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, 1998
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: 14,621,188 shares of Class A Common Stock and 2,337,948
shares of Class B Common Stock as of August 10, 1998.
The Exhibit index is on page 34. This filing contains 36 pages (including this
facing sheet).
REPUBLIC BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 3-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 30
Item 4. Submission of Matters to a Vote of Securities Holders 30-31
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
PART I
ITEM 1
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands)
June 30, December 31,
1998 1997
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 23,253 $ 24,546
Securities purchased
under agreements to resell 30,000
--------- ----------
Total cash and cash equivalents 53,253 24,546
Securities available for sale 161,047 93,826
Securities to be held to maturity 69,099 98,546
Loans, less allowance for loan losses of
$8,234 (1998) and $8,176 (1997) 828,556 794,939
Mortgage loans held for sale 11,586 9,970
Federal Home Loan Bank stock 10,961 8,124
Accrued interest receivable 9,319 8,803
Premises and equipment, net 13,804 12,774
Other assets 4,098 3,422
--------- --------
TOTAL $ 1,161,723 $ 1,054,950
========= =========
LIABILITIES:
Deposits:
Non-interest bearing $ 78,237 $ 65,913
Interest bearing 667,316 665,685
Securities sold under agreements to repurchase and
other short-term borrowings 102,497 111,137
Other borrowed funds 219,020 124,405
Accrued interest payable 6,764 6,233
Guaranteed preferred beneficial interests in
Company's subordinated debentures 6,452 6,452
Other liabilities 5,695 6,739
------------ -------------
Total liabilities 1,085,981 986,564
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A and Class B Common stock, no par value 3,615 3,613
Additional paid-in capital 10,890 10,833
Retained earnings 61,310 53,994
Net unrealized depreciation on securities available
for sale, net of tax (73) (54)
------------- -------------
Total stockholders' equity 75,742 68,386
------------ -------------
TOTAL $ 1,161,723 $ 1,054,950
============ =============
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
INTEREST INCOME:
Loans, including fees $ 19,097 $ 19,557 $ 38,220 $ 38,372
Securities available for sale 2,086 1,441 3,811 2,904
Securities to be held to maturity:
Taxable 1,153 1,955 2,520 3,933
Non-taxable 28 32 56 63
FHLB dividends 196 117 384 227
Other 469 140 823 353
--------- -------- --------- --------
Total interest income 23,029 23,242 45,814 45,852
--------- -------- --------- --------
INTEREST EXPENSE:
Deposits 8,821 10,148 17,353 19,812
Short-term borrowings 1,167 1,098 2,383 2,340
Long-term debt 2,724 1,756 5,391 3,453
---------- ---------- --------- ---------
Total interest expense 12,712 13,002 25,127 25,605
---------- ---------- --------- ---------
NET INTEREST INCOME 10,317 10,240 20,687 20,247
PROVISION FOR LOAN LOSSES 741 1,416 1,384 2,714
---------- ---------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,576 8,824 19,303 17,533
---------- ---------- --------- ---------
NON-INTEREST INCOME:
Service charges on deposit accounts 850 824 1,603 1,601
Other service charges and fees 206 170 603 480
Bank card services 99 508
Loan servicing income 149 186 315 375
Net gain on sale of deposits 4,116
Net gain on sale of bank card 3,410 3,410
Net gain on sale of loans 1,143 263 2,152 544
Net gain on sale of securities 167 16 491 16
Other 558 189 705 319
---------- ---------- ---------- ---------
Total non-interest income 3,073 5,157 9,985 7,253
---------- ---------- ---------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,539 4,103 8,615 7,791
Occupancy and equipment 1,841 1,962 3,703 3,968
Communication and transportation 408 469 834 905
Marketing and development 407 349 712 712
FDIC deposit insurance 50 134 53
Supplies 256 265 516 507
Other 1,094 1,143 2,155 2,350
---------- ---------- ---------- ---------
Total non-interest expense 8,595 8,291 16,669 16,286
---------- ---------- ---------- ---------
INCOME BEFORE INCOME TAXES 4,054 5,690 12,619 8,500
INCOME TAXES 1,452 2,034 4,493 2,964
---------- ---------- ---------- ---------
NET INCOME $ 2,602 $ 3,656 $ 8,126 $ 5,536
========== ========= ========== =========
(Continued)
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 ( in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Change in unrealized gain (loss) on securities $ 278 $ 564 $ 472 $ (100)
Reclassification of realized amount (167) (16) (491) (16)
---------- --------- ---------- --------
Net unrealized gain (loss) recognized in
comprehensive income 111 548 (19) (116)
---------- --------- ---------- --------
COMPREHENSIVE INCOME $ 2,713 $ 4,204 $ 8,107 $ 5,420
========== ========= ========== =========
EARNINGS PER SHARE
Class A $ .17 $ .25 $ .54 $ 37
Class B $ .17 $ .24 $ .54 $ .36
EARNINGS PER SHARE ASSUMING DILUTION
Class A $ .17 $ .24 $ .52 $ .36
Class B $ .17 $ .23 $ .52 $ .36
See accompanying notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands, except for per share data)
Net Unrealized
Depreciation
Common Stock Additional on Available Total
Class A Class B Paid-In Retained For Sale Stockholders'
Shares Shares Amount Capital Earnin Securities Equity
BALANCE, January 1, 1998 12,531 2,418 $ 3,613 $ 10,833 $ 53,994 $ (54) $ 68,386
Exercised options 10 2 57 59
Conversion of Class B to Class A 4 (4)
Dividend Declared
Common: Class A ($.055 per share) (690) (690)
Class B ($.05 per share) (120) (120)
Net changes in unrealized depreciation
on securities available for sale (19) (19)
Net Income 8,126 8,126
------- ----- -------- -------- -------- ------- -------
BALANCE, June 30, 1998 12,545 2,414 $ 3,615 $ 10,890 $ 61,310 $ (73) $ 75,742
======= ===== ======== ======== ======== ======= =======
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (in thousands)
1998 1997
OPERATING ACTIVITIES:
Net income $ 8,126 $ 5,536
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization of premises and equipment 1,674 2,048
Amortization and accretion of securities 127 315
FHLB stock dividends (370) (208)
Provision for loan losses 1,384 2,714
Net gain on sale of securities (491) (16)
Net gain on sale of loans (2,152) (544)
Net gain on sale of Bank card (3,410)
Net gain on sale of deposits (4,116)
Proceeds from sale of loans 137,905 46,993
Origination of mortgage loans held for sale (137,369) (46,015)
Changes in assets and liabilities:
Accrued interest receivable (516) 124
Other assets 14 (9,577)
Accrued interest payable 531 1,589
Other liabilities (1,044) 1,644
--------- ---------
Net cash provided by operating activities 3,703 1,193
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of bank card 25,555
Purchases of securities available for sale (127,669) (5,044)
Purchases of securities to be held to maturity (11,189)
Purchases of Federal Home Loan Bank Stock (2,467) (1,000)
Proceeds from maturities of securities to be held to maturity 29,597 66,516
Proceeds from sales and paydowns of securities available for sale 60,634 9,140
Net increase in loans (35,682) (62,478)
Purchases of premises and equipment (4,054) (2,319)
Disposal of premises and equipment 1,350 175
--------- ---------
Net cash used in investing activities (78,291) 19,356
---------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 79,635 47,184
Sale of deposits (61,564)
Net decrease in securities sold under agreement to
repurchase and other short-term borrowings (8,640) (95,554)
Payments on other borrowings (62,285) (136,159)
Proceeds from other borrowings 156,900 139,250
Proceeds from issuance of guaranteed preferred beneficial
interests in Company's subordinated debentures 6,452
Proceeds from stock options exercised 59
Cash dividends paid (810) (995)
--------- ----------
Net cash provided by (used in) financing activities 103,295 (39,822)
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,707 (19,273)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,546 56,671
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 53,253 $ 37,398
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 24,597 $ 24,016
========= =========
Income taxes $ 6,272 $ 1,839
========= =========
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
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), 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-month and six-month periods
ending June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. 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, 1997.
New Accounting Pronouncements - In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". This
standard changes the way public companies report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Operating segments are parts of a company
for which separate information is available which is evaluated by the chief
operating decision maker in deciding how to allocate resources and in evaluating
performance. Required disclosures for operating segments include total segment
revenues, total segment profit or loss, and total segment assets. The standard
also requires disclosures regarding revenues derived from products or services
(or similar groups of products or services), countries in which the company
derives revenue or holds assets, and about major customers, regardless of
whether this information is used in operating decision making. Republic is
required to adopt the disclosure requirements in its 1998 annual report, and in
interim periods in 1999. The 1999 interim period disclosures are required to
include comparable 1998 information.
In June 1998, 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, 2000. Management has not yet determined the impact of this standard.
Comprehensive Income - Republic adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income", effective for the interim
period ended March 31, 1998. This Standard requires reporting of comprehensive
income, defined as changes in equity other than those resulting from investments
by or distributions to stockholders. Net income, plus or minus "other
comprehensive income" results in comprehensive income. The only item of other
comprehensive income applicable to Republic is the change in unrealized gain or
loss on securities available for sale. Comprehensive income is reported on the
statement of income. The period ended June 30, 1997 was restated to meet the
current reporting format.
Earnings Per Share - Earnings per share and earnings per share assuming dilution
are computed under a new accounting standard effective in the quarter ended
December 31, 1997. All prior amounts have been restated to be comparable.
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 two-for-one stock split
of the Class A Common stock and Class B Common stock effective July 1, 1998.
Reclassifications - Certain amounts have been reclassified in the 1997 financial
statements to conform with the current period classifications. The
reclassifications have no effect on net income or stockholders' equity as
previously reported.
2. CASH & CASH EQUIVALENTS
During 1998, the Bank entered into agreements to purchase securities under
agreements to resell ("reverse repurchase agreements"). At June 30, 1998 these
reverse repurchase agreements totaled $30.0 million. The securities purchased
under these reverse repurchase agreements are government agency securities and
are pledged against the Bank's customer repurchase accounts. The fair value of
the pledged securities as of June 30, 1998 was approximately $30.3 million. The
securities purchased under these agreements are overnight in term and maintained
by a third party safekeeping agent for the benefit of the Bank. The average
balance of securities purchased under reverse repurchase agreements for
year-to-date 1998 was $11.4 million with a maximum balance outstanding at any
month end of $30.0 million.
3. SECURITIES
Available For Sale Securities:
June 30, 1998
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. Treasury Securities and U.S.
Government Agencies $ 125,448 $ (13) $ 125,435
Mortgage-backed securities 35,709 (97) 35,612
------------- --------- --------- -----------
Total securities to be held to maturity $ 161,157 $ (110) $ 161,047
=========== ========= ========= ===========
Securities To Be Held To Maturity:
June 30, 1998
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. Treasury Securities and U.S.
Government Agencies $ 64,372 $ 122 $ (177) $ 64,317
Obligations of state and political
subdivisions 4,188 161 4,349
Mortgage-backed securities 539 (29) 510
----------- --------- --------- -----------
Total securities to be held to maturity $ 69,099 $ 283 $ (206) $ 69,176
=========== ========= ========= ===========
Securities having an amortized cost of $227 million and a fair value of $227
million at June 30, 1998, were pledged to secure public deposits, securities
sold under agreements to repurchase and for other purposes, as required or
permitted by law.
4. LOANS
June 30, 1998 December 31, 1997
(in thousands)
Residential real estate $ 502,232 $ 480,874
Commercial real estate 97,614 76,306
Real estate construction 38,996 37,940
Commercial 23,478 21,552
Consumer 69,363 81,967
Home equity 104,890 102,512
Other 1,952 4,094
----------- -----------
Total loans 838,525 805,245
Less:
Unearned interest income and unamortized
loan fees (1,735) (2,130)
Allowance for loan losses (8,234) (8,176)
----------- -----------
Loans, net $ 828,556 $ 794,939
=========== ===========
The following table sets forth the changes in the allowance for loan losses:
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
(in thousands)
Balance, beginning of period $ 8,234 $ 6,281 $ 8,176 $ 6,241
Provision charged to income 741 1,416 1,384 2,714
Charge-offs (879) (1,530) (1,581) (2,965)
Recoveries 138 114 255 291
--------- --------- --------- --------
Balance, end of period $ 8,234 $ 6,281 $ 8,234 $ 6,281
========= ========= ========= =========
Information about Republic's investment in impaired loans is as follows:
June 30, 1998 December 31, 1997
(in thousands)
Gross impaired loans $ 1,640 $ 1,640
Less: Related allowance for loan losses 240 240
--------- --------
Net impaired loans with related allowances 1,400 1,400
Impaired loans with no related allowances 0 0
---------- --------
Total $ 1,400 $ 1,400
========= ========
Average impaired loans outstanding $ 1,640 $ 1,639
========= ========
5. DEPOSITS
June 30, 1998 December 31, 1997
(in thousands)
Demand (NOW, Super NOW and Money Market): $ 170,155 $ 118,870
Savings 11,628 12,165
Money market certificates of deposit 34,429 41,307
Individual retirement accounts 22,578 30,167
Certificates of deposit, $100,000 and over 67,453 63,045
Other certificates of deposit 323,512 352,478
Brokered deposits 37,561 47,653
----------- ------------
Total interest bearing deposits 667,316 665,685
Total non-interest bearing deposits 78,237 65,913
----------- -----------
$ 745,553 $ 731,598
=========== ===========
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM
BORROWINGS
Short-term borrowings consist of repurchase agreements and overnight liabilities
to deposit customers arising from a cash management program offered by Republic.
While effectively deposit equivalents, such arrangements are in the form of
repurchase agreements. The repurchase agreements are treated as financings;
accordingly, the securities involved with the agreements are recorded as assets
and are held by a safekeeping agent and the obligations to repurchase the
securities are reflected as liabilities.
June 30, 1998 December 31, 1997
(in thousands)
Average outstanding balance $ 111,049 $ 100,291
Average interest rate 4.29% 4.57%
Maximum outstanding at month end $ 130,754 $ 111,137
End of period $ 102,497 $ 111,137
7. OTHER BORROWED FUNDS
June 30, December 31,
1998 1997
(in thousands)
Federal Home Loan Bank convertible fixed rate
advance (1) $ 30,000
Federal Home Loan Bank variable interest rate
advances, with weighted average interest rate
of 5.74% at June 30, 1998, due through 1999 115,500 $ 116,000
Federal Home Loan Bank fixed interest rate advances, with
weighted average interest rate of 5.84% at
June 30, 1998, due through 2003 73,520 8,405
------------ ------------
$ 219,020 $ 124,405
============ ============
- -----------------------------
(1) During the first quarter of 1998, Republic entered into a 5 year convertible
fixed rate advance with the Federal Home Loan Bank (FHLB) for $30 million. The
advance is fixed for 1 year at 5.11%. At the end of the first year, the FHLB has
the right to convert the fixed rate advance on a quarterly basis to a variable
rate advance tied to the 3 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 $104 million additional from the Federal Home Loan Bank. Republic
also has unsecured lines of credit totaling $16.7 million and secured lines of
credit of $104.7 million available through various financial institutions.
Aggregate future principal payments on borrowed funds as of June 30, 1998 are as
follows:
Year (in thousands)
1998 $ 42,683
1999 85,044
2000 1,103
2001 190
2002
2003 90,000
-----------
$ 219,020
===========
8. GUARANTEED PREFERRED BENEFICIAL INTERESTS
In February 1997, Republic Capital Trust (RCT), a trust subsidiary of Republic
Bancorp, Inc., completed the private placement of shares of cumulative trust
preferred securities ("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 Preferred Securities. Distributions on the
securities are payable quarterly at the annual rate of 8.5% of the liquidation
preference and are included in interest expense in the consolidated financial
statements. Republic undertook the issuance of these securities to enhance its
regulatory capital position. The Bank intends to utilize the capital for general
business purposes and to support the Bank's future opportunities for growth.
These securities are considered as Tier I capital under current regulatory
guidelines.
The 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.
9. 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 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
Earnings Per Share
Net Income $ 2,602 $ 3,656 $ 8,126 $ 5,536
Less: Dividends declared on preferred stock (106) (213)
--------- --------- --------- ---------
Net Income available to common shares
outstanding $ 2,602 $ 3,550 $ 8,126 $ 5,323
========= ========= ========= ==========
Weighted average shares outstanding 14,959 14,443 14,959 14,443
========= ========= ========= ==========
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
Earnings Per Share Assuming Dilution
Net Income $ 2,602 $ 3,656 $ 8,126 $ 5,536
Add: Interest expense, net of tax benefit,
on assumed conversion of guaranteed
preferred beneficial interests in
Republic's subordinated debentures 88 88 175 131
--------- --------- --------- ----------
Net Income available to common shareholder
assuming conversion $ 2,690 $ 3,744 $ 8,301 $ 5,667
========= ========= ========= ==========
Weighted average shares outstanding 14,959 14,443 14,959 14,443
Add dilutive effects of assumed
conversion and exercise:
Convertible guaranteed preferred
beneficial interest in Republic's
subordinated debentures 645 645 645 484
Convertible Series A, 8.5% Preferred stock 600 600
Stock options 269 206 270 195
--------- --------- --------- ----------
Weighted average shares and dilutive
potential shares outstanding 15,873 15,894 15,874 15,722
========= ========= ========= ==========
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.
10. SEGMENT INFORMATION
Republic's operations include two segments: banking and mortgage banking. The
banking segment is composed of those operations involved in making loans,
investing in government and government agencies' securities and receiving
deposits from customers. The mortgage banking segment consists of those
operations involved in originating residential mortgage loans for resale in the
secondary mortgage market and in servicing loans for others.
Intersegment interest income and expense represent interest on loans and
advances from the bank segment to the mortgage banking segment are computed at
the Bank's prime rate.
Three Months Ended June 30, 1998
(in thousands)
Mortgage
Banking Banking Other Eliminations Consolidated
Interest income:
Unaffiliated customer $ 22,693 $ 336 $ 23,029
Intersegment 266 $ 147 $ (413)
----------- ---------- --------- ---------- ------------
Total interest income 22,959 336 147 (413) 23,029
Interest expense:
Unaffiliated customer 12,575 137 12,712
Intersegment 3 266 144 (413)
----------- ---------- --------- ---------- -----------
Total interest expense 12,578 266 281 (413) 12,712
----------- ---------- --------- ---------- -----------
Net interest income 10,381 70 (134) 10,317
Provision for loan losses 741 741
Other income 1,973 1,100 3,073
Non-interest expense 8,056 498 41 8,595
----------- ---------- --------- ----------- ------------
Operating profit 3,557 672 (175) 4,054
=========== ========== ========= =========== ============
Indentifiable assets 1,149,344 12,360 91,709 (91,690) 1,161,723
=========== ========== ========= =========== ============
Depreciation and amortization 796 40 836
=========== ========== ========= =========== ============
Capital Expenditures 1,997 56 2,053
=========== ========== ========= =========== ============
Three Months Ended June 30, 1997
(in thousands)
Mortgage
Banking Banking Other Eliminations Consolidated
Interest income:
Unaffiliated customer $ 23,026 $ 216 $ 23,242
Intersegment 173 $ 154 $ (327)
----------- ---------- --------- ---------- ------------
Total interest income 23,199 216 154 (327) 23,242
Interest expense:
Unaffiliated customer 12,829 173 13,002
Intersegment 9 173 145 (327)
----------- ---------- --------- ----------
Total interest expense 12,838 173 318 (327) 13,002
----------- ---------- --------- ----------- ------------
Net interest income 10,361 43 (164) 10,240
Provision for loan losses 1,416 1,416
Other income 4,581 576 5,157
Non-interest expense 8,006 283 2 8,291
----------- ---------- --------- ----------- ------------
Operating profit 5,520 336 (166) 5,690
=========== ========== ========= =========== ============
Indentifiable assets 1,102,768 6,925 79,908 (79,888) 1,109,713
=========== ========== ========= =========== ============
Depreciation and amortization 971 30 1,001
=========== ========== ========= =========== ============
Capital Expenditures 877 414 1,291
=========== ========== ========= =========== ============
Six Months Ended June 30, 1998
(in thousands)
Mortgage
Banking Banking Other Eliminations Consolidated
Interest income:
Unaffiliated customer $ 45,201 $ 613 $ 45,814
Intersegment 464 $ 292 $ (756)
----------- ---------- --------- ---------- ------------
Total interest income 45,665 613 292 (756) 45,814
Interest expense:
Unaffiliated customer 24,853 274 25,127
Intersegment 5 464 287 (756)
----------- ---------- --------- ---------- ------------
Total interest expense 24,858 464 561 (756) 25,127
----------- ---------- --------- ----------- ------------
Net interest income 20,807 149 (269) 20,687
Provision for loan losses 1,384 1,384
Other income 7,972 2,013 9,985
Non-interest expense 15,675 949 45 16,669
----------- ---------- --------- ----------- ------------
Operating profit 11,720 1,213 (314) 12,619
=========== ========== ========= =========== ============
Indentifiable assets 1,149,344 12,360 91,709 (91,690) 1,161,723
=========== ========== ========= =========== ============
Depreciation and amortization 1,592 82 1,674
=========== ========== ========= =========== ============
Capital Expenditures 3,768 286 4,054
=========== ========== ========= =========== ============
Six Months Ended June 30, 1997
(in thousands)
Mortgage
Banking Banking Other Eliminations Consolidated
Interest income:
Unaffiliated customer $ 45,511 $ 341 $ 45,852
Intersegment 260 $ 243 $ (503)
----------- ---------- --------- ---------- ------------
Total interest income 45,771 341 243 (503) 45,852
Interest expense:
Unaffiliated customer 25,314 291 25,605
Intersegment 17 260 226 (503)
----------- ---------- --------- ---------- ------------
Total interest expense 25,331 260 517 (503) 25,605
----------- ---------- --------- ----------- ------------
Net interest income 20,440 81 (274) 20,247
Provision for loan losses 2,714 2,714
Other income 6,222 1,031 7,253
Non-interest expense 15,638 588 60 16,286
----------- ---------- --------- ----------- ------------
Operating profit 8,310 524 (334) 8,500
=========== ========== ========= =========== ============
Indentifiable assets 1,102,768 6,925 79,908 (79,888) 1,109,713
=========== ========== ========= =========== ============
Depreciation and amortization 2,003 45 2,048
=========== ========== ========= =========== ============
Capital Expenditures 1,902 417 2,319
=========== ========== ========= =========== ============
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. The 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 18 banking centers throughout Kentucky. The Bank's activities include
the acceptance of deposits for checking, savings and time deposit accounts,
making secured and unsecured loans, and 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), Federal Reserve Bank 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
Republic's total assets increased slightly in 1998 from $1.05 billion at
December 31, 1997 to $1.16 billion at June 30, 1998. The increase resulted
primarily from additional securities held for sale, cash and cash equivalents
and loans. Republic continues to experience steady overall loan demand in its
markets.
In July of 1998 Republic sold 2 million shares of its class A common stock at an
initial price of $13 per share and received approximately $23.3 million in
offering proceeds. The proceeds of the offering are expected to be used for
continued banking center expansion, broadening existing business lines,
potential acquisitions and other general corporate purposes. Republic's stock is
now being traded on the NASDAQ National Market under the symbol "RBCAA".
The following table summarizes selected financial information regarding
Republic's financial performance.
Table 1
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
Net income $ 2,602 $ 3,656 $ 8,126 $ 5,536
Net income excluding asset dispositions 2,602 1,474 5,492 3,354
Class A earnings per share .17 .25 .54 .37
Class B earnings per share .17 .24 .54 .37
ROA .89% .73% 1.19% .81%
ROA excluding asset disposition .89 .54 .96 .61
ROE 13.59 13.22 18.30 14.75
ROE excluding asset disposition 13.59 9.66 15.15 11.13
DISPOSITION OF ASSETS
During 1997, Republic elected to focus its resources on its North Central and
Central Kentucky markets. Consistent with this new 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. During the first quarter of 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 which
was completed during January, 1998. This sale was comprised of approximately
$65.7 million in deposits and certain other fixed assets. Republic retained
substantially all of its Mayfield banking center loan portfolio. The Mayfield
transaction represented the final Western Kentucky banking center sale.
Also during 1997, Republic sold its $17 million credit card portfolio, its
merchant processing assets and its $6 million, 50% interest in a joint venture
credit card arrangement, totaling $23 million. Collectively, these asset sales
resulted in a pre-tax gain of $3.4 million.
RESULTS OF OPERATIONS
Net Interest Income. For the second quarter 1998, net interest income was $10.3
million, up $77,000 over the $10.2 million attained during second quarter 1997.
Overall, the net interest rate spread decreased from 3.36% during second quarter
of 1997 to 3.14% in the comparable quarter of 1998. The Bank's net interest
margin decreased from 3.88% in second quarter 1997 to 3.76% in second quarter
1998. The decrease in the net interest spread and margin occurred because the
yield on interest earning assets decreased 43 basis points while the rate paid
on liabilities only decreased 21 basis points. During the second quarter 1998,
average interest-earning assets were $1.1 billion, an increase of $44 million
over second quarter 1997. The yield on average interest-earning assets decreased
from 8.82% during second quarter of 1997 to 8.39% during second quarter of 1998.
Total average interest bearing liabilities increased from $953 million in the
second quarter of 1997 to $969 million in the second quarter of 1998. The cost
of average interest-bearing liabilities decreased from 5.46% during second
quarter of 1997 to 5.25% in the second quarter of 1998.
Net interest income for the six months ended June 30, 1998 was $20.7 million,
down slightly from $20.2 million during the six months ended June 30, 1997. When
comparing the respective six month periods, average earning assets grew by $27
million in 1998 and average interest bearing liabilities increased $2 million
As a result of an overall decline in market rates, Republic's yield on interest
earning assets and rate paid on interest bearing liabilities declined during the
period. The decline in spread occurred as the reduction in Republic's higher
yielding unsecured consumer portfolio was replaced with lower yielding real
estate secured loans. Net interest margin declined at a slower rate than net
interest spread because Republic was able to fund a greater portion of its
interest earning assets through equity and non-interest bearing deposits.
Tables 2 and 3 provide 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, 1998 and 1997.
Table 2 - Average Balance Sheet Rates for Second Quarter, 1998 and 1997 (dollars
in thousands)
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $176,055 $2,589 5.88% $ 216,558 $ 3,324 6.14%
State and Political Subdivision Securities 4,215 84 7.97% 4,544 96 8.45%
Other Investments 10,891 196 7.24% 6,752 117 6.93%
Mortgage-Backed Securities 37,870 594 6.27% 641 8 4.99%
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 34,026 469 5.51% 10,318 140 5.43%
Total Loans and Fees 835,330 19,097 9.14% 815,648 19,557 9.59%
------- ------ ------- ------
Total Earning Assets 1,098,387 23,029 8.39% 1,054,461 23,242 8.82%
--------- ------ --------- ------
Less: Allowance for Loan Losses (8,234) (6,281)
Non-Earning Assets:
Cash and Due From Banks 17,882 21,191
Bank Premises and Equipment, Net 13,510 17,887
Other Assets 15,167 13,528
------ ------
Total Assets $ 1,136,712 $ 1,100,786
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 103,058 $ 839 3.26% $ 133,733 $ 1,159 3.47%
Money Market Accounts 99,408 1,177 4.74% 41,340 490 4.74%
Individual Retirement Accounts 22,688 341 6.01% 37,429 546 5.84%
Certificates of Deposit and Other
Time Deposits 441,165 6,464 5.86% 530,274 7,953 6.00%
Repurchase Agreements and Other
Borrowings 302,644 3,891 5.14% 209,868 2,854 5.44%
------- ----- ------- -----
Total Interest Bearing Liabilities 968,963 12,712 5.25% 952,644 13,002 5.46%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 80,037 67,631
Other Liabilities 13,467 19,465
Stockholders' Equity 74,245 61,046
------ ------
Total Liabilities and Stockholders'
Equity $ 1,136,712 $ 1,100,786
=========== ===========
Net Interest Income $10,317 $ 10,240
======= ========
Net Interest Spread 3.14% 3.36%
===== =====
Net Interest Margin 3.76% 3.88%
===== =====
For the purposes of these calculations, non-accruing loans are included in the
quarterly average loan amounts outstanding.
Table 3 - Average Balance Sheet Rates for Six Months, 1998 and 1997 (dollars in
thousands)
Six months ended June 30, 1998 Six months ended June 30, 1997
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $ 166,680 $ 4,897 5.88% $ 225,106 $ 6,688 5.94%
State and Political Subdivision Securities 4,239 176 8.30% 4,533 196 8.65%
Other Investments 10,531 384 7.31% 6,593 227 6.89%
Mortgage-Backed Securities 42,297 1,314 6.21% 649 16 4.93%
Federal Funds Sold 29,430 823 5.59% 12,775 353 5.53%
Total Loans and Fees 824,850 38,220 9.27% 801,345 38,372 9.58%
------- ------ ------- ------
Total Earning Assets 1,078,027 45,814 8.50% 1,051,001 45,852 8.73%
--------- ------ --------- ------
Less: Allowance for Loan Losses (8,227) (6,271)
Non-Earning Assets:
Cash and Due From Banks 19,531 22,737
Bank Premises and Equipment, Net 13,155 17,810
Other Assets 13,795 12,991
------ ------
Total Assets $ 1,116,281 $ 1,098,268
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 98,705 $ 1,601 3.24% $ 135,067 $ 2,333 3.45%
Money Market Accounts 89,426 2,163 4.84% 40,641 957 4.71%
Individual Retirement Accounts 22,713 680 5.99% 36,874 1,078 5.85%
Certificates of Deposit and Other
Time Deposits 439,753 12,909 5.87% 520,783 15,444 5.93%
Repurchase Agreements and Other
Borrowings 301,725 7,774 5.15% 216,833 5,793 5.34%
------- ----- ------- -----
Total Interest Bearing Liabilities 952,322 25,127 5.28% 950,198 25,605 5.39%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 76,370 69,956
Other Liabilities 14,887 17,836
Stockholders' Equity 72,702 60,278
------ ------
Total Liabilities and Stockholders'
Equity $ 1,116,281 $ 1,098,268
=========== ===========
Net Interest Income $ 20,687 $ 20,247
======== ========
Net Interest Spread 3.22% 3.34%
===== =====
Net Interest Margin 3.84% 3.85%
===== =====
For the purposes of these calculations, non-accruing loans are included in the
quarterly average loan amounts outstanding.
Table 4 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 4 - Volume/Rate Variance Analysis (in thousands)
Three Months Ended June 30, 1998 Six months ended June 30, 1998
Compared to Compared to
Three Months Ended June 30, 1997 Six months ended June 30, 1997
-------------------------------- ------------------------------
Increase/(Decrease) Increase/(Decrease)
due to due to
Total Net Total Net
Change Volume Rate Change Volume Rate
Interest Income (1):
U.S. Treasury and
Government Agency Securities $ (735) $ (622) $ (113) $ (1,791) $ (1,751) $ (40)
State and Political
Subdivision Securities (12) (7) (5) (20) (13) (7)
Other Investments 79 71 8 157 135 22
Mortgage-Backed Securities 586 465 121 1,298 2,330 (1,032)
Federal Funds Sold 329 322 7 470 460 10
Total Loans and Fees (2) (460) 472 (932) (152) 1,126 (1,278)
----- ----- ----- ---- ----- -----
Net Change in Interest Income (213) 701 (914) (38) 2,287 (2,325)
----- ----- ----- ---- ----- -----
Interest Expense:
Interest Bearing
Transaction Accounts (320) (266) (54) (732) (628) (104)
Money Market Accounts 687 688 (1) 1,206 1,149 57
Individual Retirement Accounts (205) (215) 10 (398) (414) 16
Certificates of Deposit and
Other Time Deposits (1,489) (1,337) (152) (2,535) (2,404) (131)
Repurchase Agreements and
Other Borrowings 1,037 1,262 (225) 1,981 2,268 (287)
----- ----- ----- ---- ----- -----
Net Change in Interest Expense (290) 132 (422) (478) (29) (449)
----- ----- ----- ---- ----- -----
Increase in Net Interest Income $ 77 $ 569 $ (492) $ 440 $ 2,316 $ (1,876)
==== ===== ====== ===== ======= ========
(1) Interest income for loans on non-accrual status have been included in
Interest Income.
(2) The amount of fees in interest on loans was approximately $765 and $448 for
the years ended June 30, 1998 and 1997, respectively.
Non-Interest Income. Non-interest income was $3.1 million during second quarter
1998, down from $5.2 million during second quarter of 1997. The decrease was
primarily due to the one-time gains from the sale of the Bank's bank card
portfolio during 1997 of $3.4 million. Excluding the one-time sale of bank card
during 1997, non-interest income increased by $1.3 million. The increase was
principally a result of a higher number of loan originations and gains generated
from subsequent sales into the secondary market.
Non-interest income increased from $7.3 million for the six months ended June
30, 1997 to $10.0 million for the comparable period in 1998. Excluding the
one-time gain on sale of deposits of $4.1 million during 1998 and the sale of
bankcard totaling $3.4 million during 1997, non-interest income increased by
$2.0 million. The increase was primarily in additional gains on loans sold into
the secondary market. Also during the first six months of 1998, Republic
realized $491,000 in gains from sales of securities. Future gains on sales of
securities, if any, are dependent upon market conditions and other factors.
Service charges on deposit accounts remained constant at $1.6 million for the
six month periods ended June 30, 1998 and 1997, notwithstanding the sale of five
banking centers in Western Kentucky. Republic continues to market its
transaction accounts, review fees assessed and improve collection activities.
Other service charges and fees increased $123,000 to $603,000 for the six months
ended June 30, 1998 due to increased volume associated with Republic's
participation in a rapid tax refund joint venture. Revenues generated from this
joint venture are primarily realized only during the tax filing season,
comprised of the first quarter and to a lesser extent the second quarter of the
year.
Revenue from mortgage banking activities during the six month period ending June
30, 1998 has been positively influenced by increases in origination, sales
volume and the sale of most loans with servicing released. Proceeds from sales
of loans were $47.0 million and $137.9 million for the six month periods ending
June 30, 1997 and 1998, respectively. Secondary market residential loan
originations are heavily influenced by interest rates, which was the primary
factor for the increased volume. Net gains from sales of loans closely track
loan origination volume. Net gains as a percentage of loans sold were 1.6% and
1.2% for the six month periods ending June 30, 1997 and 1998, respectively.
Management made a change from selling loans with servicing retained to servicing
released in 1995 in order to offset downward market pressure on loan sale
pricing. The sale of a significant number of loans with servicing released,
coupled with normal loan paydowns and payoffs, has resulted in a decline in the
size of the loan servicing portfolio and a corresponding decline in loan
servicing income. As of June 30, 1998, Republic was servicing $241 million in
mortgage loans for other investors, compared to $263 million at December 31,
1997.
Non-Interest Expense. Total non-interest expense was $8.6 million in second
quarter 1998, compared to $8.3 million for second quarter 1997. Non-interest
expense increased marginally from $16.3 million for the six months ended June
30, 1997, to $16.7 million for the comparable period in 1998. The increase for
the six months ended June 30, 1998 was primarily attributable to costs
associated with salaries and employee benefits. Excluding the one-time gain on
sale of deposits and bankcard, Republic's non-interest expense ratio
(non-interest expense divided by the sum of net interest income and non-interest
expense) at June 30, 1998 was 63% compared to 69% at June 30, 1997.
Salary and employee benefit expense increased 11% for the second quarter 1998
over second quarter, 1997, and 11% for the six months ended June 30, 1998
compared to June 30, 1997. This rise was due an increase in the number of higher
salaried technical staff, lending staff additions, commissions, and annual merit
salary increases. Republic's overall staffing level reduced to 412 full-time
equivalent employees (FTE's) at June 30, 1998, compared to 443 FTE's at June 30,
1997, primarily due to the sale of the Bank's Western Kentucky banking centers.
Occupancy and equipment expense decreased marginally from $2.0 million in second
quarter 1997 to $1.8 million for the comparable period in 1998. These expenses
are not expected to decrease further in the near term as the Bank intends to
open additional locations in its existing markets as well as incur additional
expenses for technology enhancements in the areas of deposit, lending and
customer support systems.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Cash and cash equivalents. Cash and cash equivalents increased from $25 million
at December 31, 1997 to $53 million at June 30, 1998. Cash and due from banks
decreased $1 million, while Republic entered into overnight reverse repurchase
agreements totaling $30 million. The overnight reverse repurchase agreements
provided the bank with additional collateral which can be pledged against
short-term borrowings and public funds deposits.
Securities available for sale. Securities available for sale consists primarily
of mortgage-backed securities, U.S. Treasury and U.S. Government Agencies with a
weighted average maturity of 1.42 years. Securities available for sale increased
from $94 million at December 31, 1997 to $161 million at June 30, 1998. Republic
elected to invest funds from maturing securities previously held to maturity
into securities available for sale in order to provide for more flexibility in
administering the investment portfolio in changing market conditions.
Securities to be held to maturity . Securities to be held to maturity decreased
from $99 million at December 31, 1997 to $69 million at June 30, 1998. The
decrease was due to management's decision to reinvest maturing securities into
securities available for sale. Securities to be held to maturity consists
primarily of U.S. Treasury and U.S government Agencies with a weighted average
maturity of 1.05 years.
Loans. Net loans increased $34 million to $829 million at June 30, 1998 compared
to $795 million at December 31, 1997. The increase in loans was led by
residential real estate lending portfolio which increased $21 million since
December 31, 1997. Republic also increased its commercial real estate lending by
$21 million to $98 million at June 30, 1997, a 28% increase. The rise in
residential real estate loan volume was a result of a continued favorable rate
environment. The rise in commercial real estate lending was primarily due to the
Bank's decision to capitalize on customer demand through its recently developed
commercial lending unit. Commercial real estate lending remains primarily
concentrated within the Bank's existing markets.
Republic's consumer loans decreased from $189 million at December 31, 1997 to
$176 million at June 30, 1998. The consumer loan portfolio consists of both
secured (home equity, auto, etc.) and unsecured loans. Republic's home equity
portfolio increased from $103 million at December 31, 1997 to $105 million at
June 30, 1998. Following strong growth in this product during 1997, credit
utilization by existing customers has moderated. The
home equity line portfolio increased $2 million to $105 million for the six
month period ending June 30, 1998. Approximately 41% of loans in the consumer
portfolio are unsecured. Republic's unsecured consumer portfolio includes the
"All Purpose" and "Pre Approved" loan products. Republic's "All Purpose" loans,
with total outstandings of $10 million at June 30, 1998 and $13 million at
December 31 1997, are originated through Republic's banking centers. "Pre
Approved" loans decreased from $25 million at December 31, 1997 to $18 million
at June 30, 1998. These loans were originated through direct mail. Management
plans to continue to allow the "All Purpose" and "Pre Approved" portfolios to
reduce in the near term.
Allowance and Provision for Loan Losses. The allowance for loan losses remained
constant at $8.2 million from December 31, 1997 to June 30, 1998. Republic's
allowance to total loan ratio was .98% at June 30, 1998 compared to 1.02% at
December 31, 1997.
The provision for loan losses was $741,000 in the second quarter, 1998, compared
to $1.4 million in the second quarter of 1997. Overall, net charge-offs
decreased $675,000 during second quarter 1998 compared to the comparable 1997
period. Republic's unsecured consumer loan portfolio accounted for 92% of total
charge-offs in the second quarter of 1998.
The provision for loan losses was $1.4 million for the six months ended June 30,
1998, compared to $2.7 million for the six months ended June 30, 1997. Net
charge-offs decreased $1.3 million from year-to-date 1997 to year-to-date 1998.
The decrease in net charge-offs during 1998 resulted from continued moderation
of charge-offs in the unsecured consumer loan portfolio This portfolio's
outstandings are expected to continue to reduce in the near term. Management
believes, based on information presently available, that it has adequately
provided for loan losses at June 30, 1998.
Table 5 below depicts the allowance activity by loan type for the three and six
months ended June 30, 1998 and 1997.
Table 5 - Summary of Loan Loss Experience
Three Months Ended Six months ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
Allowance for loan losses:
Balance-beginning of period $ 8,234 $ 6,281 $ 8,176 $ 6,241
Charge-offs:
Real Estate (59) (142) (78) (164)
Commercial (5) (43)
Consumer (820) (1,383) (1,503) (2,758)
--------- --------- --------- -------
Total (879) (1,530) (1,581) (2,965)
--------- --------- --------- -------
Recoveries:
Real Estate 2 5 18
Commercial 4
Consumer 136 114 246 273
-------- --------- -------- -------
Total 138 114 255 291
-------- --------- -------- -------
Net charge-offs (741) (1,416) (1,326) (2,674)
Provision for loan losses 741 1,416 1,384 2,714
-------- --------- -------- -------
Allowance for loan losses:
Balance-end of period $ 8,234 $ 6,281 $ 8,234 $ 6,281
======== ========= ======== =======
Deposits. Total deposits increased to $746 million at June 30, 1998 compared to
$732 million at December 31, 1997. The overall increase in deposits was achieved
even though $66 million in deposits at the Mayfield banking center were sold
during the first quarter of 1998. Excluding the sale of deposits at the Mayfield
banking center, total deposits would have reflected an increase of $80 million
during the six month period. Republic's growth in deposits was the result of
management's emphasis on retail deposit gathering and its commercial cash
management program. Republic plans to continue its deposit gathering initiatives
by utilizing aggressive pricing strategies and offering competitive products in
its existing markets.
Other borrowed funds. Other borrowed funds, which consists of FHLB advances,
increased from $124 million at December 31, 1997 to $219 million at June 30,
1998. The increase was primarily due to additional advances from the FHLB to
fund the sale of deposits at the Mayfield banking center during the first
quarter of 1998. Additional borrowings were used to purchase investment
securities which were used to collateralize deposits due to the bank's growth in
public funds and high balance commercial accounts.
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 and are deemed uncollectible. At June 30, 1998, Republic had $648,000
in consumer loans 90 days or more past due compared to $497,000 at December 31,
1997.
Table 6 provides information related to non-performing assets and loans 90 days
or more past-due. Total non-performing assets increased slightly from December
31, 1997 to June 30, 1998.
Table 6 - Non-Performing Loans
June 30, December 31,
(dollars in thousands) 1998 (1) 1997 (1)
Loans on non-accrual status (2) $ 2,785 $ 2,676
Loans past due 90 days or more 4,553 4,459
------- ---------
Total non-performing loans 7,338 7,135
Other real estate owned 290 22
------- ---------
Total non-performing assets $ 7,628 $ 7,157
======= =========
Percentage of non-performing loans to total loans .88% .90%
Percentage of non-performing assets to total loans .91% .90%
(1) The table is exclusive of impaired loans which remained on accrual status.
(2) Interest income that would have been earned and received on non-accrual
loans was not material.
Non-performing assets increased from $7.2 million at December 31, 1997 to $7.6
million at June 30, 1998. This increase is largely comprised of loans which are
primarily secured by 1-4 family residential loans. Management does not consider
the increase in non-performing assets to be 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 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 it is
probable the full amount will not be collected. Impaired loans consist of one
commercial real estate loan which remained constant from December 31, 1997 to
June 30, 1998 at $1.4 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 $76 of repurchase agreements and money markets are comprised of 3
entities at June 30, 1998. Should these funds be removed, Republic has the
ability to replenish these funds 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 strategies.
Republic's objectives include preserving an adequate liquidity position.
Asset/liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve an acceptable
net interest margin. While Republic continues to experience steady loan demand,
management continues to monitor interest rate and liquidity risk and implement
appropriate funding and balance sheet strategies.
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 improved its capital position during the first
six months of 1998 due to the increase in retained earnings achieved during the
period. As a result of the improved capital position , Republic's capital to
assets ratio increased to 6.66% at June 30, 1998 compared to 6.26% at December
31, 1997. Republic continues to exceed the regulatory requirements fro 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. Table 7 below indicates the capital ratios at June 30,
1998.
Table 7 - 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)
As of June 30, 1998
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated $ 90,482 12.71% $ 56,972 8% $ 71,215 10%
Bank only $ 90,142 12.65% $ 56,988 8% $ 71,235 10%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 82,248 11.55% $ 28,486 4% $ 42,729 6%
Bank only $ 81,908 11.50% $ 28,494 4% $ 42,741 6%
Tier I Leverage Capital (to Average Assets)
Consolidated $ 82,248 7.24% $ 45,468 4% $ 56,835 5%
Bank only $ 81,908 7.21% $ 45,468 4% $ 56,835 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, 1998, the
Bank had $15 million of retained earnings available for payment of dividends.
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 Board of Directors sets policy guidelines
establishing maximum limits on the Bank's interest rate risk exposure.
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 is 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 Board approved policy limits. Republic'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. Republic's Board approved policy established for interest rate
risk is stated in terms of the change in net interest income given a 100 and 200
basis point immediate and sustained increase or decrease in market interest
rates. The current limits approved by the Board are plus or minus 8% for a 100
basis point change and plus or minus 12% for a 200 basis point movement.
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 above may not be a precise measurement of the effect of changing
interest rates on Republic in the future.
Table 8 - Interest Rate Sensitivity
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 $ 61,537 $ 66,874 $ 72,508 $ 78,295 $ 83,642
Investments 13,954 14,822 15,709 16,483 17,256
Short-term investments 198 274 361 458 547
----------- ---------- ---------- ----------- ---------
Total interest income $ 75,689 $ 81,970 $ 88,578 $ 95,236 $ 101,445
Projected interest expense
Deposits $ 30,220 $ 32,474 $ 34,728 $ 37,033 $ 39,760
Other borrowings 15,562 14,804 17,045 19,287 21,528
----------- ---------- ---------- ----------- ---------
Total interest expense 42,782 47,278 51,773 56,320 61,288
Net interest income $ 32,907 $ 34,692 $ 36,805 $ 38,916 $ 40,157
Change from base $ (3,898) $ (2,113) $ 2,111 $ 3,352
% Change from base (10.59)% (5.74)% 5.74% 9.11%
YEAR 2000
Management has assessed the operational and financial implications of its year
2000 needs and developed a plan to ensure that data processing systems can
properly handle the century change. Management has determined that if a business
interruption as a result of the year 2000 issue occurred, that such an
interruption could be material to the Bank's overall financial performance. The
primary effort required to prevent a potential business interruption is the
installation of the most current software releases for major mainframe
applications developed by Republic's third party software application providers.
Software upgrades and modifications will also be required for certain other data
processing applications. Republic has retained certain employees whose primary
function is to year 2000 compliance. The loss of these employees could have a
material adverse effect on the implementation of Republic's year 2000 plan.
Certain software upgrades have been commenced, or in some cases completed,
earlier than would otherwise have been planned. Year 2000 remediation has
resulted in some delay in other data processing projects , none of which are
deemed material to the Bank's financial performance. Management believes its
current state of year 2000 readiness to be satisfactory and in line with overall
industry and regulatory recommendations. At this time, the Bank has no reason to
believe that its software providers will not be able to adequately address the
Bank's needs for year 2000 software functionality. However, Republic must also
rely to some extent on the year 2000 readiness of additional third parties, not
only from hardware and software providers, but from other third party entities
such as public utilities and governmental units. These and other like entities
provide important ongoing services to the Bank. Management is therefore
currently developing ongoing contingency plans, all of which are scheduled to be
in place by year end 1998.
In carrying out its overall year 2000 plan, Republic will incur certain
operational expenses and may replace some existing software which has not been
fully amortized. Most of the expenditures associated with software application
upgrades represent costs that would have been incurred in the normal course of
business and, accordingly, will be capitalized. The operating expenses will be
expensed as incurred, and the unamortized cost of software replaced, if any,
will be charged off when the applicable software is removed from service.
Republic has expensed approximately $450,000 in costs attributable to year 2000
remediation and anticipates total costs and charges to be in an approximate
range of $1.2 to $1.8 million. These expenses could vary from management's
estimates if the scope of the Bank's year 2000 plan exceeds management's
projections.
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 2. Changes in Securities and Use of Proceeds
(a) Following receipt of shareholder approval at a special meeting of
shareholders held June 30, 1998, Republic Bancorp, Inc. (the "Corporation")
amended its Articles of Incorporation to:
a. Change the capital structure of the Corporation as follows: (i) increase
the number of authorized shares of Class A Common Stock from 15 million shares
to 30 million shares, (ii) increase the number of authorized shares of Class B
Common Stock from 2 million shares to 5 million shares, (iii) split the issued
and outstanding shares of Class A Common Stock and Class B Common Stock on a
two-for-one basis, (iv) provide that any recapitalization or other similar
change in either the Class A Common Stock or Class B Common Stock will require a
proportionate recapitalization or similar change in the other class, and (v)
provide that the payment of a dividend (other than a share dividend) on the
Class A Common Stock does not require the payment of such a dividend on the
Class B Common Stock;
b. Limit the liability of a director to the Corporation or its shareholders
except for any transaction in which the director has a personal financial
conflict of interest, for acts or omissions not in good faith or which involve
intentional misconduct or are known to the director to be a violation of law,
for any vote for an unlawful distribution to shareholders, or for any
transaction from which the director derived an improper personal benefit;
c. Limit the right of shareholders to call a special meeting of
shareholders by requiring the consent of the holders of more than 50% of the
voting power of the Corporation to call a special meeting of shareholders; and
d. Increase to a majority of the voting power the vote required to amend
the new provision summarized in paragraph c above.
The foregoing amendments to the Articles of Incorporation were
effective July 1, 1998. The description of the Class A Common Stock of the
Corporation contained in the Form 8-A filed by the Corporation with the
Securities and Exchange Commission on July 20, 1998, reflects such amendments.
Item 4. Submission of Matters to a Vote of Securities Holders
A special meeting of the shareholders of the Corporation was held on June 30,
1998. At the special meeting the proposals to adopt the following amendments to
the Articles of Incorporation of the Corporation were submitted to and approved
by shareholders of the Corporation by the votes indicated:
1. Amendment to Article V of the Articles of Incorporation to, among other
things, increase the authorized number of shares of Class A Common Stock of the
Corporation from 15 million to 30 million and the number of authorized shares of
Class B Common Stock of the Corporation from 2 million to 5 million, remove the
series designation of authorized shares of preferred stock of the corporation no
longer outstanding, provide that any recapitalization or other similar change in
either the Class A Common Stock or the Class B Common Stock will require a
proportionate recapitalization or similar change in the other class, provide
that a payment of a dividend (other than a share dividend) on the Class A Common
Stock does not require a payment of such a dividend on the Class B Common Stock,
and effect of a two-for-one split of the outstanding shares of Class A Common
Stock and Class B Common Stock.
2. The addition of a new Article XII to the Articles of Incorporation
eliminating, to the maximum extent permitted by law, the personal liability of a
director to the Corporation or its shareholders for monetary damages for breach
of his duties as a director.
3. The addition of a new Article XIII to the Articles of Incorporation to
provide that shareholders of the Corporation may not call a special meeting of
shareholders without the affirmative written consent of the holders of more than
50% of the voting power of the then outstanding voting stock of the Corporation,
considered as a single group.
4. The addition of a new Article XIV (and the deletion of the Article that,
prior to the amendments appeared as Article XII) of the Articles of
Incorporation to increase to a majority of the voting power the vote required to
amend, alter or repeal, or adopt any provision inconsistent with, the new
Article XIV or Article XIII.
* * * * * * *
The total number of votes cast for and against each amendment by each
voting group entitled to vote separately thereon was:
Amendment No. 1: ARTICLE V
Number of Votes Cast
-------------------------------------------------------
Voting Group For Against Abstain
Class A Common Stock 5,330,341 16,220 0
Class B Common Stock 10,399,680 38,240 0
---------- ------ -
Total 15,730,021 54,460 0
Amendment No. 2: ARTICLE XII
Number of Votes Cast
-------------------------------------------------------
Voting Group For Against Abstain
Class A Common Stock 5,312,498 20,252 13,811
Class B Common Stock 10,392,040 20,260 25,620
---------- ------ ------
Total 15,704,538 40,512 39,431
Amendment No. 3: ARTICLE XIII
Number of Votes Cast
-------------------------------------------------------
Voting Group For Against Abstain
Class A Common Stock 5,324,219 22,342 0
Class B Common Stock 10,417,480 20,440 0
---------- ------ -
Total 15,741,699 42,782 0
Amendment No. 4: ARTICLE XIV
Number of Votes Cast
-------------------------------------------------------
Voting Group For Against Abstain
Class A Common Stock 5,307,879 38,682 0
Class B Common Stock 10,379,000 58,920 0
---------- ------ -
Total 15,686,879 97,602 0
There were no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
a. The exhibits required by Item 601 of Regulation S-K are attached to and
listed in the Exhibit Index on page 34.
b. On July 7, 1998, Republic Bancorp, Inc. filed a Report on Form 8-K,
dated July 1, 1998, to report under Item 5 of that form the amendments to its
Articles of Incorporation and summary of financial results for the period ended
June 30, 1998.
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:08/14/98 /s/ Steven E. Trager
------------------------- ----------------------------
Steven E. Trager
Chief Executive Officer
Principal Financial Officer:
Date:08/14/98 /s/ Mark A. Vogt
------------------------- ----------------------------
Mark A. Vogt
Chief Financial Officer
EXHIBIT INDEX
Incorporated
Exhibit Description By Reference To
3(i), 4.1 Articles of Incorporation Articles of Incorporation, as amended,
of Republic are incorporated by reference to
Exhibit 3(i) of the Registration Statement on Form S-1
of Republic (Registration No. 333-56583)
3(ii), 4.2 By laws By laws, as amended, of Republic are
incorporated by reference to Exhibit
3(ii) of the Registration Statement on
Form S-1 of Republic
(Registration No. 333-56583)
10.10 Lease Agreement between Lease Agreement between Republic
Republic Bank & Trust Company Bank & Trust Company and Teeco
and Teeco Properties dated Properties dated October 1, 1996, is
October 1, 1996 incorporated by reference to Exhibit
10.10 of the Registration Statement on
Form S-1 of Republic
(Registration No. 333-56583)
10.14 Officer Compensation Continuation Officer Compensation Continuation
Agreement, Mark A. Vogt Agreement, Mark A. Vogt, is incorporated by
reference to Exhibit 10.14 of the Registration Statement
on Form S-1 of Republic (Registration No. 333-56583)
10.15 Stock Option Plan Agreement, Stock Option Plan Agreement, Mark A.
Mark A. Vogt Vogt, is incorporated by reference to
to Exhibit 10.15 of the Registration
Statement on Form S-1 of Republic
(Registration No. 333-56583)
11 Statement Regarding Computation Filed as Exhibit 11 on page 35 of this of
Per Share Earnings Form 10-Q for the period ended June 30, 1998
27 Financial Data Schedule Filed as Exhibit 27 on page 36 of this
Form 10-Q for the period ended
June 30, 1998
99 Underwriting Agreement Filed as Exhibit 99 on page 37 of this
Form 10-Q for the period ended
June 30, 1998
Exhibit 11.
Statement Regarding Computation of Per Share Earnings
See Item 1, Note 9 "Earnings Per Share" for calculations.