Exhibit 13 Excerpts from the 1998 Annual Report to Shareholders
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth Republic's selected historical financial
information from 1994 through 1998. This information should be read in
conjunction with the Consolidated Financial Statements and the related Notes.
Factors affecting the comparability of certain indicated periods are discussed
in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
dollars in thousands, Years Ended December 31,
except per share data) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Income Statement Data:
Interest income......... $92,667 $91,194 $81,986 $71,133 $47,375
Interest expense........ 50,174 50,856 43,855 37,720 22,513
Net interest income..... 42,493 40,338 38,131 33,413 24,862
Provision for loan losses 3,110 7,251 9,149 4,268 537
Non-interest income..... 11,396 7,743 7,097 7,520 6,997
Gain on sale of deposits 4,116 7,527
Gain on sale of Bankcard 3,660
Non-interest expense.... 33,533 32,880 31,409 24,505 22,216
Income before taxes..... 21,362 19,137 4,670 12,160 9,106
Net income.............. 13,756 12,259 2,727 7,788 6,170
Balance Sheet Data:
Total assets............ $1,207,684 $1,054,950 $1,140,882 $891,347 $736,009
Total securities........ 216,921 192,372 281,855 114,654 100,705
Total loans, net........ 870,031 794,939 759,424 668,193 571,950
Allowance for loan losses 7,862 8,176 6,241 3,695 1,827
Total deposits.......... 747,147 731,598 783,141 734,443 590,036
Repurchase agreements and
other short-term
borrowings............ 148,659 111,137 181,634 21,729 12,732
Other borrowed funds.... 190,222 124,405 106,974 68,063 77,060
Total stockholders' equity 103,842 68,386 59,019 58,502 47,045
Per Share Data:(1)
Basic Class A common
earnings per share.... $0.87 $0.82 $0.16 $N/A $N/A
Basic Class B common
earnings per share.... 0.86 0.81 0.15 N/A N/A
Net income per common... N/A N/A N/A 0.52 0.43
Book value.............. 6.03 4.58 3.74 3.71 3.28
Cash dividends per Class A
common................ 0.11 0.11 0.11 N/A N/A
Cash dividends per Class B
common................ 0.10 0.10 0.10 N/A N/A
Cash dividend per common
N/A N/A N/A 0.0850 N/A
Performance ratios:
Return on average assets 1.20% 1.12% .29% .95% .93%
Return on average common
equity................ 15.82 18.81 4.57 14.46 13.71
Net interest margin..... 3.84 3.85 4.21 4.25 3.96
Efficiency ratio........ 62(2) 68(3) 64(4) 60 70
Asset quality ratios:
Nonperforming assets to
total loans........... 0.63% 0.90% 1.06% 0.41% 0.46%
Net loan charge-offs to
average loans......... 0.40 0.66 0.91 0.38 0.06
Allowance for loan losses
to total loans........ 0.89 1.02 0.81 0.55 0.32
Allowance for loan losses
to non-performing loans 158 115 78 168 97
Capital ratios:
Leverage ratio.......... 9.29% 6.99% 5.76% 6.62% 6.40%
Average stockholders'
equity to average total
assets................ 7.58 5.97 6.30 6.56 6.65
Tier 1 risk-based capital 14.63 10.57 9.14 10.29 10.19
ratio.................
Total risk-based capital
ratio................. 15.68 11.73 10.10 10.96 10.60
Dividend payout ratio... 13 13 68 16 N/A
<FN>
- - -----------
(1) In 1996 the Company's common stock was replaced by Class A Common Stock
and Class B Common Stock.
(2) Excludes pre-tax gain on sale of deposits of $4.1 million.
(3) Excludes pre-tax gain on sale of deposits of $7.5 million and pre-tax
gain on sale of Bankcard of $3.7 million.
(4) Excludes one time Savings Association Insurance Fund ("SAIF")
assessment of $2.3 million.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Republic Bancorp, Inc. ("Republic" or "the Company") analyzes
the major elements of Republic's balance sheets and statements of income.
Republic, a bank holding company headquartered in Louisville, Kentucky, is the
parent of Republic Bank & Trust Company (the "Bank"). This section should be
read in conjunction with the Company's Consolidated Financial Statements and
accompanying Notes and other detailed information.
This discussion includes various forward-looking statements with
respect to credit quality (including delinquency trends and the allowance for
loan losses), corporate objectives and other financial and business matters.
When used in this discussion the words "anticipate," "project," "expect,"
"believe," and similar expressions are intended to identify forward-looking
statements. Republic cautions that these forward-looking statements are subject
to numerous assumptions, risks and uncertainties, all of which may change over
time. Actual results could differ materially from forward-looking statements.
In addition to factors disclosed by Republic elsewhere in this discussion, the
following factors, among others, could cause actual results to differ materially
from such forward-looking statements: pricing pressures on loan and deposit
products; competition; changes in economic conditions both nationally and in the
Bank's markets; the extent and timing of actions of the Federal Reserve Board;
clients' acceptance of the Bank's products and services; Year 2000 issues
experienced by Republic or by governmental or private entities; and the extent
and timing of legislative and regulatory actions and reforms.
HIGHLIGHTS
Republic reported record earnings of $13.8 million in 1998, an increase
from $12.3 million reported in 1997. On a per share basis, Class A Common Stock
diluted earnings per share for 1998 were $0.83 up from $0.79 per share in 1997.
The increase in earnings for 1998 reflects strong performance in many areas of
the Company. The favorable interest rate environment resulted in record loan
origination volume for Republic. Total loan originations at the banking centers
and the mortgage banking operations increased to a record $770 million for 1998
compared to $563 million during 1997. The increased loan origination volume
resulted in additional interest income from those loans retained in the Bank's
portfolio, as well as increased fee income realized from the sale of loans into
the secondary market. Gain on sale of securities was significant during 1998 as
a result of active management of the investment portfolio and favorable market
conditions. Earnings also improved as a result of a significant decrease in the
provisions required for the loan loss allowance due to reduced loss experience
in the unsecured consumer loan portfolio.
The following table summarizes selected financial information regarding
Republic's financial performance.
Table 1 - Summary
For the Years Ended December 31, (dollars in thousands) 1998 1997 1996
-------------------------------------
Net income $ 13,756 $ 12,259 $ 2,727
Net income excluding asset dispositions 11,122 5,099 2,727
Diluted Class A earnings per share 0.83 0.79 0.16
Diluted Class B earnings per share 0.82 0.78 0.15
ROA 1.20% 1.12% 0.29%
ROA excluding asset dispositions 0.97 0.47 0.29
ROE 15.82 18.81 4.57
ROE excluding asset dispositions 13.19 8.11 4.57
During 1998, Republic's total assets grew 14% to a record $1.2 billion.
Republic's loan portfolio increased by $75 million or 9% since December 31,
1997. This growth was achieved despite the scheduled paydowns of the unsecured
consumer loan portfolio and paydowns of loans by customers in the communities
where the Western Kentucky banking centers were sold. Overall, Republic
experienced healthy loan demand in its markets and had further development of
the commercial and business banking initiatives. Loan growth was funded by
retail deposits and additional advances from the Federal Home Loan Bank.
Republic achieved an overall increase in total deposits, even though $66 million
in deposits from the Mayfield banking center were sold during 1998.
In July of 1998 Republic sold 2 million shares of its Class A Common
Stock at an initial offering price of $13 per share and received approximately
$23.6 million in proceeds. The stock offering proceeds are being utilized for
continued banking center expansion, the broadening of existing business lines
and other general corporate purposes. Republic's Class A Common Stock is traded
on the NASDAQ National Market under the symbol "RBCAA".
During 1998, Republic completed its program, initiated in 1997, of
refocusing its resources on its North Central and Central Kentucky markets.
Under this program, Republic sold its banking centers and their associated
deposits in the Western Kentucky cities of Murray, Benton, Paducah, and
Mayfield. The Murray, Benton and Paducah sales were closed in the second half of
1997. During the first quarter of 1998, Republic completed the sale of deposits
and fixed assets at the Mayfield banking center, realizing a pre-tax gain of
approximately $4.1 million. This sale was comprised of approximately $66 million
in deposits and certain other fixed assets. Republic retained substantially all
of its Mayfield banking center loan portfolio in that transaction. The Mayfield
transaction represented the final Western Kentucky banking center sale.
Management funded these transactions with additional advances from the Federal
Home Loan Bank, deposits at its existing retail banking centers and liquidation
of selected investment securities and overnight federal funds.
Also during 1997, Republic sold its $17 million Bankcard portfolio, its
merchant processing assets and its $6 million, 50% interest in a joint venture
Bankcard arrangement. Collectively, these asset sales resulted in a pre-tax gain
of $3.7 million. Under the terms of the joint venture Bankcard arrangement,
Republic was subject to a recourse provision of $1.2 million. During 1998,
Republic settled all of its obligations under the joint venture arrangement for
approximately $272,000. Republic had previously expensed $18,000 under the
arrangement prior to the final settlement.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The principal source of Republic's revenue is net interest income. Net
interest income is the difference between interest income on interest-earning
assets such as loans and securities and the interest expense on liabilities used
to fund those assets, such as interest-bearing deposits and borrowings. Net
interest income is impacted by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities and market interest
rates.
The change in net interest income is typically measured by changes in
net interest spread and net interest margin. Net interest spread is the
difference between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities. Net interest margin is determined by
dividing net interest income by average interest-earning assets.
Average interest-earning assets increased 6% in 1998, compared to a 16%
increase in 1997. The 1998 and 1997 growth resulted from increased loan volume
supported by an increase in investment securities.
During 1998, average interest-bearing liabilities grew $20 million to
$965 million, an increase of 2% over 1997. The increase was primarily in money
market accounts and other borrowings. In 1997, average interest-bearing
liabilities grew 15% over 1996. The increase of $127 million during 1997 was
primarily in certificates of deposit, other time deposits and overnight
repurchase agreements.
For 1998, net interest income was $42 million, up $2 million over the
$40 million attained during 1997. Overall, the net interest rate spread
decreased from 3.33% during 1997 to 3.18% in 1998. The Bank's net interest
margin decreased slightly from 3.85% in 1997 to 3.84% in 1998. The decrease in
the net interest spread and margin in 1998 occurred because the yield on
interest earning assets decreased 33 basis points while the rate paid on
liabilities only decreased 18 basis points. As a result of an overall decline in
market interest rates during 1998, Republic's yield on interest earning assets
and the rate paid on interest bearing liabilities both declined during the
period. The average rate on earning assets decreased faster than the average
rate paid on liabilities due, in part, to Republic's higher yielding unsecured
consumer loans being replaced with lower yielding real estate secured loans. Net
interest margin declined at a slower rate than net interest spread because
during 1998 Republic was able to fund a greater portion of its interest earning
assets through equity and non-interest bearing deposits.
Net interest income increased 6% in 1997, following a 14% increase in
1996. The increase in 1997 was attributable to Republic's loan growth,
particularly residential and home equity lending. The increase in 1996 was due
to substantial growth in the unsecured consumer loan portfolio which also
favorably impacted the Bank's net interest spread.
Table 2 provides detailed information as to average balances, interest
income/expense, and rates by major balance sheet category for 1996 through 1998.
Table 3 provides an analysis of the changes in net interest income attributable
to changes in rates and changes in volume of interest-earning assets and
interest-bearing liabilities.
Table 2 - Average Balance Sheets and Rates for December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Average Average Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Earning assets:
U.S. Treasury and U.S. Government
Agency Securities............... $168,862 $9,798 5.80% $209,599 $12,473 5.95% $147,376 $9,040 6.13%
State and political subdivision
securities...................... 4,195 368 8.77 4,447 381 8.57 4,557 390 8.56
Mortgage-backed securities........ 42,572 2,591 6.09 4,415 263 5.96 705 36 5.11
Other investments................. 15,365 1,061 6.91 6,952 497 7.15 5,303 414 7.79
Federal funds sold................ 16,472 930 5.65 12,452 691 5.55 23,847 1,275 5.35
Total loans and fees(1)(2)........ 858,420 77,919 9.08 809,700 76,889 9.50 724,669 70,831 9.77
Total earning assets.............. 1,105,886 92,667 8.38 1,047,565 91,194 8.71 906,457 81,986 9.04
Less: Allowance for loan losses... (8,150) (6,278) (6,196)
Non-earning assets:
Cash and due from banks........... 19,942 20,338 20,830
Bank premises and equipment, net.. 14,123 16,793 14,391
Other assets...................... 14,934 13,198 10,974
Total assets...................... $1,146,735 $1,091,616 $946,456
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Transaction accounts.............. $102,231 $3,263 3.19 $124,062 $4,250 3.43 $149,383 $5,163 3.46
Money market accounts............. 105,668 4,977 4.71 47,036 2,329 4.95 35,557 1,622 4.56
Individual retirement accounts.... 22,549 1,316 5.84 35,641 2,090 5.86 34,956 2,156 6.17
Certificates of deposits and other
time deposits................... 425,721 24,665 5.79 512,260 30,271 5.91 450,759 27,143 6.02
Repurchase agreements and other
borrowings...................... 308,744 15,953 5.17 226,400 11,916 5.26 148,026 7,771 5.25
Total interest bearing liabilities 964,913 50,174 5.20 945,399 50,856 5.38 818,681 43,855 5.36
Non-interest bearing liabilities:
Non-interest bearing deposits..... 79,636 68,184 57,041
Other liabilities................. 15,218 12,875 11,090
Stockholders' equity.............. 86,968 65,158 59,644
Total liabilities and stockholders' $1,146,735 $1,091,616 $946,456
equity..........................
Net interest income............... $42,493 $40,338 $38,131
Net interest spread............... 3.18% 3.33% 3.68%
Net interest margin............... 3.84% 3.85% 4.21%
<FN>
- - -----------
(1) The amount of fee income included in interest on loans was $1,367,000,
$837,000, and $520,000 for the years ended December 31, 1998, 1997, and
1996, respectively.
(2) Calculations include non-accruing loans in the average loan amounts
outstanding
</FN>
The following table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities affected Republic's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate), (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume), and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
Table 3 - Volume/Rate Variance Analysis
1998 compared to 1997 1997 compared to 1996
Total Net Total Net
(dollars in thousands) Change Volume Rate Change Volume Rate
Interest income:
U.S. Treasury and Government Agency Securities..... $(2,675) $(2,424) $(251) $3,433 $3,817 $(384)
State and political subdivision securities......... (13) (22) 9 (9) (10) 1
Mortgage backed securities......................... 2,328 2,273 55 227 189 38
Other investments.................................. 564 601 (37) 83 127 (44)
Federal funds sold................................. 239 223 16 (584) (609) 25
Total loans and fees(1)(2)......................... 1,030 4,626 (3,596) 6,058 8,311 (2,253)
Total increase (decrease) in interest income....... 1,473 5,277 (3,804) 9,208 11,825 (2,617)
Interest expense:
Interest bearing transaction accounts.............. (987) (748) (239) (913) (875) (38)
Money market accounts.............................. 2,648 2,903 (255) 707 524 183
Individual retirement accounts..................... (774) (768) (6) (66) 42 (108)
Certificates of deposit and other time deposits.... (5,606) (5,114) (492) 3,128 3,703 (575)
Repurchase agreements and other borrowings......... 4,037 4,334 (297) 4,145 4,114 31
Total increase (decrease) in interest expense...... (682) 607 (1,289) 7,001 7,508 (507)
Increase (decrease) in net interest income......... $2,155 $4,670 $(2,515) $2,207 $4,317 $(2,110)
- - -----------
<FN>
(1) Interest income for loans on non-accrual status has been excluded from
interest income.
(2) The amount of fee income included in interest on loans was $1,367,000,
$837,000, and $520,000 for the years ended December 31, 1998, 1997, and
1996, respectively.
</FN>
NON-INTEREST INCOME
Non-interest income was $15.5 million during 1998, $18.9 million during
1997, and $7.1 million during 1996. The decrease from 1997 to 1998 was primarily
due to the gains from the sale of deposits and Bankcard during 1997 of $11.2
million. Excluding the sale of deposits and Bankcard during 1998 and 1997,
non-interest income increased by $3.7 million. The increase during 1998 was
principally a result of gains generated from sales of loans into the secondary
market and sales of investment securities. The $11.8 million increase in
non-interest income in 1997 from 1996 was due primarily to the sale of Western
Kentucky deposits and Bankcard.
Table 4 - Analysis of Non-Interest Income
Percent Increase (Decrease)
Year Ended December 31,(dollars in thousands) 1998 1997 1996 1998/97 1997/96
---- ---- ---- ------- -------
Service charges on deposit accounts................ $3,255 $3,284 $2,642 (1%) 24%
Other service charges and fees..................... 821 661 445 24 49
Bankcard services.................................. 508 1,010 NM (50)
Net gain on available for sale securities.......... 1,139 81 1,306 NM
Net gain on sale of loans.......................... 4,326 1,852 1,212 134 53
Loan servicing income.............................. 598 734 829 (19) (12)
Other.............................................. 1,257 623 959 102 (35)
Subtotal........................................ 11,396 7,743 7,097 47 9
Net gain on sale of deposits....................... 4,116 7,527 45 NM
Net gain on sale of Bankcard....................... 3,660 NM NM
Total........................................... $15,512 $18,930 $7,097 (18%) 167%
Service charges on deposit accounts were constant at $3.3 million for
1998 and 1997, even with the sale of five banking centers in Western Kentucky.
Republic continues to open additional transaction accounts at its existing
banking centers which has minimized the impact of the banking center sales on
deposit fee income. Other service charges and fees increased from $661,000 to
$821,000 for 1998 due to increased volume associated with Republic's
participation in a rapid tax refund joint venture with Refunds Now, Inc.
Revenues generated from this joint venture are primarily realized during the
first quarter of the year, the tax-filing season. During the fourth quarter of
1998, Refunds Now, Inc. was merged into Republic. Republic issued 230,000 shares
of Class B Common Stock for the stock of Refunds Now, Inc. in a business
combination accounted for as a pooling of interest. During the first quarter of
1999, Republic expects to realize additional fee income resulting from its
ownership of Refunds Now, Inc.
Revenue from mortgage banking activities during 1996 through 1998 has
been positively influenced by increases in originations, sales volume, and the
sale of most loans with servicing released. Proceeds from sales of loans were
$272 million, $124 million, and $104 million in 1998, 1997, and 1996,
respectively. Secondary market residential loan originations are heavily
influenced by the favorable interest rate environment, which is the primary
factor for increased volume. Net gains from sales of loans closely track loan
origination volume. Net gains as a percentage of loans sold were 1.59%, 1.49%,
and 1.16% in 1998, 1997, and 1996, respectively. Management changed from selling
loans with servicing retained to servicing released in 1995 in order to offset
downward market pressure on loan pricing. The sale of a significant number of
loans with servicing released, coupled with normal loan paydowns and payoffs,
has resulted in a continued decline in the size of the loan servicing portfolio
and a corresponding decline in loan servicing income. As of December 31, 1998,
Republic was servicing $220 million in mortgage loans for other investors,
compared to $263 million at December 31, 1997.
Management cannot determine how long the strong loan originations and
sales may continue. Relatively low interest rates are a key factor in consumer
decisions to acquire new homes and to refinance existing home loans. However, as
rates continue to remain low, the number of consumers who stand to benefit
financially from refinancing decisions declines. Further, certain lenders,
including secondary market investors, now offer current borrowers the option to
reduce their rate for a one-time fee, bypassing the underwriting process, thus
preempting an opportunity for Republic to provide refinancing.
NON-INTEREST EXPENSE
As shown in Table 5, total non-interest expense increased by 2% to
$33.5 million in 1998, compared to $32.9 million in 1997, and $31.4 million in
1996. Republic received the benefit from reduced non-interest expenses during
1998 following the Western Kentucky banking center sales. However, the costs
associated with Republic's addition of seven new banking centers since 1996 and
continued technology enhancements during 1997 resulted in an overall increase in
non-interest expense during 1997 and 1998.
Non-interest expense levels are often measured using an efficiency
ratio (non-interest expense divided by the sum of net interest income and
non-interest income). Excluding its one-time gains from the sale of deposits and
related fixed assets and Bankcard, Republic's efficiency ratio was 62% in 1998
compared to 68% in 1997 and 69% in 1996 (64% exclusive of a one-time SAIF
deposit insurance assessment).
Table 5 - Analysis of Non-Interest Expense
Percent Increase/(Decrease)
Year Ended December 31,(dollars in thousands) 1998 1997 1996 1998/97 1997/96
---- ---- ---- ------- -------
Salaries and employee benefits............. $16,968 $15,444 $13,236 10% 17%
Occupancy and equipment.................... 7,423 8,562 6,623 (13) 29
Communication and transportation........... 1,703 1,796 1,548 (5) 16
Marketing and development.................. 1,372 1,299 1,620 6 (20)
FDIC deposit insurance..................... 307 107 3,277 187 (97)
Supplies................................... 1,066 1,013 973 5 4
Other...................................... 4,694 4,659 4,132 1 13
Total...................................... $33,533 $32,880 $31,409 2% 5%
Salary and employee benefits expense increased approximately 10% and
17% in 1998 and 1997, respectively. This rise in 1998 was primarily due to
increased staffing and commissions paid for Republic's mortgage banking
activities as a result of higher loan volumes. Also in 1998 Republic had
increases in the number of higher salaried technical and lending staff additions
and annual merit salary increases.
Occupancy and equipment expenses declined 13% in 1998 following a 29%
increase during 1997. The 1998 decrease was primarily due to reduced
depreciation and maintaince expenses resulting from the sale of Western Kentucky
banking centers. The $1.9 million increase in 1997 reflects a full year of
operating expenses associated with the opening of five new banking centers in
1996 in Louisville (3), Frankfort and Paducah.
FDIC deposit insurance expense decreased $3.2 million from 1996 to
1997. This decrease is principally a result of the federally mandated one-time
assessment of $2.3 million on the Bank's deposits insured in the FDIC's Savings
Association Insurance Fund (SAIF) during 1996. The 1996 federal legislation
which mandated the one-time assessment provided for a future ongoing reduction
in the FDIC's insurance rate premiums on SAIF insured deposits. Republic
benefited from this one time charge as it resulted in a reduction of the FDIC's
overall insurance rate premium charges during 1997 and 1998.
FINANCIAL CONDITION
LOAN PORTFOLIO
Republic experienced record loan growth throughout its markets in 1998.
Total loans increased 9% to $879 million at December 31, 1998 compared to $805
million at December 31, 1997. The increase in lending was primarily in
residential and commercial loans.
The residential real estate lending portfolio increased $40 million to
$521 million at December 31, 1998. The rise in residential real estate loan
volume was a result of a continued favorable rate environment. During 1998,
Republic introduced two new adjustable rate mortgage products with initial 5 and
10 year fixed rate terms. At December 31, 1998 Republic had $58 million
outstanding in these products. These portfolio products were specifically
designed to compete effectively with secondary market products. Management
determined that the interest rate risk associated with fixed rate features of
these adjustable-rate assets was acceptable, particularly since Republic has
historically been asset-sensitive.
Republic's commercial real estate loan portfolio increased by 55% to
$118 million at December 31, 1998. Republic's commercial banking initatives are
directed by seasoned senior loan executives and are targeted principally toward
the Bank's existing customer base. As a result of increased client demand,
Republic allocated additional resources to the commercial lending function.
Commercial real estate lending remains primarily concentrated within the Bank's
existing markets, which are principally comprised of multifamily investment
properties and small business owner-occupied office and warehouse facilities. In
conjunction with its commercial real estate lending, emphasis has also been
placed on acquiring the associated deposit relationships from these clients.
Republic's consumer loans decreased from $86 million at December 31,
1997 to $60 million at December 31, 1998. The consumer loan portfolio consists
of both secured and unsecured loans. Republic's consumer portfolio includes the
"All Purpose" and "Pre Approved" unsecured loan products. Republic's "All
Purpose" loans, with total outstandings of $8 million at December 31, 1998 and
$13 million at December 31 1997, are originated through Republic's banking
centers. "Pre Approved" loans decreased from $25 million at December 31, 1997 to
$12 million at December 31, 1998. These loans were originated through direct
mail. Management plans to continue to allow the "All Purpose" and "Pre Approved"
portfolios to reduce.
Republic's home equity portfolio increased slightly from $103 million
at December 31, 1997 to $107 million at December 31, 1998. Following strong
origination in this product during 1997, credit utilization by existing
customers has moderated. Loan originations have grown with total lines available
of $202 million at December 31, 1998 compared to $184 million at December 31,
1997.
Republic expects overall loan originations to continue at strong levels
in the near term based on current interest rates. The rate of loan growth on the
balance sheet may, however, slightly lag behind the rate of originations.
Republic's loan portfolio is comprised primarily of adjustable rate single
family loans which are subject to refinancing pressures in a declining interest
rate environment. Also, Republic anticipates that the loan portfolio retained
from the Western Kentucky deposit sales will continue to be subjected to a
higher level of prepayments than its overall loan portfolio in general. During
1998, loans associated with Republic's Western Kentucky banking centers
decreased from $142 million at December 31, 1997 to $87 million at December 31,
1998. Republic will continue to provide service to these clients through its
centralized loan operations, but a number of these clients will elect to
refinance with other local institutions. Republic is not able to predict the
rate at which the Western Kentucky loan portfolio will pre-pay.
Table 6 - Loans by Type
As of December 31, (dollars in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Real estate:
Residential............................ $520,583 $480,874 $457,204 $371,846 $346,649
Construction........................... 47,396 37,940 32,130 31,230 21,919
Commercial............................. 118,293 76,306 59,086 75,648 76,725
Commercial............................... 26,381 21,552 25,115 21,042 18,542
Consumer................................. 59,874 86,061 124,974 127,735 72,684
Home Equity.............................. 106,845 102,512 69,572 48,244 42,309
Total Loans.............................. $879,372 $805,245 $768,081 $675,745 $578,828
The mortgage banking operation provides for the origination and the
sale of first mortgage residential loans into the secondary market. This
operation primarily sells fixed rate originations in the secondary market
without recourse. During 1998, Republic sold $272 million of residential
mortgage loans into the secondary market compared to $124 million in 1997. At
the end of 1998, Republic was servicing $220 million in mortgage loans for other
investors compared to $263 million in 1997 and $297 million in 1996. The decline
in the mortgage banking servicing portfolio from 1996 to 1998 resulted from
management's election to sell a majority of its originations on a servicing
released basis combined with regular loan principal paydowns.
Table 7 illustrates Republic's fixed rate maturities and repricing
frequency for the loan portfolio:
Table 7 - Selected Loan Distribution
One Over One Over
Year Through Five Five
As of December 31, 1998(dollars in thousands) Total or Less Years Years
Fixed rate maturities............................. $181,396 $55,986 $66,594 $58,816
Variable rate repricing frequency................. 697,976 405,763 226,549 65,664
Total............................................. $879,372 $461,749 $293,143 $124,480
Allowance and Provision for Loan Losses
The provision for loan losses was $3.1 million for the year ended
December 31, 1998, compared to $7.3 million for 1997 and $9.1 million for 1996.
Net charge-offs were $3.4 million during 1998 compared to $5.3 million and $6.6
million for 1997 and 1996, respectively. Republic's unsecured consumer loan
portfolio accounted for 57% of total net charge-offs for the year ended December
31, 1998. The net charge-offs in the unsecured loan portfolio were primarily
comprised of $654,000 in the "All Purpose" program compared to $1.8 million
during 1997 and $1.3 million in the "Pre-Approved" program compared to $2.3
million during 1997 (see description of programs under "Loan Portfolio). These
unsecured consumer loan portfolio's outstandings, consisting primarily of fully
amortizing loans with initial terms of 5 years, are expected to continue to
reduce.
The allowance for loan losses decreased slightly from $8.2 million at
December 31, 1997 to $7.9 million at December 31, 1998. Republic's allowance to
total loan ratio was .89% at December 31, 1998 compared to 1.02% at December 31,
1997. This change in the allowance reflects a reduction in overall portfolio
risk due to the decreased outstandings in the Bank's unsecured consumer loan
portfolio and Republic's sale of its Bankcard portfolio during 1997. Both of
these portfolios had higher than expected loan losses in 1996 and 1997. In
addition to the decrease in the level of the unsecured consumer loan portfolio,
management believes that the average quality of the remaining balance of the
portfolio has steadily improved. While the overall loan portfolio balance has
increased, higher risk unsecured consumer loans have been principally replaced
by lower risk, secured residential real estate loans. There has also been an
increase in commercial real estate lending, which is generally considered to
carry greater risk of loss than residential real estate. Management is
monitoring this portfolio closely, and believes it has provided an adequate
component within the allowance for this expanded activity.
The allowance for loan losses is regularly evaluated by management and
maintained at a level believed to be adequate to absorb loan losses in the
Bank's lending portfolios. Periodic provisions to the allowance are made as
needed. The amount of the provision for loan losses necessary to maintain an
adequate allowance is based upon an assessment of current economic conditions,
analysis of periodic internal loan reviews, delinquency trends and ratios,
changes in the mixture and levels of the various categories of loans, historical
charge-offs, recoveries, and other information. Management believes, based on
information presently available, that it has adequately provided for loan losses
at December 31, 1998. Although management believes it uses the best information
available to make allowance provisions, future adjustments which could be
material may be necessary if management's assumptions differ significantly from
the loan portfolio's actual performance.
Table 8 - Summary of Loan Loss Experience
Year Ended December 31,(dollars in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Allowance for loan losses at beginning of year................... $8,176 $6,241 $3,695 $1,827 $1,627
Charge-offs:
Real estate.................................................... (1,017) (358) (242) (313) (83)
Commercial..................................................... (79) (43) (22) (107) (14)
Consumer....................................................... (2,828) (5,458) (6,865) (2,069) (362)
Total.......................................................... (3,924) (5,859) (7,129) (2,489) (459)
Recoveries:
Real estate................................................... 7 23 290 22
Commercial.................................................... 4 25 29
Consumer...................................................... 489 520 236 42 93
Total......................................................... 500 543 526 89 122
Net loan charge-offs............................................ (3,424) (5,316) (6,603) (2,400) (337)
Provision for loan losses....................................... 3,110 7,251 9,149 4,268 537
Allowance for loan losses at end of year........................ $7,862 $8,176 $6,241 $3,695 $1,827
Ratios:
Allowance for loan losses to total loans...................... .89% 1.02% .81% .55% .32%
Net loan charge-offs to average loans outstanding for the .40 .66 .91 .38 .06
period...................................................
Allowance for loan losses to non-performing loans............. 158 115 78 168 97
The following table is management's allocation of the allowance for
loan losses by loan type. Allowance funding and allocation is based on
management's assessment of economic conditions, past loss experience, loan
volume, past due history and other factors. Since these factors are subject to
change, the allocation is not necessarily predictive of future portfolio
performance.
Table 9 - Management's Allocation of the Allowance for Loan Losses
1998 1997 1996
---- ---- ----
Percent Percent Percent
of Loans of Loans of Loans
to Total to Total to Total
Allowance Loans Allowance Loans Allowance Loans
As of December 31,(dollars in thousands)
Real estate....................... $5,729 78% $3,590 74% $1,771 71%
Commercial........................ 265 3 46 3 46 3
Consumer.......................... 1,868 19 4,540 23 4,424 25
Total............................. $7,862 100% $8,176 100% $6,241 100%
Asset Quality
Loans (including impaired loans under SFAS 114 and 118 but excluding
consumer loans) are placed on non-accrual status when they become past due 90
days or more as to principal or interest, unless they are adequately secured and
in the process of collection. When loans are placed on non-accrual status, all
unpaid accrued interest is reversed. These loans remain on non-accrual status
until the borrower demonstrates the ability to remain current or the loan is
deemed uncollectible and is charged off. Consumer loans are not placed on
non-accrual status, but are reviewed and charged off when they reach 120 days
past due. At December 31, 1998, Republic had $256,000 in consumer loans 90 days
or more past due compared to $497,000 at December 31, 1997.
Table 10 provides information related to non-performing assets and
loans 90 days or more past due. Total non-performing loans decreased from $7.1
million at December 31, 1997, to $5.0 million at December 31, 1998. These loans
are primarily secured 1-4 family residential loans. Should the underlying
collateral be determined to be insufficient to satisfy the obligation, the loan
is classified and the Bank's allowance is increased accordingly. Historically,
Republic's security in residential loans has been generally adequate and has
acted to limit the Bank's exposure to loss.
Table 10 - Non-Performing Assets
As of December 31, (dollars in thousands) 1998 1997 1996 1995 1994
Loans on non-accrual status(1)(2)..................... $3,258 $2,676 $3,055 $742 $1,285
Loans past due 90 days or more........................ 1,731 4,459 4,955 1,463 606
Total non-performing loans............................ 4,989 7,135 8,010 2,205 1,891
Other real estate owned............................... 540 22 104 552 791
Total non-performing assets........................... $5,529 $7,157 $8,114 $2,757 $2,682
Percentage of non-performing loans to total loans..... .57% .90% 1.04% .33% .33%
Percentage of non-performing assets to total loans.... .63% .90% 1.06% .41% .46%
<FN>
- - -----------
(1) Loans on non-accrual status include impaired loans. See note 4 to the
Consolidated Financial Statements for additional discussion on impaired
loans.
(2) The interest income that would have been earned and received on non-accrual
loans was not material.
</FN>
Republic defines impaired loans to be those commercial real estate and
other commercial loans greater than $499,999 that management has classified as
doubtful (collection of all amounts due is highly questionable or improbable) or
loss (all or a portion of the loan has been written off or a specific allowance
for loss has been provided). Republic's policy is to charge off all or that
portion of its investment in an impaired loan upon a determination that it is
probable the full amount will not be collected. Impaired loans decreased from
$1.6 million at December 31, 1997 to $1.1 million at December 31, 1998.
Investment Securities
Table 11 - Securities Portfolio
As of December 31(in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Securities Available for Sale:
U.S. Treasury and government agencies........ $123,976 $44,559 $107,937
Agency mortgage-backed securities............ 47,806 49,267
Corporate bonds.............................. 15,154
Total Securities Available for Sale.... $186,936 $93,826 $107,937
Securities Held to Maturity:
U.S. Treasury and government agencies........ $25,422 $93,693 $168,797 $109,282 $96,014
States and political subdivisions............ 4,077 4,270 4,458 4,629 4,691
Agency mortgage-backed securities............ 486 583 663 743
Total Securities Held to Maturity...... $29,985 $98,546 $173,918 $114,654 $100,705
Total............................... $216,921 $192,372 $281,855 $114,654 $100,705
The investment portfolio primarily consists of U.S. Treasury and U.S.
Government Agency Obligations, corporate bonds and mortgage-backed securities.
The mortgage-backed securities (MBS's) consist of 15 year fixed and 7.5 year
balloon mortgage securities, underwritten and guaranteed by FNMA, a
government-sponsored agency. Republic sold $143 million in securities during
1998 compared to $83 million in 1997. The change resulted from continued efforts
to actively manage the investment portfolio.
Securities available for sale increased from $94 million at December
31, 1997 to $187 million at December 31, 1998. Republic elected to invest funds
from maturing securities previously held to maturity into securities available
for sale in order to provide for more flexibility in administering the
investment portfolio in changing market conditions. Securities available for
sale have a weighted average maturity of 5.2 years.
Table 12 - Investment Securities Available For Sale
Average Weighted
Amortized Maturity Average
As of December 31, 1998(dollars in thousands) Cost Fair Value in Years Yield
U.S. Treasury and U.S. Government Agencies:
Within one year $52,171 $52,416 0.68 5.58%
Over one through five years.......................... 71,349 71,560 2.54 5.49%
Total U.S. Treasury and Government Agencies 123,520 123,976 1.75 5.53%
Corporate Bonds
Over one through five years.......................... 10,104 10,041 4.18 5.81%
Over five through ten years.......................... 5,222 5,113 5.54 5.19%
Total corporate bonds................................ 15,326 15,154 4.64 5.61%
Mortgage-backed securities............................. 47,771 47,806 5.97%
Total available for sale investment securities......... $186,617 $186,936 5.18 5.65%
Securities to be held to maturity decreased from $99 million at
December 31, 1997 to $30 million at December 31, 1998. The decrease was due to
management's decision to reinvest maturing securities into securities available
for sale. Securities to be held to maturity have a weighted average maturity of
2.6 years.
Table 13 -Investment Securities Held to Maturity
Average Weighted
Amortized Maturity Average
As of December 31, 1998(dollars in thousands) Cost Fair Value in Years Yield
U.S. Treasury and U.S. Government Agencies:
Within one year...................................... $18,120 $18,152 0.15 6.33%
Over one through five years.......................... 7,302 7,191 1.70 4.86%
Total U.S. Treasury and Government Agencies.......... 25,422 25,343 0.59 5.91%
Obligations of states and political subdivision:
Within one year 85 85 0.00 7.76%
Over one through five years.......................... 658 684 2.50 8.87%
Over five through ten years.......................... 700 821 6.84 11.44%
Over ten years....................................... 2,634 2,646 17.09 10.01%
Total obligations of state and political subdivisions 4,077 4,236 12.63 10.03%
Mortgage-Backed Securities............................. 486 460 7.75%
Total held to maturity investment securities........... $29,985 $30,039 2.59 6.50%
Deposits
Total deposits were $747 million at December 31, 1998 compared to $732
million at December 31, 1997. The slight increase in deposits was achieved even
though $66 million in deposits at the Mayfield banking center were sold during
the first quarter of 1998. Excluding the sale of deposits at the Mayfield
banking center, total deposits would have reflected an increase of $81 million,
or 11%. Republic was also successful in changing its deposit mix by increasing
its low cost deposits (Checking, NOW and Money Market). Republic's growth in
deposits was the result of management's emphasis on retail deposit gathering and
its commercial cash management program. Republic's commercial cash management
program has added approximately 890 accounts representing $27 million in demand
and non-interest-bearing deposits from 1997 to 1998. Republic plans to continue
its deposit gathering initiatives by utilizing aggressive pricing strategies and
offering competitive products in its existing markets.
Table 14 - Deposits
As of December 31(in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Demand (NOW, SuperNOW and Money Market)........... $179,804 $118,870 $116,180 $103,744 $84,957
Savings........................................... 12,330 12,165 14,840 15,395 15,905
Money market certificates of deposit.............. 35,139 41,307 63,423 58,599 85,388
Individual retirement accounts.................... 23,353 30,167 35,845 34,275 22,636
Certificates of deposit, $100,000 and over........ 77,365 63,045 60,890 55,708 43,321
Other certificates of deposit..................... 309,938 352,478 374,864 355,344 279,019
Brokered deposits................................. 28,873 47,653 50,130 48,074 0
Total interest bearing deposits................... 666,802 665,685 716,172 671,139 531,226
Total non-interest bearing deposits............... 80,345 65,913 66,969 63,304 58,795
Total............................................. $747,147 $731,598 $783,141 $734,443 $590,021
Republic's $48 million in brokered deposits at the end of 1997 decreased $19
million during 1998 due to maturities. Republic did not solicit or add any
additional brokered deposits during 1998. The brokered deposits have stated
rates ranging from 5.35% to 6.15% and original contractual maturities ranging
from 3 to 5 years. The entire balance of brokered deposits matures in the next
two years, $12.5 million in 1999 and $16.4 million in 2000.
Securities Sold Under Agreements to Repurchase and Other Short-Term Borrowings
Short-term borrowings consist of short term excess funds from
correspondent banks, repurchase agreements and overnight liabilities to deposit
clients arising from Republic's cash management program. During 1998, short-term
borrowings increased from $111 million at December 31, 1997, to $149 million at
December 31, 1998.
Other Borrowed Funds
Other borrowed funds which consist principally of FHLB advances,
increased from $124 million at December 31, 1997 to $190 million at December 31,
1998. These additional advances from the FHLB were primarily used to replace
deposits associated with the sale of the Mayfield banking center. Additional
borrowings were also used to fund loan growth and purchase investment securities
that were used to collateralize deposits due to the bank's growth in public
funds and high balance commercial accounts. Republic's management expects to
continue to use FHLB borrowings as a source of funds in addition to retail
deposits. The need for additional FHLB borrowings above current levels will be
evaluated by management, with consideration given to the growth of the Bank's
loan portfolio, liquidity needs, cost of retail deposits, market conditions and
other factors. As of December 31, 1998, Republic had the capacity to increase
its borrowings from the FHLB an additional $130 million.
Liquidity
Republic maintains sufficient liquidity in order to fund loan demand
and deposit withdrawals. Liquidity is managed by retaining sufficient liquid
assets in the form of investment securities and core deposits to meet demand.
Funding and cash flows can also be realized from the investment portfolio and
paydowns from within the loan portfolio. Republic's banking centers also provide
access to the retail deposit market. In addition, Republic has established lines
of credit with other financial institutions, the FHLB and brokerage firms. While
Republic utilizes numerous funding sources in order to meet its liquidity
requirements, FHLB borrowings remain a material component of management's
balance sheet strategies.
Republic's objectives include preserving an adequate liquidity
position. Asset/liability management control is designed to ensure safety and
soundness, maintain liquidity and regulatory capital standards, and achieve an
acceptable net interest margin. Republic continues to experience strong loan
demand and management continues to monitor interest rate and liquidity risk
while implementing appropriate funding and balance sheet strategies.
Capital
In July of 1998 Republic sold 2 million shares of its Class A Common
Stock at an initial offering price of $13 per share and received approximately
$23.6 million in proceeds. The stock offering proceeds strengthened Republic's
capital base and are being utilized for continued banking center expansion,
broadening existing business lines and other general corporate purposes
To further enhance Republic's capital position, management has utilized
alternative capital sources. During 1997, Republic issued $6.4 million in 8.5%
Quarterly Income Trust Preferred Securities (the "Trust Preferred securities")
through a subsidiary, Republic Capital Trust. The effective cost of these
securities is 5.5%. The interest paid on these securities is deductible to
Republic. Each Trust Preferred security, par value $100, can be converted to ten
shares of Class A Common Stock. Holders of the Trust Preferred securities are
entitled to the payments made on Republic's subordinated convertible debentures
issued to that subsidiary which have a thirty year maturity with a right of
redemption at par after five years, subject to certain restrictions.
On December 31, 1997, Republic redeemed its $5 million outstanding
Series A Convertible Preferred stock. At the option of each shareholder, each
security was either convertible into 10 shares of Class A Common Stock and 2
shares of Class B Common Stock, or redeemable in cash for the initial offering
price of $100 per share plus a 20% premium. As a result of this redemption
approximately 80% of the outstanding securities were converted to Common Stock.
The remaining securities were redeemed for cash. The $1.2 million payout to
those shareholders included the 20% premium of $203,000 which was charged to
retained earnings.
Regulatory agencies measure capital adequacy within a framework that
makes capital requirements, in part, dependent on the individual risk profiles
of financial institutions. Republic improved its capital position during 1998
and 1997 due to capital raised during the offerings mentioned above and
increased retained earnings achieved during the periods. As a result of the
improved capital position, Republic's capital to average assets ratio increased
to 7.58% at December 31, 1998 compared to 5.97% and 6.30% at year end 1997 and
1996. Republic continues to exceed the regulatory requirements for Tier I, Tier
I leverage and total risk-based capital. The Bank intends to maintain a capital
position that meets or exceeds the "well capitalized" requirements as defined by
the FDIC. See Note 13 to the Consolidated Financial Statements.
Asset/Liability Management and Market Risk
Asset/liability management control is designed to ensure safety and
soundness, maintain liquidity and regulatory capital standards, and achieve
acceptable net interest income. Management considers interest rate risk to be
Republic's most significant market risk. Interest rate risk is the exposure to
adverse changes in the net interest income as a result of market fluctuations in
interest rates.
Management regularly monitors interest rate risk in relation to
prospective market and business conditions. The Bank's board of directors sets
policy guidelines establishing maximum limits on the Bank's interest rate risk
exposure. Republic's management monitors and adjusts exposure to interest rate
fluctuations as influenced by the Bank's loan and deposit portfolios.
Republic uses an earnings simulation model to analyze net interest
income sensitivity. Potential changes in market interest rates and their
subsequent effect on interest income are then evaluated. The model projects the
effect of instantaneous movements in interest rates of both 100 and 200 basis
points. Assumptions based on the historical behavior of Republic's deposit rates
and balances in relation to changes in interest rates are also incorporated into
the model. These assumptions are inherently uncertain and, as a result, the
model cannot precisely measure net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. Actual
results will differ from the model's simulated results due to timing, magnitude,
and frequency of interest rate changes as well as changes in market conditions
and the application of various management strategies.
Interest rate risk management focuses on maintaining acceptable net
interest income within policy limits approved by the board of directors. The
Bank's Asset/Liability Management Committee monitors and manages interest rate
risk to maintain an acceptable level of change to net interest income resulting
from market interest rate changes.
Tables 15 & 16 illustrate Republic's estimated annualized earnings
sensitivity profile:
Table 15 - Interest Rate Sensitivity for 1998
Decrease in Rates Increase in Rates
As of December 31, 1998 200 100 BASE 100 200
dollars in thousands) Basis Points Basis Points Basis Points Basis Points
Projected interest income
Loans........................ $63,043 $68,835 $75,394 $81,537 $86,959
Investments.................. 11,111 12,011 13,060 13,583 14,102
Short-term investments....... 240 354 493 635 773
Total interest income........ $74,394 $81,200 $88,947 $95,755 $101,834
Projected interest expense
Deposits..................... $27,287 $29,197 $31,126 $33,111 $35,446
Other borrowings............. 12,368 14,366 16,364 18,361 20,359
Total interest expense....... 39,655 43,563 47,490 51,472 55,805
Net interest income.......... $34,739 $37,637 $41,457 $44,283 $46,029
Change from base............. $(6,718) $(3,820) $2,826 $4,572
% Change from base........... (16.20)% (9.21)% 6.82% 11.03%
Table 16 - Interest Rate Sensitivity for 1997
Decrease in Rates Increase in Rates
As of December 31, 1997 200 100 BASE 100 200
(dollars in thousands) Basis Points Basis Points Basis Points Basis Points
Projected interest income
Loans........................ $65,254 $70,528 $75,721 $80,555 $85,190
Investments.................. 11,061 11,655 12,337 12,692 13,045
Short-term investments....... 39 69 109 148 182
Total interest income........ $76,354 $82,252 $88,167 $93,395 $98,417
Projected interest expense
Deposits..................... $32,209 $33,735 $35,261 $36,844 $38,877
Other borrowings............. 7,418 9,584 11,750 13,916 16,081
Short-term borrowings........ 95 117 136 157 179
Total interest expense....... 39,722 43,436 47,147 50,917 55,137
Net interest income.......... $36,632 $38,816 $41,020 $42,478 $43,280
Change from base............. $(4,388) $(2,204) $1,459 $2,260
% Change from base........... (10.70)% (5.37)% 3.56% 5.51%
Republic's interest sensitivity profile changed from 1997 to 1998 as a
result of an increase in fixed rate long-term borrowings. In a declining
interest rate environment these borrowings reduce net interest income. Given a
sustained 200 basis point downward shock to the yield curve used in the
simulation model, Republic's base net interest income would decrease by an
estimated 10.70% in 1997 compared to 16.20% for 1998. In a rising interest rate
environment the fixed rate borrowings act to enhance net interest income. Given
a 200 basis point rise in the yield curve Republic's base net interest income
would increase by an estimated 5.51% in 1997 compared to 11. 03% for 1998.
These interest rate sensitivity profiles of Republic at any point in
time will be affected by a number of factors. These factors include the mix of
interest sensitive assets and liabilities as well as their relative repricing
schedules. The tables above may not be a precise measurement of the effect of
changing interest rates on Republic in the future.
Year 2000
Management has assessed the operational and financial implications of its year
2000 needs and developed a plan to ensure that data processing systems, as well
as essential non-information technology systems, can properly handle the century
change. Management has determined that if a business interruption as a result of
the year 2000 issue occurred, that such an interruption could be material to the
Bank's overall financial performance. The primary task required to prevent a
potential business interruption is the installation of the most current software
releases for major mainframe applications developed by Republic's third party
software application providers. Mainframe software upgrades and modifications
for major mission critical applications have been installed and placed into
production. Year 2000 Script Testing for the dates of September 9, 1999,
December 31, 1999, January 3-4, 2000, and February 29, 2000 has been completed.
The Bank's personal computer network was also reviewed and upgraded as
necessary. Software upgrades and modifications will also be required for
selected lower priority non mission critical data processing applications during
1999.
Republic has identified selected employees whose primary function is year 2000
compliance. While Republic does not foresee that it will experience any
significant Year 2000 staffing changes in the coming year, the loss of these
employees could have a material adverse effect on the implementation of
Republic's year 2000 plan. Republic has initiated a year 2000 retention program
designed to encourage and promote the retention of these employees.
Year 2000 remediation has resulted in some delay in other data
processing projects, none of which are deemed material to the Bank's financial
performance. Management believes its current state of year 2000 readiness to be
satisfactory and in accordance with general industry and regulatory
recommendations. Management has also contacted its major suppliers and customers
and inquired about the status of their year 2000 readiness. At this time, the
Bank has no reason to believe that its software providers will not be able to
adequately address the Bank's needs for year 2000 software functionality.
However, Republic must also rely to some extent on the year 2000 readiness of
not only hardware and software providers, but other third party entities such as
public utilities and governmental units. These and other like entities provide
important ongoing services to the Bank. Management is therefore developing and
implementing contingency plans that are scheduled to be in place by the end of
the first quarter, 1999. The Bank has also established and recently successfully
tested its disaster recovery capabilities at its back-up operational site in
Little Rock, Arkansas.
In carrying out its overall year 2000 plan, Republic will incur
certain operational expenses and may replace some existing software that has not
been fully amortized. Most of the expenditures associated with software
application upgrades represent capitalizable costs that would have been incurred
in the normal course of business. The operating expenses will be expensed as
incurred, and the unamortized cost of software replaced, if any, will be charged
off when the applicable software is removed from service. Republic has expensed
approximately $563,000 in costs attributable to year 2000 remediation and
anticipates total costs and charges to be in an approximate range of $1.2 to
$1.7 million. Actual expenses could vary from management's estimates.
Market and Dividend Information
Republic's Class A common stock is traded on the Nasdaq National Market
System (NASDAQ) under the symbol "RBCAA". The following table sets forth the
high and low prices of the Class A common stock since July 23, 1998, the date
the Class A common stock began trading on NASDAQ.
1998
Quarter Ended High Low
- - --------------------------------------------------------------------------------
September 30 $ 16.44 $ 12.63
December 31 14.13 11.88
There is no established public trading market for the Class B common
stock, and there was no established public trading market for the Class A common
stock prior to July 22, 1998. At February 8, 1999, the Class A common stock was
held by 852 shareholders of record, and the Class B common stock was held by 392
shareholders of record. Note 24 to Republic's Consolidated Financial Statements
provides the amount of quarterly cash dividends paid on the Class A and Class B
Common Stock for both 1998 and 1997. The Company currently intends to continue
its policy of paying quarterly cash dividends although there is no assurance
that such dividends will continue to be paid in the future. The payment of
dividends is subject to the discretion of the board of directors. The payment of
dividends in the future is dependent on future income, financial position,
capital requirements and other considerations. In addition, the payment of
dividends is subject to the restrictions described in note 13 to the Company's
consolidated financial statements.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
of Republic Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Republic
Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows for each of the three years in the period ending December 31,
1998. These financial statements are the responsibility of Republic's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Republic Bancorp,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1998, in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
January 11, 1999
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997 (dollars in thousands)
1998 1997
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 37,446 $ 24,546
Federal funds sold 2,500
------------ ------------
Total cash and cash equivalents 39,946 24,546
Securities available for sale 186,936 93,826
Securities to be held to maturity 29,985 98,546
Mortgage loans held for sale 38,167 9,970
Loans, less allowance for loan losses
of $7,862 (1998) and $8,176 (1997) 870,031 794,939
Federal Home Loan Bank stock 14,036 8,124
Accrued interest receivable 8,825 8,803
Premises and equipment, net 15,870 12,774
Other assets 3,888 3,422
------------ ------------
TOTAL $ 1,207,684 $ 1,054,950
============ ============
LIABILITIES:
Deposits:
Non-interest bearing $ 80,345 $ 65,913
Interest bearing 666,802 665,685
Securities sold under agreements to repurchase
and other short-term borrowings 148,659 111,137
Other borrowed funds 190,222 124,405
Accrued interest payable 3,769 6,233
Guaranteed preferred beneficial interests in
Republic's subordinated debentures 6,402 6,452
Other liabilities 7,643 6,739
------------ ------------
Total liabilities 1,103,842 986,564
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 100,000 shares authorized,
Series A 8.5% noncumulative convertible
Class A common stock, no par value, 30,000,000 shares
authorized, 14,868,741 shares (1998) and 12,531,062 shares (1997) issued
and outstanding; Class B common stock, no par value, 5,000,000 shares
authorized, 2,304,928 shares (1998) and 2,418,074
shares (1997) issued and outstanding 4,149 3,613
Additional paid-in capital 34,014 10,833
Retained earnings 65,469 53,994
Net unrealized appreciation (depreciation) on securities available
for sale, net of tax 210 (54)
------------ ------------
Total Stockholders' equity 103,842 68,386
------------ ------------
TOTAL $ 1,207,684 $ 1,054,950
============ ============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands, except per share data)
1998 1997 1996
INTEREST INCOME:
Loans, including fees $ 77,919 $ 76,889 $ 70,831
Securities available for sale 8,816 5,748 569
Securities to be held to maturity:
Taxable 4,035 7,249 8,806
Non-taxable 112 123 127
FHLB dividends 855 494 378
Other 930 691 1,275
------------- ------------ ------------
Total interest income 92,667 91,194 81,986
------------- ------------ ------------
INTEREST EXPENSE:
Deposits 34,221 38,940 36,084
Securities sold under agreements to
repurchase and short-term borrowings 4,869 4,533 3,481
Other borrowed funds 11,084 7,383 4,290
------------- ------------ ------------
Total interest expense 50,174 50,856 43,855
------------- ------------ ------------
NET INTEREST INCOME 42,493 40,338 38,131
PROVISION FOR LOAN LOSSES 3,110 7,251 9,149
------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 39,383 33,087 28,982
------------- ------------ ------------
NON-INTEREST INCOME:
Service charges on deposit accounts 3,255 3,284 2,642
Other service charges and fees 821 661 445
Net gain on sale of mortgage loans 4,326 1,852 1,212
Net gain on sale of deposits 4,116 7,527
Net gain on sale of Bankcard 3,660
Net gain on sale of securities 1,139 81
Loan servicing income 598 734 829
Bankcard services 508 1,010
Other 1,257 623 959
------------- ------------ ------------
Total non-interest income 15,512 18,930 7,097
------------- ------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 16,968 15,444 13,236
Occupancy and equipment 7,423 8,562 6,623
Communication and transportation 1,703 1,796 1,548
Marketing and development 1,372 1,299 1,620
FDIC Deposit Insurance 307 107 3,277
Supplies 1,066 1,013 973
Other 4,694 4,659 4,132
------------- ------------ ------------
Total non-interest expense 33,533 32,880 31,409
------------- ------------ ------------
INCOME BEFORE INCOME TAXES 21,362 19,137 4,670
INCOME TAXES 7,606 6,878 1,943
------------- ------------ ------------
NET INCOME $ 13,756 $ 12,259 $ 2,727
============= ============ ============
- - - Continued -
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (CONT.)
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands, except for per share
data)
1998 1997 1996
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Change in unrealized gain (loss) on securities $ 1,403 $ 246 $ (219)
Reclassification of realized amount (1,139) (81) -
--------- --------- ---------
Net unrealized gain (loss) recognized in comprehensive
income 264 165 (219)
COMPREHENSIVE INCOME $ 14,020 $ 12,424 $ 2,508
========= ========= =========
EARNINGS PER SHARE, BASIC
Class A $ .87 $ .82 $ .16
Class B $ .86 $ .81 $ .15
EARNINGS PER SHARE ASSUMING DILUTION
Class A $ .83 $ .79 $ .16
Class B $ .82 $ .78 $ .15
See accompanying notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands, except per share data)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Appreciation
Common Stock Additional (Depreciation) on Total
Preferred Stock Class A Class B Paid-In Retained Available for Sale Stockholders'
Shares Amount Shares Shares Amount Capital Earnings Securities Equity
BALANCE, January 1, 1996 50 $ 5,000 12,036 2,408 $3,491 $ 6,817 $ 43,194 $ 58,502
Conversions of Class B Common
to Class A Common 68 (68)
Dividends declared:
Preferred ($8.50 per share) (425) (425)
Common: Class A($. 11 per share) (1,330) (1,330)
Class B($. 10 per share) (236) (236)
Net changes in unrealized
appreciation (depreciation) on
securities available for sale,
net of tax $ (219) (219)
Net income 2,727 2,727
------- ------- ------ ------ ------ -------- ------- -------- --------
BALANCE, December 31, 1996 50 5,000 12,104 2,340 3,491 6,817 43,930 (219) 59,019
Exercise of Common Stock options 27 7 146 153
Redemption of preferred stock (10) (1,015) (203) (1,218)
Conversion of preferred stock into
Common Stock (40) (3,985) 398 80 115 3,870
Conversion of Class B Common to
Class A Common 2 (2)
Dividends declared:
Preferred ($8.50 per share) (425) (425)
Common: Class A($ .11 per share) (1,335) (1,335)
Class B($ .10 per share) (232) (232)
Net changes in unrealized appreciation
(depreciation) on securities available
for sale, net of tax 165 165
Net income 12,259 12,259
------- ------- ------ ------ ------ -------- ------- -------- -------
BALANCE, December 31, 1997 12,531 2,418 3,613 10,833 53,994 (54) 68,386
Exercise of Common Stock options 34 5 7 148 155
Issuance of Class A Common 2,000 484 23,097 23,581
Repurchase of Class A Common (52) (12) (100) (574) (686)
Acquisition of Refunds Now 230 55 (53) 30 32
Employee stock grant 3 1 40 41
Conversion of Class B Common to
Class A Common 348 (348)
Conversion of Capital Trust Preferred
to Class A Common 5 1 49 50
Dividends declared Common:
Class A ($ .11 per share) (1,501) (1,501)
Class B ($ .10 per share) (236) (236)
Net changes in unrealized appreciation
(depreciation) on securities available
for sale, net of tax 264 264
Net income 13,756 13,756
------- ------- ------ ------ ------ -------- ------- -------- -------
BALANCE, December 31, 1998 14,869 2,305 $4,149 $ 34,014 $ 65,469 $ 210 $103,842
======= ======= ====== ====== ====== ======== ======= ======== =======
See accompanying notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996
OPERATING ACTIVITIES:
Net income $ 13,756 $ 12,259 $ 2,727
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 3,313 4,683 3,179
Amortization and accretion of securities 331 606 (124)
FHLB stock dividends (855) (456) (372)
Provision for loan losses 3,110 7,251 9,149
Net gain on sale of deposits (4,116) (7,527)
Net gain on sale of bank card (3,660)
Net gain on sale of mortgage loans (4,326) (1,852) (1,212)
Net gain on sale of securities (1,139) (81)
Proceeds from sale of loans held for sale 272,080 123,909 104,115
Origination of mortgage loans held for sale (295,951) (124,403) (104,539)
Employee stock grant 41
Changes in assets and liabilities:
Accrued interest receivable (22) 882 (2,441)
Other assets 617 17 415
Accrued interest payable (2,464) 590 1,329
Other liabilities 841 2,268 83
------------- ------------ ------------
Net cash provided by (used in) operating activities (14,784) 14,486 12,309
INVESTING ACTIVITIES:
Purchases of securities available for sale (235,129) (69,355) (108,350)
Purchases of securities to be held to maturity (11,189) (215,655)
Purchases of FHLB stock (5,057) (2,120)
Proceeds from maturities of securities to be held to maturity 68,827 86,746 156,596
Proceeds from sales of securities available for sale 142,961 83,006
Proceeds from sale of Bankcard 26,590
Net increase in loans (79,421) (66,654) (100,484)
Purchases of premises and equipment (7,394) (3,364) (8,673)
Proceeds from sales of premises and equipment 985 3,416
Cash acquired in acquisition of Refunds Now 32
------------- ------------ ------------
Net cash provided by (used in) investing activities (114,196) 47,076 (276,566)
FINANCING ACTIVITIES:
Net increase in deposits 81,229 63,593 48,698
Sale of deposits (61,564) (107,609)
Net increase (decrease) in securities sold under agree-
ments to repurchase and other short-term borrowings 37,522 (70,497) 159,905
Payments on other borrowed funds (336,453) (296,819) (77,089)
Proceeds from other borrowed funds 402,270 314,250 116,000
Proceeds from issuance of Class A common stock 23,581
Repurchase of Class A common stock (686)
Proceeds from issuance of guaranteed preferred beneficial
interests in Republic's subordinated debentures 6,452
Proceeds from common stock options exercised 155 153
Redemption of preferred stock (1,218)
Cash dividends paid (1,674) (1,992) (1,899)
-------------- ------------ ------------
Net cash provided by (used in) financing activities 144,380 (93,687) 245,615
-------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 15,400 (32,125) (18,642)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 24,546 56,671 75,313
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 39,946 $ 24,546 $ 56,671
============= ============ ============
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 52,638 $ 50,266 $ 42,526
Income taxes $ 9,500 $ 6,095 $ 2,902
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS - The consolidated financial
statements include the accounts of Republic Bancorp, Inc. (Parent Company)
and its wholly-owned subsidiaries; Republic Bank & Trust Company (Bank),
and its subsidiary Republic Financial Services (d/b/a Refunds Now),
Republic Capital Trust, Republic Mortgage Company and Republic Insurance
Agency, Inc. (collectively Republic). All significant intercompany balances
and transactions have been eliminated.
Republic operates 19 banking centers primarily in the retail banking
industry and conducts its operations predominately in metropolitan
Louisville and in Central Kentucky. Republic's consolidated results of
operations are dependent upon net interest income, which is the difference
between the interest income on interest-earning assets and the interest
expense on interest-bearing liabilities. Principal interest-earning assets
are securities and real estate mortgage, commercial, and consumer loans.
Interest-bearing liabilities consist of interest-bearing deposit accounts
and short-term and long-term borrowings.
Other sources of income include fees charged to customers for a variety of
banking services such as transaction deposit accounts, and trust services.
Republic also generates revenue from its mortgage banking activities which
include the origination and sale of loans in the secondary market and
servicing loans for others.
Republic's operating expenses consist primarily of salaries and employee
benefits, occupancy and equipment expenses, marketing and development,
communications and transportation costs and other general and
administrative expenses. Republic's results of operations are significantly
affected by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of
regulatory agencies.
CASH FLOWS - Cash and cash equivalents includes cash, deposits with other
financial institutions under 90 days, and federal funds sold. Net cash
flows are reported for loan and deposit transactions.
SECURITIES - Securities to be held to maturity are those which Republic has
the positive intent and ability to hold to maturity and are reported at
cost, adjusted for premiums and discounts that are recognized in interest
income using the interest method over the period to maturity.
Securities available for sale carried at fair value, consist of securities
not classified as trading securities nor as held to maturity securities.
Unrealized holding gains and losses, net of tax, on securities available
for sale are reported as a separate component of stockholders' equity until
realized. Gains and losses on the sale of available for sale securities are
determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period
to maturity.
Declines in the fair value of individual securities below their cost that
are other than temporary result in write-downs of the individual securities
to their fair value. The related write-downs are included in earnings as
realized losses.
Federal Home Loan Bank stock is carried at cost.
MORTGAGE BANKING ACTIVITIES - Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of aggregate cost or
market value. Republic controls its interest rate risk with respect to
mortgage loans held for sale and loan commitments expected to close by
entering into agreements to sell loans. The aggregate market value of
mortgage loans held for sale considers the sales prices of such agreements.
Republic also provides currently for any losses on uncovered commitments to
lend or sell.
Servicing rights are recognized as assets for purchased rights and for the
allocated value of retained servicing rights on loans sold. Servicing
rights are expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of the
rights, using groupings of the underlying loans as to interest rates and
then, secondarily, as to geographic and prepayment characteristics. Any
impairment of a grouping is reported as a valuation allowance. Republic's
loans sold in the secondary market have been primarily servicing released.
Accordingly, servicing rights have not had a material impact on Republic's
financial position or results of operations.
Loan servicing income is recorded as principal payments are collected and
includes servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. Costs of loan servicing are charged
to expense as incurred.
Mortgage loans originated in mortgage banking activities may be converted
into securities. A new accounting standard for 1999 will allow classifying
these securities as available for sale, trading, or held to maturity,
instead of the current requirement to classify as trading. This is not
expected to have a material effect, but the effect will vary depending on
the level and designation of securitizations as well as on market price
movements.
LOANS - Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
Interest on loans is computed on the principal balance outstanding. Loan
origination fees and certain direct loan origination costs relating to
successful loan origination efforts are deferred and recognized over the
lives of the related loans as an adjustment to yield.
Generally, the accrual of interest on loans, including impaired loans, is
discontinued when it is determined that the collection of interest or
principal is doubtful, or when a default of interest or principal has
existed for 90 days or more, unless such loan is well secured and in the
process of collection. Interest received on non-accrual loans generally is
either applied against principal or reported as interest income, according
to management's judgment as to the collectibility of principal. When loans
are placed on non-accrual status, all unpaid accrued interest is reversed.
Such loans remain on non-accrual status until the borrower demonstrates the
ability to remain current or the loan is deemed uncollectible and is
charged off. Consumer loans generally are not placed on non-accrual status
but are reviewed periodically and charged off when deemed uncollectible.
Republic recognizes interest income on an impaired loan when earned, unless
the loan is on non-accrual status, in which case interest income is
recognized when received.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is an amount that
management believes will be adequate to absorb probable credit losses on
existing loans, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay. Although
management believes it uses the best information available to make
determinations with respect to Republic's allowance for loan losses, future
adjustments, which could be material, may be necessary if original
assumptions differ from actual performance.
A loan is defined as "impaired" when it is probable that a creditor will be
unable to collect all principal and interest due according to the
contractual terms of the loan agreement. Republic has defined its
population of impaired loans to be those commercial real estate and
commercial loans over $499,999 that management has classified as doubtful
(collection of all amounts due under the terms of the loan is highly
questionable or improbable) or loss (all or a portion of the loan has been
written off or a specific allowance for loss has been provided). Republic's
policy is to charge off all or that portion of its investment in an
impaired loan upon determination that it is probable the amount will not be
collected.
Impairment of smaller balance, homogeneous loans (commercial real estate
and commercial loans less than $500,000, residential real estate, consumer,
home equity, and credit card loans) is measured on an aggregate basis
giving consideration to historical charge-off experience of the related
portfolios.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed over
the estimated useful lives of the related assets on the straight-line
method. Estimated lives are 25 to 31 1/2 years for buildings and
improvements, 3 to 5 years for furniture, fixtures and equipment and 3 to 9
years for leasehold improvements.
LONG LIVED ASSETS - Long lived assets are reviewed for impairment when
events indicate their carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at discounted
amounts.
STOCK OPTION PLANS - Employee compensation expense under stock option plans
is reported if options are granted below market price at grant date.
Pro-forma disclosures of net income and earnings per share are shown using
the fair value method of SFAS No. 123 to measure expense for options
granted after 1994, using an option pricing model to estimate fair value.
INCOME TAXES - Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
EARNINGS PER SHARE - Earnings per share is based on income less preferred
stock dividends (and, in the case of Class B Common Stock, less the
dividend preference on Class A Common Stock) divided by the weighted
average number of shares outstanding during the period. Earnings per share
assuming dilution shows the effect of additional common shares issuable
under stock options, convertible preferred stock and guaranteed preferred
beneficial interests in Republic's subordinated debentures. All per share
amounts have been restated to reflect the stock splits occurring during the
periods presented.
USE OF ESTIMATES - Financial statements prepared in conformity with
generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
these estimates.
COMPREHENSIVE INCOME - Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale which are also recognized
as separate components of equity. The accounting standard that requires
reporting comprehensive income first applies for 1998, with prior
information restated to be comparable.
SEGMENT INFORMATION - Public companies are required to report information
about operating segments. Segments are parts of a company evaluated by
management with separate financial information. Republic's internal
information is primarily reported and evaluated in two lines of business -
banking and mortgage banking.
ACQUISITIONS - During 1998, Republic acquired Refunds Now for 230,000
shares of Class B Common Stock. Refunds Now provides electronic tax return
filing and refund anticipation loan services through approximately 1,000
locations nationwide. The transaction was accounted for using the pooling
of interests method. As reflected in the changes in shareholders' equity
and cash flows, prior periods have not been restated for the acquisition as
the impact to those periods is not material. As of and for the year ended
1998, Refunds Now had $507,000 in total assets and net income of $169,000.
CURRENT ACCOUNTING ISSUES - Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be
recorded by offsetting gains and losses on the hedge and on the hedged
item, even if the fair value of the hedged item is not otherwise recorded.
This is not expected to have a material effect, but the effect will depend
on derivative holdings when this standard applies.
2. RESTRICTIONS ON CASH AND DUE FROM BANKS
Republic is required by the Federal Reserve Bank to maintain average
reserve balances. Cash and due from banks in the consolidated balance sheet
includes $5.2 million of reserve balances at December 31, 1998.
3. SECURITIES
Securities available for sale:
Gross Gross
Amortized Unrealized Unrealized
As of December 31, 1998 (in thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and U.S.
government agencies $ 123,520 $ 532 $ (76) $ 123,976
Mortgage-backed securities 47,771 185 (150) 47,806
Corporate bonds 15,326 (172) 15,154
----------- ----------- ------------ -----------
Total securities available for sale $ 186,617 $ 717 $ (398) $ 186,936
=========== =========== ============ ===========
Gross Gross
Amortized Unrealized Unrealized
As of December 31, 1997 (in thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and U.S.
government agencies $ 44,586 $ 6 $ (33) $ 44,559
Mortgage-backed securities 49,322 28 (83) 49,267
----------- ----------- ----------- -----------
Total securities available for sale $ 93,908 $ 34 $ (116) $ 93,826
=========== =========== =========== ===========
Securities to be held to maturity:
Gross Gross
Amortized Unrealized Unrealized
As of December 31, 1998 (in thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and U.S.
government agencies $ 25,422 $ 32 $ (111) $ 25,343
Obligations of state and political
subdivisions 4,077 159 4,236
Mortgage-backed securities 486 (26) 460
----------- ----------- ------------ -----------
Total securities to be held to maturity $ 29,985 $ 191 $ (137) $ 30,039
=========== =========== ============ ===========
Gross Gross
Amortized Unrealized Unrealized
As of December 31, 1997 (in thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and U.S.
government agencies $ 93,693 $ 229 $ (378) $ 93,544
Obligations of state and political
subdivisions 4,270 177 4,447
Mortgage-backed securities 583 (34) 549
----------- ----------- ----------- -----------
Total securities to be held to maturity $ 98,546 $ 406 $ (412) $ 98,540
=========== =========== =========== ===========
Securities having an amortized cost of $168.1 million and $168.6 million
and fair value of $168.4 million and $168.1 million at December 31, 1998
and 1997, respectively, were pledged to secure public deposits, securities
sold under agreements to repurchase and for other purposes, as required or
permitted by law. Gross gains of $1.1 million and losses of $2,000 were
recognized in 1998 from proceeds of $143 million on sales of available for
sale securities. In 1997, gross gains of $194,000 and losses of $113,000
were recognized from proceeds of $83 million on sales of available for sale
securities.
The amortized cost and fair value of securities, by contractual maturity,
are as follows:
Securities to be Securities
held to maturity available for sale
---------------- ------------------
Amortized Amortized
As of December 31, 1998 (in thousands) Cost Fair Value Cost Fair Value
Due in one year or less $ 18,205 $ 18,237 $ 52,171 $ 52,416
Due after one year through
five years 7,960 7,875 81,453 81,601
Due after five through ten years 700 821 5,222 5,113
Due after ten years 2,634 2,646
Mortgage-backed securities 486 460 47,771 47,806
------------ ------------- ------------ ------------
Total $ 29,985 $ 30,039 $ 186,617 $ 186,936
============ ============= ============ ============
4. LOANS
As of December 31 (in thousands) 1998 1997
Residential real estate $ 520,583 $ 480,874
Commercial real estate 118,293 76,306
Real estate construction 47,396 37,940
Commercial 26,381 21,552
Consumer 56,728 81,967
Home equity 106,845 102,512
Other 3,146 4,094
------------ ------------
Total loans 879,372 805,245
Less:
Unearned interest income
and unamortized loan fees 1,479 2,130
Allowance for loan losses 7,862 8,176
------------ ------------
Loans, net $ 870,031 $ 794,939
============ ============
During 1997, Republic sold its Bankcard loans. A gain of $3.7 million was
recognized on these sales and includes $500,000 of gain recognized on the
sale of the associated merchant processing.
Activity in the allowance for loan losses is summarized as follows:
As of December 31 (in thousands) 1998 1997 1996
Balance, beginning of year $ 8,176 $ 6,241 $ 3,695
Provision for loan losses charged to income 3,110 7,251 9,149
Charge-offs (3,924) (5,859) (7,129)
Recoveries 500 543 526
------------ ------------ ------------
Balance, end of year $ 7,862 $ 8,176 $ 6,241
============ ============ ============
The level of charge offs in 1997 and 1996 exceeded losses incurred in prior
periods and were directly related to two unsecured credit programs
initiated in 1995. The net charge-offs related to loans arising under these
programs were $1.9 million, $4.2 million and $4.8 million in 1998, 1997 and
1996, and accounted for 57%, 71% and 73% of net charge offs in each of
those years. Originations of loans under these programs were significantly
reduced in 1997 and 1996, and such originations were underwritten to more
restrictive standards than in 1995.
Information about Republic's investment in impaired loans is as follows:
As of and for the Year Ended December 31 (in thousands) 1998 1997 1996
Gross impaired loans which have allowances $ 1,116 $ 1,640 $ 1,638
Less: related allowances for loan losses 100 240 240
------------ ------------ ------------
Net impaired loans with related allowances 1,016 1,400 1,398
Impaired loans with no related allowances 0 0 0
------------ ------------ ------------
Total $ 1,016 $ 1,400 $ 1,398
============ ============ ============
Average impaired loans outstanding $ 1,116 $ 1,639 $ 1,638
============ ============ ============
Interest income recognized $ 100 $ 93 $ 110
============ ============ ============
Interest income received $ 100 $ 93 $ 110
============ ============ ============
Loans made to executive officers and directors of Republic and their
related interests in the ordinary course of business, subject to
substantially the same credit policies as other loans and current in their
terms, are as follows:
Balance, Balance,
Beginning New End
Of Period Loans Repayments Of Period
(in thousands)
Year ended December 31, 1998 $ 4,662 $ 3,995 $ 5,137 $ 3,520
=========== =========== =========== ===========
5. LOAN SERVICING
Republic was servicing loans for others (primarily FHLMC) totaling $220
million and $263 million at December 31, 1998 and 1997, respectively.
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
processing foreclosures. In connection with these loans serviced for
others, Republic held borrowers' escrow balances of $400,000 and $500,000
at December 31, 1998 and 1997, respectively.
6. PREMISES AND EQUIPMENT
December 31 (in thousands) 1998 1997
Land $ 1,502 $ 1,007
Office buildings and improvements 9,458 6,991
Furniture, fixtures and equipment 18,322 17,735
Leasehold improvements 960 869
------------ ------------
Total premises and equipment 30,242 26,602
Less accumulated depreciation and amortization 14,372 13,828
------------ ------------
Net premises and equipment $ 15,870 $ 12,774
============ ============
7. DEPOSITS
Time deposits of $100,000 or more were approximately $77 million and
$63 million at year-end 1998 and 1997.
The scheduled maturities of time deposits of $100,000 or more are as
follows:
Weighted
Average Rate
As of December 31, 1998 (in thousands)
Less than 1 year $ 45,673 5.55%
Over 1 year through 3 years 30,640 5.17%
Over 3 years through 5 years 1,052 5.64%
------------
$ 77,365
============
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND
OTHER SHORT TERM BORROWINGS
These borrowings consist of short-term excess funds from correspondent
banks, repurchase agreements and overnight liabilities to deposit customers
arising from a cash management program offered by Republic. While
effectively deposit equivalents, such arrangements are in the form of
repurchase agreements. The repurchase agreements are treated as financings;
accordingly, the securities involved with the agreements are recorded as
assets and are held by a safekeeping agent and the obligations to
repurchase the securities are reflected as liabilities. All securities
underlying the agreements were under Republic's control.
As of December 31 (in thousands) 1998 1997
Average outstanding balance during the year $ 115,280 $ 100,291
Average interest rate during the year 4.21% 4.57%
Maximum month end balance during the year $ 148,659 $ 111,137
9. OTHER BORROWED FUNDS
As of December 31(in thousands) 1998 1997
Federal Home Loan Bank convertible fixed rate
advance (see comment below) $ 50,000
Federal Home Loan Bank variable interest rate advances, with weighted
average interest rate of 5.38% at December 31, 1998, due through 1999 52,800 $ 116,000
Federal Home Loan Bank fixed interest rate advances, with weighted average
interest rate of 5.57% at December 31, 1998, due through 2003 87,422 8,405
------------ ------------
$ 190,222 $ 124,405
============ ============
Republic has entered into convertible fixed rate advances ranging from 3 to
5 years with the Federal Home Loan Bank (FHLB) totaling $50 million. The
advances are fixed from one to three years at rates varying from 4.26% to
5.11%. At the end of the fixed term, the FHLB has the right to convert the
fixed rate advance on a quarterly basis to a variable rate advance tied to
the three months LIBOR index. The advances can be prepaid at any quarterly
date without penalty, but may not be prepaid at any time during the fixed
rate term.
The Federal Home Loan Bank advances are collateralized by a blanket pledge
of eligible real estate loans with an unpaid principal balance of greater
than 150% of the outstanding advances. Republic has available collateral to
borrow an additional $130 million from the Federal Home Loan Bank. Republic
also has unsecured lines of credit totaling $40 million and secured lines
of credit of $115 million available through various financial institutions.
Aggregate future principal payments on borrowed funds as of December 31,
1998 are as follows:
December 31, 1998(in thousands)
1999 $ 93,840
2000 26,098
2001 10,284
2002 -
2003 60,000
----------
$ 190,222
==========
10. GUARANTEED PREFERRED BENEFICIAL INTERESTS
In February 1997, Republic Capital Trust (RCT), a trust subsidiary of
Republic Bancorp, Inc., completed the private placement of 64,520 shares
of cumulative trust preferred securities (Trust Preferred Securities) with
a liquidation preference of $100 per security. Each security can be
converted into ten shares of Class A Common Stock at the option of the
holder. The proceeds of the offering were loaned to Republic Bancorp, Inc.
in exchange for subordinated debentures with terms that are similar to the
Trust Preferred Securities. Distributions on the securities are payable
quarterly at the annual rate of 8.5% of the liquidation preference and are
included in interest expense in the consolidated financial statements.
Republic undertook the issuance of these securities to enhance its
regulatory capital position. The Bank has utilized the capital for general
business purposes and to support the Bank's future opportunities for
growth. These securities are considered as Tier I capital under current
regulatory guidelines.
The Trust Preferred Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the subordinated debentures at
maturity or their earlier redemption at the liquidation preference. The
subordinated debentures are redeemable prior to the maturity date of April
1, 2027 at the option of Republic on or after April 1, 2002, or upon the
occurrence of specific events, defined within the trust indenture.
Republic has the option to defer distributions on the subordinated
debentures from time to time for a period not to exceed 20 consecutive
quarters.
11. INCOME TAXES
Income tax expense is summarized as follows:
For the Years Ended December 31 (in thousands) 1998 1997 1996
Current $ 6,918 $ 7,587 $ 2,560
Deferred expense (benefit) 688 (709) (617)
------------ ------------ ------------
Total $ 7,606 $ 6,878 $ 1,943
============ ============ ============
The provision for income taxes differs from the amount computed at the
statutory rate as follows:
For the Years Ended December 31, 1998 1997 1996
Federal statutory rate 35.0% 35.0% 34.0
Increase (decrease) resulting from:
Tax-exempt interest income (0.1) (0.3) (1.4)
Acquisition intangibles 6.5
Other 0.7 1.2 2.5
-------- ------- -------
Effective rate 35.6% 35.9% 41.6%
======== ======= =======
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
As of December 31(in thousands) 1998 1997
Deferred tax assets:
Depreciation $ 511 $ 448
Loan fees 168
Allowance for loan losses 1,802 1,860
FAS 115 valuation reserve 28
------------ ------------
Total deferred tax assets 2,313 2,504
------------ ------------
Deferred tax liabilities:
FHLB dividends 920 662
FAS 115 valuation reserve 197
Other 476 209
------------ ------------
Total deferred tax liabilities 1,593 871
------------ ------------
Net deferred tax asset, included in other assets $ 720 $ 1,633
============ ============
12. EARNINGS PER SHARE
A reconciliation of the combined Class A and B Common Stock numerators and
denominators of the earnings per share and earnings per share assuming
dilution computations is as follows:
Years Ended December 31(in thousands) 1998 1997 1996
Earnings Per Share
Net Income $ 13,756 $ 12,259 $ 2,727
Less: Dividends declared on preferred stock (425) (425)
------------ ------------ ------------
Net Income available to common shares
outstanding $ 13,756 $ 11,834 $ 2,302
============ ============ ============
Weighted average shares outstanding 15,886 14,450 14,444
============ ============ ============
Years Ended December 31 (in thousands) 1998 1997 1996
Earnings Per Share Assuming Dilution
Net Income $ 13,756 $ 12,259 $ 2,727
Less: Dividends declared on preferred stock (425)
Add: Interest expense, net of tax benefit,
on assumed conversion of guaranteed
preferred beneficial interests in
Republic's subordinated debentures 356 320
------------ ------------ ------------
Net Income available to common shareholder
assuming conversion $ 14,112 $ 12,579 $ 2,302
============ ============ ============
Years Ended December 31(in thousands) 1998 1997 1996
Weighted average shares outstanding 15,886 14,450 14,444
Add dilutive effects of assumed
conversion and exercise:
Convertible preferred stock 600
Convertible guaranteed preferred
beneficial interest in Republic's
subordinated debentures 645 564
Stock options 498 320 198
------------ ------------ ------------
Weighted average shares and dilutive
potential shares outstanding 17,029 15,934 14,642
============ ============ ============
The difference in earnings per share between the two classes of common
stock result solely from the dividend premium paid to Class A over Class B
Common Stock.
The 50,000 shares of preferred stock were not considered converted to
600,000 shares of common stock for 1996 in computing earnings per share
assuming dilution because the impact of their conversion was antidilutive.
13. STOCKHOLDERS' EQUITY
COMMON STOCK - The Class A shares are entitled to cash dividends equal to
110% of the dividend paid per share on the Class B Common Stock. Class A
shares have one vote per share and Class B shares have ten votes per share.
Class B Common Stock may be converted, at the option of the holder, to
Class A stock on a share-for-share basis. The Class A Common Stock is not
convertible into any other class of Republic's capital stock.
On June 30, 1998, the shareholders approved an amendment to Republic's
Articles of Incorporation to increase the authorized Class A Common Stock
to 30,000,000 shares and the authorized Class B Common Stock to 5,000,000
shares. Concurrently, the shareholders approved a 2-for-1 stock split
affecting both classes of Common Stock. All per share amounts have been
retroactively restated to reflect the split.
On July 21, 1998, Republic issued 2 million shares of Class A Common Stock
in an initial public offering at $13.00 per share.
PREFERRED STOCK - On December 31, 1997, Republic redeemed the $5 million
outstanding Series A Convertible Preferred stock. At the option of
shareholder, each security was either convertible to 10 shares of Class A
Common Stock and 2 shares of Class B Common Stock, or redeemable in cash
for the initial offering price of $100 per share plus a 20% premium.
DIVIDEND LIMITATIONS - Banking regulations limit the amount of dividends
that may be paid to the Parent Company without prior approval of the Bank's
regulatory agency. Under these regulations, the amount of dividends that
may be paid in any calendar year is limited to the current year's net
profits, as defined, combined with the retained net profits of the
preceding two years, less any dividends declared during those periods. At
December 31, 1998, the Bank had $20 million of retained earnings available
for such purposes.
REGULATORY CAPITAL REQUIREMENTS - The Parent Company and the Bank are
subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on
Republic's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Parent Company and
the Bank must meet specific capital guidelines that involve quantitative
measures of the bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Parent Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Parent Company and the Bank
meet all capital adequacy requirements to which it is subject.
The most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized the Bank must maintain minimum Total
Risk-Based, Tier I Risk-Based, and Tier I Leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
Minimum
Minimum Requirement
Requirement To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998 (dollars in thousands)
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated $ 117,878 15.68% $ 60,146 8% $ 75,192 10%
Bank only $ 117,528 15.63% $ 60,144 8% $ 75,181 10%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 110,016 14.63% $ 30,073 4% $ 45,109 6%
Bank only $ 109,666 14.59% $ 30,072 4% $ 45,108 6%
Tier I Leverage Capital (to Average Assets)
Consolidated $ 110,016 9.29% $ 47,374 4% $ 59,217 5%
Bank only $ 109,666 9.26% $ 47,368 4% $ 59,211 5%
As of December 31, 1997
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated $ 83,069 11.73% $ 56,672 8% $ 70,841 10%
Bank only $ 83,149 11.74% $ 56,670 8% $ 70,837 10%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 74,893 10.57% $ 28,336 4% $ 42,504 6%
Bank only $ 74,973 10.58% $ 28,335 4% $ 42,502 6%
Tier I Leverage Capital (to Average Assets)
Consolidated $ 74,893 6.99% $ 42,866 4% $ 53,583 5%
Bank only $ 74,973 7.00% $ 42,865 4% $ 53,581 5%
14. STOCK OPTION PLAN
Under a stock option plan, certain key employees and directors are granted
options to purchase shares of Republic's common stock at fair value at the
date of the grant. Options granted become fully exercisable at the end of
two to six years of continued employment and must be exercised within one
year.
A summary of Republic's stock option activity, and related information for
the years ended December 31 follows:
1998 1997
-------------------------------------------- -------------------------------------------
Options Weighted Options Weighted Options Weighted Options Weighted
Class A Average Class B Average Class A Average Class B Average
Shares Exercise Shares Exercise Shares Exercise Shares Exercise
Price Price Price Price
Outstanding
beginning of year 993,000 $ 5.36 57,000 $ 3.81 937,000 $ 5.16 68,000 $ 3.73
Granted 281,000 12.52 227,000 $ 6.00
Exercised (32,500) 4.34 (4,500) 3.61 (27,000) $ 5.54 (1,000) $ 3.61
Forfeited (24,000) 5.97 (144,000) $ 5.04 (10,000) $ 3.28
--------- -------- -------- -------
Outstanding
year end 1,217,500 $ 7.03 52,500 $ 3.83 993,000 $ 5.36 57,000 $ 3.81
========= ======== ======= =======
Exercisable
(vested) end
of year --- --- --- ---
1996
Options Weighted Options Weighted
Class A Average Class B Average
Shares Exercise Shares Exercise
Price Price
Outstanding
beginning of year 380,000 $ 3.86 76,000 $ 3.86
Granted 623,000 5.97
Exercised
Forfeited (66,000) 5.38 (8,000) 5.00
-------- -------
Outstanding
year end 937,000 $ 5.16 68,000 $ 3.73
======== =======
Exercisable
(vested) end
of year --- ---
Options outstanding at year-end 1998 were as follows.
Outstanding
Class A Class B
---------------------------- ----------------------------
Weighted Weighted
Average Average
Remaining Remaining
Contractual Contractual
Number Life Number Life
Range of Exercise Prices
$3.28 - $5.97 713,500 2.32 52,500 1.49
$6.00 - $13.00 504,000 4.37
------------ ------------ ------------ ------------
Outstanding 1,217,500 3.16 52,500 1.49
============ ============ ============ ============
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if Republic had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model. The weighted average
assumptions for options granted during the year and the resulting estimated
weighted average fair values per share used in computing pro forma
disclosures are as follows:
As of December 31 1998 1997 1996
---------------------------------------------
Assumptions:
Risk-free interest rate 5.53% 6.25% 6.29%
Expected dividend yield .89 1.84% 1.84%
Expected life (years) 5.94 5.78 6.00
Expected common stock
market price volatility 13% 13% 13%
Estimated fair value per share $3.21 $1.38 $1.40
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period on an
accelerated basis. Republic's pro forma information follows (in thousands
except for earnings per share information):
As of December 31 1998 1997 1996
---------------------------------------
Pro forma net income $ 13,461 $ 12,058 $ 2,574
Pro forma earnings per share
Class A $ .85 $ .81 $ .15
Class B $ .84 $ .80 $ .14
Pro forma earnings per share
assuming dilution
Class A $ .81 $ .79 $ .15
Class B $ .80 $ .78 $ .14
Future pro forma net income will be negatively impacted should Republic
choose to grant additional options.
15. EMPLOYEE BENEFIT PLAN
Republic maintains a 401(k) plan for full-time employees who have been
employed for 1,000 hours in a plan year and have reached the age of 21.
Participants in the plan may elect to contribute from 1% to 15% of their
annual compensation. Republic matches 50% of participant contributions up
to 5% of each participant's annual compensation. Republic's contribution
may increase if certain operating ratios are achieved. Republic's matching
contributions were $372,000, $313,000, and $284,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
16. LEASES AND TRANSACTIONS WITH AFFILIATES
Republic leases office facilities from Republic's Chairman and from
partnerships in which Republic's Chairman and Chief Executive Officer are
partners under operating leases. Rent expense for the years ended December
31, 1998, 1997 and 1996 under these leases was $1,251,000, $1,064,000 and
$1,054,000, respectively. Total rent expense on all operating leases was
$1,563,000, $1,533,000 and $1,343,000, for the years ended December 31,
1998, 1997 and 1996, respectively. The total minimum lease commitments
under noncancelable operating leases are as follows:
As of December 31, 1998 (in thousands) Affiliate Other Total
1999 $ 1,251 $ 312 $ 1,563
2000 1,236 237 1,473
2001 958 120 1,078
2002 403 98 501
Thereafter 327 574 901
------------ ------------ ------------
$ 4,175 $ 1,341 $ 5,516
============ ============ ============
Republic made payments to companies owned by directors of the Bank for the
construction of branches totaling $245,000 and $711,000 for the years ended
December 31, 1997 and 1996, respectively.
A director of Republic is a former partner at Wyatt, Tarrant & Combs. Fees
paid by Republic to this firm totaled $207,000, $88,000, and $22,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
17. SALE OF DEPOSITS AND BANKING CENTERS
During 1997, Republic entered into agreements to sell deposits totaling
$180 million and fixed assets of $3.7 million associated with its Western
Kentucky banking centers. Substantially all loans originated by these
banking centers were retained by Republic.
Sales of four of the five banking centers were finalized during 1997,
resulting in a pretax gain of $7.5 million. The sale of the remaining
banking center was finalized during January 1998 for a pretax gain of $4.1
million. Federal Home Loan Bank advances of $36 million and $60 million
were used, in part, to fund the 1997 and 1998 sales.
18. SAIF ASSESSMENT
In November 1994, Republic completed a merger with its affiliated savings
association, Republic Savings Bancorp, Inc. Subsequent to the merger, a
portion of Republic's deposits continue to be insured by the Savings
Association Insurance Fund (SAIF). A bill was passed on September 30, 1996,
which included a provision to replenish the SAIF through a special
assessment. The one-time assessment was imposed on SAIF assessable deposits
held at March 31, 1995. Republic's assessment of approximately $2.3 million
is included in 1996 FDIC deposit insurance expense in the accompanying
consolidated statements of income.
19. OFF-BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
Republic is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments primarily include commitments to extend credit
and standby letters of credit. The contract or notional amounts of these
instruments reflect the extent of involvement Republic has in particular
classes of financial instruments. Creditworthiness for all instruments is
evaluated on a case-by-case basis in accordance with Republic's credit
policies. Collateral, if deemed necessary, is based on management's credit
evaluation of the counterparty and may include business assets of
commercial borrowers as well as personal property and real estate of
individual borrowers or guarantors.
Republic extends binding commitments to prospective customers. Such
commitments assure the borrower of financing for a specified period of time
at a specified rate. The risk to Republic under such loan commitments is
limited by the terms of the contract. For example, Republic may not be
obligated to advance funds if the customer's financial condition
deteriorates or if the customer fails to meet specific covenants. An
approved, but undrawn, loan commitment represents a potential credit risk
once the funds are advanced to the customer, a liquidity risk since the
customer may demand immediate cash that would require a funding source, and
an interest rate risk since interest rates may rise above the rate
committed to the customer. Republic's current liquidity position continues
to meet its need for funds. In addition, since a portion of these loan
commitments normally expire unused, the total amount of outstanding
commitments at any point in time will not require a funding source. As of
December 31, 1998, Republic had outstanding loan commitments totaling $123
million which includes unused home equity lines of credit totaling $95
million. These commitments are substantially all at variable rates.
At December 31, 1998, Republic's mortgage banking activities included
commitments to extend credit, primarily representing fixed rate mortgage
loans, totaling $61 million. Of commitments to originate loans, borrowers
with commitments totaling $4 million have elected to wait until closing to
lock the rate on the loan. Republic has also entered into forward
commitments to deliver loans into the secondary market of $50 million at
December 31, 1998.
Standby letters of credit are conditional commitments issued by Republic to
guarantee the performance of a customer to a third party. The terms and
risk of loss involved in issuing standby letters of credit are similar to
those involved in issuing loan commitments and extending credit.
Commitments outstanding under standby letters of credit totaled $2.0
million for December 31, 1998 and $1.9 million for December 31, 1997.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by Republic using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts Republic
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
1998 1997
----------------------------- ----------------------------
Carrying Fair Carrying Fair
As of December 31 (in thousands) Amount Value Amount Value
Assets:
Cash and cash equivalents $ 39,946 $ 39,946 $ 24,546 $ 24,546
Securities available for sale 186,936 186,936 93,826 93,826
Securities to be held to maturity 29,985 30,039 98,546 98,540
Mortgage loans held for sale 38,167 38,525 9,970 10,070
Loans, net 870,031 874,253 794,939 796,577
Federal Home Loan Bank stock 14,036 14,036 8,124 8,124
Liabilities:
Deposits:
Certificate of deposit and individual
retirement accounts $ 439,529 $ 442,962 $ 493,343 $ 495,776
Non interest-bearing accounts 80,345 80,345 65,913 65,913
Transaction accounts 227,273 227,279 172,342 172,608
Securities sold under agreements to
repurchase and other short-term
borrowings 148,659 148,659 111,137 111,134
Other borrowed funds 190,222 190,608 124,405 124,403
Guaranteed preferred beneficial interests
in Republic's subordinated debentures 6,402 6,402 6,452 6,452
CASH AND CASH EQUIVALENTS - The carrying amount is a reasonable estimate of
fair value.
SECURITIES AVAILABLE FOR SALE, SECURITIES TO BE HELD TO MATURITY AND
FEDERAL HOME LOAN BANK STOCK - Fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. For Federal
Home Loan Bank stock, the carrying amount is a reasonable estimate of fair
value.
LOANS - The fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
MORTGAGE LOANS HELD FOR SALE - Estimated fair value is defined as the
current quoted secondary market price for such loans without regard to
Republic's other commitments to make and sell loans.
DEPOSITS - The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM
BORROWINGS - The carrying amount is a reasonable estimate of
fair value.
GUARANTEED PREFERRED BENEFICIAL INTERESTS - The fair value is estimated
based on the estimated present value of future cash flows using the current
rates at which similar financings with the same remaining maturities could
be obtained.
OTHER BORROWED FUNDS - The fair value is estimated based on the estimated
present value of future cash outflows using the current rates at which
similar loans with the same remaining maturities could be obtained.
COMMITMENTS TO EXTEND CREDIT - The fair value of commitments to extend
credit is based upon the difference between the interest rate at which
Republic is committed to make the loans and the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities, adjusted for the estimated volume of
loan commitments actually expected to close. The fair value of such
commitments is not material.
COMMITMENTS TO SELL LOANS - The fair value of commitments to sell loans is
based upon the difference between the interest rates at which Republic is
committed to sell the loans and the current quoted secondary market price
for similar loans. The fair value of such commitments is not material.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1998 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
21. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
As of December 31 (in thousands) 1998 1997
Assets:
Cash and cash equivalents $ 1,238 $ 596
Due from subsidiaries 1,493 2,220
Investment in subsidiaries 110,217 75,271
Other 19 20
----------- -----------
Total assets $ 112,967 $ 78,107
=========== ===========
Liabilities:
Long-term debt $ 6,702 $ 6,752
Other 2,423 2,969
----------- -----------
Total liabilities 9,125 9,721
----------- -----------
Stockholders' equity:
Common stock 4,149 3,613
Additional paid-in capital 34,014 10,833
Retained earnings 65,469 53,994
Net unrealized depreciation on
securities available for sale, net of tax 210 (54)
----------- -----------
Total stockholders' equity 103,842 68,386
----------- -----------
Total $ 112,967 $ 78,107
=========== ===========
STATEMENTS OF INCOME
Years Ended December 31, (in thousands) 1998 1997 1996
Income:
Dividends from subsidiary $ 2,826 $ 4,446 $ 2,400
Interest 24 38 115
----------- ----------- -----------
Total income 2,850 4,484 2,515
----------- ----------- -----------
Expenses:
Interest expense 574 590 166
Other expense 73 67 42
----------- ----------- -----------
Total expenses 647 657 208
----------- ----------- -----------
Income before income taxes 2,203 3,827 2,307
Income tax benefit 222 283 33
----------- ----------- -----------
Income before equity in undistributed
net income of subsidiaries 2,425 4,110 2,340
Equity in undistributed net income of subsidiaries 11,331 8,149 387
----------- ----------- -----------
Net income $ 13,756 $ 12,259 $ 2,727
=========== =========== ===========
STATEMENTS OF CASH FLOWS
Years Ended December 31, (in thousands) 1998 1997 1996
Operating activities:
Net income $ 13,756 $ 12,259 $ 2,727
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed net income of subsidiaries (11,331) (8,149) (387)
Change in due from subsidiary 727 (1,678) (35)
Change in other assets 1 (38) (63)
Change in other liabilities (609) 1,480 (15)
----------- ----------- -----------
Net cash provided by operating
activities 2,544 3,874 2,227
----------- ----------- -----------
Investment activities:
Purchase of common stock of subsidiary bank (23,278) (6,775) (3,999)
Proceeds from maturities of repurchase
agreements 889 3,999
----------- ----------- -----------
Net cash used in investing activities (23,278) (5,886)
----------- ----------- -----------
Financing activities:
Dividends paid (1,674) (1,992) (1,899)
Proceeds from stock options exercised 155 153
Proceeds from issuance of guaranteed
preferred beneficial interests in
Republic's subordinated debentures 6,752
Proceeds from issuance of Class A
Common Stock 23,581
Repurchase of Class A common stock (686)
Payments on long-term debt (1,638) (350)
Redemption of preferred stock (1,218)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 21,376 2,057 (2,249)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 642 45 (22)
Cash and cash equivalents, beginning of year 596 551 573
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,238 $ 596 $ 551
=========== =========== ===========
22. SEGMENT INFORMATION
The reportable segments are determined by the products and services
offered, primarily distinguished between banking and mortgage banking
operations. Loans, investments, and deposits provide the revenues in the
banking operation, and servicing fees and loan sales provide the revenues
in mortgage banking. All operations are domestic.
The accounting policies used are the same as those described in the summary
of significant accounting policies. Income taxes are allocated and indirect
expenses are allocated on revenue. Transactions among segments are made at
fair value. Information reported internally for performance assessment
follows.
1998
Mortgage Consolidated
(in thousands) Banking Banking Totals
Net interest income $ 42,126 $ 367 $ 42,493
Other revenues 11,329 4,183 15,512
Noncash items:
Provision for loan loss 3,110 3,110
Net gain on sale of loans 4,326 4,326
Income tax expense 6,758 848 7,606
Segment profit 12,111 1,645 13,756
Segment assets 1,168,562 39,122 1,207,684
1997
Mortgage Consolidated
(in thousands) Banking Banking Totals
Net interest income $ 40,114 $ 224 $ 40,338
Other revenues 16,631 2,299 18,930
Noncash items:
Provision for loan loss 7,251 7,251
Net gain on sale of loans 1,852 1,852
Income tax expense 6,470 408 6,878
Segment profit 11,466 793 12,259
Segment assets 1,044,396 10,554 1,054,950
1996
Mortgage Consolidated
(in thousands) Banking Banking Totals
Net interest income $ 37,979 $ 152 $ 38,131
Other revenues 5,195 1,902 7,097
Noncash items:
Provision for loan loss 9,149 9,149
Net gain on sale of loans 1,212 1,212
Income tax expense 1,645 298 1,943
Segment profit 2,149 578 2,727
Segment assets 1,131,682 9,180 1,140,862
23. SUBSEQUENT EVENT (UNAUDITED)
On January 29, 1999, Republic formed an Employee Stock Ownership Plan
(ESOP) for the benefit of its employees. The ESOP borrowed $3.9 million
from the Parent Company and directly and indirectly purchased 300,000
shares of Class A Common Stock from Republic's largest beneficial owner at
a market value of $12.91 per share. The purchase price, determined by an
independent pricing committee, was the average closing price for the thirty
trading days immediately prior to the transaction. Shares in the ESOP will
be allocated to eligible employees over the term of the loan, which is ten
years. Republic will record compensation expense based on the market price
of the shares as they are committed to be released for allocation to
participants' accounts.
24. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
Presented below is a summary of the consolidated quarterly financial data
for the years ended December 31, 1998 and 1997.
Fourth Third Second First
(dollars in thousands, except per share data) Quarter Quarter Quarter Quarter
1998:
Interest income $23,336 $23,517 $23,029 $22,785
Net interest income 11,096 10,710 10,317 10,370
Provision for loan losses 1,423 303 741 643
Income (loss) before income taxes 4,334 4,409 4,054 8,565
Net income (loss) 2,830 2,800 2,602 5,524
Earnings per share:
Class A Common 0.17 0.17 0.17 0.37
Class B Common 0.16 0.17 0.17 0.37
Earnings per share assuming dilution:
Class A Common 0.16 0.16 0.17 0.35
Class B Common 0.16 0.16 0.17 0.35
Weighted average common shares outstanding:
Basic Common 17,116 16,480 14,959 14,958
Diluted Common 18,382 17,751 15,873 15,898
Cash Dividends declared
Class A Common .0275 .0275 .0275 .0275
Class B Common .0250 .0250 .0250 .0250
1997:
Interest income $22,431 $22,911 $23,242 $22,610
Net interest income 9,892 10,199 10,240 10,007
Provision for loan losses 3,401 1,136 1,416 1,298
Income (loss) before income taxes 3,684 6,953 5,690 2,810
Net income (loss) 2,331 4,392 3,656 1,880
Earnings per share:
Class A 0.15 0.30 0.25 0.12
Class B 0.15 0.29 0.24 0.12
Earnings per share assuming dilution:
Class A 0.15 0.28 0.24 0.12
Class B 0.15 0.28 0.23 0.12
Weighted average common shares outstanding:
Basic 14,450 14,449 14,443 14,444
Diluted 15,429 16,054 15,894 14,624
Cash Dividends declared:
Class A .0275 .0275 .0275 .0275
Class B .0250 .0250 .0250 .0250