,011 13,060 13,583 14,102 Short-term investments....... 240 354 493 635 773 Total interest income........ $74,394 $81,200 $88,947 $95,755 $101,834 Projected interest expense Deposits..................... $27,287 $29,197 $31,126 $33,111 $35,446 Other borrowings............. 12,368 14,366 16,364 18,361 20,359 Total interest expense....... 39,655 43,563 47,490 51,472 55,805 Net interest income.......... $34,739 $37,637 $41,457 $44,283 $46,029 Change from base............. $(6,718) $(3,820) $2,826 $4,572 % Change from base........... (16.20)% (9.21)% 6.82% 11.03%
Table 16 - Interest Rate Sensitivity for 1997
Decrease in Rates Increase in Rates As of December 31, 1997 200 100 BASE 100 200 (dollars in thousands) Basis Points Basis Points Basis Points Basis Points Projected interest income Loans........................ $65,254 $70,528 $75,721 $80,555 $85,190 Investments.................. 11,061 11,655 12,337 12,692 13,045 Short-term investments....... 39 69 109 148 182 Total interest income........ $76,354 $82,252 $88,167 $93,395 $98,417 Projected interest expense Deposits..................... $32,209 $33,735 $35,261 $36,844 $38,877 Other borrowings............. 7,418 9,584 11,750 13,916 16,081 Short-term borrowings........ 95 117 136 157 179 Total interest expense....... 39,722 43,436 47,147 50,917 55,137 Net interest income.......... $36,632 $38,816 $41,020 $42,478 $43,280 Change from base............. $(4,388) $(2,204) $1,459 $2,260 % Change from base........... (10.70)% (5.37)% 3.56% 5.51%
Republic's interest sensitivity profile changed from 1997 to 1998 as a result of an increase in fixed rate long-term borrowings. In a declining interest rate environment these borrowings reduce net interest income. Given a sustained 200 basis point downward shock to the yield curve used in the simulation model, Republic's base net interest income would decrease by an estimated 10.70% in 1997 compared to 16.20% for 1998. In a rising interest rate environment the fixed rate borrowings act to enhance net interest income. Given a 200 basis point rise in the yield curve Republic's base net interest income would increase by an estimated 5.51% in 1997 compared to 11. 03% for 1998. These interest rate sensitivity profiles 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 repricing schedules. The tables above may not be a precise measurement of the effect of changing interest rates on Republic in the future. Year 2000 Management has assessed the operational and financial implications of its year 2000 needs and developed a plan to ensure that data processing systems, as well as essential non-information technology systems, can properly handle the century change. Management has determined that if a business interruption as a result of the year 2000 issue occurred, that such an interruption could be material to the Bank's overall financial performance. The primary task required to prevent a potential business interruption is the installation of the most current software releases for major mainframe applications developed by Republic's third party software application providers. Mainframe software upgrades and modifications for major mission critical applications have been installed and placed into production. Year 2000 Script Testing for the dates of September 9, 1999, December 31, 1999, January 3-4, 2000, and February 29, 2000 has been completed. The Bank's personal computer network was also reviewed and upgraded as necessary. Software upgrades and modifications will also be required for selected lower priority non mission critical data processing applications during 1999. Republic has identified selected employees whose primary function is year 2000 compliance. While Republic does not foresee that it will experience any significant Year 2000 staffing changes in the coming year, the loss of these employees could have a material adverse effect on the implementation of Republic's year 2000 plan. Republic has initiated a year 2000 retention program designed to encourage and promote the retention of these employees. Year 2000 remediation has resulted in some delay in other data processing projects, none of which are deemed material to the Bank's financial performance. Management believes its current state of year 2000 readiness to be satisfactory and in accordance with general industry and regulatory recommendations. Management has also contacted its major suppliers and customers and inquired about the status of their year 2000 readiness. At this time, the Bank has no reason to believe that its software providers will not be able to adequately address the Bank's needs for year 2000 software functionality. However, Republic must also rely to some extent on the year 2000 readiness of not only hardware and software providers, but other third party entities such as public utilities and governmental units. These and other like entities provide important ongoing services to the Bank. Management is therefore developing and implementing contingency plans that are scheduled to be in place by the end of the first quarter, 1999. The Bank has also established and recently successfully tested its disaster recovery capabilities at its back-up operational site in Little Rock, Arkansas. In carrying out its overall year 2000 plan, Republic will incur certain operational expenses and may replace some existing software that has not been fully amortized. Most of the expenditures associated with software application upgrades represent capitalizable costs that would have been incurred in the normal course of business. The operating expenses will be expensed as incurred, and the unamortized cost of software replaced, if any, will be charged off when the applicable software is removed from service. Republic has expensed approximately $563,000 in costs attributable to year 2000 remediation and anticipates total costs and charges to be in an approximate range of $1.2 to $1.7 million. Actual expenses could vary from management's estimates. Market and Dividend Information Republic's Class A common stock is traded on the Nasdaq National Market System (NASDAQ) under the symbol "RBCAA". The following table sets forth the high and low prices of the Class A common stock since July 23, 1998, the date the Class A common stock began trading on NASDAQ.
1998 Quarter Ended High Low - - -------------------------------------------------------------------------------- September 30 $ 16.44 $ 12.63 December 31 14.13 11.88
There is no established public trading market for the Class B common stock, and there was no established public trading market for the Class A common stock prior to July 22, 1998. At February 8, 1999, the Class A common stock was held by 852 shareholders of record, and the Class B common stock was held by 392 shareholders of record. Note 24 to Republic's Consolidated Financial Statements provides the amount of quarterly cash dividends paid on the Class A and Class B Common Stock for both 1998 and 1997. The Company currently intends to continue its policy of paying quarterly cash dividends although there is no assurance that such dividends will continue to be paid in the future. The payment of dividends is subject to the discretion of the board of directors. The payment of dividends in the future is dependent on future income, financial position, capital requirements and other considerations. In addition, the payment of dividends is subject to the restrictions described in note 13 to the Company's consolidated financial statements. REPORT OF INDEPENDENT AUDITORS 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, 1998 and 1997, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ending December 31, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 1998, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP Louisville, Kentucky January 11, 1999
REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (dollars in thousands) 1998 1997 ASSETS: Cash and cash equivalents: Cash and due from banks $ 37,446 $ 24,546 Federal funds sold 2,500 ------------ ------------ Total cash and cash equivalents 39,946 24,546 Securities available for sale 186,936 93,826 Securities to be held to maturity 29,985 98,546 Mortgage loans held for sale 38,167 9,970 Loans, less allowance for loan losses of $7,862 (1998) and $8,176 (1997) 870,031 794,939 Federal Home Loan Bank stock 14,036 8,124 Accrued interest receivable 8,825 8,803 Premises and equipment, net 15,870 12,774 Other assets 3,888 3,422 ------------ ------------ TOTAL $ 1,207,684 $ 1,054,950 ============ ============ LIABILITIES: Deposits: Non-interest bearing $ 80,345 $ 65,913 Interest bearing 666,802 665,685 Securities sold under agreements to repurchase and other short-term borrowings 148,659 111,137 Other borrowed funds 190,222 124,405 Accrued interest payable 3,769 6,233 Guaranteed preferred beneficial interests in Republic's subordinated debentures 6,402 6,452 Other liabilities 7,643 6,739 ------------ ------------ Total liabilities 1,103,842 986,564 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, no par value, 100,000 shares authorized, Series A 8.5% noncumulative convertible Class A common stock, no par value, 30,000,000 shares authorized, 14,868,741 shares (1998) and 12,531,062 shares (1997) issued and outstanding; Class B common stock, no par value, 5,000,000 shares authorized, 2,304,928 shares (1998) and 2,418,074 shares (1997) issued and outstanding 4,149 3,613 Additional paid-in capital 34,014 10,833 Retained earnings 65,469 53,994 Net unrealized appreciation (depreciation) on securities available for sale, net of tax 210 (54) ------------ ------------ Total Stockholders' equity 103,842 68,386 ------------ ------------ TOTAL $ 1,207,684 $ 1,054,950 ============ ============ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands, except per share data) 1998 1997 1996 INTEREST INCOME: Loans, including fees $ 77,919 $ 76,889 $ 70,831 Securities available for sale 8,816 5,748 569 Securities to be held to maturity: Taxable 4,035 7,249 8,806 Non-taxable 112 123 127 FHLB dividends 855 494 378 Other 930 691 1,275 ------------- ------------ ------------ Total interest income 92,667 91,194 81,986 ------------- ------------ ------------ INTEREST EXPENSE: Deposits 34,221 38,940 36,084 Securities sold under agreements to repurchase and short-term borrowings 4,869 4,533 3,481 Other borrowed funds 11,084 7,383 4,290 ------------- ------------ ------------ Total interest expense 50,174 50,856 43,855 ------------- ------------ ------------ NET INTEREST INCOME 42,493 40,338 38,131 PROVISION FOR LOAN LOSSES 3,110 7,251 9,149 ------------- ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 39,383 33,087 28,982 ------------- ------------ ------------ NON-INTEREST INCOME: Service charges on deposit accounts 3,255 3,284 2,642 Other service charges and fees 821 661 445 Net gain on sale of mortgage loans 4,326 1,852 1,212 Net gain on sale of deposits 4,116 7,527 Net gain on sale of Bankcard 3,660 Net gain on sale of securities 1,139 81 Loan servicing income 598 734 829 Bankcard services 508 1,010 Other 1,257 623 959 ------------- ------------ ------------ Total non-interest income 15,512 18,930 7,097 ------------- ------------ ------------ NON-INTEREST EXPENSE: Salaries and employee benefits 16,968 15,444 13,236 Occupancy and equipment 7,423 8,562 6,623 Communication and transportation 1,703 1,796 1,548 Marketing and development 1,372 1,299 1,620 FDIC Deposit Insurance 307 107 3,277 Supplies 1,066 1,013 973 Other 4,694 4,659 4,132 ------------- ------------ ------------ Total non-interest expense 33,533 32,880 31,409 ------------- ------------ ------------ INCOME BEFORE INCOME TAXES 21,362 19,137 4,670 INCOME TAXES 7,606 6,878 1,943 ------------- ------------ ------------ NET INCOME $ 13,756 $ 12,259 $ 2,727 ============= ============ ============
- - - Continued - REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (CONT.) YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands, except for per share data)
1998 1997 1996 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Change in unrealized gain (loss) on securities $ 1,403 $ 246 $ (219) Reclassification of realized amount (1,139) (81) - --------- --------- --------- Net unrealized gain (loss) recognized in comprehensive income 264 165 (219) COMPREHENSIVE INCOME $ 14,020 $ 12,424 $ 2,508 ========= ========= ========= EARNINGS PER SHARE, BASIC Class A $ .87 $ .82 $ .16 Class B $ .86 $ .81 $ .15 EARNINGS PER SHARE ASSUMING DILUTION Class A $ .83 $ .79 $ .16 Class B $ .82 $ .78 $ .15 See accompanying notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands, except per share data) - - ----------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Appreciation Common Stock Additional (Depreciation) on Total Preferred Stock Class A Class B Paid-In Retained Available for Sale Stockholders' Shares Amount Shares Shares Amount Capital Earnings Securities Equity BALANCE, January 1, 1996 50 $ 5,000 12,036 2,408 $3,491 $ 6,817 $ 43,194 $ 58,502 Conversions of Class B Common to Class A Common 68 (68) Dividends declared: Preferred ($8.50 per share) (425) (425) Common: Class A($. 11 per share) (1,330) (1,330) Class B($. 10 per share) (236) (236) Net changes in unrealized appreciation (depreciation) on securities available for sale, net of tax $ (219) (219) Net income 2,727 2,727 ------- ------- ------ ------ ------ -------- ------- -------- -------- BALANCE, December 31, 1996 50 5,000 12,104 2,340 3,491 6,817 43,930 (219) 59,019 Exercise of Common Stock options 27 7 146 153 Redemption of preferred stock (10) (1,015) (203) (1,218) Conversion of preferred stock into Common Stock (40) (3,985) 398 80 115 3,870 Conversion of Class B Common to Class A Common 2 (2) Dividends declared: Preferred ($8.50 per share) (425) (425) Common: Class A($ .11 per share) (1,335) (1,335) Class B($ .10 per share) (232) (232) Net changes in unrealized appreciation (depreciation) on securities available for sale, net of tax 165 165 Net income 12,259 12,259 ------- ------- ------ ------ ------ -------- ------- -------- ------- BALANCE, December 31, 1997 12,531 2,418 3,613 10,833 53,994 (54) 68,386 Exercise of Common Stock options 34 5 7 148 155 Issuance of Class A Common 2,000 484 23,097 23,581 Repurchase of Class A Common (52) (12) (100) (574) (686) Acquisition of Refunds Now 230 55 (53) 30 32 Employee stock grant 3 1 40 41 Conversion of Class B Common to Class A Common 348 (348) Conversion of Capital Trust Preferred to Class A Common 5 1 49 50 Dividends declared Common: Class A ($ .11 per share) (1,501) (1,501) Class B ($ .10 per share) (236) (236) Net changes in unrealized appreciation (depreciation) on securities available for sale, net of tax 264 264 Net income 13,756 13,756 ------- ------- ------ ------ ------ -------- ------- -------- ------- BALANCE, December 31, 1998 14,869 2,305 $4,149 $ 34,014 $ 65,469 $ 210 $103,842 ======= ======= ====== ====== ====== ======== ======= ======== ======= See accompanying notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 OPERATING ACTIVITIES: Net income $ 13,756 $ 12,259 $ 2,727 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 3,313 4,683 3,179 Amortization and accretion of securities 331 606 (124) FHLB stock dividends (855) (456) (372) Provision for loan losses 3,110 7,251 9,149 Net gain on sale of deposits (4,116) (7,527) Net gain on sale of bank card (3,660) Net gain on sale of mortgage loans (4,326) (1,852) (1,212) Net gain on sale of securities (1,139) (81) Proceeds from sale of loans held for sale 272,080 123,909 104,115 Origination of mortgage loans held for sale (295,951) (124,403) (104,539) Employee stock grant 41 Changes in assets and liabilities: Accrued interest receivable (22) 882 (2,441) Other assets 617 17 415 Accrued interest payable (2,464) 590 1,329 Other liabilities 841 2,268 83 ------------- ------------ ------------ Net cash provided by (used in) operating activities (14,784) 14,486 12,309 INVESTING ACTIVITIES: Purchases of securities available for sale (235,129) (69,355) (108,350) Purchases of securities to be held to maturity (11,189) (215,655) Purchases of FHLB stock (5,057) (2,120) Proceeds from maturities of securities to be held to maturity 68,827 86,746 156,596 Proceeds from sales of securities available for sale 142,961 83,006 Proceeds from sale of Bankcard 26,590 Net increase in loans (79,421) (66,654) (100,484) Purchases of premises and equipment (7,394) (3,364) (8,673) Proceeds from sales of premises and equipment 985 3,416 Cash acquired in acquisition of Refunds Now 32 ------------- ------------ ------------ Net cash provided by (used in) investing activities (114,196) 47,076 (276,566) FINANCING ACTIVITIES: Net increase in deposits 81,229 63,593 48,698 Sale of deposits (61,564) (107,609) Net increase (decrease) in securities sold under agree- ments to repurchase and other short-term borrowings 37,522 (70,497) 159,905 Payments on other borrowed funds (336,453) (296,819) (77,089) Proceeds from other borrowed funds 402,270 314,250 116,000 Proceeds from issuance of Class A common stock 23,581 Repurchase of Class A common stock (686) Proceeds from issuance of guaranteed preferred beneficial interests in Republic's subordinated debentures 6,452 Proceeds from common stock options exercised 155 153 Redemption of preferred stock (1,218) Cash dividends paid (1,674) (1,992) (1,899) -------------- ------------ ------------ Net cash provided by (used in) financing activities 144,380 (93,687) 245,615 -------------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,400 (32,125) (18,642) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,546 56,671 75,313 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 39,946 $ 24,546 $ 56,671 ============= ============ ============
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.) YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 52,638 $ 50,266 $ 42,526 Income taxes $ 9,500 $ 6,095 $ 2,902
REPUBLIC BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BUSINESS - The consolidated financial statements include the accounts of Republic Bancorp, Inc. (Parent Company) and its wholly-owned subsidiaries; Republic Bank & Trust Company (Bank), and its subsidiary Republic Financial Services (d/b/a Refunds Now), Republic Capital Trust, Republic Mortgage Company and Republic Insurance Agency, Inc. (collectively Republic). All significant intercompany balances and transactions have been eliminated. Republic operates 19 banking centers primarily in the retail banking industry and conducts its operations predominately in metropolitan Louisville and in Central Kentucky. Republic's consolidated results of operations are dependent upon net interest income, which is the difference between the interest income on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning assets are securities and real estate mortgage, commercial, and consumer loans. Interest-bearing liabilities consist of interest-bearing deposit accounts and short-term and long-term borrowings. Other sources of income include fees charged to customers for a variety of banking services such as transaction deposit accounts, and trust services. Republic also generates revenue from its mortgage banking activities which include 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, marketing and development, communications and transportation costs and other general and administrative expenses. 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. CASH FLOWS - Cash and cash equivalents includes cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions. 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 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 individual securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. Federal Home Loan Bank stock is carried at cost. MORTGAGE BANKING ACTIVITIES - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Republic controls its interest rate risk with respect to mortgage loans held for sale and loan commitments expected to close by entering into agreements to sell loans. The aggregate market value of mortgage loans held for sale considers the sales prices of such agreements. Republic also provides currently for any losses on uncovered commitments to lend or sell. Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Republic's loans sold in the secondary market have been primarily servicing released. Accordingly, servicing rights have not had a material impact on Republic's financial position or results of operations. Loan servicing income is recorded as principal payments are collected and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. Costs of loan servicing are charged to expense as incurred. Mortgage loans originated in mortgage banking activities may be converted into securities. A new accounting standard for 1999 will allow classifying these securities as available for sale, trading, or held to maturity, instead of the current requirement to classify as trading. This is not expected to have a material effect, but the effect will vary depending on the level and designation of securitizations as well as on market price movements. 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 adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. 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 lives of the related loans as an adjustment to yield. 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 loan is 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 collectibility of principal. When loans are placed on non-accrual status, all unpaid accrued interest is reversed. 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 generally are not placed on non-accrual status but are reviewed periodically and charged off when deemed uncollectible. Republic recognizes interest income on an impaired loan when earned, unless the loan is on non-accrual status, in which case interest income is recognized when received. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is an amount that management believes will be adequate to absorb probable credit losses on existing loans, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Although management believes it uses the best information available to make determinations with respect to Republic's allowance for loan losses, future adjustments, which could be material, may be necessary if original assumptions differ from actual performance. A loan is defined as "impaired" when it is probable that a creditor will be unable to collect all principal and interest due according to the contractual terms of the loan agreement. Republic has defined its population of impaired loans to be those commercial real estate and commercial loans over $499,999 that management has classified as doubtful (collection of all amounts due under the terms of the loan is highly questionable or improbable) or loss (all or a portion of the loan has been written off or a specific allowance for loss has been provided). Republic's policy is to charge off all or that portion of its investment in an impaired loan upon determination that it is probable the amount will not be collected. Impairment of smaller balance, homogeneous loans (commercial real estate and commercial loans less than $500,000, residential real estate, consumer, home equity, and credit card loans) is measured on an aggregate basis giving consideration to historical charge-off experience of the related portfolios. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over the estimated useful lives of the related assets on the straight-line method. Estimated lives are 25 to 31 1/2 years for buildings and improvements, 3 to 5 years for furniture, fixtures and equipment and 3 to 9 years for leasehold improvements. LONG LIVED ASSETS - Long lived 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 discounted amounts. STOCK OPTION PLANS - Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro-forma disclosures of net income and earnings per share are shown using the fair value method of SFAS No. 123 to measure expense for options granted after 1994, using an option pricing model to estimate fair value. INCOME TAXES - 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. EARNINGS PER SHARE - Earnings per share is based on income less preferred stock dividends (and, 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. Earnings per share assuming dilution shows the effect of additional common shares issuable under stock options, convertible preferred stock and guaranteed preferred beneficial interests in Republic's subordinated debentures. All per share amounts have been restated to reflect the stock splits occurring during the periods presented. USE OF ESTIMATES - Financial statements prepared in conformity with 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. Actual results could differ from these estimates. 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 separate components of equity. The accounting standard that requires reporting comprehensive income first applies for 1998, with prior information restated to be comparable. SEGMENT INFORMATION - Public companies are required to report information about operating segments. Segments are parts of a company evaluated by management with separate financial information. Republic's internal information is primarily reported and evaluated in two lines of business - banking and mortgage banking. ACQUISITIONS - During 1998, Republic acquired Refunds Now for 230,000 shares of Class B Common Stock. Refunds Now provides electronic tax return filing and refund anticipation loan services through approximately 1,000 locations nationwide. The transaction was accounted for using the pooling of interests method. As reflected in the changes in shareholders' equity and cash flows, prior periods have not been restated for the acquisition as the impact to those periods is not material. As of and for the year ended 1998, Refunds Now had $507,000 in total assets and net income of $169,000. CURRENT ACCOUNTING ISSUES - Beginning January 1, 2000, a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. This is not expected to have a material effect, but the effect will depend on derivative holdings when this standard applies. 2. RESTRICTIONS ON CASH AND DUE FROM BANKS Republic is required by the Federal Reserve Bank to maintain average reserve balances. Cash and due from banks in the consolidated balance sheet includes $5.2 million of reserve balances at December 31, 1998. 3. SECURITIES Securities available for sale:
Gross Gross Amortized Unrealized Unrealized As of December 31, 1998 (in thousands) Cost Gains Losses Fair Value U.S. Treasury securities and U.S. government agencies $ 123,520 $ 532 $ (76) $ 123,976 Mortgage-backed securities 47,771 185 (150) 47,806 Corporate bonds 15,326 (172) 15,154 ----------- ----------- ------------ ----------- Total securities available for sale $ 186,617 $ 717 $ (398) $ 186,936 =========== =========== ============ ===========
Gross Gross Amortized Unrealized Unrealized As of December 31, 1997 (in thousands) Cost Gains Losses Fair Value U.S. Treasury securities and U.S. government agencies $ 44,586 $ 6 $ (33) $ 44,559 Mortgage-backed securities 49,322 28 (83) 49,267 ----------- ----------- ----------- ----------- Total securities available for sale $ 93,908 $ 34 $ (116) $ 93,826 =========== =========== =========== ===========
Securities to be held to maturity:
Gross Gross Amortized Unrealized Unrealized As of December 31, 1998 (in thousands) Cost Gains Losses Fair Value U.S. Treasury securities and U.S. government agencies $ 25,422 $ 32 $ (111) $ 25,343 Obligations of state and political subdivisions 4,077 159 4,236 Mortgage-backed securities 486 (26) 460 ----------- ----------- ------------ ----------- Total securities to be held to maturity $ 29,985 $ 191 $ (137) $ 30,039 =========== =========== ============ ===========
Gross Gross Amortized Unrealized Unrealized As of December 31, 1997 (in thousands) Cost Gains Losses Fair Value U.S. Treasury securities and U.S. government agencies $ 93,693 $ 229 $ (378) $ 93,544 Obligations of state and political subdivisions 4,270 177 4,447 Mortgage-backed securities 583 (34) 549 ----------- ----------- ----------- ----------- Total securities to be held to maturity $ 98,546 $ 406 $ (412) $ 98,540 =========== =========== =========== ===========
Securities having an amortized cost of $168.1 million and $168.6 million and fair value of $168.4 million and $168.1 million at December 31, 1998 and 1997, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law. Gross gains of $1.1 million and losses of $2,000 were recognized in 1998 from proceeds of $143 million on sales of available for sale securities. In 1997, gross gains of $194,000 and losses of $113,000 were recognized from proceeds of $83 million on sales of available for sale securities. The amortized cost and fair value of securities, by contractual maturity, are as follows:
Securities to be Securities held to maturity available for sale ---------------- ------------------ Amortized Amortized As of December 31, 1998 (in thousands) Cost Fair Value Cost Fair Value Due in one year or less $ 18,205 $ 18,237 $ 52,171 $ 52,416 Due after one year through five years 7,960 7,875 81,453 81,601 Due after five through ten years 700 821 5,222 5,113 Due after ten years 2,634 2,646 Mortgage-backed securities 486 460 47,771 47,806 ------------ ------------- ------------ ------------ Total $ 29,985 $ 30,039 $ 186,617 $ 186,936 ============ ============= ============ ============
4. LOANS
As of December 31 (in thousands) 1998 1997 Residential real estate $ 520,583 $ 480,874 Commercial real estate 118,293 76,306 Real estate construction 47,396 37,940 Commercial 26,381 21,552 Consumer 56,728 81,967 Home equity 106,845 102,512 Other 3,146 4,094 ------------ ------------ Total loans 879,372 805,245 Less: Unearned interest income and unamortized loan fees 1,479 2,130 Allowance for loan losses 7,862 8,176 ------------ ------------ Loans, net $ 870,031 $ 794,939 ============ ============
During 1997, Republic sold its Bankcard loans. A gain of $3.7 million was recognized on these sales and includes $500,000 of gain recognized on the sale of the associated merchant processing. Activity in the allowance for loan losses is summarized as follows:
As of December 31 (in thousands) 1998 1997 1996 Balance, beginning of year $ 8,176 $ 6,241 $ 3,695 Provision for loan losses charged to income 3,110 7,251 9,149 Charge-offs (3,924) (5,859) (7,129) Recoveries 500 543 526 ------------ ------------ ------------ Balance, end of year $ 7,862 $ 8,176 $ 6,241 ============ ============ ============
The level of charge offs in 1997 and 1996 exceeded losses incurred in prior periods and were directly related to two unsecured credit programs initiated in 1995. The net charge-offs related to loans arising under these programs were $1.9 million, $4.2 million and $4.8 million in 1998, 1997 and 1996, and accounted for 57%, 71% and 73% of net charge offs in each of those years. Originations of loans under these programs were significantly reduced in 1997 and 1996, and such originations were underwritten to more restrictive standards than in 1995. Information about Republic's investment in impaired loans is as follows:
As of and for the Year Ended December 31 (in thousands) 1998 1997 1996 Gross impaired loans which have allowances $ 1,116 $ 1,640 $ 1,638 Less: related allowances for loan losses 100 240 240 ------------ ------------ ------------ Net impaired loans with related allowances 1,016 1,400 1,398 Impaired loans with no related allowances 0 0 0 ------------ ------------ ------------ Total $ 1,016 $ 1,400 $ 1,398 ============ ============ ============ Average impaired loans outstanding $ 1,116 $ 1,639 $ 1,638 ============ ============ ============ Interest income recognized $ 100 $ 93 $ 110 ============ ============ ============ Interest income received $ 100 $ 93 $ 110 ============ ============ ============
Loans made to executive officers and directors of Republic and their related interests in the ordinary course of business, subject to substantially the same credit policies as other loans and current in their terms, are as follows:
Balance, Balance, Beginning New End Of Period Loans Repayments Of Period (in thousands) Year ended December 31, 1998 $ 4,662 $ 3,995 $ 5,137 $ 3,520 =========== =========== =========== ===========
5. LOAN SERVICING Republic was servicing loans for others (primarily FHLMC) totaling $220 million and $263 million at December 31, 1998 and 1997, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. In connection with these loans serviced for others, Republic held borrowers' escrow balances of $400,000 and $500,000 at December 31, 1998 and 1997, respectively. 6. PREMISES AND EQUIPMENT
December 31 (in thousands) 1998 1997 Land $ 1,502 $ 1,007 Office buildings and improvements 9,458 6,991 Furniture, fixtures and equipment 18,322 17,735 Leasehold improvements 960 869 ------------ ------------ Total premises and equipment 30,242 26,602 Less accumulated depreciation and amortization 14,372 13,828 ------------ ------------ Net premises and equipment $ 15,870 $ 12,774 ============ ============
7. DEPOSITS Time deposits of $100,000 or more were approximately $77 million and $63 million at year-end 1998 and 1997. The scheduled maturities of time deposits of $100,000 or more are as follows:
Weighted Average Rate As of December 31, 1998 (in thousands) Less than 1 year $ 45,673 5.55% Over 1 year through 3 years 30,640 5.17% Over 3 years through 5 years 1,052 5.64% ------------ $ 77,365 ============
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT TERM BORROWINGS These borrowings consist of short-term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit customers arising from a cash management program offered by Republic. While effectively deposit equivalents, such arrangements are in the form of repurchase agreements. The repurchase agreements 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 were under Republic's control.
As of December 31 (in thousands) 1998 1997 Average outstanding balance during the year $ 115,280 $ 100,291 Average interest rate during the year 4.21% 4.57% Maximum month end balance during the year $ 148,659 $ 111,137
9. OTHER BORROWED FUNDS
As of December 31(in thousands) 1998 1997 Federal Home Loan Bank convertible fixed rate advance (see comment below) $ 50,000 Federal Home Loan Bank variable interest rate advances, with weighted average interest rate of 5.38% at December 31, 1998, due through 1999 52,800 $ 116,000 Federal Home Loan Bank fixed interest rate advances, with weighted average interest rate of 5.57% at December 31, 1998, due through 2003 87,422 8,405 ------------ ------------ $ 190,222 $ 124,405 ============ ============
Republic has entered into convertible fixed rate advances ranging from 3 to 5 years with the Federal Home Loan Bank (FHLB) totaling $50 million. The advances are fixed from one to three years at rates varying from 4.26% to 5.11%. At the end of the fixed term, the FHLB has the right to convert the fixed rate advance on a quarterly basis to a variable rate advance tied to the three months LIBOR index. The advances can be prepaid at any quarterly date without penalty, but may not be prepaid at any time during the fixed rate term. The Federal Home Loan Bank advances are collateralized by a blanket pledge of eligible real estate loans with an unpaid principal balance of greater than 150% of the outstanding advances. Republic has available collateral to borrow an additional $130 million from the Federal Home Loan Bank. Republic also has unsecured lines of credit totaling $40 million and secured lines of credit of $115 million available through various financial institutions. Aggregate future principal payments on borrowed funds as of December 31, 1998 are as follows: December 31, 1998(in thousands)
1999 $ 93,840 2000 26,098 2001 10,284 2002 - 2003 60,000 ---------- $ 190,222 ==========
10. GUARANTEED PREFERRED BENEFICIAL INTERESTS In February 1997, Republic Capital Trust (RCT), a trust subsidiary of Republic Bancorp, Inc., completed the private placement of 64,520 shares of cumulative trust preferred securities (Trust Preferred Securities) with a liquidation preference of $100 per security. Each security can be converted into ten shares of Class A Common Stock at the option of the holder. The proceeds of the offering were loaned to Republic Bancorp, Inc. in exchange for subordinated debentures with terms that are similar to the Trust Preferred Securities. Distributions on the securities are payable quarterly at the annual rate of 8.5% of the liquidation preference and are included in interest expense in the consolidated financial statements. Republic undertook the issuance of these securities to enhance its regulatory capital position. The Bank has utilized the capital for general business purposes and to support the Bank's future opportunities for growth. These securities are considered as Tier I capital under current regulatory guidelines. The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable prior to the maturity date of April 1, 2027 at the option of Republic on or after April 1, 2002, or upon the occurrence of specific events, defined within the trust indenture. Republic has the option to defer distributions on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. 11. INCOME TAXES
Income tax expense is summarized as follows: For the Years Ended December 31 (in thousands) 1998 1997 1996 Current $ 6,918 $ 7,587 $ 2,560 Deferred expense (benefit) 688 (709) (617) ------------ ------------ ------------ Total $ 7,606 $ 6,878 $ 1,943 ============ ============ ============
The provision for income taxes differs from the amount computed at the statutory rate as follows:
For the Years Ended December 31, 1998 1997 1996 Federal statutory rate 35.0% 35.0% 34.0 Increase (decrease) resulting from: Tax-exempt interest income (0.1) (0.3) (1.4) Acquisition intangibles 6.5 Other 0.7 1.2 2.5 -------- ------- ------- Effective rate 35.6% 35.9% 41.6% ======== ======= =======
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:
As of December 31(in thousands) 1998 1997 Deferred tax assets: Depreciation $ 511 $ 448 Loan fees 168 Allowance for loan losses 1,802 1,860 FAS 115 valuation reserve 28 ------------ ------------ Total deferred tax assets 2,313 2,504 ------------ ------------ Deferred tax liabilities: FHLB dividends 920 662 FAS 115 valuation reserve 197 Other 476 209 ------------ ------------ Total deferred tax liabilities 1,593 871 ------------ ------------ Net deferred tax asset, included in other assets $ 720 $ 1,633 ============ ============
12. EARNINGS PER SHARE A reconciliation of the combined Class A and B Common Stock numerators and denominators of the earnings per share and earnings per share assuming dilution computations is as follows:
Years Ended December 31(in thousands) 1998 1997 1996 Earnings Per Share Net Income $ 13,756 $ 12,259 $ 2,727 Less: Dividends declared on preferred stock (425) (425) ------------ ------------ ------------ Net Income available to common shares outstanding $ 13,756 $ 11,834 $ 2,302 ============ ============ ============ Weighted average shares outstanding 15,886 14,450 14,444 ============ ============ ============
Years Ended December 31 (in thousands) 1998 1997 1996 Earnings Per Share Assuming Dilution Net Income $ 13,756 $ 12,259 $ 2,727 Less: Dividends declared on preferred stock (425) Add: Interest expense, net of tax benefit, on assumed conversion of guaranteed preferred beneficial interests in Republic's subordinated debentures 356 320 ------------ ------------ ------------ Net Income available to common shareholder assuming conversion $ 14,112 $ 12,579 $ 2,302 ============ ============ ============
Years Ended December 31(in thousands) 1998 1997 1996 Weighted average shares outstanding 15,886 14,450 14,444 Add dilutive effects of assumed conversion and exercise: Convertible preferred stock 600 Convertible guaranteed preferred beneficial interest in Republic's subordinated debentures 645 564 Stock options 498 320 198 ------------ ------------ ------------ Weighted average shares and dilutive potential shares outstanding 17,029 15,934 14,642 ============ ============ ============
The difference in earnings per share between the two classes of common stock result solely from the dividend premium paid to Class A over Class B Common Stock. The 50,000 shares of preferred stock were not considered converted to 600,000 shares of common stock for 1996 in computing earnings per share assuming dilution because the impact of their conversion was antidilutive. 13. STOCKHOLDERS' EQUITY COMMON STOCK - The Class A shares are entitled to cash dividends equal to 110% of the dividend paid per share on the Class B Common Stock. Class A shares have one vote per share and Class B shares have ten votes per share. Class B Common Stock may be converted, at the option of the holder, to Class A stock on a share-for-share basis. The Class A Common Stock is not convertible into any other class of Republic's capital stock. On June 30, 1998, the shareholders approved an amendment to Republic's Articles of Incorporation to increase the authorized Class A Common Stock to 30,000,000 shares and the authorized Class B Common Stock to 5,000,000 shares. Concurrently, the shareholders approved a 2-for-1 stock split affecting both classes of Common Stock. All per share amounts have been retroactively restated to reflect the split. On July 21, 1998, Republic issued 2 million shares of Class A Common Stock in an initial public offering at $13.00 per share. PREFERRED STOCK - On December 31, 1997, Republic redeemed the $5 million outstanding Series A Convertible Preferred stock. At the option of shareholder, each security was either convertible to 10 shares of Class A Common Stock and 2 shares of Class B Common Stock, or redeemable in cash for the initial offering price of $100 per share plus a 20% premium. DIVIDEND LIMITATIONS - Banking regulations limit the amount of dividends that may be paid to the Parent Company without prior approval of the Bank's regulatory agency. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years, less any dividends declared during those periods. At December 31, 1998, the Bank had $20 million of retained earnings available for such purposes. 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 bank'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. Quantitative measures established by regulation to ensure capital adequacy require the Parent Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the Parent Company and the Bank meet all capital adequacy requirements to which it is subject. The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum Total Risk-Based, Tier I Risk-Based, and Tier I Leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.
Minimum Minimum Requirement Requirement To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 1998 (dollars in thousands) Total Risk Based Capital (to Risk Weighted Assets) Consolidated $ 117,878 15.68% $ 60,146 8% $ 75,192 10% Bank only $ 117,528 15.63% $ 60,144 8% $ 75,181 10% Tier I Capital (to Risk Weighted Assets) Consolidated $ 110,016 14.63% $ 30,073 4% $ 45,109 6% Bank only $ 109,666 14.59% $ 30,072 4% $ 45,108 6% Tier I Leverage Capital (to Average Assets) Consolidated $ 110,016 9.29% $ 47,374 4% $ 59,217 5% Bank only $ 109,666 9.26% $ 47,368 4% $ 59,211 5% As of December 31, 1997 Total Risk Based Capital (to Risk Weighted Assets) Consolidated $ 83,069 11.73% $ 56,672 8% $ 70,841 10% Bank only $ 83,149 11.74% $ 56,670 8% $ 70,837 10% Tier I Capital (to Risk Weighted Assets) Consolidated $ 74,893 10.57% $ 28,336 4% $ 42,504 6% Bank only $ 74,973 10.58% $ 28,335 4% $ 42,502 6% Tier I Leverage Capital (to Average Assets) Consolidated $ 74,893 6.99% $ 42,866 4% $ 53,583 5% Bank only $ 74,973 7.00% $ 42,865 4% $ 53,581 5%
14. STOCK OPTION PLAN Under a stock option plan, certain key employees and directors are granted options to purchase shares of Republic's common stock at fair value at the date of the grant. Options granted become fully exercisable at the end of two to six years of continued employment and must be exercised within one year. A summary of Republic's stock option activity, and related information for the years ended December 31 follows:
1998 1997 -------------------------------------------- ------------------------------------------- Options Weighted Options Weighted Options Weighted Options Weighted Class A Average Class B Average Class A Average Class B Average Shares Exercise Shares Exercise Shares Exercise Shares Exercise Price Price Price Price Outstanding beginning of year 993,000 $ 5.36 57,000 $ 3.81 937,000 $ 5.16 68,000 $ 3.73 Granted 281,000 12.52 227,000 $ 6.00 Exercised (32,500) 4.34 (4,500) 3.61 (27,000) $ 5.54 (1,000) $ 3.61 Forfeited (24,000) 5.97 (144,000) $ 5.04 (10,000) $ 3.28 --------- -------- -------- ------- Outstanding year end 1,217,500 $ 7.03 52,500 $ 3.83 993,000 $ 5.36 57,000 $ 3.81 ========= ======== ======= ======= Exercisable (vested) end of year --- --- --- ---
1996 Options Weighted Options Weighted Class A Average Class B Average Shares Exercise Shares Exercise Price Price Outstanding beginning of year 380,000 $ 3.86 76,000 $ 3.86 Granted 623,000 5.97 Exercised Forfeited (66,000) 5.38 (8,000) 5.00 -------- ------- Outstanding year end 937,000 $ 5.16 68,000 $ 3.73 ======== ======= Exercisable (vested) end of year --- ---
Options outstanding at year-end 1998 were as follows.
Outstanding Class A Class B ---------------------------- ---------------------------- Weighted Weighted Average Average Remaining Remaining Contractual Contractual Number Life Number Life Range of Exercise Prices $3.28 - $5.97 713,500 2.32 52,500 1.49 $6.00 - $13.00 504,000 4.37 ------------ ------------ ------------ ------------ Outstanding 1,217,500 3.16 52,500 1.49 ============ ============ ============ ============
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if Republic had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The weighted average assumptions for options granted during the year and the resulting estimated weighted average fair values per share used in computing pro forma disclosures are as follows:
As of December 31 1998 1997 1996 --------------------------------------------- Assumptions: Risk-free interest rate 5.53% 6.25% 6.29% Expected dividend yield .89 1.84% 1.84% Expected life (years) 5.94 5.78 6.00 Expected common stock market price volatility 13% 13% 13% Estimated fair value per share $3.21 $1.38 $1.40
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period on an accelerated basis. Republic's pro forma information follows (in thousands except for earnings per share information):
As of December 31 1998 1997 1996 --------------------------------------- Pro forma net income $ 13,461 $ 12,058 $ 2,574 Pro forma earnings per share Class A $ .85 $ .81 $ .15 Class B $ .84 $ .80 $ .14 Pro forma earnings per share assuming dilution Class A $ .81 $ .79 $ .15 Class B $ .80 $ .78 $ .14
Future pro forma net income will be negatively impacted should Republic choose to grant additional options. 15. EMPLOYEE BENEFIT PLAN 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 may elect to contribute from 1% to 15% 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 certain operating ratios are achieved. Republic's matching contributions were $372,000, $313,000, and $284,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 16. LEASES AND TRANSACTIONS WITH AFFILIATES Republic leases office facilities from Republic's Chairman and from partnerships in which Republic's Chairman and Chief Executive Officer are partners under operating leases. Rent expense for the years ended December 31, 1998, 1997 and 1996 under these leases was $1,251,000, $1,064,000 and $1,054,000, respectively. Total rent expense on all operating leases was $1,563,000, $1,533,000 and $1,343,000, for the years ended December 31, 1998, 1997 and 1996, respectively. The total minimum lease commitments under noncancelable operating leases are as follows:
As of December 31, 1998 (in thousands) Affiliate Other Total 1999 $ 1,251 $ 312 $ 1,563 2000 1,236 237 1,473 2001 958 120 1,078 2002 403 98 501 Thereafter 327 574 901 ------------ ------------ ------------ $ 4,175 $ 1,341 $ 5,516 ============ ============ ============
Republic made payments to companies owned by directors of the Bank for the construction of branches totaling $245,000 and $711,000 for the years ended December 31, 1997 and 1996, respectively. A director of Republic is a former partner at Wyatt, Tarrant & Combs. Fees paid by Republic to this firm totaled $207,000, $88,000, and $22,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 17. SALE OF DEPOSITS AND BANKING CENTERS During 1997, Republic entered into agreements to sell deposits totaling $180 million and fixed assets of $3.7 million associated with its Western Kentucky banking centers. Substantially all loans originated by these banking centers were retained by Republic. Sales of four of the five banking centers were finalized during 1997, resulting in a pretax gain of $7.5 million. The sale of the remaining banking center was finalized during January 1998 for a pretax gain of $4.1 million. Federal Home Loan Bank advances of $36 million and $60 million were used, in part, to fund the 1997 and 1998 sales. 18. SAIF ASSESSMENT In November 1994, Republic completed a merger with its affiliated savings association, Republic Savings Bancorp, Inc. Subsequent to the merger, a portion of Republic's deposits continue to be insured by the Savings Association Insurance Fund (SAIF). A bill was passed on September 30, 1996, which included a provision to replenish the SAIF through a special assessment. The one-time assessment was imposed on SAIF assessable deposits held at March 31, 1995. Republic's assessment of approximately $2.3 million is included in 1996 FDIC deposit insurance expense in the accompanying consolidated statements of income. 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 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 extent of involvement Republic has in particular classes of financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with Republic's credit policies. Collateral, if deemed necessary, is based on management's credit evaluation of the counterparty and may include business assets of commercial borrowers as well as personal property and real estate of individual borrowers or guarantors. Republic extends binding commitments to 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 contract. 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 undrawn, loan commitment represents a potential credit risk once the funds are advanced to the customer, a liquidity risk since the customer may demand immediate cash that would require a funding source, and an interest rate risk since interest rates may rise above the rate committed to the customer. Republic's current liquidity position continues to meet its need for funds. In addition, since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time will not require a funding source. As of December 31, 1998, Republic had outstanding loan commitments totaling $123 million which includes unused home equity lines of credit totaling $95 million. These commitments are substantially all at variable rates. At December 31, 1998, Republic's mortgage banking activities included commitments to extend credit, primarily representing fixed rate mortgage loans, totaling $61 million. Of commitments to originate loans, borrowers with commitments totaling $4 million have elected to wait until closing to lock the rate on the loan. Republic has also entered into forward commitments to deliver loans into the secondary market of $50 million at December 31, 1998. 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 $2.0 million for December 31, 1998 and $1.9 million for December 31, 1997. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by Republic using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts Republic could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
1998 1997 ----------------------------- ---------------------------- Carrying Fair Carrying Fair As of December 31 (in thousands) Amount Value Amount Value Assets: Cash and cash equivalents $ 39,946 $ 39,946 $ 24,546 $ 24,546 Securities available for sale 186,936 186,936 93,826 93,826 Securities to be held to maturity 29,985 30,039 98,546 98,540 Mortgage loans held for sale 38,167 38,525 9,970 10,070 Loans, net 870,031 874,253 794,939 796,577 Federal Home Loan Bank stock 14,036 14,036 8,124 8,124 Liabilities: Deposits: Certificate of deposit and individual retirement accounts $ 439,529 $ 442,962 $ 493,343 $ 495,776 Non interest-bearing accounts 80,345 80,345 65,913 65,913 Transaction accounts 227,273 227,279 172,342 172,608 Securities sold under agreements to repurchase and other short-term borrowings 148,659 148,659 111,137 111,134 Other borrowed funds 190,222 190,608 124,405 124,403 Guaranteed preferred beneficial interests in Republic's subordinated debentures 6,402 6,402 6,452 6,452
CASH AND CASH EQUIVALENTS - The carrying amount is 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. For Federal Home Loan Bank stock, the carrying amount is a reasonable estimate of fair value. LOANS - The fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. MORTGAGE LOANS HELD FOR SALE - Estimated fair value is defined as the current quoted secondary market price for such loans without regard to Republic's other commitments to make and sell loans. 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 rates currently offered for deposits of similar remaining maturities. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS - The carrying amount is a reasonable estimate of fair value. GUARANTEED PREFERRED BENEFICIAL INTERESTS - The fair value is estimated based on the estimated present value of future cash flows using the current rates at which similar financings with the same remaining maturities could be obtained. OTHER BORROWED FUNDS - The fair value is estimated based on the estimated present value of future cash outflows using the current rates at which similar loans with the same remaining maturities could be obtained. 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 current 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 actually expected to close. The fair value of such commitments is not material. COMMITMENTS TO SELL LOANS - 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 current quoted secondary market price for similar loans. The fair value of such commitments is not material. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1998 and 1997. 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, current estimates of fair value may differ significantly from the amounts presented herein. 21. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS As of December 31 (in thousands) 1998 1997 Assets: Cash and cash equivalents $ 1,238 $ 596 Due from subsidiaries 1,493 2,220 Investment in subsidiaries 110,217 75,271 Other 19 20 ----------- ----------- Total assets $ 112,967 $ 78,107 =========== =========== Liabilities: Long-term debt $ 6,702 $ 6,752 Other 2,423 2,969 ----------- ----------- Total liabilities 9,125 9,721 ----------- ----------- Stockholders' equity: Common stock 4,149 3,613 Additional paid-in capital 34,014 10,833 Retained earnings 65,469 53,994 Net unrealized depreciation on securities available for sale, net of tax 210 (54) ----------- ----------- Total stockholders' equity 103,842 68,386 ----------- ----------- Total $ 112,967 $ 78,107 =========== ===========
STATEMENTS OF INCOME Years Ended December 31, (in thousands) 1998 1997 1996 Income: Dividends from subsidiary $ 2,826 $ 4,446 $ 2,400 Interest 24 38 115 ----------- ----------- ----------- Total income 2,850 4,484 2,515 ----------- ----------- ----------- Expenses: Interest expense 574 590 166 Other expense 73 67 42 ----------- ----------- ----------- Total expenses 647 657 208 ----------- ----------- ----------- Income before income taxes 2,203 3,827 2,307 Income tax benefit 222 283 33 ----------- ----------- ----------- Income before equity in undistributed net income of subsidiaries 2,425 4,110 2,340 Equity in undistributed net income of subsidiaries 11,331 8,149 387 ----------- ----------- ----------- Net income $ 13,756 $ 12,259 $ 2,727 =========== =========== ===========
STATEMENTS OF CASH FLOWS Years Ended December 31, (in thousands) 1998 1997 1996 Operating activities: Net income $ 13,756 $ 12,259 $ 2,727 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiaries (11,331) (8,149) (387) Change in due from subsidiary 727 (1,678) (35) Change in other assets 1 (38) (63) Change in other liabilities (609) 1,480 (15) ----------- ----------- ----------- Net cash provided by operating activities 2,544 3,874 2,227 ----------- ----------- ----------- Investment activities: Purchase of common stock of subsidiary bank (23,278) (6,775) (3,999) Proceeds from maturities of repurchase agreements 889 3,999 ----------- ----------- ----------- Net cash used in investing activities (23,278) (5,886) ----------- ----------- ----------- Financing activities: Dividends paid (1,674) (1,992) (1,899) Proceeds from stock options exercised 155 153 Proceeds from issuance of guaranteed preferred beneficial interests in Republic's subordinated debentures 6,752 Proceeds from issuance of Class A Common Stock 23,581 Repurchase of Class A common stock (686) Payments on long-term debt (1,638) (350) Redemption of preferred stock (1,218) ----------- ----------- ----------- Net cash provided by (used in) financing activities 21,376 2,057 (2,249) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 642 45 (22) Cash and cash equivalents, beginning of year 596 551 573 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 1,238 $ 596 $ 551 =========== =========== ===========
22. SEGMENT INFORMATION The reportable segments are determined by the products and services offered, primarily distinguished between banking and mortgage banking operations. Loans, investments, and deposits provide the revenues in the banking operation, and servicing fees and loan sales provide the revenues in mortgage banking. All operations are domestic. The accounting policies used are the same as those described in the summary of significant accounting policies. Income taxes are allocated and indirect expenses are allocated on revenue. Transactions among segments are made at fair value. Information reported internally for performance assessment follows.
1998 Mortgage Consolidated (in thousands) Banking Banking Totals Net interest income $ 42,126 $ 367 $ 42,493 Other revenues 11,329 4,183 15,512 Noncash items: Provision for loan loss 3,110 3,110 Net gain on sale of loans 4,326 4,326 Income tax expense 6,758 848 7,606 Segment profit 12,111 1,645 13,756 Segment assets 1,168,562 39,122 1,207,684
1997 Mortgage Consolidated (in thousands) Banking Banking Totals Net interest income $ 40,114 $ 224 $ 40,338 Other revenues 16,631 2,299 18,930 Noncash items: Provision for loan loss 7,251 7,251 Net gain on sale of loans 1,852 1,852 Income tax expense 6,470 408 6,878 Segment profit 11,466 793 12,259 Segment assets 1,044,396 10,554 1,054,950
1996 Mortgage Consolidated (in thousands) Banking Banking Totals Net interest income $ 37,979 $ 152 $ 38,131 Other revenues 5,195 1,902 7,097 Noncash items: Provision for loan loss 9,149 9,149 Net gain on sale of loans 1,212 1,212 Income tax expense 1,645 298 1,943 Segment profit 2,149 578 2,727 Segment assets 1,131,682 9,180 1,140,862
23. SUBSEQUENT EVENT (UNAUDITED) 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 300,000 shares of Class A Common Stock from Republic's largest beneficial owner at a market value of $12.91 per share. The purchase price, determined by an independent pricing committee, was the average closing price for the thirty trading days immediately prior to the transaction. Shares in the ESOP will be allocated to eligible employees over the term of the loan, which is ten years. Republic will record compensation expense based on the market price of the shares as they are committed to be released for allocation to participants' accounts. 24. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 1998 and 1997.
Fourth Third Second First (dollars in thousands, except per share data) Quarter Quarter Quarter Quarter 1998: Interest income $23,336 $23,517 $23,029 $22,785 Net interest income 11,096 10,710 10,317 10,370 Provision for loan losses 1,423 303 741 643 Income (loss) before income taxes 4,334 4,409 4,054 8,565 Net income (loss) 2,830 2,800 2,602 5,524 Earnings per share: Class A Common 0.17 0.17 0.17 0.37 Class B Common 0.16 0.17 0.17 0.37 Earnings per share assuming dilution: Class A Common 0.16 0.16 0.17 0.35 Class B Common 0.16 0.16 0.17 0.35 Weighted average common shares outstanding: Basic Common 17,116 16,480 14,959 14,958 Diluted Common 18,382 17,751 15,873 15,898 Cash Dividends declared Class A Common .0275 .0275 .0275 .0275 Class B Common .0250 .0250 .0250 .0250 1997: Interest income $22,431 $22,911 $23,242 $22,610 Net interest income 9,892 10,199 10,240 10,007 Provision for loan losses 3,401 1,136 1,416 1,298 Income (loss) before income taxes 3,684 6,953 5,690 2,810 Net income (loss) 2,331 4,392 3,656 1,880 Earnings per share: Class A 0.15 0.30 0.25 0.12 Class B 0.15 0.29 0.24 0.12 Earnings per share assuming dilution: Class A 0.15 0.28 0.24 0.12 Class B 0.15 0.28 0.23 0.12 Weighted average common shares outstanding: Basic 14,450 14,449 14,443 14,444 Diluted 15,429 16,054 15,894 14,624 Cash Dividends declared: Class A .0275 .0275 .0275 .0275 Class B .0250 .0250 .0250 .0250
EX-21 4 EX-21 EXHIBIT 21 Subsidiaries of Republic Bancorp, Inc Subsidiaries of Republic Bancorp, Inc.* Name of Subsidiary State in Which Organized Republic Bank & Trust Company Kentucky Republic Capital Trust Delaware Subsidiaries of Republic Bank & Trust Company Republic Finacial Services d/b/a Refunds Now Inc Kentucky *Certain subsidiaries are not listed since, considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary at December 31, 1998. EX-27 5 FDS --
9 This schedule contains summary financial information extracted from the consolidated balance sheet, the consolidated statement of income and bank records and is qualified in its entirety by reference to such report on Form 10-K. 1,000 U.S. Dollars 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 1.000 1.000 37,446 24,546 0 0 2,500 0 0 0 186,936 93,826 29,985 98,546 30,039 98,540 870,031 794,939 7,862 8,176 1,207,684 1,054,950 747,147 731,598 148,659 111,137 17,814 19,424 190,222 124,405 0 0 0 0 4,149 3,613 99,693 64,773 1,207,684 1,054,950 77,919 76,889 13,818 13,614 930 691 92,667 91,194 34,221 38,940 50,174 50,856 42,493 40,338 3,110 7,251 1,139 81 4,694 4,659 21,362 19,137 13,756 12,259 0 0 0 0 13,756 12,259 .87 .82 .83 .79 3.84 3.85 3,258 2,676 1,731 4,459 1,116 1,639 0 0 8,176 6,241 3,924 5,859 500 543 7,862 8,176 7,862 8,176 0 0 0 0
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