SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth Republic's selected historical
financial information from 1995 through 1999. 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."
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Years Ended December 31,
(dollars in thousands, except per share data)
Income Statement Data:
Interest income .............................. $ 97,157 $ 92,667 $ 91,194 $ 81,986 $ 71,133
Interest expense ............................. 49,552 50,174 50,856 43,855 37,720
Net interest income .......................... 47,605 42,493 40,338 38,131 33,413
Provision for loan losses .................... 1,806 3,110 7,251 9,149 4,268
Non-interest income .......................... 10,084 11,396 7,743 7,097 7,520
Gain on sale of deposits ..................... 4,116 7,527
Gain on sale of Bankcard ..................... 3,660
Non-interest expense ......................... 37,383 33,533 32,880 31,409 24,505
Income before taxes .......................... 18,500 21,362 19,137 4,670 12,160
Net income ................................... 12,252 13,756 12,259 2,727 7,788
Balance Sheet Data:
Total assets ................................. $1,368,983 $1,207,684 $1,054,950 $1,140,882 $ 891,347
Total securities ............................. 214,558 216,921 192,372 281,855 114,654
Total loans, net ............................. 1,031,512 870,031 794,939 759,424 668,193
Allowance for loan losses .................... 7,862 7,862 8,176 6,241 3,695
Total deposits ............................... 800,909 747,147 731,598 783,141 734,443
Repurchase agreements and other
short-term borrowings ..................... 215,718 148,659 111,137 181,634 21,729
Other borrowed funds ......................... 231,383 190,222 124,405 106,974 68,063
Total stockholders' equity ................... 103,770 103,842 68,386 59,019 58,502
Per Share Data:(1)
Basic Class A common earnings
per share ................................. $ 0.73 $ 0.87 $ 0.82 $ 0.16 $ N/A
Basic Class B common earnings
per share ................................. 0.72 0.86 0.81 0.15 N/A
Basic common earnings per share .............. N/A N/A N/A N/A 0.52
Book value (2) ............................... 6.46 6.03 4.58 3.74 3.71
Cash dividends per Class A common ............ 0.12 0.11 0.11 0.11 N/A
Cash dividends per Class B common ............ 0.11 0.10 0.10 0.10 N/A
Cash dividend per common ..................... N/A N/A N/A N/A 0.09
Performance ratios:
Return on average assets ..................... 0.98% 1.20% 1.12% .29% .95%
Return on average common equity .............. 11.90 15.82 18.81 4.57 14.46
Net interest margin .......................... 3.96 3.84 3.85 4.21 4.25
Efficiency ratio ............................. 65 62(3) 68(4) 64(5) 60
Asset quality ratios:
Non-performing assets to total
loans ..................................... 0.38% 0.63% 0.90% 1.06% 0.41%
Net loan charge-offs to average
loans ..................................... 0.19 0.40 0.66 0.91 0.38
Allowance for loan losses to
total loans ............................... 0.76 0.89 1.02 0.81 0.55
Allowance for loan losses to
non-performing loans ...................... 213 158 115 78 168
Capital ratios:
Leverage ratio ............................... 8.61% 9.29% 6.99% 5.76% 6.62%
Average stockholders' equity to
average total assets ...................... 8.27 7.58 5.97 6.30 6.56
Tier 1 risk-based capital ratio .............. 13.36 14.63 10.57 9.14 10.29
Total risk-based capital ratio ............... 14.28 15.68 11.73 10.10 10.96
Dividend payout ratio ........................ 16 13 13 68 16
Other key data:
End-of-period full-time
equivalent employees ...................... 467 425 418 419 363
Number of bank offices ....................... 20 19 18 21 17
- -----------
(1) In 1996 the Company's common stock was replaced by Class A Common Stock and
Class B Common Stock.
(2) Exclusive of accumulated other comprehensive income.
(3) Excludes pre-tax gain on sale of deposits of $4.1 million.
(4) Excludes pre-tax gain on sale of deposits of $7.5 million and pre-tax gain
on sale of Bankcard of $3.7 million.
(5) 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 Annual
Report, 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;
and the extent and timing of legislative and regulatory actions and reforms.
HIGHLIGHTS
Republic reported earnings of $12.3 million during 1999 compared with $13.8
million for 1998. Excluding a one-time gain on sale of deposits during 1998, net
income increased by 11% during 1999. Republic's 1999 performance was supported
by steady increases in net interest income and continued declining provisions
due to reduced loan losses. These improvements more than offset a reduction in
gains on sales of loans in the secondary market, due to rising interest rates,
and increases in non-interest expenses arising from banking center expansion.
Republic's book value per common share, exclusive of accumulated other
comprehensive income, increased from $6.03 at December 31, 1998 to $6.46 per
share at December 31, 1999.
The following table summarizes selected financial information regarding
Republic's financial performance.
TABLE 1 - SUMMARY
Years Ended December 31, (dollars in thousands) 1999 1998 1997
Net income $ 12,252 $ 13,756 $ 12,259
Net income excluding asset dispositions 12,252 11,122 5,099
Diluted Class A earnings per share 0.71 0.83 0.79
Diluted Class A earnings per share
excluding asset dispositions 0.71 0.68 0.32
ROA 0.98% 1.20% 1.12%
ROA excluding asset dispositions 0.98 0.97 0.47
ROE 11.90 15.82 18.81
ROE excluding asset dispositions 11.90 13.19 8.11
Republic's total assets at December 31, 1999 grew more than 13% over 1998
to approximately $1.4 billion. Net loans increased $161 million from December
31, 1998 to over $1 billion at December 31, 1999. The residential real estate
portfolio grew $115 million while the commercial real estate portfolio increased
$45 million. This growth was attributable to continued loan demand in Republic's
markets and the further development of Republic's commercial and business
banking services. While loan growth remained strong, the Bank's level of
delinquent loans declined favorably to 1.29% at December 31, 1999, compared to
2.29% at December 31, 1998.
Funding for the growth in the loan portfolio was derived from deposits,
repurchase agreements and Federal Home Loan Bank advances. Deposits and
repurchase agreements increased to over $1.0 billion as of December 31, 1999
compared to $896 million at year-end 1998. A significant portion of this
increase was in lower cost deposits such as demand and money market accounts.
Republic's Internet banking (Republicbank.com) accounted for $42 million of the
increase in deposits, while Republic's corporate cash management accounts
reflected a 43% increase in balances over year-end 1998. FHLB advances increased
from $190 million at December 31, 1998 to $231 million at December 31, 1999.
During 1999 Republic continued to expand its banking centers. Republic
moved into newly completed facilities in the Springhurst and Fern Creek areas in
Louisville. The Bank also opened a loan production office in Southern Indiana,
its first location outside of Kentucky.
Republic continues to expand its product lines and service delivery through
Republicbank.com. Sixteen percent of the Bank's checking account clients now
utilize Republic's Internet banking services. Republicbank.com has deposits from
44 states and the District of Columbia as of December 31, 1999. During 2000
Republic intends to make available on-line tax preparation and on-line
brokerage.
During 1999, Republic began offering investment management and personal
trust services. During 1999, Republic was awarded an $800 million custodial
account relationship. In less than a year of operation, this division now has in
excess of $850 million in trust assets under management
REFUNDS NOW(R)
During November 1998, a wholly owned subsidiary of the Bank acquired
Refunds Now, Inc. Republic exchanged 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. Refunds Now(R) is a rapid refund tax processing service for
taxpayers receiving both federal and state tax refunds through a nationwide
network of tax preparers. Refund anticipation loans ("RALs") are made to
taxpayers filing income tax returns electronically. The RALs are repaid by the
taxpayer when the taxpayer's refunds are electronically received by the Bank
from governmental taxing authorities. Refunds Now(R) also provides electronic
refund checks ("ERCs") to taxpayers. After receiving refunds electronically from
governmental taxing authorities, checks are issued to taxpayers for the amount
of their refund, less fees. During 1999, Refunds Now(R) generated $944,000 in
electronic tax refund loan fees and $1.2 million in electronic tax refund check
fees. During 1999, Republic successfully marketed its products to new tax
preparers for the year 2000. These additional relationships are projected to
increase revenues for Refunds Now(R) during 2000. The projected increase in
Refunds Now(R) earnings is not expected to materially impact the earnings of
Republic in 2000.
DISPOSITION OF ASSETS
During 1997, Republic elected to focus its resources on its North Central
and Central Kentucky markets. Consistent with this focus, Republic sold its
banking centers 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, of which Republic realized a net gain of approximately $7.5 million.
During 1998, Republic completed the sale of deposits and fixed assets at the
Mayfield banking center. Republic realized a pre-tax gain of approximately $4.1
million from the Mayfield banking center sale. Republic retained substantially
all of its Western Kentucky banking center loan portfolios in those
transactions. 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.
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 9% in 1999, compared to a 6%
increase in 1998. The 1999 and 1998 growth resulted from increased loan volume
coupled with an increase in investment securities.
During 1999, average interest-bearing liabilities grew $77 million to $1.0
billion, an increase of 8% over 1998. The increase was primarily in transaction
accounts, money market accounts and other borrowings. In 1998, average
interest-bearing liabilities grew 2% over 1997. The increase of $20 million
during 1998 was primarily in certificates of deposit, other time deposits and
overnight repurchase agreements.
For 1999, net interest income was $48 million, up $6 million over the $42
million attained during 1998. Overall, the net interest rate spread increased
from 3.18% during 1998 to 3.34% in 1999. The Bank's net interest margin also
increased from 3.84% in 1998 to 3.96% in 1999. The increase in the net interest
spread and margin in 1999 occurred because the yield on interest earning assets
decreased 29 basis points while the rate paid on liabilities decreased 45 basis
points. As a result, the average rate on earning assets decreased slower than
the average rate paid on liabilities as Republic continues to focus efforts on
attracting additional lower-cost transaction accounts, Internet banking and cash
management accounts. Net interest margin also grew because during 1999 Republic
funded a greater portion of its interest earning assets through equity and
non-interest bearing deposits.
Net interest income increased 5% in 1998 over 1997. The increase in 1998
was attributable to Republic's loan growth, particularly residential and
commercial lending.
Table 2 provides detailed information as to average balances, interest
income/expense, and rates by major balance sheet category for 1997 through 1999.
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, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(dollars in thousands)
ASSETS
Earning assets:
U.S. Treasury and U.S. Government
Agency Securities ............... $ 127,492 $ 6,938 5.44% $ 168,862 $ 9,798 5.80% $ 209,599 $12,473 5.95%
State and political subdivision
securities ...................... 3,915 339 8.66 4,195 368 8.77 4,447 381 8.57
Mortgage-backed securities ......... 32,781 2,104 6.42 42,572 2,591 6.09 4,415 263 5.96
Other investments .................. 65,493 4,015 6.13 15,365 1,061 6.91 6,952 497 7.15
Federal funds sold ................. 3,487 180 5.16 16,472 930 5.65 12,452 691 5.55
Total loans and fees(1)(2) ......... 967,751 83,581 8.64 858,420 77,919 9.08 809,700 76,889 9.50
Total earning assets ............... 1,200,919 97,157 8.09 1,105,886 92,667 8.38 1,047,565 91,194 8.71
Less: Allowance for loan losses .... (7,911) (8,150) (6,278)
Non-earning assets:
Cash and due from banks ............ 20,931 19,942 20,338
Bank premises and equipment, net ... 17,597 14,123 16,793
Other assets ....................... 13,552 14,934 13,198
Total assets ....................... $ 1,245,088 $ 1,146,735 $ 1,091,616
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Transaction accounts ............... $ 124,435 $ 3,311 2.66% $ 102,231 $ 3,263 3.19% $ 124,062 $ 4,250 3.43%
Money market accounts .............. 139,567 6,285 4.50 105,668 4,977 4.71 47,036 2,329 4.95
Individual retirement accounts ..... 26,359 1,407 5.34 22,549 1,316 5.84 35,641 2,090 5.86
Certificates of deposits and other
time deposits ................... 414,406 21,683 5.23 425,721 24,665 5.79 512,260 30,271 5.91
Repurchase agreements and other
borrowings ...................... 337,590 16,866 5.00 308,744 15,953 5.17 226,400 11,916 5.26
Total interest bearing liabilities . 1,042,357 49,552 4.75 964,913 50,174 5.20 945,399 50,856 5.38
Non-interest bearing liabilities:
Non-interest bearing deposits ...... 87,760 79,636 68,184
Other liabilities .................. 12,002 15,218 12,875
Stockholders' equity ............... 102,969 86,968 65,158
Total liabilities and stockholders'
equity .......................... $ 1,245,088 $ 1,146,735 $ 1,091,616
Net interest income ................ $47,605 $42,493 $40,338
Net interest spread ................ 3.34% 3.18% 3.33%
Net interest margin ................ 3.96% 3.84% 3.85%
- -----------
(1) The amount of fee income included in interest on loans was $2,050,000,
$1,367,000, and $837,000 for the years ended December 31, 1999, 1998, and
1997, 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
Year Ended December 31, 1999 Year Ended December 31, 1998
compared to compared to
Year Ended December 31, 1998 Year Ended December 31, 1997
INCREASE/(DECREASE) INCREASE/(DECREASE)
Due to Due to
Total Net Total Net
Change Volume Rate Change Volume Rate
(dollars in thousands)
Interest income:
U.S. Treasury and Government Agency Securities ....... $(2,860) $(2,400) $ (460) $(2,675) $(2,424) $ (251)
State and political subdivision securities ........... (29) (25) (4) (13) (22) 9
Mortgage backed securities ........................... (487) (596) 109 2,328 2,273 55
Other investments .................................... 2,954 3,461 (507) 564 601 (37)
Federal funds sold ................................... (750) (733) (17) 239 223 16
Total loans and fees(1)(2) ........................... 5,662 9,924 (4,262) 1,030 4,626 (3,596)
Total increase (decrease) in interest income ......... 4,490 9,631 (5,141) 1,473 5,277 (3,804)
Interest expense:
Interest bearing transaction accounts ................ 48 709 (661) (987) (748) (239)
Money market accounts ................................ 1,308 1,597 (289) 2,648 2,903 (255)
Individual retirement accounts ....................... 91 222 (131) (774) (768) (6)
Certificates of deposit and other time deposits ...... (2,982) (656) (2,326) (5,606) (5,114) (492)
Repurchase agreements and other borrowings ........... 913 1,490 (577) 4,037 4,334 (297)
Total increase (decrease) in interest expense ........ (622) 3,362 (3,984) (682) 607 (1,289)
Increase (decrease) in net interest income ........... $ 5,112 $ 6,269 $(1,157) $ 2,155 $ 4,670 $(2,515)
- -----------
(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 $2,050,000,
$1,367,000, and $837,000 for the years ended December 31, 1999, 1998, and
1997, respectively.
NON-INTEREST INCOME
Non-interest income was $10.1 million during 1999, $15.5 million during
1998, and $18.9 million during 1997. The decrease from 1997 and 1998 was
primarily due to the gains from the sale of deposits and Bankcard. Also during
1998 Republic benefited from gains generated from sales of loans into the
secondary market and sales of investment securities.
TABLE 4 - ANALYSIS OF NON-INTEREST INCOME
Percent
Increase (Decrease)
Years Ended December 31, (dollars in thousands) 1999 1998 1997 1999/98 1998/97
---- ---- ---- ------- -------
Service charges on deposit accounts ................ $ 3,653 $ 3,255 $ 3,284 12% (1%)
Electronic refund check fees ....................... 1,238 380 247 226 54
Other service charges and fees ..................... 489 441 414 11 7
Bankcard services .................................. 508 NM NM
Net gain on available for sale securities .......... 184 1,139 81 (84) 1,306
Net gain on sale of mortgage loans ................. 2,974 4,326 1,852 (31) 134
Loan servicing income .............................. 455 598 734 (24) (19)
Other .............................................. 1,091 1,257 623 (13) 102
Subtotal ........................................ 10,084 11,396 7,743 (12) 47
Net gain on sale of deposits ....................... 4,116 7,527 NM (45)
Net gain on sale of Bankcard ....................... 3,660 NM NM
Total ........................................... $10,084 $15,512 $18,930 (35%) (18%)
Service charges on deposit accounts were $3.7 million for 1999, compared
with $3.3 million for 1998. Electronic refund check fees increased by $858,000
due to Republic's acquisition of Refunds Now, Inc., and increased volume
following the acquisition.
The interest rate environment heavily influences revenue from mortgage
banking activities. This revenue during early 1999, 1998 and 1997 reflected
increases in secondary market originations, sales volume, and the sale of most
loans with servicing released. This period generally had low, stable interest
rates. During mid to late 1999, the increase in rates led to fewer secondary
market loan originations resulting in reduced mortgage banking revenue. Proceeds
from sales of loans were $211 million, $272 million, and $124 million in 1999,
1998, and 1997, respectively. Net gains from sales of loans closely track
secondary market loan origination volume. Net gains as a percentage of loans
sold were 1.43%, 1.59%, and 1.49% in 1999, 1998, and 1997, respectively. As of
December 31, 1999, Republic was servicing $199 million in mortgage loans for
other investors, compared to $220 million at December 31, 1998.
NON-INTEREST EXPENSE
Total non-interest expense increased by 11% to $37.4 million in 1999,
compared to $33.5 million in 1998, and $32.9 million in 1997. Republic received
the benefit from reduced non-interest expenses during 1998 following the Western
Kentucky banking center sales. However, the costs, including related salary
expense, associated with Republic's addition of three new banking centers since
1997, opening the Indiana loan production office, expanded facilities at two
locations and continued technology enhancements resulted in an overall increase
in non-interest expense during 1998 and 1999.
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 65% in 1999 compared
to 62% in 1998 and 68% in 1997.
TABLE 5 - ANALYSIS OF NON-INTEREST EXPENSE
Percent
Increase/(Decrease)
Years Ended December 31, (dollars in thousands) 1999 1998 1997 1999/98 1998/97
---- ---- ---- ------- -------
Salaries and employee benefits ..................... $20,661 $16,968 $15,444 22% 10%
Occupancy and equipment ............................ 7,632 7,423 8,562 3 (13)
Communication and transportation ................... 1,716 1,703 1,796 1 (5)
Marketing and development .......................... 1,266 1,372 1,299 (8) 6
Supplies ........................................... 940 1,066 1,013 (12) 5
Other .............................................. 5,168 5,001 4,766 3 5
Total .............................................. $37,383 $33,533 $32,880 11% 2%
Salary and employee benefits expense increased approximately 22% and 10% in
1999 and 1998, respectively. Republic's overall staffing level increased to 467
full-time equivalent employees ("FTE's") at December 31, 1999, compared to 425
FTE's at December 31, 1998. The increases in salaries and employee benefits
during 1999 were attributable to several factors. Republic opened a new banking
center, loan production office and moved into permanent facilities in
Springhurst banking center, while also expanding its commercial lending, cash
management and trust activities. Annual merit salary increases were also awarded
during the year. Additional expense was also recognized as a result of the
formation of the Employee Stock Ownership Plan ("ESOP"). The 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 increased 3% in 1999 following a 13%
decrease during 1998. The 1998 decrease was primarily due to reduced
depreciation and maintenance expenses resulting from the sale of western
Kentucky banking centers. The increase in 1999 is largely attributable to the
costs associated with Republic's continued banking center expansion. These
expenses may continue to increase in the near term as the Bank intends to open
an additional location during 2000.
FINANCIAL CONDITION
LOAN PORTFOLIO
Republic experienced record loan growth and healthy loan demand throughout
its markets in 1999. During 1999 residential loan demand shifted from longer
term fixed rate secondary market products to the Bank's portfolio products. The
shift in demand was prompted by increases in rates for longer term fixed rate
products. As a result, total portfolio loans increased 18% to over $1.0 billion
at December 31, 1999 compared to $879 million at December 31, 1998. Republic
also experienced strong loan demand for its commercial loan products.
The residential real estate lending portfolio increased 22% to $636 million
at December 31, 1999. The increase in the residential real estate portfolio was
a result of a strong demand for the Bank's adjustable-rate mortgage products.
Republic's adjustable rate mortgage products consist of 3,5,7 and 10 year
initial fixed rate terms. At December 31, 1999 Republic had $216 million
outstanding in these products. These portfolio products were specifically
designed to compete effectively with long term fixed rate secondary market
products.
Republic's commercial real estate loan portfolio increased by 38% to $163
million at December 31, 1999. Republic's commercial banking initiatives 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, and are principally comprised
of loans secured by multifamily investment properties, medical facilities, small
business owner-occupied office and retail properties. In conjunction with its
commercial real estate lending, emphasis has also been placed on acquiring the
associated deposit relationships from these loan clients.
By design, Republic's consumer loans decreased from $60 million at December
31, 1998 to $42 million at December 31, 1999. The consumer loan portfolio
consists of both secured and unsecured loans. Republic's consumer portfolio also
includes the "All Purpose" and "Pre Approved" unsecured loan products. Republic
is currently not originating these unsecured products and has elected to allow
the remaining portfolios to paydown. These portfolios had $20 million
outstanding at December 31, 1998 compared to $8 million at December 31, 1999.
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 1999, loans
associated with Republic's Western Kentucky banking centers decreased from $87
million at December 31, 1998 to $58 million at December 31, 1999. Republic
continues to provide service to these clients through its centralized loan
operations, but expects 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) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Real estate:
Residential .................... $ 636,012 $520,583 $480,874 $457,204 $371,846
Commercial ..................... 163,064 118,293 76,306 59,086 75,648
Construction ................... 63,928 47,396 37,940 32,130 31,230
Commercial ........................ 31,411 26,381 21,552 25,115 21,042
Consumer .......................... 42,408 59,874 86,061 124,974 127,735
Home Equity ....................... 103,833 106,845 102,512 69,572 48,244
Total Loans ....................... $1,040,656 $879,372 $805,245 $768,081 $675,745
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 1999, Republic sold $208 million of residential mortgage loans
into the secondary market compared to $268 million in 1998. At the end of 1999,
Republic was servicing $199 million in mortgage loans for other investors
compared to $220 million in 1998 and $263 million in 1997. The decline in the
mortgage banking servicing portfolio from 1997 to 1999 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, 1999 (dollars in thousands) Total Or Less Years Years
Fixed rate maturities ............................ $ 131,551 $ 70,171 $ 37,730 $ 23,650
Variable rate repricing frequency ................ 909,105 477,017 348,531 83,557
Total ............................................ $1,040,656 $547,188 $386,261 $107,207
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The provision for loan losses was $1.8 million for the year ended December
31, 1999, compared to $3.1 million for 1998 and $7.3 million for 1997. Net
charge-offs were $1.8 million during 1999 compared to $3.4 million and $5.3
million for 1998 and 1997, respectively. Republic's unsecured consumer loan
portfolio accounted for 34% of total net charge-offs for the year ended December
31, 1999.
The allowance for loan losses remained constant at $7.9 million for both
December 31, 1999 and 1998. Republic's allowance to total loan ratio was .76% at
December 31, 1999 compared to .89% at December 31, 1998. 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. As the overall
loan portfolio outstandings have 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, 1999. 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
Years Ended December 31, (dollars in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Allowance for loan losses at beginning of year .................... $ 7,862 $ 8,176 $ 6,241 $ 3,695 $ 1,827
Charge-offs:
Real estate .................................................... (593) (1,017) (358) (242) (313)
Commercial ..................................................... (97) (79) (43) (22) (107)
Consumer ....................................................... (1,708) (2,828) (5,458) (6,865) (2,069)
Total ..................................................... (2,398) (3,924) (5,859) (7,129) (2,489)
Recoveries:
Real estate .................................................... 15 7 23 290 22
Commercial ..................................................... 8 4 25
Consumer ....................................................... 569 489 520 236 42
Total ..................................................... 592 500 543 526 89
Net loan charge-offs .............................................. (1,806) (3,424) (5,316) (6,603) (2,400)
Provision for loan losses ......................................... 1,806 3,110 7,251 9,149 4,268
Allowance for loan losses at end of year .......................... $ 7,862 $ 7,862 $ 8,176 $ 6,241 $ 3,695
Ratios:
Allowance for loan losses to total loans ....................... .76% .89% 1.02% .81% .55%
Net loan charge-offs to average loans outstanding for the period .19 .40 .66 .91 .38
Allowance for loan losses to non-performing loans .............. 213 158 115 78 168
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 indicative of future portfolio performance.
TABLE 9 - MANAGEMENT'S ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31, (dollars in thousands) 1999 1998 1997
---- ---- ----
Percent Percent Percent
of Loans of Loans of Loans
to Total to Total to Total
Allowance Loans Allowance Loans Allowance Loans
Real estate ........................ $6,235 83% $5,729 78% $3,590 74%
Commercial ......................... 483 3 265 3 46 3
Consumer ........................... 1,144 14 1,868 19 4,540 23
Total .............................. $7,862 100% $7,862 100% $8,176 100%
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, 1999, Republic had $97,000 in consumer loans 90 days
or more past due compared to $256,000 at December 31, 1998.
Total non-performing loans decreased from $5.0 million at December 31,
1998, to $3.7 million at December 31, 1999. 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 as
non-performing 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) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans on non-accrual status(1)(2) ............................ $2,721 $3,258 $2,676 $3,055 $ 742
Loans past due 90 days or more ............................... 968 1,731 4,459 4,955 1,463
Total non-performing loans ................................... 3,689 4,989 7,135 8,010 2,205
Other real estate owned ...................................... 218 540 22 104 552
Total non-performing assets .................................. $3,907 $5,529 $7,157 $8,114 $2,757
Percentage of non-performing loans to total loans ............ .35% .57% .90% 1.04% .33%
Percentage of non-performing assets to total loans ........... .38 .63 .90 1.06 .41
- -------------
(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, consisting of
one commercial real estate loan, decreased slightly from December 31, 1998 to
$1.1 million at December 31, 1999.
INVESTMENT SECURITIES
TABLE 11 - SECURITIES PORTFOLIO
As of December 31, (dollars in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Securities Available for Sale:
U.S. Treasury and government agencies ............ $ 97,029 $123,976 $ 44,559 $107,937
Agency mortgage-backed securities ................ 66,340 47,806 49,267
Corporate bonds .................................. 18,258 15,154
Total Securities Available for Sale ........ 181,627 186,936 93,826 107,937
Securities Held to Maturity:
U.S. Treasury and government agencies ............ 25,353 25,422 93,693 168,797 $109,282
States and political subdivisions ................ 3,775 4,077 4,270 4,458 4,629
Agency mortgage-backed securities ................ 3,803 486 583 663 743
Total Securities Held to Maturity .......... 32,931 29,985 98,546 173,918 114,654
Total ................................... $214,558 $216,921 $192,372 $281,855 $114,654
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.
Securities available for sale decreased slightly from $187 million at
December 31, 1998 to $182 million at December 31, 1999. Securities available for
sale have a weighted average maturity of 6.1 years. Securities to be held to
maturity increased slightly from $30 million at December 31, 1998 to $33 million
at December 31, 1999. Securities to be held to maturity have a weighted average
maturity of 3.6 years.
TABLE 12 - INVESTMENT SECURITIES AVAILABLE FOR SALE
Average Weighted
Amortized Maturity Average
As of December 31, 1999 (dollars in thousands) Cost Fair Value in Years Yield
---- ---------- -------- -----
U.S. Treasury and U.S. Government Agencies:
Within one year ......................................... $ 24,029 $ 23,876 0.6 5.12%
Over one through five years ............................. 74,989 73,153 2.4 5.33
Total U.S. Treasury and Government Agencies ............. 99,018 97,029 2.0 5.28
Corporate Bonds
Over one through five years ............................. 19,267 18,258 3.7 5.64
Total corporate bonds ................................... 19,267 18,258 3.7 5.64
Total mortgage-backed securities ........................ 69,292 66,340 6.05
Total available for sale investment securities ............. $187,577 $181,627 6.1 5.60
TABLE 13 -INVESTMENT SECURITIES HELD TO MATURITY
Average Weighted
Amortized Maturity Average
As of December 31, 1999 (dollars in thousands) Cost Fair Value in Years Yield
---- ---------- -------- -----
U.S. Treasury and U.S. Government Agencies:
Within one year ......................................... $ 6,300 $ 6,280 0.2 4.96%
Over one through five years ............................. 19,053 18,939 2.0 6.19
Total U.S. Treasury and Government Agencies ............. 25,353 25,219 1.6 5.89
Obligations of states and political subdivision:
Within one year ......................................... 225 228 0.5 9.38
Over one through five years ............................. 276 277 2.7 7.90
Over five through ten years ............................. 824 909 6.5 11.26
Over ten years .......................................... 2,450 2,450 16.4 10.00
Total obligations of state and political subdivisions ... 3,775 3,864 12.3 10.09
Total mortgage-backed securities ........................ 3,803 3,753 6.97
Total held to maturity investment securities ............... $32,931 $32,836 3.6 6.49
DEPOSITS
Total deposits were $801 million at December 31, 1999 compared to $747
million at December 31, 1998. 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.
TABLE 14 - DEPOSITS
As of December 31, (dollars in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Demand (NOW, SuperNOW and Money Market) ............ $204,071 $179,804 $118,870 $116,180 $103,744
Savings ............................................ 12,158 12,330 12,165 14,840 15,395
Money market certificates of deposit ............... 43,152 35,139 41,307 63,423 58,599
Individual retirement accounts ..................... 29,380 23,353 30,167 35,845 34,275
Certificates of deposit, $100,000 and over ......... 91,848 77,365 63,045 60,890 55,708
Other certificates of deposit ...................... 319,558 309,938 352,478 374,864 355,344
Brokered deposits .................................. 16,486 28,873 47,653 50,130 48,074
Total interest bearing deposits .................... 716,653 666,802 665,685 716,172 671,139
Total non-interest bearing deposits ................ 84,256 80,345 65,913 66,969 63,304
Total .............................................. $800,909 $747,147 $731,598 $783,141 $734,443
Republic's $16 million in brokered deposits at the end of 1999 decreased
$12 million from 1998 due to maturities. Republic did not solicit or add any
additional brokered deposits during 1999. 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 2000.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS
Short-term borrowings consist of repurchase agreements and overnight
liabilities to deposit clients arising from Republic's cash management program.
While effectively deposit equivalents, these arrangements consist of securities
sold under agreements to repurchase and liabilities secured by private
insurance. Short-term borrowings increased from $149 million at December 31,
1998, to $215 million at December 31, 1999. Included in December 31, 1999
balances are approximately $28 million in deposits from public funds entities
which are expected to be withdrawn during the first quarter of 2000.
OTHER BORROWED FUNDS
Other borrowed funds, which consist principally of FHLB advances, increased
from $190 million at December 31, 1998 to $231 million at December 31, 1999.
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 deposits, market conditions and other
factors. As of December 31, 1999, Republic had the capacity to increase its
borrowings from the FHLB an additional $103 million.
LIQUIDITY
Republic maintains sufficient liquidity in order to fund loan demand and
routine deposit withdrawal activity. 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
available-for-sale portion of the securities portfolio and paydowns from the
loan portfolio. Republic's banking centers also provide access to their retail
deposit markets. Approximately $102 million of repurchase agreements are
attributable to three customer relationships at December 31, 1999. These funds
are short-term in nature and subject to immediate withdrawal by these entities.
Should these funds be removed, Republic has the ability to replenish these funds
through various funding sources. 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 liquidity requirements, FHLB
borrowings remain a material component of management's balance sheet strategy.
CAPITAL
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 purchased 300,000 shares of Class A Common Stock. The
transaction led to a reduction in capital of $3.6 million during 1999.
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.
Republic's board of directors approved a Class A share repurchase program
of 500,000 shares during the fourth quarter of 1998 and throughout 1999 Under
the repurchase program Republic has repurchased approximately 299,000 shares as
of December 31, 1999 with a weighted average cost of $11.42, totaling $3.4
million.
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 in 1998 due to
capital raised during the offerings mentioned above and increased retained
earnings achieved during the period. Republic's capital decreased slightly in
1999 due to net unrealized depreciation on securities available for sale of $3.9
million, and the ESOP plan shares totalling $3.6 million. These reductions were
largely offset by an increase of $8.1 million in retained earnings in 1999
compared to 1998. Republic's capital to average assets ratio increased to 8.27%
at December 31, 1999 compared to 7.58% and 5.97% at year end 1998 and 1997.
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 based on the asset/liability model as of year-end 1999 and
year-end 1998:
TABLE 15 - INTEREST RATE SENSITIVITY FOR 1999
Decrease in Rates Increase in Rates
----------------- -----------------
200 100 100 200
As of December 31, 1999 (dollars in thousands) Basis Points Basis Points BASE Basis Points Basis Points
Projected interest income
Loans ................................ $ 82,805 $ 87,101 $ 92,825 $ 97,350 $101,418
Investments .......................... 13,311 13,862 14,191 14,565 14,914
Short-term investments ............... 353 871 585 613 631
Total interest income ................ 96,469 101,834 107,601 112,528 116,963
Projected interest expense
Deposits ............................. 28,261 31,367 34,736 38,277 41,834
Other borrowings ..................... 16,622 20,047 23,661 27,256 30,866
Total interest expense ............... 44,883 51,414 58,397 65,533 72,700
Net interest income .................. $ 51,586 $ 50,420 $ 49,204 $ 46,995 $ 44,263
Change from base ..................... $ 2,382 $ 1,216 $ (2,209) $ (4,941)
% Change from base ................... 4.84% 2.47% (4.49)% (10.04)%
TABLE 16 - INTEREST RATE SENSITIVITY FOR 1998
Decrease in Rates Increase in Rates
----------------- -----------------
200 100 100 200
As of December 31, 1999 (dollars in thousands) Basis Points Basis Points BASE 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%
Republic's interest sensitivity profile changed from 1998 to 1999 as a
result of the increase in longer term adjustable rate mortgage (ARM) loan
products. In a rising interest rate environment these longer term ARM loans
reduce net interest income, due to the fact that the rates during the initial
term on the five-, seven-, and ten-year products are fixed. Given a sustained
200 basis point downward shock to the interest rate yield curve used in the
simulation model, Republic's base net interest income would decrease by an
estimated 16.20% in 1998 compared to an increase of 9.84% for 1999. Given a 200
basis point rise in the yield curve Republic's base net interest income would
increase by an estimated 11.03% in 1998 compared to a decrease of 10.04% for
1999.
The interest rate sensitivity profile of Republic at any point in time will
be affected by a number of factors. These factors include the mix of interest
sensitive assets and liabilities as well as their relative 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
Republic undertook a project (the "Year 2000 Project") to identify and
assess the readiness of its computer systems, programs and other infrastructure
that could be affected by the Year 2000 issue and to remedy any problems
identified. Republic's Year 2000 Project also included an assessment of the Year
2000 readiness of key third parties on whom the Company's operations depend, as
well as customers Republic deemed to have material Year 2000 issues. Republic
also developed contingency plans permitting the Company to continue operations,
consistent with the highest quality standards, in the event Year 2000 problems
arose. Management believes that its Year 2000 Project proceeded successfully as
all operating systems performed well during the year change. While management
does not expect future problems resulting from the Year 2000 issue, it is
possible that other dates in the year 2000 may further affect computer software
or systems, or cause a Year 2000 problem relating to the Company's own systems
or to those of key third parties with whom Republic conducts business that could
adversely affect its financial condition.
Republic has incurred costs of approximately $760,000 attributable to year
2000 remediation and anticipates total costs and charges to be in an approximate
range of $1.2 to $1.5 million. A large proportion of the remaining budgeted
costs to be incurred are related to the Year 2000 employee retention program,
with the majority not being fully earned until the end of 2000. Actual expenses
could vary from management's estimates if unforeseen circumstances were to
arise.
Monitoring of computer date-sensitive issues will continue at least through
the first quarter of 2000. Corrective action will be taken if management
encounters any previously unidentified Year 2000 problems internally or in
interfacing with third parties, and the Company's contingency plans remain
available. Management has determined that if an unlikely business interruption
as a result of computer date-sensitive issues occurred, such an interruption
could be material to Republic's overall financial performance.
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 21, 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
1999
Quarter Ended High Low
- ------------------------------------------------------------------
March 31 $ 13.00 $ 11.00
June 30 12.00 10.63
September 30 11.63 9.00
December 31 9.94 8.31
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 25, 2000, the Class A common stock was held
by 825 shareholders of record, and the Class B common stock was held by 227
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 1999 and 1998. 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, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Louisville, Kentucky
January 14, 2000
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998 (dollars in thousands) 1999 1998
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 20,827 $ 37,446
Federal funds sold 46,700 2,500
----------- -----------
Total cash and cash equivalents 67,527 39,946
Securities available for sale 181,627 186,936
Securities to be held to maturity 32,931 29,985
Mortgage loans held for sale 7,408 38,167
Loans, less allowance for loan losses
of $7,862 (1999 and 1998) 1,031,512 870,031
Federal Home Loan Bank stock 15,054 14,036
Accrued interest receivable 9,162 8,825
Premises and equipment, net 18,986 15,870
Other assets 4,776 3,888
----------- -----------
TOTAL $ 1,368,983 $ 1,207,684
=========== ===========
LIABILITIES:
Deposits:
Non-interest bearing $ 84,256 $ 80,345
Interest bearing 716,653 666,802
Securities sold under agreements to repurchase
and other short-term borrowings 215,718 148,659
Other borrowed funds 231,383 190,222
Accrued interest payable 3,942 3,769
Guaranteed preferred beneficial interests in
Republic's subordinated debentures 6,352 6,402
Other liabilities 6,909 7,643
----------- -----------
Total liabilities 1,265,213 1,103,842
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,
14,536,337 shares (1999) and 14,868,741 shares (1998) issued and
outstanding; Class B common stock, no par value, 5,000,000 shares
authorized, 2,142,149 shares (1999) and 2,304,928 shares (1998)
issued and outstanding 4,099 4,149
Additional paid-in capital 33,617 34,014
Retained earnings 73,600 65,469
Unearned employee stock ownership plan shares (3,620)
Accumulated other comprehensive income (loss) (3,926) 210
----------- -----------
Total stockholders' equity 103,770 103,842
----------- -----------
TOTAL $ 1,368,983 $ 1,207,684
=========== ===========
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 1999, 1998 and 1997 (in thousands, except per share data)
1999 1998 1997
INTEREST INCOME:
Loans, including fees $83,581 $77,919 $76,889
Securities available for sale - taxable 10,965 8,816 5,748
Securities to be held to maturity:
Taxable 1,295 4,035 7,249
Non-taxable 95 112 123
FHLB dividends 1,041 855 494
Other 180 930 691
------- ------- -------
Total interest income 97,157 92,667 91,194
------- ------- -------
INTEREST EXPENSE:
Deposits 32,686 34,221 38,940
Securities sold under agreements to
repurchase and short-term borrowings 5,656 4,869 4,533
Other borrowed funds 11,210 11,084 7,383
------- ------- -------
Total interest expense 49,552 50,174 50,856
------- ------- -------
NET INTEREST INCOME 47,605 42,493 40,338
PROVISION FOR LOAN LOSSES 1,806 3,110 7,251
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 45,799 39,383 33,087
------- ------- -------
NON-INTEREST INCOME:
Service charges on deposit accounts 3,653 3,255 3,284
Electronic refund check fees 1,238 380 247
Other service charges and fees 489 441 414
Loan servicing income 455 598 734
Net gain on sale of mortgage loans 2,974 4,326 1,852
Net gain on sale of securities 184 1,139 81
Net gain on sale of deposits 4,116 7,527
Net gain on sale of Bankcard 3,660
Other 1,091 1,257 1,131
------- ------- -------
Total non-interest income 10,084 15,512 18,930
------- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 20,661 16,968 15,444
Occupancy and equipment 7,632 7,423 8,562
Communication and transportation 1,716 1,703 1,796
Marketing and development 1,266 1,372 1,299
Supplies 940 1,066 1,013
Other 5,168 5,001 4,766
------- ------- -------
Total non-interest expense 37,383 33,533 32,880
------- ------- -------
INCOME BEFORE INCOME TAXES 18,500 21,362 19,137
INCOME TAXES 6,248 7,606 6,878
------- ------- -------
NET INCOME $12,252 $13,756 $12,259
======= ======= =======
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Change in unrealized gain (loss) on securities $(4,015) $ 1,004 $ 218
Reclassification of realized amount (121) (740) (53)
------- ------- -------
Net unrealized gain (loss) recognized in comprehensive
income (4,136) 264 165
------- ------- -------
COMPREHENSIVE INCOME $ 8,116 $14,020 $12,424
======= ======= =======
EARNINGS PER SHARE, BASIC
Class A $ .73 $ .87 $ .82
Class B .72 .86 .81
EARNINGS PER SHARE ASSUMING DILUTION
Class A .71 .83 .79
Class B .69 .82 .78
See accompanying notes.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997 (in thousands, except per share data)
Unearned Accumu-
Employee lated
Stock Other Total
Common Stock Additional Ownership Compre- Stock-
Preferred Stock Class A Class B Paid-In Retained Plan hensive holders'
Shares Amount Shares Shares Amount Capital Earnings Shares Income(Loss) Equity
BALANCE, January 1, 1997 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
Exercise of Common Stock options 22 4 6 91 97
Repurchase of Class A Common (247) (57) (489) (2,167) (2,713)
Conversion of Class B Common to
Class A Common 167 (167)
Conversion of Capital Trust Preferred
to Class A Common 5 1 49 50
Purchase of 300,000 shares under the
Employee Stock Ownership Plan (300) $(3,873) (3,873)
Commitment of 19,612 shares to be
released under the Employee Stock
Ownership Plan 20 (48) 253 205
Dividends declared Common:
Class A ($ .11825 per share) (1,721) (1,721)
Class B ($ .10750 per share) (233) (233)
Net changes in unrealized appreciation
(depreciation) on securities available
for sale, net of tax (4,136) (4,136)
Net income 12,252 12,252
--- ------- ------ ------ ------ ------- ------- ------- ------- --------
BALANCE, December 31, 1999 14,536 2,142 $4,099 $33,617 $73,600 $(3,620) $(3,926) $103,770
=== ======= ====== ====== ====== ======= ======= ======= ======= ========
See accompanying notes.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997 (in thousands)
1999 1998 1997
OPERATING ACTIVITIES:
Net income $ 12,252 $ 13,756 $ 12,259
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 3,608 3,313 4,683
Amortization and accretion of securities 341 331 606
FHLB stock dividends (1,018) (855) (456)
Provision for loan losses 1,806 3,110 7,251
Net gain on sale of deposits (4,116) (7,527)
Net gain on sale of Bankcard (3,660)
Net gain on sale of mortgage loans (2,974) (4,326) (1,852)
Net gain on sale of securities (184) (1,139) (81)
Proceeds from sale of mortgage loans held for sale 210,747 272,080 123,909
Origination of mortgage loans held for sale (177,014) (295,951) (124,403)
Employee stock grant 41
Employee Stock Ownership Plan expense 205
Changes in assets and liabilities:
Accrued interest receivable and other assets 3,273 595 899
Accrued interest payable and other liabilities (684) (1,623) 2,858
--------- --------- ---------
Net cash provided by (used in) operating activities 50,358 (14,784) 14,486
INVESTING ACTIVITIES:
Purchases of securities available for sale (89,042) (235,129) (69,355)
Purchases of securities to be held to maturity (61,354) (11,189)
Purchases of FHLB stock (5,057) (2,120)
Proceeds from maturities of securities to be held to maturity 58,544 68,827 86,746
Proceeds from maturities and paydowns of securities
available for sale 67,546 9,094
Proceeds from sales of securities available for sale 20,244 133,867 83,006
Proceeds from sale of Bankcard 26,590
Net increase in loans (165,653) (79,421) (66,654)
Purchases of premises and equipment (6,733) (7,394) (3,364)
Proceeds from sales of premises and equipment 9 985 3,416
Cash acquired in acquisition of Refunds Now 32
--------- --------- ---------
Net cash provided by (used in) investing activities (176,439) (114,196) 47,076
FINANCING ACTIVITIES:
Net increase in deposits 53,762 81,229 63,593
Sale of deposits (61,564) (107,609)
Net increase (decrease) in securities sold under agree-
ments to repurchase and other short-term borrowings 67,059 37,522 (70,497)
Payments on other borrowed funds (93,839) (336,453) (296,819)
Proceeds from other borrowed funds 135,000 402,270 314,250
Proceeds from issuance of Class A common stock 23,581
Repurchase of Class A common stock (2,713) (686)
Proceeds from issuance of guaranteed preferred beneficial
interests in Republic's subordinated debentures 6,452
Proceeds from common stock options exercised 97 155 153
Redemption of preferred stock (1,218)
Purchase of shares for Employee Stock Ownership Plan (3,873)
Cash dividends paid (1,831) (1,674) (1,992)
--------- --------- ---------
Net cash provided by (used in) financing activities 153,662 144,380 (93,687)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 27,581 15,400 (32,125)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 39,946 24,546 56,671
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 67,527 $ 39,946 $ 24,546
========= ========= =========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 49,379 $ 52,638 $ 50,266
Income taxes 5,949 8,379 6,095
Transfers from loans to other real estate owned 2,366 1,219 958
See accompanying notes.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998, AND 1997
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 21 banking centers primarily in the retail banking
industry and conducts its operations predominately in metropolitan
Louisville and in Central Kentucky. During 1999, Republic began offering
services through an internet banking software application. 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, and through electronic tax return filing
services.
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.
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. Estimates that are particularly
subject to change include the allowance for loan losses and fair value of
financial instruments. Actual results could differ from these estimates.
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, deposit and other borrowing 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.
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.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM
BORROWINGS - Substantially all repurchase agreement liabilities represent
amounts advanced by various customers. Securities are pledged to cover
most of these liabilities, not covered by federal deposit insurance.
Certain of these liabilities, which are not covered by federal deposit
insurance, are secured by private insurance purchased by Republic rather
than by a pledge of securities.
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.
EMPLOYEE STOCK OWNERSHIP PLAN- The cost of shares held by the ESOP, but
not yet allocated to participants, is shown as a reduction of
stockholders' equity. Compensation expense is based on the market price of
shares as they are committed to be released to participant accounts.
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest.
FINANCIAL INSTRUMENTS - Financial instruments include off-balance sheet
credit instruments, such as commitments to make loans and standby letters
of credit, issued to meet customer financing needs. The face amount for
these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded
when they are funded.
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.
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.
SEGMENT INFORMATION - 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.
ACQUISITION - During 1998, Republic acquired Refunds Now, Inc. for 230,000
shares of Class B Common Stock. Refunds Now(R) 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 consolidated statements
of stockholders' 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, 2001, 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.
RECLASSIFICATIONS - Certain amounts presented in prior periods have been
restated to conform with 1999 presentation.
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 $5.8 million of reserve balances at December 31, 1999.
3. SECURITIES
Securities available for sale:
Gross Gross
Amortized Unrealized Unrealized
As of December 31, 1999 (in thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and U.S.
government agencies $ 99,019 $ 3 $ (1,993) $ 97,029
Mortgage-backed securities 69,292 (2,952) 66,340
Corporate bonds 19,266 (1,008) 18,258
-------- -------- -------- --------
Total securities available for sale $187,577 $ 3 $ (5,953) $181,627
======== ======== ======== ========
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
======== ======== ======== ========
Securities to be held to maturity:
Gross Gross
Amortized Unrealized Unrealized
As of December 31, 1999 (in thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and U.S.
government agencies $ 25,353 $ $ (134) $ 25,219
Obligations of state and political
subdivisions 3,775 89 3,864
Mortgage-backed securities 3,803 (50) 3,753
-------- -------- -------- --------
Total securities to be held to maturity $ 32,931 $ 89 $ (184) $ 32,836
======== ======== ======== ========
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
======== ======== ======== ========
Securities having an amortized cost of $164.7 million and $168.1 million
and fair value of $160.6 million and $168.4 million at December 31, 1999
and 1998, 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 $185,000 and losses of $1,000 were
recognized in 1999 from proceeds of $20 million on sales of available for
sale securities. In 1998, gross gains of $1.1 million and losses of $2,000
were recognized from proceeds of $134 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, 1999 (in thousands) Cost Fair Value Cost Fair Value
Due in one year or less $ 6,525 $ 6,508 $ 24,029 $ 23,876
Due after one year through
five years 19,329 19,216 94,256 91,411
Due after five through ten years 824 909
Due after ten years 2,450 2,450
Mortgage-backed securities 3,803 3,753 69,292 66,340
-------- -------- -------- --------
Total $ 32,931 $ 32,836 $187,577 $181,627
======== ======== ======== ========
4. LOANS
As of December 31, (in thousands) 1999 1998
Residential real estate $ 636,012 $ 520,583
Commercial real estate 163,064 118,293
Real estate construction 63,928 47,396
Commercial 31,411 26,381
Consumer 39,435 56,728
Home equity 103,833 106,845
Other 2,973 3,146
---------- ----------
Total loans 1,040,656 879,372
Less:
Unearned interest income
and unamortized loan fees 1,282 1,479
Allowance for loan losses 7,862 7,862
---------- ----------
Loans, net $1,031,512 $ 870,031
========== ==========
Activity in the allowance for loan losses is summarized as follows:
As of December 31, (in thousands) 1999 1998 1997
Balance, beginning of year $ 7,862 $ 8,176 $ 6,241
Provision for loan losses charged to income 1,806 3,110 7,251
Charge-offs (2,398) (3,924) (5,859)
Recoveries 592 500 543
-------------- --------------- --------------
Balance, end of year $ 7,862 $ 7,862 $ 8,176
============== =============== ==============
The level of charge-offs in 1997 exceeded losses incurred in subsequent
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 $610,000, $1.9 million and $4.2 million in 1999, 1998
and 1997, and accounted for 34%, 57% and 71% of net charge offs in each of
those years. Originations of loans under these programs were significantly
reduced in 1997 and 1996, with no originations in 1998 and 1999.
Information about Republic's investment in impaired loans is as follows:
As of and for the Year Ended December 31, (in thousands) 1999 1998 1997
Gross impaired loans which have allowances $ 1,043 $ 1,116 $ 1,640
Less: related allowances for loan losses 700 100 240
-------------- --------------- --------------
Net impaired loans with related allowances 343 1,016 1,400
Impaired loans with no related allowances 0 0 0
-------------- --------------- --------------
Total $ 343 $ 1,016 $ 1,400
============== =============== ==============
Average impaired loans outstanding $ 1,043 $ 1,116 $ 1,639
============== =============== ==============
Interest income recognized 92 100 93
Interest income received 92 100 93
Nonperforming loans were as follows:
Loans past due 90 days still on accrual 968 1,731 4,459
Nonaccrual loans 2,721 3,258 2,676
Nonperforming loans includes impaired loans and smaller balance
homogeneous loans as defined in note 1.
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, Change in Balance,
Beginning Related Party New End
Period Of Period Status Loans Repayments Of Period
(in thousands)
Year ended December 31, 1999 $ 3,520 $ (118) $ 4,167 $ (1,043) $ 6,526
============= ============ ============= ============= =============
5. LOAN SERVICING
Republic was servicing loans for others (primarily FHLMC) totaling $199
million and $220 million at December 31, 1999 and 1998, respectively.
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors
and processing foreclosures.
6. PREMISES AND EQUIPMENT
As of December 31, (in thousands) 1999 1998
Land $ 1,502 $ 1,502
Office buildings and improvements 11,348 9,458
Furniture, fixtures and equipment 20,666 18,322
Leasehold improvements 1,994 960
--------------- --------------
Total premises and equipment 35,510 30,242
Less accumulated depreciation and amortization 16,524 14,372
--------------- --------------
Net premises and equipment $ 18,986 $ 15,870
=============== ==============
7. DEPOSITS
Time deposits of $100,000 or more were approximately $92 million and $77
million at year-end 1999 and 1998.
At December 31, 1999, the scheduled maturities of time deposits of
$100,000 or more are as follows:
Weighted
(dollars in thousands) Average Rate
Less than 1 year $ 61,440 5.55%
Over 1 year through 3 years 24,306 5.18
Over 3 years through 5 years 6,102 6.91
---------------
$ 91,848
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 or liabilities secured by insurance policies
purchased by Republic. Repurchase agreements secured by securities are
treated as financings; accordingly, the securities involved with the
agreements are recorded as assets and are held by a safekeeping agent and
the obligations to repurchase the securities are reflected as liabilities.
All securities underlying the agreements were under Republic's control.
Information concerning securities sold under agreements to repurchase and
liabilities secured by insurance policies at year end 1999 and 1998 is as
follows:
As of December 31, (in thousands) 1999 1998
Average outstanding balance during the year $ 129,903 $ 115,280
Average interest rate during the year 4.35% 4.21%
Maximum month end balance during the year $ 217,143 $ 148,659
Included in December 31, 1999 balances are $28 million from public funds
entities, which are expected to be withdrawn during the first quarter of
2000, and $102 million related to three major customer relationships.
9. OTHER BORROWED FUNDS
As of December 31, (in thousands) 1999 1998
Federal Home Loan Bank convertible fixed rate advance (see comment below) $ 10,000 $ 50,000
Federal Home Loan Bank variable interest rate advances, with weighted
average interest rate of 6.42% at December 31, 1999, due through 2001 110,000 52,800
Federal Home Loan Bank fixed interest rate advances, with weighted average
interest rate of 5.61% at December 31, 1999, due through 2003 111,383 87,422
--------------- --------------
$ 231,383 $ 190,222
=============== ==============
Republic has entered into a convertible fixed rate advance maturing in 9
years with the Federal Home Loan Bank (FHLB) totaling $10 million. The
advance is fixed for 2 years at 4.61%. 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 month LIBOR index. The
advance 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 total commitment. Republic has available collateral to
borrow an additional $102.6 million from the Federal Home Loan Bank.
Republic also has unsecured lines of credit totaling $40 million and
secured lines of credit of $100 million available through various
financial institutions.
Aggregate future principal payments on borrowed funds as of December 31,
1999 are as follows:
Year (in thousands)
2000 $ 51,099
2001 110,284
2002
2003 60,000
2004 and thereafter 10,000
---------
$ 231,383
=========
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.
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. If distributions are deferred, Republic is prohibited from
paying dividends to its Class A and Class B Common stockholders.
11. INCOME TAXES
Income tax expense is summarized as follows:
Years Ended December 31, (in thousands) 1999 1998 1997
Current $ 5,692 $ 6,918 $ 7,587
Deferred expense (benefit) 556 688 (709)
--------------- -------------- --------------
Total $ 6,248 $ 7,606 $ 6,878
=============== ============== ==============
The provision for income taxes differs from the amount computed at the
statutory rate as follows:
Years Ended December 31, 1999 1998 1997
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
Tax-exempt interest income (0.2) (0.1) (0.3)
Other (1.0) 0.7 1.2
---- ---- ----
Effective rate 33.8% 35.6% 35.9%
==== ==== ====
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
Years Ended December 31, (in thousands) 1999 1998
Deferred tax assets:
Depreciation $ 691 $ 511
Allowance for loan losses 1,829 1,802
Unrealized securities losses 2,023
-------------- --------------
Total deferred tax assets 4,543 2,313
-------------- --------------
Deferred tax liabilities:
FHLB dividends 1,276 920
Unrealized securities gains 197
Loan fees 210
Mortgage servicing 182
Other 491 476
-------------- --------------
Total deferred tax liabilities 2,159 1,593
-------------- --------------
Net deferred tax asset, included in other assets $ 2,384 $ 720
============== ==============
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 presented below.
Class A and B shares participate equally in undistributed earnings. The
difference in earnings per share between the two classes of common stock
results solely from the 10% per share dividend premium paid to Class A
Common Stock over that paid to Class B Common Stock as discussed in Note
13. The aggregate dividend premium paid to Class A Common Stock for 1999,
1998 and 1997 was $156,000, $136,000 and $121,000, or approximately one
cent on basic earnings per share.
Years Ended December 31, (in thousands) 1999 1998 1997
Earnings Per Share
Net Income $ 12,252 $ 13,756 $ 12,259
Less: Dividends declared on preferred stock (425)
--------------- -------------- --------------
Net Income available to common shares
outstanding $ 12,252 $ 13,756 $ 11,834
=============== ============== ==============
Weighted average shares outstanding 16,769 15,886 14,450
=============== ============== ==============
Earnings Per Share, Basic
Class A $ .73 $ .87 $ .82
Class B .72 .86 .81
Years Ended December 31, (in thousands) 1999 1998 1997
Earnings Per Share Assuming Dilution
Net Income $ 12,252 $ 13,756 $ 12,259
Add: Interest expense, net of tax benefit,
on assumed conversion of guaranteed
preferred beneficial interests in
Republic's subordinated debentures 354 356 320
--------------- -------------- --------------
Net Income available to common shareholder
assuming conversion $ 12,606 $ 14,112 $ 12,579
=============== ============== ==============
Earnings Per Share, Diluted
Class A $ .71 $ .83 $ .79
Class B .69 .82 .78
Years Ended December 31, (in thousands) 1999 1998 1997
Weighted average shares outstanding 16,769 15,886 14,450
Add dilutive effects of assumed
conversion and exercise:
Convertible preferred stock 600
Convertible guaranteed preferred
beneficial interest in Republic's
subordinated debentures 635 645 564
Stock options 496 498 320
--------------- -------------- --------------
Weighted average shares and dilutive
potential shares outstanding 17,900 17,029 15,934
=============== ============== ==============
Stock options for 238,000 shares of Class A Common Stock were excluded
from the 1999 earnings per share assuming dilution because their impact
was antidilutive.
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.
13. STOCKHOLDERS' EQUITY
COMMON STOCK - The Class A shares are entitled to cash dividends equal to
110% of the cash 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 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.
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, 1999, the Bank had $23 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, 1999, 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
(dollars in thousands)
As of December 31, 1999
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated $ 121,892 14.28% $ 68,285 8% $ 85,356 10%
Bank only 117,665 13.79 68,281 8 85,351 10
Tier I Capital (to Risk Weighted Assets)
Consolidated 114,030 13.36 34,142 4 51,213 6
Bank only 109,803 12.86 34,140 4 51,211 6
Tier I Leverage Capital (to Average Assets)
Consolidated 114,030 8.61 49,804 4 62,254 5
Bank only 109,803 8.29 49,799 4 62,249 5
As of December 31, 1998
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
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:
1999 1998
--------------------------------------------------- --------------------------------------------------
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 1,217,500 $ 7.03 52,500 $ 3.83 993,000 $ 5.36 57,000 $ 3.81
Granted 7,000 10.63 281,000 12.52
Exercised (22,500) 3.61 (4,500) 3.61 (32,500) 4.34 (4,500) 3.61
Forfeited (76,000) 7.52 (24,000) 5.97
--------- --------- ---------
Outstanding
year end 1,126,000 7.08 48,000 3.84 1,217,500 7.03 52,500 3.83
========= ========= ========= =========
Exercisable
(vested) end
of year -- -- -- --
1997
---------------------------------------------------
Options Weighted Options Weighted
Class A Average Class B Average
Shares Exercise Shares Exercise
Price Price
Outstanding
beginning of year 937,000 $ 5.16 68,000 $ 3.73
Granted 227,000 6.00
Exercised (27,000) 5.54 (1,000) 3.61
Forfeited (144,000) 5.04 (10,000) 3.28
--------- ---------
Outstanding
year end 993,000 5.36 57,000 3.81
========= =========
Exercisable
(vested) end
of year -- --
Options outstanding at year-end 1999 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 - $5.97 681,000 2.38 48,000 1.63
$6.00 - $13.00 445,000 4.46
--------- ------------- --------- -------------
Outstanding 1,126,000 3.21 48,000 1.63
========= ============= ========= =============
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:
December 31,
1999 1998 1997
Assumptions:
Risk-free interest rate 5.08% 5.53% 6.25%
Expected dividend yield 1.03 .89 1.84
Expected life (years) 6.00 5.94 5.78
Expected common stock
market price volatility 17 13 13
Estimated fair value per share $ 2.78 $ 3.21 $ 1.38
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):
Years Ended December 31, 1999 1998 1997
Pro forma net income $ 11,874 $ 13,461 $ 12,058
Pro forma earnings per share
Class A .71 .85 .81
Class B .70 .84 .80
Pro forma earnings per share
assuming dilution
Class A .69 .81 .79
Class B .68 .80 .78
Future pro forma net income will be negatively impacted should Republic
choose to grant additional options.
15. EMPLOYEE BENEFIT PLANS
Republic maintains a 401(k) plan for full-time employees who have been
employed for 1,000 hours in a plan year and have reached the age of 21.
Participants in the plan 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 $446,000, $372,000, and $313,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
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 are allocated to eligible employees based on principal payments over
the term of the loan, which is ten years. Participants become fully vested
in allocated shares after five years of credited service and may receive
their distributions in the form of cash or stock.
During 1999, 19,612 shares of stock were allocated, resulting in ESOP
compensation expense of approximately $205,000. As of December 31, 1999,
280,388 shares were unallocated. The fair value of the unallocated shares
was approximately $2.4 million.
The cost of shares issued to the employee stock ownership plan but not yet
committed to be released to participants is presented in the consolidated
balance sheet as a reduction of shareholders equity. Compensation expense
is recorded based on the market price of the shares as they are committed
to be released for allocation to participant accounts. The difference
between market price and the cost of shares committed to be released is
recorded as an adjustment to be paid in capital.
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, 1999, 1998 and 1997 under these leases was $1,320,000, $1,251,000 and
$1,064,000, respectively. Total rent expense on all operating leases was
$1,747,000, $1,563,000 and $1,533,000, for the years ended December 31,
1999, 1998 and 1997, respectively. The total minimum lease commitments
under noncancelable operating leases are as follows:
December 31, 1999
Year Affiliate Other Total
(in thousands)
2000 $ 1,367 $ 485 $ 1,852
2001 1,147 429 1,576
2002 522 423 945
2003 355 393 748
Thereafter 207 1,510 1,717
--------- --------- ---------
$ 3,598 $ 3,240 $ 6,838
========= ========= =========
Republic made payments to companies owned by directors of the Bank for the
construction of branches totaling $245,000 for the year ended December 31,
1997.
A director of the Bank is a partner in a law firm. Fees paid by Republic
to this firm totaled $155,000, $207,000, and $88,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Banker's Insurance Agency (BIA), a company beneficially owned by
Republic's chairman and CEO, sells title insurance to most of the
company's mortgage borrowers. Under an agreement between BIA and Republic,
Republic personnel perform certain functions for issuance of the policies.
BIA recorded title insurance revenues of $1.1 million, $1.0 million and
$496,000 from Republic loan clients in 1999, 1998 and 1997, respectively.
BIA paid Republic $61,000, $27,000 and $27,000 for services performed by
Republic employees during the same periods.
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 at the time of sale. 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.
18. 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, 1999, Republic had outstanding loan commitments totaling $143
million which includes unused home equity lines of credit totaling $93
million. These commitments are substantially all at variable rates.
At December 31, 1999, Republic's mortgage banking activities included
commitments to extend credit, primarily representing fixed rate mortgage
loans, totaling $20 million. Of commitments to originate loans, borrowers
with commitments totaling $7 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 $13 million at
December 31, 1999.
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 $3.9
million for December 31, 1999 and $2.0 million for December 31, 1998.
19. 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.
December 31, 1999 December 31, 1998
---------------------------- ---------------------------
(in thousands)
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash and cash equivalents $ 67,527 $ 67,527 $ 39,946 $ 39,946
Securities available for sale 181,627 181,627 186,936 186,936
Securities to be held to maturity 32,931 32,836 29,985 30,039
Mortgage loans held for sale 7,408 7,462 38,167 38,525
Loans, net 1,031,512 1,025,216 870,031 874,253
Federal Home Loan Bank stock 15,054 15,054 14,036 14,036
Liabilities:
Deposits:
Certificate of deposit and individual
retirement accounts $ 457,272 $ 459,575 $ 439,529 $ 442,962
Non interest-bearing accounts 84,256 84,256 80,345 80,345
Transaction accounts 259,381 259,381 227,273 227,279
Securities sold under agreements to
repurchase and other short-term
borrowings 215,718 215,738 148,659 148,659
Other borrowed funds 231,383 227,737 190,222 190,608
Guaranteed preferred beneficial interests
in Republic's subordinated debentures 6,352 6,352 6,402 6,402
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, 1999 and 1998.
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.
20. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
As of December 31, (in thousands) 1999 1998
Assets:
Cash and cash equivalents $ 1,517 $ 1,238
Due from subsidiaries 4,293 1,493
Investment in subsidiaries 106,219 110,217
Other 46 19
-------------- --------------
Total assets $ 112,075 $ 112,967
============== ==============
Liabilities:
Long-term debt $ 6,652 $ 6,702
Other 1,653 2,423
-------------- --------------
Total liabilities 8,305 9,125
-------------- --------------
Stockholders' equity:
Common stock 4,099 4,149
Additional paid-in capital 33,617 34,014
Retained earnings 73,600 65,469
Unearned employees stock ownership plan shares (3,620)
Accumulated other comprehensive income (loss) (3,926) 210
--------------- --------------
Total stockholders' equity 103,770 103,842
-------------- --------------
Total $ 112,075 $ 112,967
============== ==============
STATEMENTS OF INCOME
Years Ended December 31, (in thousands) 1999 1998 1997
Income:
Dividends from subsidiary $ 8,699 $ 2,826 $ 4,446
Interest 281 24 38
-------------- -------------- --------------
Total income 8,980 2,850 4,484
-------------- -------------- --------------
Expenses:
Interest expense 567 574 590
Other expense 165 73 67
-------------- -------------- --------------
Total expenses 732 647 657
-------------- -------------- --------------
Income before income taxes 8,248 2,203 3,827
Income tax benefit 220 222 283
-------------- -------------- --------------
Income before equity in undistributed
net income of subsidiaries 8,468 2,425 4,110
Equity in undistributed net income of subsidiaries 3,784 11,331 8,149
-------------- -------------- --------------
Net income $ 12,252 $ 13,756 $ 12,259
============== ============== ==============
STATEMENTS OF CASH FLOWS
Years Ended December 31, (in thousands) 1999 1998 1997
Operating activities:
Net income $ 12,252 $ 13,756 $ 12,259
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed net income of subsidiaries (3,784) (11,331) (8,149)
Change in due from subsidiary (2,800) 727 (1,678)
Change in other assets (27) 1 (38)
Change in other liabilities (893) (609) 1,480
-------------- -------------- --------------
Net cash provided by operating activities 4,748 2,544 3,874
-------------- -------------- --------------
Investment activities:
Dividends on unallocated ESOP shares (22)
Purchase of common stock of subsidiary bank (23,278) (6,775)
Proceeds from maturities of repurchase agreements 889
-------------- -------------- --------------
Net cash used in investing activities (22) (23,278) (5,886)
-------------- -------------- --------------
Financing activities:
Dividends paid (1,831) (1,674) (1,992)
Proceeds from stock options exercised 97 155 153
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 (2,713) (686)
Payments on long-term debt (1,638)
Redemption of preferred stock (1,218)
-------------- -------------- --------------
Net cash provided by (used in) financing activities (4,447) 21,376 2,057
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 279 642 45
Cash and cash equivalents, beginning of year 1,238 596 551
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 1,517 $ 1,238 $ 596
============== ============== ==============
21. 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.
1999
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 47,285 $ 320 $ 47,605
Provision for loan loss 1,806 1,806
Net gain on sale of loans 2,974 2,974
Other revenues 7,110 7,110
Income tax expense 5,861 387 6,248
Segment profit 11,501 751 12,252
Segment assets 1,358,679 10,304 1,368,983
1998
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 42,126 $ 367 $ 42,493
Provision for loan loss 3,110 3,110
Net gain on sale of loans 4,326 4,326
Other revenues 11,186 11,186
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
Banking Banking Totals
(in thousands)
Net interest income $ 40,114 $ 224 $ 40,338
Provision for loan loss 7,251 7,251
Net gain on sale of loans 1,852 1,852
Other revenues 17,078 17,078
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
22. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
Presented below is a summary of the consolidated quarterly financial data
for the years ended December 31, 1999 and 1998.
Fourth Third Second First
(dollars in thousands) Quarter Quarter Quarter Quarter
1999:
Interest income $25,724 $24,192 $23,386 $23,855
Net interest income 12,233 11,626 11,603 12,143
Provision for loan losses 329 204 419 854
Income before income taxes 4,746 4,475 4,211 5,068
Net income 3,113 3,007 2,768 3,364
Earnings per share:
Class A Common .19 .18 .17 .20
Class B Common .18 .18 .16 .20
Earnings per share assuming dilution:
Class A Common .18 .17 .16 .19
Class B Common .18 .17 .16 .19
Weighted average common shares outstanding:
Basic Common 16,675 16,708 16,764 16,934
Diluted Common 17,696 17,814 17,925 18,137
Cash Dividends declared
Class A Common .03575 .0275 .0275 .0275
Class B Common .03250 .0250 .0250 .0250
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 before income taxes 4,334 4,409 4,054 8,565
Net income 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