UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000
OR
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-24649
REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0862051
(State of other jurisdiction or (I.R.S. Employer Identification No.)
incorporation or organization)
601 West Market Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 584-3600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ]No
The number of shares outstanding of the issuer's class of common stock as of the
latest practicable date: 14,769,702 shares of Class A Common Stock and 2,094,172
shares of Class B Common Stock as of August 3, 2000.
The Exhibit index is on page 34. This filing contains 37 pages (including this
facing sheet).
REPUBLIC BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 4-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Republic Bancorp, Inc.
Louisville, Kentucky
We have reviewed the consolidated balance sheet of Republic Bancorp, Inc. as of
June 30, 2000 and the related consolidated statements of income and
comprehensive income for the quarter and year-to-date periods ended June 30,
2000 and 1999, the consolidated statements of cash flows for the year-to-date
periods ended June 30, 2000 and 1999, and the consolidated statement of changes
in stockholders' equity for the year-to-date period ended June 30, 2000. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
August 11, 2000
PART I
ITEM 1
REPUBLIC BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands)
June 30, December 31,
2000 1999
ASSETS:
Cash and due from banks $ 27,439 $ 20,827
Federal funds sold and securities purchased
under agreements to resell 46,700
Securities available for sale 160,723 181,627
Securities to be held to maturity 90,556 32,931
Mortgage loans held for sale 6,047 7,408
Loans, less allowance for loan losses of
$7,862 (2000 and 1999) 1,106,118 1,031,512
Federal Home Loan Bank stock 15,586 15,054
Accrued interest receivable 10,389 9,162
Premises and equipment, net 19,354 18,986
Other assets 5,613 4,776
----------- -----------
TOTAL $ 1,441,825 $ 1,368,983
=========== ===========
LIABILITIES:
Deposits:
Non-interest bearing $ 103,294 $ 84,256
Interest bearing 730,700 716,653
Securities sold under agreements to repurchase
and other short-term borrowings 232,944 215,718
Other borrowed funds 247,991 231,383
Accrued interest payable 3,618 3,942
Guaranteed preferred beneficial interests in
Company's subordinated debentures 6,352 6,352
Other liabilities 8,590 6,909
----------- -----------
Total liabilities 1,333,489 1,265,213
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A and Class B Common stock, no par value 4,076 4,099
Additional paid-in capital 33,374 33,617
Retained earnings 78,675 73,600
Unearned Employee Stock Ownership Plan shares (3,475) (3,620)
Accumulated other comprehensive income (loss) (4,314) (3,926)
----------- -----------
Total stockholders' equity 108,336 103,770
----------- -----------
TOTAL $ 1,441,825 $ 1,368,983
=========== ===========
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
INTEREST INCOME:
Loans, including fees $ 24,366 $ 20,050 $ 49,173 $ 40,561
Securities available for sale 2,330 2,894 4,947 5,601
Securities to be held to maturity:
Taxable 1,690 157 2,861 489
Non-taxable 21 25 42 48
FHLB dividends 264 256 527 506
Other 46 4 249 36
-------- -------- -------- --------
Total interest income 28,717 23,386 57,799 47,241
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits 9,026 7,965 17,576 16,028
Short-term borrowings 3,226 1,138 6,039 2,383
Other borrowed funds 3,785 2,680 7,324 5,084
-------- -------- -------- --------
Total interest expense 16,037 11,783 30,939 23,495
-------- -------- -------- --------
NET INTEREST INCOME 12,680 11,603 26,860 23,746
PROVISION FOR LOAN LOSSES 432 419 967 1,273
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,248 11,184 25,893 22,473
-------- -------- -------- --------
NON-INTEREST INCOME:
Service charges on deposit accounts 970 913 1,904 1,761
Electronic refund check fees 109 197 1,064 1,058
Other service charges and fees 61 152 143 295
Loan servicing income 94 120 191 238
Net gain on sale of loans 388 658 589 2,055
Net gain (loss) on sale of securities 54 (161) 184
Other 292 245 607 416
-------- -------- -------- --------
Total non-interest income 1,914 2,339 4,337 6,007
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,020 5,201 10,627 10,831
Occupancy and equipment 2,176 1,934 4,357 3,916
Communication and transportation 547 417 1,046 871
Marketing and development 351 358 734 691
Supplies 220 238 483 492
Other 1,368 1,164 3,048 2,400
-------- -------- -------- --------
Total non-interest expense 9,682 9,312 20,295 19,201
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 4,480 4,211 9,935 9,279
INCOME TAXES 1,418 1,443 3,222 3,147
-------- -------- -------- --------
NET INCOME $ 3,062 $ 2,768 $ 6,713 $ 6,132
======== ======== ======== ========
(Continued)
REPUBLIC BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Change in unrealized loss on securities $ 309 $ (1,781) $ (494) $ (2,534)
Reclassification of realized amount (36) 106 (121)
-------- --------- -------- --------
Net unrealized gain/(loss) recognized in
comprehensive income 309 (1,817) (388) (2,655)
-------- --------- -------- --------
COMPREHENSIVE INCOME $ 3,371 $ 951 $ 6,325 $ 3,477
======== ========= ======== ========
EARNINGS PER SHARE
Class A $ 0.18 $ 0.17 $ 0.40 $ 0.36
Class B $ 0.18 $ 0.16 $ 0.40 $ 0.36
EARNINGS PER SHARE ASSUMING DILUTION
Class A $ 0.18 $ 0.16 $ 0.39 $ 0.35
Class B $ 0.18 $ 0.16 $ 0.39 $ 0.35
See accompanying notes to consolidated financial statements.
REPUBLIC BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands, except for per share data)
Unearned
Empl. Stock Accumulated Total
Common Stock Additional Ownership Other Stock-
Class A Class B Paid-In Retained Plan Comprehensive Holders'
Shares Shares Amount Capital Earnings Shares Income(Loss) Equity
BALANCE, January 1, 2000 14,536 2,142 $4,099 $33,617 $73,600 $(3,620) $(3,926) $103,770
Conversion of Class B to Class A 6 (6)
Dividend Declared
Common: Class A ($.0715 per share) (1,037) (1,037)
Class B ($.0650 per share) (139) (139)
Repurchase of Class A Common (95) (23) (187) (462) (672)
Commitment of 11,258 shares to be released under the
Employee Stock Ownership Plan 11 (56) 145 89
Net change in accumulated other
comprehensive income (loss) (388) (388)
Net Income 6,713 6,713
------ ----- ------ ------- ------- ------- ------- --------
BALANCE, June 30, 2000 14,458 2,136 $4,076 $33,374 $78,675 $(3,475) $(4,314) $108,336
====== ===== ====== ======= ======= ======= ======= ========
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (in
thousands)
2000 1999
OPERATING ACTIVITIES:
Net income $ 6,713 $ 6,132
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 1,977 1,876
Amortization and accretion of securities 96 235
FHLB stock dividends (532) (494)
Provision for loan losses 967 1,273
Net loss (gain) on sale of securities 161 (184)
Net gain on sale of loans (589) (2,055)
Proceeds from sale of loans 56,992 145,014
Origination of mortgage loans held for sale (55,042) (116,841)
Employee Stock Ownership Plan expense 89 100
Changes in assets and liabilities:
Other assets (1,080) 913
Other liabilities 1,357 (574)
-------- --------
Net cash provided by operating activities 11,109 35,395
-------- --------
INVESTING ACTIVITIES:
Purchases of securities available for sale (15,203) (84,615)
Purchases of securities to be held to maturity (73,044)
Proceeds from maturities of securities to be held to maturity 15,486 18,364
Proceeds from maturities and paydowns of securities available for sale 7,749 47,323
Proceeds from sales of securities available for sale 27,569 20,244
Net increase in loans (76,480) (76,639)
Purchases of premises and equipment (2,345) (3,241)
Disposal of premises and equipment 9
-------- --------
Net cash used in investing activities (116,268) (78,555)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 33,085 33,055
Net change in securities sold under agreement to
repurchase and other short-term borrowings 17,226 (50,952)
Payments on other borrowings (53,242) (52,313)
Proceeds from other borrowings 69,850 101,600
Purchase of shares for Employee Stock Ownership Plan (3,873)
Repurchase of Class A Common Stock (672) (1,643)
Cash dividends paid (1,176) (923)
-------- --------
Net cash provided by financing activities 65,071 24,951
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (40,088) (18,209)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 67,527 39,946
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,439 $ 21,737
======== ========
(Continued)
REPUBLIC BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (in thousands)
2000 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 31,263 $ 23,863
======== ========
Income taxes $ 2,455 $ 3,396
======== ========
Transfers from loans to real estate
acquired in settlement of loans $ 907 $ 1,352
======== ========
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION (AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES)
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Republic Bancorp, Inc. and its wholly-owned subsidiaries; Republic
Mortgage Company, Republic Insurance Agency, Inc., Republic Capital Trust, and
Republic Bank & Trust Company (Bank) and its subsidiary Republic Financial
Services Corporation (d.b.a. Refunds Now), collectively "Republic". All
significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and six-month periods ending
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto-included in Republic's
annual report on Form 10-K for the year ended December 31, 1999.
NEW ACCOUNTING PRONOUNCEMENTS - In September 1999, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". This new
standard requires companies to record derivatives on the balance sheet as assets
or liabilities at fair value. Depending on the use of the derivative and whether
it qualifies for hedge accounting, gains or losses resulting from changes in the
values of those derivatives would either be recorded as a component of net
income or as a change in stockholders' equity. Republic is required to adopt
this new standard January 1, 2001. Management has not yet determined the impact
of this standard.
RECLASSIFICATIONS - Certain amounts have been reclassified in the 1999 financial
statements to conform with the current period classifications. The
reclassifications have no effect on net income or stockholders' equity as
previously reported.
2. SECURITIES
Securities Available For Sale:
June 30, 2000
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury Securities and U.S.
Government Agencies $ 82,353 $ $ (1,899) $ 80,454
Mortgage-backed securities 65,548 (3,361) 62,187
Corporate bonds 19,236 (1,154) 18,082
-------- -------- -------- --------
Total securities available for sale $167,137 $ $ (6,414) $160,723
======== ======== ======== ========
Securities To Be Held To Maturity:
June 30, 2000
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury Securities and U.S.
Government Agencies $ 35,243 $ (208) $ 35,035
Obligations of state and political
subdivisions 1,235 $ 74 (1) 1,308
Mortgage-backed securities 54,078 (1,465) 52,613
-------- -------- -------- --------
Total securities to be held to maturity $ 90,556 $ 74 $ (1,674) $ 88,956
======== ======== ======== ========
Securities having an amortized cost of $208 million and a fair value of $202
million at June 30, 2000, were pledged to secure public deposits, securities
sold under agreements to repurchase and for other purposes, as required or
permitted by law.
3. LOANS
June 30, 2000 Dec. 31, 1999
-----------------------------
(in thousands)
Residential real estate $ 647,302 $ 636,012
Commercial real estate 214,487 163,064
Real estate construction 73,588 63,928
Commercial 33,313 31,411
Consumer 34,087 39,435
Home equity 111,318 103,833
Other 1,221 2,973
----------- -----------
Total loans 1,115,316 1,040,656
Less:
Unearned interest income and
unamortized loan fees (1,336) (1,282)
Allowance for loan losses (7,862) (7,862)
----------- -----------
Loans, net $ 1,106,118 $ 1,031,512
=========== ===========
The following table sets forth the changes in the allowance for loan losses:
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
(in thousands) (in thousands)
Balance, beginning of period $ 7,862 $ 7,962 $ 7,862 $ 7,862
Provision charged to income 432 419 967 1,273
Charge-offs (598) (607) (1,437) (1,501)
Recoveries 166 188 470 328
------- ------- ------- -------
Balance, end of period $ 7,862 $ 7,962 $ 7,862 $ 7,962
======= ======= ======= =======
Information about Republic's investment in impaired loans is as follows:
June 30, 2000 Dec. 31, 1999
-----------------------------
(in thousands)
Gross impaired loans $ 784 $1,043
Less: Related allowance for loan losses 400 700
------ ------
Net impaired loans with related allowances 384 343
Impaired loans with no related allowances
------ ------
Total $ 384 $ 343
====== ======
Average impaired loans outstanding $ 784 $1,043
====== ======
4. DEPOSITS
June 30, 2000 Dec. 31, 1999
------------------------------
(in thousands)
Demand (NOW, Super NOW and Money Market) $137,717 $174,376
Internet money market accounts 42,464 29,695
Savings 12,823 12,158
Money market certificates of deposit 36,318 43,152
Individual retirement accounts 30,781 29,380
Certificates of deposit, $100,000 and over 109,701 91,848
Other certificates of deposit 355,967 319,558
Brokered deposits 4,929 16,486
-------- --------
Total interest bearing deposits 730,700 716,653
Total non-interest bearing deposits 103,294 84,256
-------- --------
Total $833,994 $800,909
======== ========
5. 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.
June 30, 2000 Dec. 31, 1999
-----------------------------------
(in thousands)
Average outstanding balance $226,742 $129,903
Average interest rate 5.33% 4.35%
Maximum outstanding at month end $232,944 $217,143
End of period $232,944 $215,718
6. OTHER BORROWED FUNDS
June 30, December 31,
2000 1999
-------------------------
(in thousands)
Federal Home Loan Bank convertible fixed rate
advances (1) $ 10,000 $ 10,000
Federal Home Loan Bank variable interest rate
advances, with weighted average interest rate
of 6.80% at June 30, 2000, due through 2001 110,000 110,000
Federal Home Loan Bank fixed interest rate advances,
with weighted average interest rate of 5.99%
at June 30, 2000, due through 2003 127,991 111,383
---------- ----------
Total $ 247,991 $ 231,383
========== ==========
(1) During December 1998, Republic entered into a convertible fixed-rate
advance totaling $10 million with a ten-year maturity. The advance was
fixed for two 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 outstanding advances. Republic has sufficient collateral to borrow
approximately $93 million in additional funds from the Federal Home Loan Bank.
Republic also has unsecured lines of credit totaling $40 million and secured
lines of $80 million available through various financial institutions that were
unused as of June 30, 2000.
Aggregate future principal payments on borrowed funds as of June 30, 2000 are as
follows:
Year
(in thousands)
2000 $ 67,434
2001 120,557
2002
2003 60,000
------------
Total $ 247,991
============
7. EARNINGS PER SHARE
A reconciliation of the combined Class A and Class B Common Stock numerators and
denominators of the earnings per share and earnings per share assuming dilution
computations are 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 on Class A Common Stock over
that paid on Class B Common Stock. The aggregate dividend premium paid on Class
A Common Stock for 2000 and 1999 was approximately one-half of one cent on basic
earnings per share.
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(in thousands) (in thousands)
Earnings Per Share:
Net Income available to common shares
outstanding $ 3,062 $ 2,768 $ 6,713 $ 6,132
======== ======== ======== ========
Weighted average shares outstanding 16,640 16,764 16,656 16,849
======== ======== ======== ========
Earnings per share, basic:
Class A $ 0.18 $ 0.17 $ 0.40 $ 0.36
Class B $ 0.18 $ 0.16 $ 0.40 $ 0.36
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(in thousands) (in thousands)
Earnings Per Share Assuming Dilution:
Net Income $ 3,062 $ 2,768 $ 6,713 $ 6,132
Add: Interest expense, net of tax benefit,
on assumed conversion of guaranteed
preferred beneficial interests in
Republic's subordinated debentures 87 86 174 172
-------- -------- -------- --------
Net Income available to common
Shareholder assuming conversion $ 3,149 $ 2,854 $ 6,887 $ 6,304
======== ======== ======== ========
Weighted average shares outstanding 16,640 16,764 16,656 16,849
Add dilutive effects of assumed
conversion and exercise:
Convertible guaranteed preferred
beneficial interest in Republic's
subordinated debentures 635 635 635 635
Stock options 233 526 298 544
-------- -------- -------- --------
Weighted average shares and dilutive
potential shares outstanding 17,508 17,925 17,589 18,028
======== ======== ======== ========
Earnings per share assuming dilution:
Class A $ 0.18 $ 0.16 $ 0.39 $ 0.35
Class B $ 0.18 $ 0.16 $ 0.39 $ 0.35
Stock options for 270,000 and 251,500 shares of Class A Common Stock were
excluded from the three months ended June 30, 2000 and 1999 earnings per share
assuming dilution because their impact was antidilutive.
Stock options for 275,000 and 258,500 shares of Class A Common Stock were
excluded from the six months ended June 30, 2000 and 1999 earnings per share
assuming dilution because their impact was antidilutive.
8. EMPLOYEE STOCK OWNERSHIP PLAN
On January 29, 1999, Republic formed an Employee Stock Ownership Plan (ESOP) for
the benefit of its employees. The ESOP borrowed $3.9 million from the Parent
Company and directly and indirectly purchased 300,000 shares of Class A Common
Stock from Republic's largest beneficial owner at a market value of $12.91 per
share. The purchase price, determined by an independent pricing committee, was
the average closing price for the thirty trading days immediately prior to the
transaction. Shares in the ESOP will be allocated to eligible employees 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. For the quarter
ended June 30, 2000; 5,680 shares were committed to be released resulting in
ESOP compensation expense of approximately $40,000. For the six months ended
June 30, 2000; 11,258 shares were committed to be released resulting in ESOP
compensation expense of approximately $89,000.
Shares held by the plan at June 30, 2000 are as follows:
(dollars in thousands) June 30, 2000
Allocated shares 19,612
Unallocated shares 280,388
----------
Total Employee Stock Ownership Plan Shares 300,000
==========
Fair value of unallocated shares $ 2,821
9. SEGMENT INFORMATION
The reportable segments are determined by the products and services offered and
are primarily distinguished between banking, tax refund services and mortgage
banking. Loans, investments, deposits and fees provide the revenue for banking
operations, fees from refund anticipation loans and electronic refund checks
provide the revenue for tax refund services; and servicing fees and loan sales
provide the revenue for 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 and indirect expenses are
allocated based on revenue. Transactions among segments are made at fair value.
Information reported internally for performance assessment follows:
Three Months Ended June 30, 2000
Tax Refund Mortgage Consolidated
Banking Services Banking Totals
(in thousands)
Net interest income $ 12,531 $ 55 $ 94 $ 12,680
Provision for loan losses 432 432
Electronic refund check fees 109 109
Net gain on sale of loans 388 388
Other revenue 1,521 29 (133) 1,417
Non-interest expense 9,155 344 183 9,682
Income tax expense 1,388 (27) 57 1,418
Segment profit 3,077 (124) 109 3,062
Segment assets 1,429,005 689 12,131 1,441,825
Three Months Ended June 30, 1999
Tax Refund Mortgage Consolidated
Banking Services Banking Totals
(in thousands)
Net interest income $ 11,440 $ 78 $ 85 $ 11,603
Provision for loan losses 419 419
Electronic refund check fees 197 197
Net gain on sale of loans 658 658
Other revenue 1,417 26 41 1,484
Non-interest expense 8,534 151 627 9,312
Income tax expense 1,335 55 53 1,443
Segment profit 2,569 95 104 2,768
Segment assets 1,222,104 15 12,526 1,234,645
Six Months Ended June 30, 2000
Tax Refund Mortgage Consolidated
Banking Services Banking Totals
(in thousands)
Net interest income $ 24,371 $ 2,332 $ 157 $ 26,860
Provision for loan losses 620 347 967
Electronic refund check fees 1,064 1,064
Net gain on sale of loans 589 589
Other revenue 2,814 77 (207) 2,684
Non-interest expense 19,088 838 369 20,295
Income tax expense 2,386 778 58 3,222
Segment profit 5,091 1,510 112 6,713
Segment assets 1,429,005 689 12,131 1,441,825
Six Months Ended June 30, 1999
Tax Refund Mortgage Consolidated
Banking Services Banking Totals
(in thousands)
Net interest income $ 22,506 $ 1,060 $ 180 $ 23,746
Provision for loan losses 1,073 200 1,273
Electronic refund check fees 1,058 1,058
Net gain on sale of loans 2,055 2,055
Other revenue 2,861 34 (1) 2,894
Non-interest expense 17,338 580 1,283 19,201
Income tax expense 2,358 466 323 3,147
Segment profit 4,598 906 628 6,132
Segment assets 1,222,104 15 12,526 1,234,645
10. LEGAL PROCEEDINGS
The Bank is a defendant in a lawsuit which alleges that, in the course of
providing banking-related services, the Bank contributed to the death of a
borrower. The suit seeks approximately $6.4 million in damages. Republic
believes the case is without merit and intends to vigorously defend this claim.
PART 1
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Republic Bancorp, Inc., headquartered in Louisville, Kentucky, was incorporated
on January 2, 1974. Republic Bank & Trust Company (Bank) is a commercial banking
and trust corporation organized and chartered under the laws of the Commonwealth
of Kentucky. The Bank is also headquartered in Louisville, Kentucky and provides
banking services through 21 banking centers throughout Kentucky and a loan
production office in southern Indiana. The Bank's activities include the
acceptance of deposits for checking, savings and time deposit accounts, making
secured and unsecured loans, investing in securities and trust services. The
Bank's lending services include the origination of real estate, commercial and
consumer loans. Operating revenues are derived primarily from interest and fees
on domestic real estate, commercial and consumer loans, and from interest on
securities of the United States Government and Agencies, states, and
municipalities. Regulators for Republic include the Federal Deposit Insurance
Corporation (FDIC), the Board of Governors of the Federal Reserve System (and
the Federal Reserve Bank of St. Louis) and the Kentucky Department of Financial
Institutions.
REPUBLIC HAS MADE, AND MAY CONTINUE TO MAKE, 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, 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;
CUSTOMERS' ACCEPTANCE OF THE BANK'S PRODUCTS AND SERVICES; AND THE EXTENT AND
TIMING OF LEGISLATIVE AND REGULATORY ACTIONS AND REFORMS.
OVERVIEW
Net income for the second quarter of 2000 was $3.1 million, up $300,000 over the
same period in 1999. Second quarter diluted earnings per share increased 13%
over the same period in 1999, to $0.18. Republic's increased earnings were
primarily due to increases in interest income resulting from steady growth of
the loan portfolio, particularly commercial real estate.
Net income for the six months ended June 30, 2000 was $6.7 million, compared to
$6.1 million for the same period in 1999. Republic's book value per common
share, exclusive of net unrealized gains and losses on securities available for
sale, increased from $6.18 at June 30, 1999 to $6.79 at June 30, 2000.
Republic's total assets grew to over $1.4 billion at June 30, 2000. Net loans
increased $75 million from December 31, 1999 to over $1.1 billion at June 30,
2000. The growth in the lending portfolio was primarily due to commercial loan
initiatives resulting in loan originations of more than $118 million for the
first half of 2000. While loan volume remained strong, the percentage of
non-performing loans to total loans remained historically low at 0.41%.
To fund the increased loan growth, Republic utilized its 21 banking centers and
35 ATM locations to market its competitive retail deposit products and cash
management services. Cash management services now accounts for over $254 million
of deposits and repurchase agreements under management at June 30, 2000.
Republic also plans to continue attracting deposits nationally through
republicbank.com, which had more than $57 million in deposits from 48 states at
the close of the second quarter.
As a result of ongoing efforts to enhance fee income, Republic will formally
introduce a newly developed insurance program, including title and life
products, beginning in the third quarter of 2000. Republic is also continuing to
promote its Trust Services area, which currently has over $900 million in assets
under management. These initiatives are expected to broaden the Bank's product
mix for its current customer base, as well as attract new customers.
REFUNDS NOW
Refunds Now 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 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 the six months ended June 30, 2000, Refunds Now generated $2.0
million in electronic tax refund loan fees, compared to $944,000 for the same
period in 1999. Refunds Now also received $1.1 million in electronic refund
check fees in the six months ended June 30, 2000 and 1999. The increase in
revenues for Refunds Now resulted from a 36% increase in tax offices served and
a 63% increase in the number of tax refunds processed during the 2000 tax
season. Substantially all of the income realized by the Bank from the activities
of Refunds Now is recognized during the first quarter of the year.
RESULTS OF OPERATIONS
Net Interest Income. For the second quarter 2000, net interest income was $12.7
million, up 9% over the $11.6 million attained during second quarter 1999.
Overall, the net interest rate spread decreased from 3.35% during second quarter
1999 to 3.04% in the comparable quarter of 2000. The Bank's net interest margin
decreased from 3.97% in second quarter 1999 to 3.69% in second quarter 2000. The
decrease in the net interest spread and margin occurred because the yield on
interest earning assets increased 36 basis points while the rate paid on
liabilities increased 67 basis points. During the second quarter 2000, average
interest-earning assets were $1.4 billion, an increase of $206 million over
second quarter 1999. Total average interest bearing liabilities increased from
$1.0 billion in the second quarter of 1999 to $1.2 billion in the second quarter
of 2000.
Net interest income for the six months ended June 30, 2000 was $26.9 million, up
from $23.7 million attained in the same period during 1999. Republic's net
interest rate spread decreased 14 basis points and net interest margin decreased
15 basis points for the six months ended June 30, 2000 compared to the same
period in 1999. The decrease in the net interest spread and margin occurred
because the yield on interest earning assets increased 36 basis points while the
rate paid on liabilities increased 50 basis points. Republic's net interest
margin and spread are expected to tighten if rates continue to increase.
Tables 1 and 2 provides detailed information as to average balance, interest
income/expense, and rates by major balance sheet category for the three and six
months ended June 30, 2000 and 1999.
Table 1 - Average Balance Sheet Rates for Second Quarter, 2000 and 1999 (dollars
in thousands)
Three Months Ended June 30, 2000 Three Months Ended June 30, 1999
----------------------------------- -----------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $ 115,462 $ 1,716 5.94% $ 132,022 $ 1,782 5.40%
State and Political Subdivision Securities 2,420 55 9.09% 3,936 87 8.84%
Other Investments 33,605 539 6.42% 33,430 531 6.35%
Mortgage-Backed Securities 117,140 1,995 6.81% 62,261 932 5.99%
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 2,936 46 6.27% 274 4 5.84%
Total Loans and Fees 1,103,245 24,366 8.83% 937,191 20,050 8.56%
----------- ------- ----------- -------
Total Earning Assets 1,374,808 28,717 8.36% 1,169,114 23,386 8.00%
----------- ------- ----------- -------
Less: Allowance for Loan Losses (7,862) (7,962)
Non-Earning Assets:
Cash and Due From Banks 25,192 19,977
Bank Premises and Equipment, Net 19,437 17,201
Other Assets 14,672 13,548
----------- -----------
Total Assets $ 1,426,247 $ 1,211,878
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 125,207 $ 820 2.62% $ 119,124 $ 803 2.70%
Money Market Accounts 112,245 1,532 5.46% 133,760 1,468 4.39%
Individual Retirement Accounts 29,910 424 5.67% 25,691 340 5.29%
Certificates of Deposit and Other
Time Deposits 456,006 6,250 5.48% 411,692 5,354 5.20%
Repurchase Agreements and Other
Short-Term Borrowings 234,911 3,226 5.49% 120,131 1,138 3.79%
Other Borrowings 247,726 3,785 6.11% 202,600 2,680 5.29%
----------- ------- ----------- -------
Total Interest Bearing Liabilities 1,206,005 16,037 5.32% 1,012,998 11,783 4.65%
----------- ------- ----------- -------
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 99,835 84,505
Other Liabilities 12,937 11,958
Stockholders' Equity 107,470 102,417
----------- -----------
Total Liabilities and Stockholders'
Equity $ 1,426,247 $ 1,211,878
=========== ===========
Net Interest Income $12,680 $11,603
======= =======
Net Interest Spread 3.04% 3.35%
==== ====
Net Interest Margin 3.69% 3.97%
==== ====
For the purposes of these calculations, non-accruing loans are included in the
quarterly average loan amounts outstanding.
Table 2 - Average Balance Sheet Rates for Six Months Ended, 2000 and 1999
(dollars in thousands)
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
----------------------------------- -----------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $ 118,563 $ 3,463 5.84% $ 135,229 $ 3,673 5.43%
State and Political Subdivision Securities 3,053 134 8.78% 3,963 175 8.83%
Other Investments 33,516 1,076 6.42% 32,227 1,022 6.34%
Mortgage-Backed Securities 110,785 3,704 6.69% 59,526 1,774 5.96%
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 8,772 249 5.68% 1,567 36 4.59%
Total Loans and Fees 1,087,402 49,173 9.04% 929,747 40,561 8.73%
----------- ------- ----------- -------
Total Earning Assets 1,362,091 57,799 8.49% 1,162,259 47,241 8.13%
----------- ------- ----------- -------
Less: Allowance for Loan Losses (7,862) (7,945)
Non-Earning Assets:
Cash and Due From Banks 24,761 19,465
Bank Premises and Equipment, Net 19,297 16,823
Other Assets 14,655 13,207
----------- -----------
Total Assets $ 1,412,942 $ 1,203,809
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 125,168 $ 1,655 2.64% $ 115,885 $ 1,561 2.69%
Money Market Accounts 117,398 2,957 5.04% 127,909 2,810 4.39%
Individual Retirement Accounts 29,825 832 5.58% 24,827 662 5.33%
Certificates of Deposit and Other
Time Deposits 446,373 12,132 5.44% 415,528 10,995 5.29%
Repurchase Agreements and Other
Short-Term Borrowings 226,742 6,039 5.33% 124,796 2,383 3.82%
Other Borrowings 244,021 7,324 6.00% 191,428 5,084 5.31%
----------- ------- ----------- -------
Total Interest Bearing Liabilities 1,189,527 30,939 5.20% 1,000,373 23,495 4.70%
----------- ------- ----------- -------
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 103,765 88,627
Other Liabilities 12,974 11,713
Stockholders' Equity 106,676 103,096
----------- -----------
Total Liabilities and Stockholders'
Equity $ 1,412,942 $ 1,203,809
=========== ===========
Net Interest Income $26,860 $23,746
======= =======
Net Interest Spread 3.29% 3.43%
==== ====
Net Interest Margin 3.94% 4.09%
==== ====
For the purposes of these calculations, non-accruing loans are included in the
quarterly 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 have 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 old 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 (in thousands)
Three Months Ended June 30, 2000 Six Months Ended June 30, 2000
Compared to Compared to
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
Increase/(Decrease) Increase/(Decrease)
due to due to
Total Net Total Net
Change Volume Rate Change Volume Rate
Interest Income:
U.S. Treasury and
Government Agency Securities $ (66) $ (224) $ 158 $ (210) $ (453) $ 243
State and Political
Subdivision Securities (32) (34) 2 (41) (40) (1)
Other Investments 8 3 5 54 41 13
Mortgage-Backed Securities 1,063 821 242 1,930 1,528 402
Federal Funds Sold 42 39 3 213 166 47
Total Loans and Fees (1) (2) 4,316 3,553 763 8,612 6,878 1,734
-------- -------- -------- -------- -------- --------
Net Change in Interest Income 5,331 4,158 1,173 10,558 8,120 2,438
-------- -------- -------- -------- -------- --------
Interest Expense:
Interest Bearing
Transaction Accounts 17 41 (24) 94 125 (31)
Money Market Accounts 64 (236) 300 147 (231) 378
Individual Retirement Accounts 84 56 28 170 133 37
Certificates of Deposit and
Other Time Deposits 896 576 320 1,137 816 321
Repurchase Agreements and Other
Short-Term Borrowings 2,088 1,087 1,001 3,656 1,947 1,709
Other Borrowings 1,105 597 508 2,240 1,397 843
-------- -------- -------- -------- -------- --------
Net Change in Interest Expense 4,254 2,121 2,133 7,444 4,187 3,257
-------- -------- -------- -------- -------- --------
Increase in Net Interest Income $ 1,077 $ 2,037 $ (960) $ 3,114 $ 3,933 $ (819)
======== ======== ======== ======== ======== ========
(1) The amount of fees on loans in total interest income was approximately $322
and $300 for the quarters ended June 30, 2000 and 1999, respectively.
(2) The amount of fees on loans in total interest income was approximately
$2,579 and $1,422 for the six months ended June 30, 2000 and 1999,
respectively.
Non-Interest Income. Non-interest income was $1.9 million during second quarter
2000, down from $2.3 million during second quarter of 1999. Non-interest income
was down $1.7 million for the six months ended June 30, 2000 to $4.3 million.
The decrease was principally due to a reduction in gains generated from sales of
loans into the secondary market and sales of securities.
Revenue from mortgage banking activities declined during the three-month and
six-month periods ended June 30, 2000 as a result of reduced secondary market
sales volume. The market's interest-rate environment heavily influences
secondary market residential loan originations and, correspondingly,
consumer-refinance activity. For the second quarter and the first half of 2000,
market interest rates were above 1999 levels, which led to lower secondary
market originations and sales volumes. Given the rise in interest rates from
1999, management believes that the secondary market sales volume, comprised of
fixed rate products, are likely to continue at current levels. Management also
believes that this reduction in secondary market gains on the sale of loans will
be partially offset by increased interest income generated by further growth in
the Bank's loan portfolio. In addition, management believes that the decline in
mortgage banking income may be moderated by a corresponding decrease in
commission costs due to lower secondary market origination volume.
Non-Interest Expense. Total non-interest expense was $9.7 million for the second
quarter of 2000, compared to $9.3 million for the same period in 1999.
Non-interest expense increased from $19.2 million for the six months ended June
30, 1999 to $20.3 million for the comparable period in 2000. The increases for
both the three and six months ended June 30, 2000 were primarily attributable to
the growth in the number of banking centers.
Salary and employee benefits decreased for both the three and six months ended
June 30, 2000. Even with the addition of two banking centers, Republic's overall
staffing levels decreased to 467 full-time equivalent employees ("FTE's") at
June 30, 2000, compared to 488 FTE's at June 30, 1999. The decrease resulted
from staffing reductions associated with further centralization of loan
administration operations.
Occupancy and equipment expense increased for both the three and six months
ended June 30, 2000. The increase is largely attributable to the costs
associated with the opening of two additional banking centers. It is also
anticipated that additional expense will be incurred for technology enhancements
for deposit, lending and customer support systems during the remainder of 2000.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND DECEMBER 31, 1999
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL. Federal
funds sold and securities purchased under agreements to resell decreased $47
million from December 31, 1999 as Republic maintained a higher level of liquid
funds in conjunction with its Y2K planning.
SECURITIES AVAILABLE FOR SALE. Securities available-for-sale consists primarily
of mortgage-backed securities, U.S. Treasury and U.S. Government Agencies and
Corporate bonds with a weighted average maturity of 3.2 years. Securities
available-for-sale decreased from $182 million at December 31, 1999 to $161
million at June 30, 2000.
SECURITIES TO BE HELD TO MATURITY. Securities to-be-held-to-maturity increased
from $33 million at December 31, 1999 to $91 million at June 30, 2000. The
increase occurred as Republic classified new security purchases and reinvestment
of proceeds from securities sales in the held-to-maturity category. Securities
to-be-held-to-maturity consists primarily of U.S. Treasury and U.S Government
Agencies as well as collateralized mortgage obligations (CMOs).
LOANS. Net loans increased $75 million to $1.1 billion at June 30, 2000 from
December 31, 1999. The increase in loans was primarily in the secured real
estate lending portfolio. Republic's commercial real estate lending portfolio
increased $51 from December 31, 1999 as a result of the Bank's ongoing emphasis
on commercial real estate lending. Republic also had healthy growth in
residential real estate and construction lending as a result of continued
consumer demand.
ALLOWANCE AND PROVISION FOR LOAN LOSSES. The provision for loan losses was
$432,000 in the second quarter of 2000, compared to $419,000 in the second
quarter of 1999. The provision for loan losses also decreased for the six months
ended June 30, 2000, to $1.0 million. Charge-offs of $500,000 related to tax
refund loans are included in the total charge-offs for the six months ended June
30, 2000. No charge-offs for these loans were attributed to the Bank during the
second quarter of 2000. Excluding charge-offs and recoveries related to tax
refund loans, net charge-offs decreased by approximately 36% during year-to-date
2000 compared to the same period in 1999.
The allowance for loan losses remained at $7.9 million from December 31, 1999 to
June 30, 2000. Management believes, based on information presently available,
that it has adequately provided for loan losses at June 30, 2000. Management has
considered the effect of increased commercial real estate lending on the
allowance, and that effect has been largely offset by the Bank's decreased
exposure in its unsecured consumer portfolio.
Table 4 below depicts the allowance activity by loan type for the three and
three months ended June 30, 2000 and 1999.
Table 4 - Summary of Loan Loss Experience
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(in thousands)
Allowance for loan losses:
Balance-beginning of period $ 7,862 $ 7,962 $ 7,862 $ 7,862
Charge-offs:
Real Estate (445) (135) (576) (315)
Commercial (25) (21) (33) (28)
Consumer (128) (451) (328) (958)
Tax Refund Loans (500) (200)
------- ------- ------- -------
Total (598) (607) (1,437) (1,501)
------- ------- ------- -------
Recoveries:
Real Estate 36 3 37 9
Commercial 5 5
Consumer 125 185 275 319
Tax Refund Loans 153
------- ------- ------- -------
Total 166 188 470 328
------- ------- ------- -------
Net charge-offs (432) (419) (967) (1,173)
Provision for loan losses 432 419 967 1,273
------- ------- ------- -------
Allowance for loan losses:
Balance-end of period $ 7,862 $ 7,962 $ 7,862 $ 7,962
======= ======= ======= =======
DEPOSITS. Total deposits were $834 million at June 30, 2000 compared to $801
million at December 31, 1999. Non-interest bearing deposits have increased by
approximately 23% since December 31, 1999 to $103 million. Republic's growth in
deposits was the result of management's ongoing emphasis on its commercial cash
management program, retail deposit gathering and its successful Internet banking
initiative. As of June 30, 2000, Republic had $42 million in money market
accounts and $15 million in CD's which had been opened through the Internet.
Republic plans to continue development of its deposit gathering programs by
hiring additional cash management personnel and offering competitive products in
its existing markets, as well as republicbank.com.
ASSET QUALITY
Loans, including impaired loans under SFAS 114 and 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 periodically and charged off when they reach 120 days
past due or are deemed uncollectible. At June 30, 2000, Republic had $93,000 in
consumer loans 90 days or more past due compared to $256,000 at December 31,
1999. The reduction in consumer loans 90 days or more past due is largely
attributable to the planned overall reduction in outstanding loans associated
with the Bank's Pre-Approved and All-Purpose unsecured loan programs.
The Bank's level of delinquent loans decreased slightly to 1.27% at June 30,
2000, down from 1.29% at December 31, 1999. Republic experienced a modest
increase in total non-performing loans from $3.7 million at December 31, 1999 to
$4.5 million at June 30, 2000. This increase is not deemed by management to
reflect any adverse change in overall asset quality. Other real estate owned
increased from $218,000 at December 31, 1999 to $343,000 at June 30, 2000.
Management does not consider the modest overall increase in non-performing
assets during the quarter to be material or indicative of any decline in
portfolio quality.
Table 5 provides information related to non-performing assets and loans 90 days
or more past due.
Table 5 - Non-Performing Loans
June 30, Dec. 31,
(dollars in thousands) 2000 1999
Loans on non-accrual status (1) $3,876 $2,721
Loans past due 90 days or more 669 968
------ ------
Total non-performing loans 4,545 3,689
Other real estate owned 343 218
------ ------
Total non-performing assets $4,888 $3,907
====== ======
Percentage of non-performing loans to total loans .41% .35%
Percentage of non-performing assets to total loans .44% .38%
(1) 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
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 loans have 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 it is
probable the full amount may not be collected. Impaired loans increased from
$500,000 at December 31, 1999 to approximately $800,000 at June 30, 2000.
LIQUIDITY
Republic maintains sufficient liquidity 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 retail deposit markets. Approximately $89 million
of deposits and collateralized sweeps are attributable to three customer
relationships at June 30, 2000. These funds are short-term in nature and subject
to immediate withdrawal by those entities. Should these funds be removed,
Republic has the ability to replenish them through various funding sources noted
below. 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
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. Republic's average capital to average assets ratio was
7.55% at June 30, 2000 compared to 8.27% at December 31, 1999. The decrease in
Republic's capital ratio is primarily due to the successful growth of the Bank's
loan portfolio. Republic continues to exceed the minimum regulatory requirements
for Tier I, Tier I Leverage and total risk-based capital. The Bank expects to
maintain a capital position that meets or exceeds the "well capitalized"
requirements as defined by the FDIC. Table 6 below depicts the capital ratios at
June 30, 2000.
Table 6 - Capital Ratios
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated $126,847 13.99% $ 72,542 8% $ 90,678 10%
Bank only $122,395 13.50% $ 72,535 8% $ 90,669 10%
Tier I Capital (to Risk Weighted Assets)
Consolidated $118,985 13.12% $ 36,271 4% $ 54,407 6%
Bank only $114,533 12.63% $ 36,268 4% $ 54,401 6%
Tier I Leverage Capital (to Average Assets)
Consolidated $118,985 8.34% $ 56,518 4% $ 70,647 5%
Bank only $114,533 8.03% $ 56,515 4% $ 70,644 5%
Kentucky banking regulations limit the amount of dividends that may be paid to
Republic by the Bank 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 Bank's current year's net income, as defined in
the regulations, combined with the retained net income of the preceding two
years, less any dividends declared during those periods. At June 30, 2000, the
Bank had approximately $19.6 million of retained earnings that could be utilized
for payment of dividends if authorized by the Bank's Board of Directors.
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. Republic continues to experience steady loan demand that
requires management to continue to monitor interest rate and liquidity risk and
implement appropriate funding and balance sheet strategies. 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.
Republic utilizes 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 future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. Actual
results will differ from the model's simulated results due to timing, magnitude
and frequency of interest rate changes as well as changes in market conditions
and the application and timing of various management strategies.
Republic's interest sensitivity profile changed from December 31, 1999 to June
30, 2000. Given a sustained 100 basis point downward shock to the yield curve
used in the simulation model, Republic's base net interest income would increase
by an estimated 5.37% at June 30, 2000 compared to an increase of 2.47% at
December 31, 1999. Given a 100 basis point increase in the yield curve
Republic's base net interest income would decrease by an estimated 6.51% at June
30, 2000 compared to a decrease of 4.49% at December 31, 1999. The overall
product mix has remained substantially constant from December 31, 1999 to June
30, 2000. However, the overall interest sensitivity profile changed due to
rising interest rates and growth during the quarter.
The interest sensitivity profile of Republic at any point in time will be
effected by a number of factors. These factors include the mix of interest
sensitive assets and liabilities as well as their relative pricing schedules.
The table below is representative only and is not a precise measurement of the
effect of changing interest rates on Republic's interest income in the future.
Table 7 - Interest Rate Sensitivity
June 30, 2000
Decrease in Rates Increase in Rates
----------------- -----------------
200 100 100 200
Basis Points Basis Points Base Basis Points Basis Points
(dollars in thousands)
Projected interest income
Loans $ 97,159 $ 100,203 $ 103,542 $ 106,293 $ 107,461
Investments 15,461 16,438 17,421 18,131 18,836
Short-term investments 42 56 40 36 47
--------- --------- --------- --------- ---------
Total interest income 112,662 116,697 121,003 124,460 126,344
Projected interest expense
Deposits 35,481 39,122 42,804 46,053 48,649
Other borrowings 22,433 25,106 28,403 31,855 35,030
--------- --------- --------- --------- ---------
Total interest expense 57,914 64,228 71,207 77,908 83,679
Net interest income $ 54,748 $ 52,469 $ 49,796 $ 46,552 $ 42,665
Change from base $ 4,952 $ 2,673 $ (3,244) $ (7,131)
% Change from base 9.94% 5.37% (6.51)% (14.32)%
December 31, 1999
Decrease in Rates Increase in Rates
----------------- -----------------
200 100 100 200
Basis Points Basis Points Base Basis Points Basis Points
(dollars in thousands)
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)%
NEW ACCOUNTING PRONOUNCEMENTS
See discussion in Note 1 to financial statements for a discussion of recent
accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information for this item is incorporated by reference to the Asset
/Liability Management and Market Risks section of Item 2., Management's
Discussion and Analysis of Financial Condition and Results of Operations.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
On June 5, 1998, a suit against the Bank was filed in Jefferson County Circuit
Court, Louisville, Kentucky by Esther A. Grossman, individually and as next
friend of Jessica Grossman, a minor, and as administratrix of the estate of
Martin L. Grossman. The suit alleges that the Bank failed to notify Mr. Grossman
that his application for a $20,000 credit life insurance policy had been
declined by a life insurance company and that such alleged failure to notify Mr.
Grossman of the insurance declination caused his death. The plaintiff asserts
various causes of action, including breach of fiduciary duty, negligence, and
breach of contract, as well as statutory claims. The plaintiff seeks
approximately $6.4 million in damages. The Company believes the allegations are
without merit and intends to vigorously defend the litigation. Reference is also
made to the Company's Quarterly Report on Form 10-Q for the period ended March
31, 2000, in which information was reported regarding the litigation brought by
Beneficial Franchise Company, Inc. against the Bank and others.
Item 2. Changes in securities
During the second quarter of 2000, Republic issued approximately 5,000 shares of
Class A Common Stock upon conversion of shares of Class B Common Stock by
shareholders of Republic in accordance with the share-for-share conversion
provision option of the Class B Common Stock. The exemption from registration of
the newly issued Class A Common Stock relied upon was Section (3)(a)(9) of the
Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
The exhibits required by Item 601 of Regulation S-K are attached to and
listed in the Exhibit Index on page 34.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Republic Bancorp, Inc.
(Registrant)
Principal Executive Officer:
Date: August 11, 2000 /s/ Steven E. Trager
--------------- --------------------
Steven E. Trager
Chief Executive Officer
Principal Financial Officer:
Date: August 11, 2000 /s/ Mark A. Vogt
--------------- ----------------
Mark A. Vogt
Chief Financial Officer
EXHIBIT INDEX
Incorporated
Exhibit Description By Reference To
- ------- ----------- ---------------
11 Statement Regarding Filed as Exhibit 11
Computation of on page 35 of this
Per Share Earnings Form 10-Q for the
period ended
June 30, 2000
15 Awareness Letter Filed as Exhibit 15
on page 36 of this
Form 10-Q for the
period ended
June 30, 2000
27 Financial Data Schedule Filed as Exhibit 27
on page 37 of this
Form 10-Q for the
period ended
June 30, 2000
Exhibit 11.
Statement Regarding Computation of Per Share Earnings
See Item 1, Note 7 "Earnings Per Share" for calculations.
Exhibit 15.
Awareness Letter
August 11, 2000
Republic Bancorp, Inc.
601 West Market Street
Louisville, Kentucky 40202
We have reviewed, in accordance with standards established by the AICPA, the
unaudited interim financial information of Republic Bancorp, Inc. (the Company)
as of June 30, 2000 and for the quarter and year-to-date periods ended June 30,
2000 and 1999 as indicated in our report dated August 11, 2000. Because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which was included in your
quarterly report on Form 10-Q, is being incorporated by reference in the Form
S-8 Registration statement.
We also are aware that our report referred to above, under Rule 436(c) under the
Securities Act of 1933, is not considered a part of the registration statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of the Act.
Crowe, Chizek and Company LLP