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 September 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: 14,642,566 shares of Class A Common Stock and 2,544,450
shares of Class B Common Stock as of November 11, 1998.
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 3-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 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)
September 30, December 31,
1998 1997
ASSETS:
Cash and due from banks $ 25,537 $ 24,546
Securities available for sale 170,848 93,826
Securities to be held to maturity 46,320 98,546
Loans, less allowance for loan losses of
$7,962 (1998) and $8,176 (1997) 867,936 794,939
Mortgage loans held for sale 15,986 9,970
Federal Home Loan Bank stock 13,820 8,124
Accrued interest receivable 9,098 8,803
Premises and equipment, net 14,582 12,774
Other assets 3,690 3,422
--------- ---------
TOTAL $1,167,817 $1,054,950
========= =========
LIABILITIES:
Deposits:
Non-interest bearing $ 77,827 $ 65,913
Interest bearing 655,773 665,685
Securities sold under agreements to repurchase
and other short-term borrowings 117,059 111,137
Other borrowed funds 194,393 124,405
Accrued interest payable 4,546 6,233
Guaranteed preferred beneficial interests in
Company's subordinated debentures 6,452 6,452
Other liabilities 8,904 6,739
--------- ---------
Total liabilities 1,064,954 986,564
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A and Class B Common stock, no par
value 4,099 3,613
Additional paid-in capital 33,987 10,833
Retained earnings 63,651 53,994
Net unrealized depreciation on securities
available for sale, net of tax 1,126 (54)
--------- ---------
Total stockholders' equity 102,863 68,386
--------- ---------
TOTAL $1,167,817 $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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
INTEREST INCOME:
Loans, including fees $19,826 $19,351 $58,046 $57,723
Securities available for sale 2,440 1,513 6,251 4,417
Securities to be held to maturity:
Taxable 914 1,735 3,434 5,668
Non-taxable 28 31 84 94
FHLB dividends 214 135 598 362
Other 95 146 918 499
------ ------ ------ ------
Total interest income 23,517 22,911 69,331 68,763
------ ------ ------ ------
INTEREST EXPENSE:
Deposits 8,505 9,866 25,858 29,678
Short-term borrowings 1,221 1,095 3,604 3,435
Long-term debt 3,081 1,751 8,472 5,204
------ ------ ------ ------
Total interest expense 12,807 12,712 37,934 38,317
------ ------ ------ ------
NET INTEREST INCOME 10,710 10,199 31,397 30,446
PROVISION FOR LOAN LOSSES 303 1,136 1,687 3,850
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,407 9,063 29,710 26,596
------ ------ ------ ------
NON-INTEREST INCOME:
Service charges on deposit accounts 810 839 2,413 2,440
Other service charges and fees 92 131 695 611
Bank card services 508
Loan servicing income 140 181 455 556
Net gain on sale of deposits 3,900 4,116 3,900
Net gain on sale of bank card 3,410
Net gain on sale of loans 1,002 529 3,154 1,073
Net gain on sale of securities 331 74 822 90
Other 153 138 858 457
------ ------ ------ ------
Total non-interest income 2,528 5,792 12,513 13,045
------ ------ ------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,249 3,890 12,864 11,681
Occupancy and equipment 1,852 1,888 5,555 5,856
Communication and transportation 401 453 1,235 1,358
Marketing and development 296 267 1,008 979
Supplies 264 250 780 757
Other 1,464 1,154 3,753 3,557
------ ------ ------ ------
Total non-interest expense 8,526 7,902 25,195 24,188
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 4,409 6,953 17,028 15,453
INCOME TAXES 1,609 2,561 6,102 5,525
------ ------ ------ ------
NET INCOME $ 2,800 $ 4,392 $10,926 $ 9,928
====== ====== ====== ======
(Continued)
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Change in unrealized gain (loss)
on securities $ 1,530 $ 338 $ 2,002 $ 238
Reclassification of realized amount (331) (74) (822) (90)
------ ------ ------ ------
Net unrealized gain (loss) recognized
in comprehensive income 1,199 264 1,180 148
------ ------ ------ ------
COMPREHENSIVE INCOME $3,999 $4,656 $12,106 $10,076
====== ====== ====== ======
EARNINGS PER SHARE
Class A $ .17 $ .30 $ .71 $ .67
Class B $ .17 $ .29 $ .70 $ .66
EARNINGS PER SHARE ASSUMING DILUTION
Class A $ .16 $ .28 $ .68 $ .66
Class B $ .16 $ .28 $ .67 $ .65
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 Earnings 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
Sale of Class A Common 2,000 484 23,097 23,581
Conversion of Class B to Class A 89 (89)
Dividend Declared
Common: Class A ($.0825 per share) (1,091) (1,091)
Class B ($.0750 per share) (178) (178)
Net changes in unrealized appreciation
/(depreciation)on securities
available for sale 1,180 1,180
Net Income 10,926 10,926
------- ------- ------- ------ ------- ------- -------
BALANCE, September 30, 1998 14,630 2,329 $ 4,099 $ 33,987 $ 63,651 $ 1,126 $102,863
======= ======= ======= ====== ======= ======= =======
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (in thousands)
1998 1997
OPERATING ACTIVITIES:
Net income $ 10,926 $ 9,928
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization of premises
and equipment 2,493 3,029
Amortization and accretion of securities 232 488
FHLB stock dividends (598) (362)
Provision for loan losses 1,687 3,850
Net gain on sale of securities (822) (90)
Net gain on sale of loans (3,154) (1,073)
Net gain on sale of Bank card (3,410)
Net gain on sale of deposits (4,116) (3,900)
Proceeds from sale of loans 199,962 77,675
Origination of mortgage loans held
for sale (202,824) (83,736)
Changes in assets and liabilities:
Accrued interest receivable (295) 318
Other assets (73) (623)
Accrued interest payable (1,687) 1,523
Other liabilities 2,165 5,110
------- -------
Net cash provided by
operating activities 3,896 8,727
------- -------
INVESTING ACTIVITIES:
Proceeds from sale of bank card 26,340
Purchases of securities available for sale (187,024) (14,993)
Purchases of securities to be held to
maturity (11,189)
Purchases of Federal Home Loan Bank Stock (5,098) (1,173)
Proceeds from maturities of securities to
be held to maturity 52,443 76,638
Proceeds from sales and paydowns of
securities available for sale 112,163 24,208
Net increase in loans (75,487) (69,573)
Purchases of premises and equipment (5,286) (2,723)
Disposal of premises and equipment 985 1,166
------- -------
Net cash provided by
(used in) investing activities (107,304) 28,701
------- -------
FINANCING ACTIVITIES:
Net increase in deposits 67,682 32,962
Sale of deposits (61,564) (45,913)
Net change in securities sold
under agreement to repurchase and
other short-term borrowings 5,922 (80,212)
Payments on other borrowings (167,632) (195,393)
Proceeds from other borrowings 237,620 225,250
Proceeds from issuance of guaranteed
preferred beneficial interests in
Company's subordinated debentures 6,452
Proceeds from issuance of common stock
and stock options exercised 23,640 71
Cash dividends paid (1,269) (1,493)
------- -------
Net cash provided by
(used in) financing activities 104,399 (58,276)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 991 (20,848)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,546 56,671
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,537 $ 35,823
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 39,621 $ 36,794
======= =======
Income taxes $ 7,598 $ 3,514
======= =======
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 nine-month periods
ending September 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.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." The standard is effective for the first fiscal
quarter beginning after December 15, 1998. This statement amends SFAS No. 65 on
mortgage banking, which required that after securitization of mortgage loans
held for sale, all retained mortgage-backed securities be classified as trading.
This new standard allows after securitization of mortgage loans held for sale,
any retained mortgage-backed securities to be classified as described under SFAS
No. 115. Current mortgage banking activities for Republic do not include the
securitization of any mortgage loans held for sale.
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 September 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. SECURITIES
Securities Available For Sale:
September 30, 1998
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. Treasury Securities and U.S.
Government Agencies $122,439 $ 1,047 $ $123,486
Mortgage-backed securities 46,702 660 47,362
------- ------- ------- -------
Total securities available for sale $169,141 $ 1,707 $ $170,848
======= ======= ======= =======
Securities To Be Held To Maturity:
September 30, 1998
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. Treasury Securities and U.S.
Government Agencies $ 41,622 $ 114 $ (54) $ 41,682
Obligations of state and political
subdivisions 4,187 174 4,361
Mortgage-backed securities 511 (3) 508
------- ------- ------- -------
Total securities to be held to maturity $ 46,320 $ 288 $ (57) $ 46,551
======= ======= ======= =======
Securities having an amortized cost of $201 million and a fair value of $203
million at September 30, 1998, were pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes, as
required or permitted by law.
3. LOANS
September 30, 1998 December 31, 1997
(in thousands)
Residential real estate $522,924 $480,874
Commercial real estate 117,849 76,306
Real estate construction 40,829 37,940
Commercial 25,245 21,552
Consumer 62,589 81,967
Home equity 106,214 102,512
Other 1,897 4,094
------- -------
Total loans 877,547 805,245
Less:
Unearned interest income and unamortized
loan fees (1,649) (2,130)
Allowance for loan losses (7,962) (8,176)
------- -------
Loans, net $867,936 $794,939
======= =======
The following table sets forth the changes in the allowance for loan losses:
Three months ended Sept. 30, Nine months ended Sept. 30,
1998 1997 1998 1997
(in thousands)
Balance, beginning of period $ 8,234 $ 6,281 $ 8,176 $ 6,241
Provision charged to income 303 1,136 1,687 3,850
Charge-offs (702) (1,279) (2,283) (4,244)
Recoveries 127 143 382 434
------ ------ ------ ------
Balance, end of period $ 7,962 $ 6,281 $ 7,962 $ 6,281
====== ====== ====== ======
Information about Republic's investment in impaired loans is as follows:
September 30, 1998 December 31, 1997
(in thousands)
Gross impaired loans $ 1,635 $ 1,640
Less: Related allowance for loan losses 600 240
------ ------
Net impaired loans with related allowances 1,035 1,400
Impaired loans with no related allowances 0 0
------ ------
Total $ 1,035 $ 1,400
====== ======
Average impaired loans outstanding $ 1,635 $ 1,639
====== ======
4. DEPOSITS
September 30, 1998 December 31, 1997
(in thousands)
Demand (NOW, Super NOW and Money Market) $175,172 $118,870
Savings 11,668 12,165
Money market certificates of deposit 34,151 41,307
Individual retirement accounts 21,831 30,167
Certificates of deposit, $100,000 and over 75,082 63,045
Other certificates of deposit 304,513 352,478
Brokered deposits 33,356 47,653
------- -------
Total interest bearing deposits 655,773 665,685
Total non-interest bearing deposits 77,827 65,913
------- -------
Total $733,600 $731,598
======= =======
5. 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.
September 30, 1998 December 31, 1997
(in thousands)
Average outstanding balance $ 112,079 $ 100,291
Average interest rate 5.20% 4.57%
Maximum outstanding at month end $ 119,684 $ 111,137
End of period $ 117,059 $ 111,137
6. OTHER BORROWED FUNDS
Sept. 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 5.52% at
September 30, 1998, due through 2000 101,720 $116,000
Federal Home Loan Bank fixed interest rate advances,
with weighted average interest rate of 5.87% at
September 30, 1998, due through 2003 62,673 8,405
------- -------
Total $194,393 $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 $127 million additional from the Federal Home Loan Bank. Republic
also has unsecured lines of credit totaling $26 million and secured lines of
credit of $103 million available through various financial institutions.
Aggregate future principal payments on borrowed funds as of September 30, 1998
are as follows:
Year (in thousands)
1998 $ 5,055
1999 31,044
2000 68,104
2001 190
2002
2003 90,000
-------
Total $194,393
=======
7. 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 10 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. 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.
8. 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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(in thousands)
Earnings Per Share
Net Income $2,800 $4,392 $10,926 $9,928
Less: Dividends declared on
preferred stock (106) (319)
------ ------ ------- ------
Net Income available to common shares
outstanding $2,800 $4,286 $10,926 $9,609
====== ====== ======= ======
Weighted average shares outstanding 16,480 14,449 15,472 14,445
====== ====== ====== ======
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(in thousands)
Earnings Per Share Assuming Dilution
Net Income $2,800 $4,392 $10,926 $9,928
Add: Interest expense, net of tax benefit,
on assumed conversion of guaranteed
preferred beneficial interests in
Republic's subordinated debentures 88 88 263 227
------ ------ ------- ------
Net Income available to common shareholder
assuming conversion $2,888 $4,480 $11,189 $10,155
====== ====== ======= ======
Weighted average shares outstanding 16,480 14,449 15,472 14,445
Add dilutive effects of assumed
conversion and exercise:
Convertible guaranteed preferred
beneficial interest in Republic's
subordinated debentures 645 645 645 538
Convertible Series A, 8.5% Preferred stock 600 600
Stock options 626 360 444 340
------ ------ ------- ------
Weighted average shares and dilutive
potential shares outstanding 17,751 16,054 16,561 15,923
====== ====== ====== ======
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.
9. SEGMENT INFORMATION
Republic's operations include two reportable 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 September 30, 1998
(in thousands)
Mortgage
Banking Banking Other Eliminations Consolidated
Interest income:
Unaffiliated customer $ 23,190 $ 327 $ 23,517
Intersegment 231 $ 152 $ (383)
------ ----- ----- ---- --------
Total interest income 23,421 327 152 (383) 23,517
------ ----- ----- ---- --------
Interest expense:
Unaffiliated customer 12,670 137 12,807
Intersegment 9 231 143 (383)
------ ----- ----- ---- --------
Total interest expense 12,679 231 280 (383) 12,807
------ ----- ----- ---- --------
Net interest income 10,742 96 (128) 10,710
Provision for loan losses 303 303
Other income 1,508 1,020 2,528
Non-interest expense 7,995 518 13 8,526
------ ----- ----- ---- ------
Operating profit $3,952 $ 598 $ (141) $ $ 4,409
====== ===== ===== ==== ======
Indentifiable assets $1,151,158 $ 16,640 $119,462 $(119,443) $1,167,817
========= ======== ======= ======== =========
Depreciation and amortization $ 779 $ 40 $ $ $ 819
========= ======== ======= ======== =========
Capital Expenditures $ 1,195 $ 37 $ $ $ 1,232
========= ======== ======= ======== =========
Three Months Ended September 30, 1997
(In Thousands)
Mortgage
Banking Banking Other Eliminations Consolidated
Interest income:
Unaffiliated customer $ 22,807 $ 104 $ 22,911
Intersegment 74 $ 152 $ (226)
---------- --------- -------- --------- -----------
Total interest income 22,881 104 152 (226) 22,911
---------- --------- -------- --------- -----------
Interest expense:
Unaffiliated customer 12,573 139 12,712
Intersegment 9 74 143 (226)
---------- --------- -------- --------- -----------
Total interest expense 12,582 74 282 (226) 12,712
---------- --------- -------- --------- -----------
Net interest income 10,299 30 (130) 10,199
Provision for loan losses 1,136 1,136
Other income 5,362 430 5,792
Non-interest expense 7,591 311 7,902
---------- --------- ------- --------- -----------
Operating profit $ 6,934 $ 149 $ (130) $ $ 6,953
========== ========= ======= ========= ===========
Indentifiable assets $ 1,090,866 $ 4,529 $ 84,247 $ (84,227) $ 1,095,415
========== ========= ======= ========= ===========
Depreciation and amortization $ 946 $ 35 $ $ $ 981
========== ========= ======= ========= ===========
Capital Expenditures $ 397 $ 7 $ $ $ 404
========== ========= ======= ========= ===========
Nine Months Ended September 30, 1998
(in thousands)
Mortgage
Banking Banking Other Eliminations Consolidated
Interest income:
Unaffiliated customer $ 68,391 $ 940 $ 69,331
Intersegment 695 $ 444 $ (1,139)
---------- -------- ------- -------- ----------
Total interest income 69,086 940 444 (1,139) 69,331
---------- -------- ------- -------- ----------
Interest expense:
Unaffiliated customer 37,523 411 37,934
Intersegment 14 695 430 (1,139)
---------- -------- ------- -------- ----------
Total interest expense 37,537 695 841 (1,139) 37,394
---------- -------- ------- -------- ----------
Net interest income 31,549 245 (397) 31,397
Provision for loan losses 1,687 1,687
Other income 9,480 3,033 12,513
Non-interest expense 23,670 1,467 58 25,195
---------- -------- ------- -------- ----------
Operating profit $ 15,672 $ 1,811 $ (455) $ $ 17,028
========== ======== ======= ======== ==========
Indentifiable assets $ 1,151,158 $ 16,640 $ 119,462 $ (119,443) $ 1,167,817
========== ======== ======= ======== ==========
Depreciation and amortization $ 2,371 $ 122 $ $ $ 2,493
========== ======== ======= ======== ==========
Capital Expenditures $ 4,963 $ 323 $ $ $ 5,286
========== ======== ======= ======== ==========
Nine Months Ended September 30, 1997
(in thousands)
Mortgage
Banking Banking Other Eliminations Consolidated
Interest income:
Unaffiliated customer $ 68,318 $ 445 $ 68,763
Intersegment 334 $ 395 $ (729)
---------- -------- ------- -------- ----------
Total interest income 68,652 445 395 (729) 68,763
---------- -------- ------- -------- ----------
Interest expense:
Unaffiliated customer 37,887 430 38,317
Intersegment 26 334 369 (729)
---------- -------- ------- -------- ----------
Total interest expense 37,913 334 799 (729) 38,317
---------- -------- ------- -------- ----------
Net interest income 30,739 111 (404) 30,446
Provision for loan losses 3,850 3,850
Other income 11,584 1,461 13,045
Non-interest expense 23,229 899 60 24,188
---------- -------- ------- -------- ----------
Operating profit $ 15,244 $ 673 $ (464) $ $ 15,453
========== ======== ======= ======== ==========
Indentifiable assets $ 1,090,866 $ 4,529 $ 84,247 $ (84,227) $ 1,095,415
========== ======== ======= ======== ==========
Depreciation and amortization $ 2,949 $ 80 $ $ $ 3,029
========== ======== ======= ======== ==========
Capital Expenditures $ 2,299 $ 424 $ $ $ 2,723
========== ======== ======= ======== ==========
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 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), 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 INTENTED 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 nine months ended September 30, 1998 was $10.9 million up
from $9.9 million reported for the comparable period in 1997. On a per share
basis, diluted earnings per share for the nine months ended September 30, 1998
were $0.68 up from $0.66 per share in 1997. The increase in earnings for 1998
reflects a strong performance in many areas of the Bank. The current interest
rate environment has fueled Republic's loan originations to record levels. Total
loan originations at the banking centers and the mortgage banking operations
increased to a record $550 million for the first 9 months of 1998 compared to
$500 million for the same period last year. The increased loan volume resulted
in additional interest income as well as increased earnings realized from the
sale of loans into the secondary market. Income also improved as a result of a
significant decrease in the provision required to maintain an adequate allowance
for loan losses due to reduced losses in consumer loans.
In the first nine months of 1998, Republic's total assets grew 10% to
approximately $1.2 billion. Republic's loan portfolio increased by $73 million
or 9% since December 1997. This growth was achieved due to healthy loan demand
in Republic's markets and the further development of Republic's commercial and
business banking services. While loan growth remains strong the Bank's total
delinquency has dropped to 2.45%, its lowest level since October 1997. Funding
for the loan portfolio came from retail deposits and additional advances from
the Federal Home Loan Bank. Deposits increased slightly even though $66 million
in deposits from the Mayfield banking center were sold during the first quarter
of 1998.
The following table summarizes selected financial information regarding
Republic's financial performance.
Table 1
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(dollars in thousands)
Net income $ 2,800 $ 4,392 $ 10,926 $ 9,928
Net income excluding asset dispositions 2,800 1,896 8,292 5,250
Class A earnings per share 0.17 0.30 0.71 0.67
Class B earnings per share 0.17 0.29 0.70 0.66
ROA 0.96% 0.92% 1.21% 1.06%
ROA excluding asset disposition 0.96 0.69 0.97 0.64
ROE 11.84 15.17 16.89 18.51
ROE excluding asset disposition 11.84 11.42 13.64 11.09
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 $23.6 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 Class A
Common Stock is now being traded on the NASDAQ National Market under the symbol
"RBCAA".
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 that
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 in that
transaction. 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, all totaling $23 million. Collectively, these asset
sales resulted in a pre-tax gain of $3.4 million. Under the terms of the sale,
Republic was subject to a recourse provision of $1.2 million. During the third
quarter of 1998, Republic settled all of its obligations under the agreement for
$272,000.
RESULTS OF OPERATIONS
Net Interest Income. For the third quarter 1998, net interest income was $10.7
million, up $500,000 over the $10.2 million attained during third quarter 1997.
Overall, the net interest rate spread decreased from 3.35% during third quarter
of 1997 to 3.14% in the comparable quarter of 1998. The Bank's net interest
margin decreased from 3.87% in third quarter 1997 to 3.81% in third quarter
1998. The decrease in the net interest spread and margin occurred because the
yield on interest earning assets decreased 32 basis points while the rate paid
on liabilities only decreased 11 basis points. During the third quarter 1998,
average interest-earning assets were $1.1 billion, an increase of $70.4 million
over third quarter 1997. Total average interest bearing liabilities increased
from $952 million in the third quarter of 1997 to $979 million in the third
quarter of 1998.
Net interest income for the nine months ended September 30, 1998 was $31.4
million, up from $30.4 million attained in the same period during 1997. When
comparing the respective nine month periods, average earning assets grew by $42
million in 1998 and average interest bearing liabilities increased $6 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 reduced outstandings in Republic's
higher yielding unsecured consumer portfolio were 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 nine
months ended September 30, 1998 and 1997.
Table 2 - Average Balance Sheet Rates for Third Quarter, 1998 and 1997 (dollars
in thousands)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Sept. 30, 1998 Three Months Ended Sept. 30, 1997
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $187,392 $2,702 5.77% $ 213,569 $ 3,177 5.95%
State and Political Subdivision Securities 4,188 92 8.79% 4,424 95 8.59%
Other Investments 11,807 217 7.35% 7,053 135 7.66%
Mortgage-Backed Securities 38,615 585 6.06% 617 7 4.54%
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 6,455 95 5.87% 10,405 146 5.61%
Total Loans and Fees 875,954 19,826 9.05% 817,992 19,351 9.46%
--------- ------ --------- ------
Total Earning Assets 1,124,411 23,517 8.37% 1,054,060 22,911 8.69%
--------- ------ --------- ------
Less: Allowance for Loan Losses (8,150) (6,281)
Non-Earning Assets:
Cash and Due From Banks 22,223 19,198
Bank Premises and Equipment, Net 14,476 17,127
Other Assets 15,971 15,304
--------- ---------
Total Assets $ 1,168,931 $ 1,099,408
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 105,961 $ 850 3.21% $ 121,577 $ 1,030 3.39%
Money Market Accounts 118,689 1,406 4.74% 49,231 632 5.13%
Individual Retirement Accounts 21,986 315 5.73% 37,206 548 5.89%
Certificates of Deposit and Other
Time Deposits 407,331 5,934 5.83% 529,369 7,656 5.79%
Repurchase Agreements and Other
Borrowings 324,990 4,302 5.29% 214,698 2,846 5.30%
--------- ------ --------- ------
Total Interest Bearing Liabilities 978,957 12,807 5.23% 952,081 12,712 5.34%
--------- ------ --------- ------
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 82,143 67,539
Other Liabilities 13,241 13,362
Stockholders' Equity 94,590 66,426
--------- ---------
Total Liabilities and Stockholders'
Equity $ 1,168,931 $ 1,099,408
========= =========
Net Interest Income $ 10,710 $ 10,199
====== ======
Net Interest Spread 3.14% 3.35%
==== ====
Net Interest Margin 3.81% 3.87%
==== ====
- --------------------------------------------------------------------------------
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 Nine Months, 1998 and 1997 (dollars in
thousands)
- -------------------------------------------------------------------------------------------------------------------
Nine months ended Sept. 30, 1998 Nine months ended Sept. 30, 1997
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $ 173,659 $ 7,594 5.83% $ 221,220 $ 9,867 5.95%
State and Political Subdivision Securities 4,222 276 8.72% 4,496 288 8.54%
Other Investments 10,961 598 7.27% 6,869 362 7.03%
Mortgage-Backed Securities 41,056 1,899 6.17% 638 24 5.02%
Federal Funds Sold 21,687 918 5.64% 11,976 499 5.56%
Total Loans and Fees 842,072 58,046 9.19% 806,953 57,723 9.54%
--------- ------ --------- ------
Total Earning Assets 1,093,657 69,331 8.45% 1,052,152 68,763 8.71%
--------- ------ --------- ------
Less: Allowance for Loan Losses (8,201) (6,274)
Non-Earning Assets:
Cash and Due From Banks 20,439 21,423
Bank Premises and Equipment, Net 13,600 17,579
Other Assets 14,603 13,453
--------- ---------
Total Assets $ 1,134,098 $ 1,098,333
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 101,150 $ 2,450 3.23% $ 130,520 $ 3,364 3.44%
Money Market Accounts 99,288 3,570 4.79% 43,536 1,589 4.87%
Individual Retirement Accounts 22,468 995 5.90% 36,986 1,626 5.86%
Certificates of Deposit and Other
Time Deposits 428,827 18,843 5.86% 523,677 23,099 5.88%
Repurchase Agreements and Other
Borrowings 309,567 12,076 5.20% 219,815 8,639 5.24%
--------- ------ --------- ------
Total Interest Bearing Liabilities 961,300 37,934 5.26% 954,534 38,317 5.35%
--------- ------ --------- ------
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 78,315 68,935
Other Liabilities 13,435 11,767
Stockholders' Equity 81,048 63,097
--------- ---------
Total Liabilities and Stockholders'
Equity $ 1,134,098 $ 1,098,333
========= =========
Net Interest Income $ 31,397 $ 30,446
====== ======
Net Interest Spread 3.19% 3.36%
==== ====
Net Interest Margin 3.83% 3.86%
==== ====
- --------------------------------------------------------------------------------
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 Sept. 30, 1998 Nine months ended Sept. 30, 1998
Compared to Compared to
Three Months Ended Sept. 30, 1997 Nine months ended Sept. 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 $ (475) $ (389) $ (86) $ (2,273) $ (2,118) $ (155)
State and Political
Subdivision Securities (3) (5) 2 (12) (17) 5
Other Investments 82 94 (12) 236 216 20
Mortgage-Backed Securities 578 431 147 1,875 1,520 355
Federal Funds Sold and Securities
Purchased Under Agreements to Resell (51) (58) 7 419 402 17
Total Loans and Fees (2) 475 1,371 (896) 323 2,512 (2,189)
----- ----- --- ----- ----- -----
Net Change in Interest Income 606 1,444 (838) 568 2,515 (1,947)
----- ----- --- ----- ----- -----
Interest Expense:
Interest Bearing
Transaction Accounts (180) (132) (48) (914) (757) (157)
Money Market Accounts 774 892 (118) 1,981 2,035 (54)
Individual Retirement Accounts (233) (224) (9) (631) (638) 7
Certificates of Deposit and
Other Time Deposits (1,722) (1,765) 43 (4,256) (4,184) (72)
Repurchase Agreements and
Other Borrowings 1,456 1,462 (6) 3,437 3,527 (90)
----- ----- --- ----- ----- -----
Net Change in Interest Expense 95 233 (138) (383) (17) (366)
----- ----- --- ----- ----- -----
Increase in Net Interest Income $ 511 $ 1,211 $ (700) $ 951 $ 2,532 $ (1,581)
===== ===== === ===== ===== =====
- --------------------------------------------------------------------------------
(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 $1,054 and $640
for the years ended Sept. 30, 1998 and 1997, respectively.
NON-INTEREST INCOME. Non-interest income was $2.5 million during third quarter
1998, down from $5.8 million during third quarter of 1997. The decrease was
primarily due to the one-time gain from the sale of deposits during 1997 of $3.9
million. Excluding the one-time sale of deposits during 1997, non-interest
income increased by $600,000. The increase was principally a result of gains
generated from sales of loans into the secondary market and sales of investment
securities.
Non-interest income decreased from $13.0 million for the nine months ended
September 30, 1997 to $12.5 million for the comparable period in 1998. Excluding
the one-time gains during 1998 and 1997, non-interest income increased by $2.7
million. The increase was primarily in additional gains on loans sold into the
secondary market. Also during the first nine months of 1998, Republic realized
$800,000 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 $2.4 million for the
nine-month periods ended September 30, 1998 and 1997, notwithstanding the sale
of five banking centers in Western Kentucky. Republic continues to market its
transaction accounts and actively manage its collection activities. Other
service charges and fees increased $100,000 to $700,000 for the nine months
ended September 30, 1998 due to increased volume associated with Republic's
participation in a rapid tax refund joint venture with Refunds Now, Inc.
Revenues generated from this joint venture are primarily realized only during
the tax-filing season, comprised of the first quarter and to a lesser extent the
second quarter of the year. Subsequent to September 30, 1998, Republic closed a
merger transaction with Refunds Now, Inc. Refunds Now, Inc. was merged into
Republic Financial Services Corporation, a wholly owed subsidiary of the Bank.
Republic exchanged 230,000 shares for the stock of Refunds Now, Inc. in a
business combination accounted for as a pooling of interest.
Revenue from mortgage banking activities during the nine-month period ending
September 30, 1998 has been positively influenced by increases in origination
and sales volume. Proceeds from sales of loans were $78 million and $200 million
for the nine-month periods ending September 30, 1997 and 1998, respectively.
Secondary market residential loan originations are heavily influenced by the
favorable interest rate environment, 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 1.4% and 1.6% for the
nine-month periods ending September 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 September 30, 1998, Republic was servicing $234 million in mortgage loans
for other investors, compared to $263 million at December 31, 1997.
NON-INTEREST EXPENSE. Total non-interest expense was $8.5 million in third
quarter 1998, compared to $7.9 million for third quarter 1997. Non-interest
expense increased marginally from $24.2 million for the nine months ended
September 30, 1997, to $25.2 million for the comparable period in 1998. The
increase for the nine months ended September 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 September 30, 1998 was 63% compared to 65% at September 30, 1997.
Salary and employee benefit expense increased 9% for the third quarter 1998 over
third quarter, 1997, and 10% for the nine months ended September 30, 1998
compared to September 30, 1997. This rise was due to an increase in the number
of higher salaried technical and lending staff additions, commissions, and
annual merit salary increases. Republic's overall staffing level remained
constant with 425 full-time equivalent employees (FTE's) at September 30, 1998,
compared to 427 FTE's at September 30, 1997.
Occupancy and equipment expense remained constant at $1.9 million for third
quarter 1997 and 1998. These expenses may increase in the near term as the Bank
intends to open additional locations in its existing markets. It is also
anticipated that additional expenses will be incurred for technology
enhancements for deposit, lending and customer support systems. (See also "YEAR
2000" discussion)
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
SECURITIES AVAILABLE FOR SALE. Securities available for sale consist primarily
of mortgage-backed securities, U.S. Treasury and U.S. Government Agencies with a
weighted average maturity of 2.30 years. Securities available for sale increased
from $94 million at December 31, 1997 to $171 million at Septembr 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 $46 million at September 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 consist
primarily of U.S. Treasury and U.S government Agencies with a weighted average
maturity of 0.37 years.
LOANS. Net loans increased $73 million to $868 million at September 30, 1998
compared to $795 million at December 31, 1997. The increase in loans included
the residential real estate lending portfolio which increased $42 million since
December 31, 1997. Republic also increased its commercial real estate lending by
$42 million to $118 million at September 30, 1997, a 55% 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 $82 million at December 31, 1997 to $63
million at September 30, 1998. The consumer loan portfolio consists primarily of
secured and unsecured loans. Republic's consumer portfolio includes the "All
Purpose" and "Pre Approved" unsecured loan products. Republic's "All Purpose"
loans, with total outstandings of $9 million at September 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 $15
million at September 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.
Republic's home equity portfolio increased slightly from $103 million at
December 31, 1997 to $106 million at September 30, 1998. Following strong growth
in this product during 1997, credit utilization by existing customers has
moderated.
ALLOWANCE AND PROVISION FOR LOAN LOSSES. The provision for loan losses was
$303,000 in the third quarter, 1998, compared to $1.1 million in the third
quarter of 1997. Overall, net charge-offs decreased $561,000 during third
quarter 1998 compared to the same period in 1997. Republic's unsecured consumer
loan portfolio accounted for 96% of total charge-offs in the third quarter of
1998.
The provision for loan losses was $1.7 million for the nine months ended
September 30, 1998, compared to $3.9 million for the nine months ended September
30, 1997. Net charge-offs decreased $1.9 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.
The allowance for loan losses decreased slightly from $8.2 million at December
31, 1997 to $8.0 million at September 30, 1998. Republic's allowance to total
loan ratio was .91% at September 30, 1998 compared to 1.02% at December 31,
1997. Management believes, based on information presently available, that it has
adequately provided for loan losses at September 30, 1998.
Table 5 below depicts the allowance activity by loan type for the three and nine
months ended September 30, 1998 and 1997.
Table 5 - Summary of Loan Loss Experience
Three Months Ended Nine months ended
September 30, September 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 (108) (78) (272)
Commercial (25) (25) (43)
Consumer (677) (1,171) (2,180) (3,929)
----- ----- ----- -----
Total (702) (1,279) (2,283) (4,244)
----- ----- ----- -----
Recoveries:
Real Estate 14 5 32
Commercial 4
Consumer 127 129 373 402
----- ----- ----- -----
Total 127 143 382 434
----- ----- ----- -----
Net charge-offs (575) (1,136) (1,901) (3,810)
Provision for loan losses 303 1,136 1,687 3,850
----- ----- ----- -----
Allowance for loan losses:
Balance-end of period $ 7,962 $ 6,281 $ 7,962 $ 6,281
===== ===== ===== =====
DEPOSITS. Total deposits were $734 million at September 30, 1998 compared to
$732 million at December 31, 1997. The slight increase in deposits was achieved
even though $66 million in deposits at the Mayfield banking center were sold
during the first quarter of 1998. Excluding the sale of deposits at the Mayfield
banking center, total deposits would have reflected an increase of $68 million
during the nine 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 consist of FHLB advances,
increased from $124 million at December 31, 1997 to $194 million at September
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 fund loan growth and
purchase investment securities that were used to collateralize deposits due to
the bank's growth in public funds and high balance commercial accounts.
STOCKHOLDERS' EQUITY. Total stockholders' equity increased from $68 million at
December 31, 1998 to $103 million at September 30, 1998. The increase is
primarily due to the sale of securities and current earnings. 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 $23.6 million in offering proceeds.
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 September 30, 1998, Republic had
$418,000 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 September 30, 1998.
Table 6 - Non-Performing Loans
September 30, December 31,
(dollars in thousands) 1998 (1) 1997 (1)
Loans on non-accrual status (2) $ 2,604 $ 2,676
Loans past due 90 days or more 4,207 4,459
----- -----
Total non-performing loans 6,811 7,135
Other real estate owned 387 22
----- -----
Total non-performing assets $ 7,198 $ 7,157
===== =====
Percentage of non-performing loans to total loans .78% .89%
Percentage of non-performing assets to total loans .82% .89%
(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.
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
September 30, 1998 at $1.6 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 $97 million of repurchase agreements and money markets are
attributable to three customer relationships at September 30, 1998. These funds
are short-term in nature and subject to immediate withdrawal by these entities.
Should these funds be removed, Republic has the ability to replenish these funds
through various funding sources 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
nine months of 1998 due to the proceeds received from the Bank's public stock
offering and 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 9.07% at September 30, 1998 compared to 6.26% at December 31, 1997.
Republic continues to exceed the regulatory requirements for Tier I, Tier I
Leverage and total risk-based capital. The Bank intends to maintain a capital
position that meets or exceeds the "well capitalized" requirements as defined by
the FDIC. Table 7 below indicates the capital ratios at September 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 September 30, 1998
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated $ 116,133 16.27% $ 57,090 8% $ 71,363 10%
Bank only $ 115,336 16.16% $ 57,089 8% $ 71,361 10%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 108,171 15.16% $ 28,545 4% $ 42,817 6%
Bank only $ 107,374 15.05% $ 28,545 4% $ 42,817 6%
Tier I Leverage Capital (to Average Assets)
Consolidated $ 108,171 9.25% $ 46,757 4% $ 58,446 5%
Bank only $ 107,374 9.19% $ 46,750 4% $ 58,437 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 September 30, 1998,
the Bank had $17 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 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 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 $ 64,413 $ 69,869 $ 75,793 $ 81,852 $ 87,473
Investments 11,927 12,622 13,196 13,767 14,333
Short-term investments 208 296 400 518 633
------ ------ ------ ------ -------
Total interest income $ 76,548 $ 82,787 $ 89,389 $ 96,137 $ 102,439
Projected interest expense
Deposits $ 29,228 $ 30,910 $ 32,592 $ 34,391 $ 36,633
Other borrowings 11,462 13,631 15,801 17,971 20,140
------ ------ ------ ------ -------
Total interest expense 40,690 44,541 48,393 52,362 56,773
------ ------ ------ ------ -------
Net interest income $ 35,858 $ 38,246 $ 40,996 $ 43,775 $ 45,666
Change from base $ (5,138) $ (2,750) $ 2,779 $ 4,670
% Change from base (12.53)% (6.71)% 6.78% 11.39%
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 task required to prevent a potential business interruption is the
installation of the most current software releases for major mainframe
applications developed by Republic's third party software application providers.
Mainframe software upgrades and modifications for major applications have been
installed and placed into production. Year 2000 Script Testing for the dates of
September 9, 1999, December 31, 1999 and January 3-4, 2000 has been completed.
The Bank's personal computer network was also reviewed and upgraded during the
quarter. Software upgrades and modifications will also be required for certain
other data processing applications.
Republic has identified selected employees whose primary function is year 2000
compliance. The loss of these employees could have a material adverse effect on
the implementation of Republic's year 2000 plan. Republic has initiated a year
2000 retention program designed to encourage and promote the retention of these
employees.
Year 2000 remediation has resulted in some delay in other data processing
projects, none of which are deemed material to the Bank's financial performance.
Management believes its current state of year 2000 readiness to be satisfactory
and in accordance with general industry and regulatory recommendations.
Management has also contacted its major suppliers and customers and inquired
about the status of their Year 2000 readiness. At this time, the Bank has no
reason to believe that its software providers will not be able to adequately
address the Bank's needs for year 2000 software functionality. However, Republic
must also rely to some extent on the year 2000 readiness of additional third
parties, not only hardware and software providers, but other third party
entities such as public utilities and governmental units. These and other like
entities provide important ongoing services to the Bank. Management is therefore
developing and implementing contingency plans that are scheduled to be in place
by the end of the first quarter, 1999.
In carrying out its overall year 2000 plan, Republic will incur certain
operational expenses and may replace some existing software that has not been
fully amortized. Most of the expenditures associated with software application
upgrades represent capitalizable costs that would have been incurred in the
normal course of business. The operating expenses will be expensed as incurred,
and the unamortized cost of software replaced, if any, will be charged off when
the applicable software is removed from service. Republic has expensed
approximately $563,000 in costs attributable to year 2000 remediation and
anticipates total costs and charges to be in an approximate range of $1.2 to
$1.8 million. Actual expenses could vary from management's estimates.
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
Information concerning amendments to the articles of incorporation of Republic
Bancorp, Inc., which were effective July 1, 1998, was previously reported in
Item 2 of Part II of Republic Bancorp, Inc.'s Form 10-Q for the quarter ended
June 30, 1998. The description of the Class A Common Stock of Republic Bancorp,
Inc. contained in the Form 8-A filed by Republic Bancorp, Inc. with the
Securities and Exchange Commission on July 20, 1998, reflects such amendments.
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 amendments to its Articles of
Incorporation and summary 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: 11/14/98 /s/ Steven E. Trager
---------------- ----------------------------
Steven E. Trager
Chief Executive Officer
Principal Financial Officer:
Date: 11/14/98 /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)
10.16 Summary of Director Stock Options Filed as Exhibit 10.16 on page 35
of this Form 10-Q for the period
ended September 30, 1998
11 Statement Regarding Computation Filed as Exhibit 11 on page 36 of this
of Per Share Earnings Form 10-Q for the period ended
September 30, 1998
27 Financial Data Schedule Filed as Exhibit 27 on page 37 of this
Form 10-Q for the period ended
September 30, 1998