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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-24649
REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0862051
(State of other jurisdiction or (I.R.S. Employer Identification No.)
incorporation or organization)
601 West Market Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 584-3600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
The number of shares outstanding of the issuer's class of common stock as of the
latest practicable date: 14,560,532 shares of Class A Common Stock and 2,147,274
shares of Class B Common Stock as of August 6, 1999.
The Exhibit index is on page 34. This filing contains 74 pages (including this
facing sheet).
REPUBLIC BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 3-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
PART II - OTHER INFORMATION
Item 2. Changes in Securities 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
PART I
ITEM 1
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands)
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June 30, December 31,
1999 1998
ASSETS:
Cash and due from banks $ 20,537 $ 37,446
Federal funds sold 1,200 2,500
Securities available for sale 199,884 186,936
Securities to be held to maturity 11,646 29,985
Mortgage loans held for sale 12,049 38,167
Loans, less allowance for loan losses of
$7,962 (1999) and $7,862 (1998) 944,045 870,031
Federal Home Loan Bank stock 14,530 14,036
Accrued interest receivable 9,076 8,825
Premises and equipment, net 17,226 15,870
Other assets 5,445 3,888
------------ -------------
TOTAL $ 1,235,638 $ 1,207,684
============ =============
LIABILITIES:
Deposits:
Non-interest bearing $ 88,947 $ 80,345
Interest bearing 691,255 666,802
Securities sold under agreements to repurchase and
other short-term borrowings 97,707 148,659
Other borrowed funds 239,509 190,222
Accrued interest payable 3,401 3,769
Guaranteed preferred beneficial interests in
Company's subordinated debentures 6,352 6,402
Other liabilities 7,425 7,643
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Total liabilities 1,134,596 1,103,842
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A and Class B Common stock, no par value 4,117 4,149
Additional paid-in capital 33,770 34,014
Retained earnings 69,360 65,469
Unearned Employee Stock Ownership Plan shares (3,760)
Net unrealized appreciation (depreciation) on securities
Available for sale, net of tax (2,445) 210
------------- -------------
Total stockholders' equity 101,042 103,842
------------- -------------
TOTAL $ 1,235,638 $ 1,207,684
============ =============
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except per share data)
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Three Months Ended Six Months Ended
June 30, June 30,
INTEREST INCOME: 1999 1998 1999 1998
Loans, including fees $ 20,050 $ 19,097 $ 40,561 $ 38,220
Securities available for sale 2,894 2,086 5,601 3,811
Securities to be held to maturity:
Taxable 157 1,153 489 2,520
Non-taxable 25 28 48 56
FHLB dividends 256 196 506 384
Other 4 469 36 823
---------- --------- ---------- ---------
Total interest income 23,386 23,029 47,241 45,814
---------- --------- ---------- ---------
INTEREST EXPENSE:
Deposits 7,965 8,821 16,028 17,353
Short-term borrowings 1,138 1,167 2,383 2,383
Long-term debt 2,680 2,724 5,084 5,391
---------- --------- --------- ---------
Total interest expense 11,783 12,712 23,495 25,127
---------- --------- ---------- ---------
NET INTEREST INCOME 11,603 10,317 23,746 20,687
PROVISION FOR LOAN LOSSES 419 741 1,273 1,384
---------- --------- ---------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,184 9,576 22,473 19,303
---------- --------- ---------- ---------
NON-INTEREST INCOME:
Service charges on deposit accounts 913 850 1,761 1,603
Electronic refund check fees 197 81 1,058 378
Other service charges and fees 152 125 295 225
Loan servicing income 120 149 238 315
Net gain on sale of deposits 4,116
Net gain on sale of loans 658 1,143 2,055 2,152
Net gain on sale of securities 54 167 184 491
Other 245 558 416 705
---------- --------- ---------- ---------
Total non-interest income 2,339 3,073 6,007 9,985
---------- --------- ---------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,201 4,539 10,831 8,615
Occupancy and equipment 1,934 1,841 3,916 3,703
Communication and transportation 417 408 871 834
Marketing and development 358 407 691 712
Supplies 238 256 492 516
Other 1,164 1,144 2,400 2,289
---------- --------- ---------- ---------
Total non-interest expense 9,312 8,595 19,201 16,669
---------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES 4,211 4,054 9,279 12,619
INCOME TAXES 1,443 1,452 3,147 4,493
---------- --------- ---------- ---------
NET INCOME $ 2,768 $ 2,602 $ 6,132 $ 8,126
========== ========= ========== =========
(Continued)
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(UNAUDITED)(CONTINUED)
(in thousands, except per share data)
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Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Change in unrealized gain (loss) on securities $ (1,781) $ 220 $ (2,534) $ 300
Reclassification of realized amount (36) (109) (121) (319)
---------- --------- ---------- --------
Net unrealized gain (loss) recognized in
comprehensive income (1,817) 111 (2,655) (19)
---------- --------- ---------- --------
COMPREHENSIVE INCOME $ 951 $ 2,713 $ 3,477 $ 8,107
========== ========= ========== ========
EARNINGS PER SHARE
Class A $ .17 $ .17 $ .36 $ .54
Class B $ .16 $ .17 $ .36 $ .54
EARNINGS PER SHARE ASSUMING DILUTION
Class A $ .16 $ .17 $ .35 $ .52
Class B $ .16 $ .17 $ .35 $ .52
See accompanying notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands, except for per share data)
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Net Unrealized
Unearned Gain/
Empl. Stock (Loss)
Common Stock Additional Ownership on Available Total
Class A Class B Paid-In Retained Plan For Sale Stockholders'
Shares Shares Amount Capital Earnings Shares Securities Equity
BALANCE, January 1, 1999 14,869 2,305 $ 4,149 $ 34,014 $ 65,469 $ 210 $ 103,842
Conversion of Class B to Class A 156 (156)
Dividend Declared
Common: Class A ($.0275 per share) (802) (802)
Class B ($.0250 per share) (109) (109)
Repurchase of Class A Common (142) (33) (280) (1,330) (1,643)
Conversion of Trust Preferred Securities
To Class A Common 5 1 49 50
Purchase of 300,000 shares under the
Employee Stock Ownership Plan (300) $(3,873) (3,873)
Commitment of 8,754 shares to be released under
the Employee Stock Ownership Plan 9 (13) 113 100
Net changes in unrealized gain/(loss)
on securities available for sale (2,655) (2,655)
Net Income 6,132 6,132
------ ----- ------- -------- ------- ------- -------- ---------
BALANCE, June 30, 1999 14,597 2,149 $ 4,117 $ 33,770 $69,360 $ (3,760) $ (2,445) $ 101,042
====== ===== ======= ======== ======= ======== ======== =========
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (in thousands)
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1999 1998
OPERATING ACTIVITIES:
Net income $ 6,132 $ 8,126
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 1,876 1,674
Amortization and accretion of securities 235 127
FHLB stock dividends (494) (370)
Provision for loan losses 1,273 1,384
Net gain on sale of securities (184) (491)
Net gain on sale of loans (2,055) (2,152)
Net gain on sale of deposits (4,116)
Proceeds from sale of loans 145,014 137,905
Origination of mortgage loans held for sale (116,841) (137,369)
Employee Stock Ownership Plan expense 100
Changes in assets and liabilities:
Accrued interest receivable (251) (516)
Other assets 1,164 14
Accrued interest payable (368) 531
Other liabilities (206) (1,044)
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Net cash provided by operating activities 35,395 3,703
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INVESTING ACTIVITIES:
Purchases of securities available for sale (84,615) (127,669)
Purchases of Federal Home Loan Bank stock (2,467)
Proceeds from maturities of securities to be held to maturity 18,364 29,597
Proceeds from maturities and paydowns of securities available for sale 47,323 1,507
Proceeds from sales of securities available for sale 20,244 59,127
Net increase in loans (76,639) (35,682)
Purchases of premises and equipment (3,241) (4,054)
Disposal of premises and equipment 9 1,350
----------- -----------
Net cash used in investing activities (78,555) (78,291)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 33,055 79,635
Sale of deposits (61,564)
Net decrease in securities sold under agreement to
repurchase and other short-term borrowings (50,952) (8,640)
Payments on other borrowings (52,313) (62,285)
Proceeds from other borrowings 101,600 156,900
Proceeds from stock options exercised 59
Purchase of shares for Employee Stock Ownership Plan (3,873)
Repurchase of Class A Common Stock (1,643)
Cash dividends paid (923) (810)
----------- -----------
Net cash provided by financing activities 24,951 103,295
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NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (18,209) 28,707
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,946 24,546
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,737 $ 53,253
=========== ===========
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (in thousands)
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1999 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 23,863 $ 24,597
=========== ===========
Income taxes $ 3,396 $ 6,272
=========== ===========
Transfers from loans to real estate
acquired in settlement of loans $ 1,352 $ 681
=========== ===========
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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1. BASIS OF PRESENTATION (AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES)
Basis of Presentation - The consolidated financial statements include the
accounts of Republic Bancorp, Inc. and its wholly-owned subsidiaries; Republic
Mortgage Company, Republic Insurance Agency, Inc., Republic Capital Trust, and
Republic Bank & Trust Company (Bank) and its subsidiary Republic Financial
Services Corporation (d.b.a. Refunds Now), collectively "Republic". All
significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods
ending June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further information, refer to
the consolidated financial statements and footnotes thereto-included in
Republic's annual report on Form 10-K for the year ended December 31, 1998 and
Form 10-Q.for the quarter ended March 31, 1999.
New Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". This new
standard requires companies to record derivatives on the balance sheet as assets
or liabilities at fair value. Depending on the use of the derivative and whether
it qualifies for hedge accounting, gains or losses resulting from changes in the
values of those derivatives would either be recorded as a component of net
income or as a change in stockholders' equity. Republic is required to adopt
this new standard January 1, 2001. Management has not yet determined the impact
of this standard.
Reclassifications - Certain amounts have been reclassified in the 1998 financial
statements to conform with the current period classifications. The
reclassifications have no effect on net income or stockholders' equity as
previously reported.
2. SECURITIES
Securities Available For Sale:
June 30, 1999
(in thousands)
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
U.S. Treasury Securities and U.S.
Government Agencies $ 115,069 $ 29 $ (1,200) $ 113,898
Mortgage-backed securities 69,224 (1,750) 67,474
Corporate bonds 19,296 (784) 18,512
----------- --------- --------- -----------
Total securities available for sale $ 203,589 $ 29 $ (3,734) $ 199,884
=========== ========= ========= ===========
Securities To Be Held To Maturity:
June 30, 1999
(in thousands)
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
U.S. Treasury Securities and U.S.
Government Agencies $ 7,301 $ $ (63) $ 7,238
Obligations of state and political
subdivisions 3,906 119 4,025
Mortgage-backed securities 439 (32) 407
----------- --------- --------- -----------
Total securities to be held to maturity $ 11,646 $ 119 $ (95) $ 11,670
=========== ========= ========= ===========
Securities having an amortized cost of $151 million and a fair value of $148
million at June 30, 1999, were pledged to secure public deposits, securities
sold under agreements to repurchase and for other purposes, as required or
permitted by law.
3. LOANS
June 30, 1999 December 31, 1998
-----------------------------------------
(in thousands)
Residential real estate $ 578,309 $ 520,583
Commercial real estate 140,866 118,293
Real estate construction 58,357 47,396
Commercial 28,854 26,381
Consumer 47,211 56,728
Home equity 96,546 106,845
Other 3,217 3,146
----------- -----------
Total loans 953,360 879,372
Less:
Unearned interest income and unamortized
loan fees (1,353) (1,479)
Allowance for loan losses (7,962) (7,862)
----------- -----------
Loans, net $ 944,045 $ 870,031
=========== ===========
The following table sets forth the changes in the allowance for loan losses:
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
(in thousands)
Balance, beginning of period $ 7,962 $ 8,234 $ 7,862 $ 8,176
Provision charged to income 419 741 1,273 1,384
Charge-offs (607) (879) (1,501) (1,581)
Recoveries 188 138 328 255
--------- --------- --------- ---------
Balance, end of period $ 7,962 $ 8,234 $ 7,962 $ 8,234
========= ========= ========= =========
Information about Republic's investment in impaired loans is as follows:
June 30, 1999 December 31, 1998
----------------------------------------
(in thousands)
Gross impaired loans $ 1,092 $ 1,116
Less: Related allowance for loan losses 100 100
--------- --------
Net impaired loans with related allowances 992 1,016
Impaired loans with no related allowances
--------- --------
Total $ 992 $ 1,016
========= ========
Average impaired loans outstanding $ 1,092 $ 1,116
========= ========
4. DEPOSITS
June 30, 1999 December 31, 1998
-----------------------------------------
(in thousands)
Demand (NOW, Super NOW and Money Market) $ 202,893 $ 179,804
Savings 12,766 12,330
Money market certificates of deposit 45,197 35,139
Individual retirement accounts 26,241 23,353
Certificates of deposit, $100,000 and over 76,621 77,365
Other certificates of deposit 303,993 309,938
Brokered deposits 23,544 28,873
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Total interest bearing deposits 691,255 666,802
Total non-interest bearing deposits 88,947 80,345
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Total $ 780,202 $ 747,147
=========== ===========
5. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM
BORROWINGS
Short-term borrowings consist of repurchase agreements and overnight liabilities
to deposit customers arising from a cash management program offered by Republic.
While effectively deposit equivalents, such arrangements are in the form of
repurchase agreements. The repurchase agreements are treated as financings;
accordingly, the securities involved with the agreements are recorded as assets
and are held by a safekeeping agent and the obligations to repurchase the
securities are reflected as liabilities.
June 30, 1999 December 31, 1998
-------------------------------------------
(in thousands)
Average outstanding balance $ 117,338 $ 115,280
Average interest rate 4.03% 4.21%
Maximum outstanding at month end $ 155,685 $ 148,659
End of period $ 97,707 $ 148,659
6. OTHER BORROWED FUNDS
June 30, December 31,
1999 1998
-------------------------------
(in thousands)
Federal Home Loan Bank convertible fixed rate advance (1) $ 50,000 $ 50,000
Federal Home Loan Bank overnight advances, with weighted average
interest rate of 6.0% at June 30, 1999 101,600 31,800
Federal Home Loan Bank variable interest rate advances, with
weighted average interest rate of 5.28% at June 30, 1999,
due through 1999 1,000 21,000
Federal Home Loan Bank fixed interest rate advances, with weighted
average interest rate of 5.80% at June 30, 1999, due through 2008 86,909 87,422
------------ ------------
Total $ 239,509 $ 190,222
============ ============
- -----------------------------
(1) Republic has entered into convertible fixed rate advances ranging from
5 to 10 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-month 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 sufficient collateral to borrow
approximately $57 million additional funds from the Federal Home Loan Bank.
Republic also has unsecured lines of credit totaling $40 million and secured
lines of $110 million available through various financial institutions.
Aggregate future principal payments on borrowed funds as of June 30, 1999 are as
follows:
Year
(in thousands)
1999 $ 103,127
2000 26,098
2001 284
2002
Thereafter 110,000
------------
Total $ 239,509
============
7. EARNINGS PER SHARE
A reconciliation of the combined Class A and Class B Common Stock numerators and
denominators of the earnings per share and earnings per share assuming dilution
computations is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1999 1998 1999 1998
(in thousands)
Earnings Per Share
Net Income available to common shares
outstanding $ 2,768 $ 2,602 $ 6,132 $ 8,126
========= ========= ========= ==========
Weighted average shares outstanding 16,764 14,959 16,849 14,959
========= ========= ========= ==========
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1999 1998 1999 1998
(in thousands)
Earnings Per Share Assuming Dilution
Net Income $ 2,768 $ 2,602 $ 6,132 $ 8,126
Add: Interest expense, net of tax benefit,
on assumed conversion of guaranteed
preferred beneficial interests in
Republic's subordinated debentures 86 88 172 175
--------- --------- --------- ----------
Net Income available to common
Shareholder assuming conversion $ 2,854 $ 2,690 $ 6,304 $ 8,301
========= ========= ========= ==========
Weighted average shares outstanding 16,764 14,959 16,849 14,959
Add dilutive effects of assumed
conversion and exercise:
Convertible guaranteed preferred
beneficial interest in Republic's
subordinated debentures 635 645 635 645
Stock options 526 269 544 270
--------- --------- --------- ----------
Weighted average shares and dilutive
potential shares outstanding 17,925 15,873 18,028 15,874
========= ========= ========= ==========
The difference in earnings per share between the two classes of common
stock results solely from the dividend premium paid to Class A over Class B
Common Stock.
8. EMPLOYEE STOCK OWNERSHIP PLAN
On January 29, 1999, Republic formed an Employee Stock Ownership Plan
(ESOP) for the benefit of its employees. The ESOP borrowed $3.9 million
from the Parent Company and directly and indirectly purchased 300,000
shares of Class A Common Stock from Republic's largest beneficial owner at
a market value of $12.91 per share. The purchase price, determined by an
independent pricing committee, was the average closing price for the thirty
trading days immediately prior to the transaction. Shares in the ESOP will
be allocated to eligible employees based on principal payments over the
term of the loan, which is ten years. Participants become fully vested in
allocated shares after five years of credited service and may receive their
distributions in the form of cash or stock. During the first six months of
1999, 8,754 shares of stock were committed to be released, resulting in
ESOP compensation expense of approximately $100,000. For the quarter ended
June 30, 1999, 5,284 shares were committed to be released resulting in ESOP
compensation expense of approximately $59,000 for the quarter. On June 30,
1999, none of the 300,000 shares in the plan had been allocated. The fair
value of the unallocated shares was $3.5 million.
The cost of shares issued to the employee stock ownership plan but not yet
allocated to participants is presented in the consolidated balance sheet as
a reduction of shareholders equity. Compensation expense is recorded based
on the market price of the shares as they are committed to be released for
allocation to participant accounts. The difference between market price and
the cost of shares committed to be released is recorded as an adjustment to
paid in capital. Dividends on allocated plan shares are recorded as a
reduction of retained earnings; dividends on unallocated plan shares are
reflected as a reduction of debt and accrued interest.
9. 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.
Three Months Ended June 30, 1999
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 11,518 $ 85 $ 11,603
Provision for loan loss 419 419
Net gain on sale of loans 658 658
Other revenues 1,681 1,681
Income tax expense 1,390 53 1,443
Segment profit 2,664 104 2,768
Segment assets 1,223,112 12,526 1,235,638
Three Months Ended June 30, 1998
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 10,247 $ 70 $ 10,317
Provision for loan loss 741 741
Net gain on sale of loans 1,143 1,143
Other revenues 1,930 1,930
Income tax expense 1,210 242 1,452
Segment profit 2,172 430 2,602
Segment assets 1,149,363 12,360 1,161,723
9. SEGMENT INFORMATION (Continued)
Six Months Ended June 30, 1999
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 23,566 $ 180 $ 23,746
Provision for loan loss 1,273 1,273
Net gain on sale of loans 2,055 2,055
Other revenues 3,952 3,952
Income tax expense 2,824 323 3,147
Segment profit 5,504 628 6,132
Segment assets 1,223,112 12,526 1,235,638
Six Months Ended June 30, 1998
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 20,538 $ 149 $ 20,687
Provision for loan loss 1,384 1,384
Net gain on sale of loans 2,152 2,152
Other revenues 7,833 7,833
Income tax expense 4,056 437 4,493
Segment profit 7,350 776 8,126
Segment assets 1,149,363 12,360 1,161,723
PART 1
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Republic Bancorp, Inc., headquartered in Louisville, Kentucky, was incorporated
on January 2, 1974. Republic Bank & Trust Company (Bank) is a commercial banking
and trust corporation organized and chartered under the laws of the Commonwealth
of Kentucky. The Bank is also headquartered in Louisville, Kentucky and provides
banking services through 19 banking centers throughout Kentucky. The Bank's
activities include the acceptance of deposits for checking, savings and time
deposit accounts, making secured and unsecured loans, investing in securities
and trust services. The Bank's lending services include the origination of real
estate, commercial and consumer loans. Operating revenues are derived primarily
from interest and fees on domestic real estate, commercial and consumer loans,
and from interest on securities of the United States Government and Agencies,
states, and municipalities. Regulators for Republic include the Federal Deposit
Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve
System (and the Federal Reserve Bank of St. Louis) and the Kentucky Department
of Financial Institutions.
REPUBLIC HAS MADE, AND MAY CONTINUE TO MAKE, VARIOUS FORWARD-LOOKING STATEMENTS
WITH RESPECT TO CREDIT QUALITY (INCLUDING DELINQUENCY TRENDS AND THE ALLOWANCE
FOR LOAN LOSSES), CORPORATE OBJECTIVES AND OTHER FINANCIAL AND BUSINESS MATTERS.
WHEN USED IN THIS DISCUSSION THE WORDS "ANTICIPATE," "PROJECT," "EXPECT,"
"BELIEVE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. REPUBLIC CAUTIONS THAT THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO NUMEROUS ASSUMPTIONS, RISKS AND UNCERTAINTIES, ALL OF WHICH MAY CHANGE OVER
TIME. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM FORWARD-LOOKING STATEMENTS.
IN ADDITION TO FACTORS DISCLOSED BY REPUBLIC, THE FOLLOWING FACTORS, AMONG
OTHERS, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
FORWARD-LOOKING STATEMENTS: PRICING PRESSURES ON LOAN AND DEPOSIT PRODUCTS;
COMPETITION; CHANGES IN ECONOMIC CONDITIONS BOTH NATIONALLY AND IN THE BANK'S
MARKETS; THE EXTENT AND TIMING OF ACTIONS OF THE FEDERAL RESERVE BOARD;
CUSTOMERS' ACCEPTANCE OF THE BANK'S PRODUCTS AND SERVICES; AND THE EXTENT AND
TIMING OF LEGISLATIVE AND REGULATORY ACTIONS AND REFORMS.
OVERVIEW
Net income for the quarter ended June 30, 1999 was $2.8 million up from $2.6
million for the same period in 1998. The increase in earnings during the second
quarter of 1999 reflects consistent financial performance in many areas of the
Bank. During the second quarter Republic earnings benefited from increased
interest income, reduced cost of funds, as well as reduced provision for loan
losses.
Net income for the six months ended June 30, 1999 was $6.1 million compared to
net income of $5.5 million for the same period in 1998, excluding the one-time
deposit sales. Despite the issuance of an additional 2 million shares as part of
Republic's public offering in July 1998, diluted earnings per share was $0.35
for the six months ended June 30, 1999, compared to $0.36 for the same period in
1998, excluding the one-time gain on sale of deposits.
The following table summarizes selected financial information regarding
Republic's financial performance.
Table 1
Excluding One-Time Including One-Time
Deposit Sales Deposit Sales
Six Months Ended June 30, Six Months Ended June 30,
(in thousands, except per share data) 1999 1998 1999 1998
Gross Operating Profit $ 9,279 $ 8,503 $ 9,279 $ 12,619
Net Income 6,132 5,492 6,132 8,126
Basic Class A Common Earnings Per Share .36 .37 .36 .54
Diluted Class A Common Earnings Per Share .35 .36 .35 .52
Republic's total assets at June 30, 1999 grew to approximately $1.24 billion
compared to $1.21 billion at December 31, 1998. Net loans increased $74 million
from December 31, 1998 to $944 million at June 30, 1999. The residential real
estate portfolio grew $58 million while the commercial real estate portfolio
increased $23 million. This growth was attributable to continued loan demand in
Republic's markets and the further development of Republic's commercial and
business banking services. While loan growth remained strong, the bank's level
of delinquent loans declined favorably to 1.65% at June 30, 1999, compared to
2.29% at December 31, 1998.
Funding for the growth in the loan portfolio was derived from retail deposits
and Federal Home Loan Bank advances. Retail deposits increased to $780 million
as of June 30, 1999 compared to $747 million at year-end 1998. The growth in
retail deposits was primarily in lower cost deposits such as demand and money
market accounts. FHLB advances increased from $190 million at December 31, 1998
to $240 million at June 30, 1999.
Republic is on schedule to open a loan production office in Clarksville,
Indiana, during the third quarter of 1999, the bank's first presence in the
Indiana community banking market. The company is also on schedule to add two new
full service banking centers in Prospect and Fern Creek in Louisville during the
third quarter of this year, bringing the total number of banking centers in
Kentucky's largest city to eleven. In order to further enhance growth,
management will continue to seek and remain receptive to new strategic
acquisition opportunities that will increase the bank's product offering
capabilities in its primary markets and elsewhere.
While Republic is expanding its locations, the bank also continues to expand its
product lines. On June 1, 1999, Republic successfully launched its Internet bank
and began offering products through the Internet at republicbank.com. The
Internet bank provides a full range of services to existing customers, while
expanding the Bank's potential client base by offering deposit and loan products
to customers outside its traditional service area. While in operation for a
limited time, management is encouraged by the preliminary results, which have
included new deposits totaling $4 million dollars with clients from 18 states as
of June 30, 1999. The bank also began offering, for the first time, a full range
of investment and trust services to its clients during the second quarter of
1999. Management is encouraged by the positive response to this exciting new
product initiative.
DISPOSITION OF ASSETS
During 1997, Republic elected to focus its resources on its North Central and
Central Kentucky markets. Consistent with this focus, Republic sold its banking
centers in the Western Kentucky cities of Murray, Benton, Paducah, and Mayfield.
The Murray, Benton and Paducah sales were closed in the second half of 1997.
During the first quarter of 1998, Republic completed the sale of deposits and
fixed assets at the Mayfield banking center. Republic realized a pre-tax gain of
approximately $4.1 million from the Mayfield banking center sale. This sale was
comprised of approximately $66 million in deposits and certain other fixed
assets. Republic retained substantially all of its Western Kentucky banking
center loan portfolios in those transactions. The Mayfield transaction
represented the final Western Kentucky banking center sale.
REFUNDS NOW
During November 1998, a wholly owned subsidiary of the Bank acquired Refunds
Now, Inc. Republic exchanged 230,000 shares of Class B Common Stock for the
stock of Refunds Now, Inc. in a business combination accounted for as a pooling
of interest. Refunds Now is a rapid refund tax processing service for taxpayers
receiving both federal and state tax refunds through a nationwide network of tax
preparers. Refund anticipation loans ("RALs") are made to taxpayers filing
income tax returns electronically. The RALs are repaid by the taxpayer when the
taxpayer's refunds are electronically received by the Bank from governmental
taxing authorities. Refunds Now also provides electronic refund checks ("ERCs")
to taxpayers. After receiving refunds electronically from governmental taxing
authorities, checks are issued to taxpayers for the amount of their refund, less
fees. During the six months ended June 30, 1999, Refunds Now generated $943,000
in electronic tax refund loan fees and $1.1 million in electronic tax refund
check fees. Substantially all of the income realized by the Bank from the
activities of Refunds Now is recognized during the first quarter of the year.
RESULTS OF OPERATIONS
Net Interest Income. For the second quarter 1999, net interest income was $11.6
million, up $1.3 million over the $10.3 million attained during second quarter
1998. Overall, the net interest rate spread increased from 3.14% during second
quarter of 1998 to 3.35% in the comparable quarter of 1999. The Bank's net
interest margin increased from 3.76% in second quarter 1998 to 3.97% in second
quarter 1999. The increase in the net interest spread and margin occurred
because the yield on interest earning assets decreased 39 basis points while the
rate paid on liabilities decreased 60 basis points.. During the second quarter
1999, average interest-earning assets were $1.17 billion, an increase of $70
million over second quarter 1998. Total average interest bearing liabilities
increased from $969 million in the second quarter of 1998 to $1.01 billion in
the second quarter of 1999.
Net interest income for the six months ended June 30, 1999 was $23.7 million up
from $20.7 million attained in the same period during 1998. Republic's net
interest spread and margin increased 21 basis points and 25 basis points
respectively for the six months ended June 30, 1999 over the comparable period
in 1998. Net interest margin increased more than net interest spread because the
amount of interest-earning assets supported by non-interest bearing deposits,
other liabilities, and equity increased to 17.5% from 15.2% in 1998. Also
supporting Republic's increased net interest spread was $657,000 in additional
loan fees provided by Refunds Now and mortgage banking activities during the six
months ended June 30, 1999 over the comparable period in 1998
Tables 2 and 3 provide detailed information as to average balance, interest
income/expense, and rates by major balance sheet category for the three and six
months ended June 30, 1999 and 1998.
Table 2 - Average Balance Sheet Rates for Second Quarter, 1999 and 1998 (dollars
in thousands)
- --------------------------------------------------------------------------------
Three Months Ended June 30, 1999 Three Months Ended June 30, 1998
-------------------------------- --------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $ 132,022 $ 1,782 5.40% $ 176,055 $ 2,589 5.88%
State and Political Subdivision Securities 3,936 87 8.84% 4,215 84 7.97%
Other Investments 33,430 531 6.35% 10,891 196 7.24%
Mortgage-Backed Securities 62,261 932 5.99% 37,870 594 6.27%
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 274 4 5.84% 34,026 469 5.51%
Total Loans and Fees 937,191 20,050 8.56% 835,330 19,097 9.14%
------- ------ ------- ------
Total Earning Assets 1,169,114 23,386 8.00% 1,098,387 23,029 8.39%
--------- ------ --------- ------
Less: Allowance for Loan Losses (7,962) (8,234)
Non-Earning Assets:
Cash and Due From Banks 19,977 17,882
Bank Premises and Equipment, Net 17,201 13,510
Other Assets 13,548 15,167
------ ------
Total Assets $ 1,211,878 $ 1,136,712
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 119,124 $ 803 2.70% $ 103,058 $ 839 3.26%
Money Market Accounts 133,760 1,468 4.39% 99,408 1,177 4.74%
Individual Retirement Accounts 25,691 340 5.29% 22,688 341 6.01%
Certificates of Deposit and Other
Time Deposits 411,692 5,354 5.20% 441,165 6,464 5.86%
Repurchase Agreements and Other
Borrowings 322,731 3,818 4.73% 302,644 3,891 5.14%
------- ----- ------- -----
Total Interest Bearing Liabilities 1,012,998 11,783 4.65% 968,963 12,712 5.25%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 84,505 80,037
Other Liabilities 11,958 13,467
Stockholders' Equity 102,417 74,245
------- ------
Total Liabilities and Stockholders'
Equity $ 1,211,878 $ 1,136,712
=========== ===========
Net Interest Income $11,603 $10,317
======= =======
Net Interest Spread 3.35% 3.14%
==== ====
Net Interest Margin 3.97% 3.76%
==== ====
- --------------------------------------------------------------------------------
For the purposes of these calculations, non-accruing loans are included in the
quarterly average loan amounts outstanding.
Table 3 - Average Balance Sheet Rates for Six Months, 1999 and 1998 (dollars in
thousands)
- --------------------------------------------------------------------------------
Six months ended June 30, 1999 Six months ended June 30, 1998
------------------------------ ------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $ 135,229 $ 3,673 5.43% $ 166,680 $ 4,897 5.88%
State and Political Subdivision Securities 3,963 175 8.83% 4,239 176 8.30%
Other Investments 32,227 1,022 6.34% 10,531 384 7.31%
Mortgage-Backed Securities 59,526 1,774 5.96% 42,297 1,314 6.21%
Federal Funds Sold 1,567 36 4.59% 29,430 823 5.59%
Total Loans and Fees 929,747 40,561 8.73% 824,850 38,220 9.27%
------- ------ ------- ------
Total Earning Assets 1,162,259 47,241 8.13% 1,078,027 45,814 8.50%
Less: Allowance for Loan Losses (7,945) (8,227)
Non-Earning Assets:
Cash and Due From Banks 19,465 19,531
Bank Premises and Equipment, Net 16,823 13,155
Other Assets 13,207 13,795
------ ------
Total Assets $ 1,203,809 $ 1,116,281
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 115,885 $ 1,561 2.69% $ 98,705 $ 1,601 3.24%
Money Market Accounts 127,909 2,810 4.39% 89,426 2,163 4.84%
Individual Retirement Accounts 24,827 662 5.33% 22,713 680 5.99%
Certificates of Deposit and Other
Time Deposits 415,528 10,995 5.29% 439,753 12,909 5.87%
Repurchase Agreements and Other
Borrowings 316,224 7,467 4.72% 301,725 7,774 5.15%
------- ----- ------- -----
Total Interest Bearing Liabilities 1,000,373 23,495 4.70% 952,322 25,127 5.28%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 88,627 76,370
Other Liabilities 11,713 14,887
Stockholders' Equity 103,096 72,702
------- ------
Total Liabilities and Stockholders'
Equity $ 1,203,809 $ 1,116,281
=========== ===========
Net Interest Income $23,746 $20,687
======== =======
Net Interest Spread 3.43% 3.22%
==== ====
Net Interest Margin 4.09% 3.84%
==== ====
- --------------------------------------------------------------------------------
For the purposes of these calculations, non-accruing loans are included in the
quarterly average loan amounts outstanding.
The following table presents the extent to which changes in interest rates and
changes in the volume of interest earning assets and interest bearing
liabilities have affected Republic's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by old volume), and (iii) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
Table 4 - Volume/Rate Variance Analysis (in thousands)
- --------------------------------------------------------------------------------
Three Months Ended June 30, 1999 Six months ended June 30, 1999
Compared to Compared to
Three Months Ended June 30, 1998 Six months ended June 30, 1998
-------------------------------- ------------------------------
Increase/(Decrease) Increase/(Decrease)
due to due to
Total Net Total Net
Change Volume Rate Change Volume Rate
Interest Income (1):
U.S. Treasury and
Government Agency Securities $ (807) $ (648) $ (159) $(1,224) $ (924) $ (300)
State and Political
Subdivision Securities 3 (6) 9 (1) (11) 10
Other Investments 335 406 (71) 638 791 (153)
Mortgage-Backed Securities 338 383 (45) 460 535 (75)
Federal Funds Sold (465) (465) - (787) (779) (8)
Total Loans and Fees (2) 953 2,329 (1,376) 2,341 4,860 (2,519)
--- ----- ----- ----- ----- -----
Net Change in Interest Income 357 1,999 (1,642) 1,427 4,472 (3,045)
--- ----- ----- ----- ----- -----
Interest Expense:
Interest Bearing
Transaction Accounts (36) 131 (167) (40) 279 (319)
Money Market Accounts 291 407 (116) 647 931 (284)
Individual Retirement Accounts (1) 45 (46) (18) 63 (81)
Certificates of Deposit and
Other Time Deposits (1,110) (432) (678) (1,914) (711) (1,203)
Repurchase Agreements and
Other Borrowings (73) 258 (331) (307) 374 (681)
-- --- --- --- --- ---
Net Change in Interest Expense (929) 409 (1,338) (1,632) 936 (2,568)
--- --- ----- ----- --- -----
Increase in Net Interest Income $ 1,286 $1,590 $ (304) $ 3,059 $3,536 $ (477)
======= ====== ====== ======= ====== ======
- --------------------------------------------------------------------------------
(1) Interest income for loans on non-accrual status have been included in
Interest Income.
(2) The amount of fees in interest on loans was approximately $1,422 and $765
for the periods ended June 30, 1999 and 1998, respectively.
Non-Interest Income. Non-interest income was $2.3 million during second quarter
1999, down from $3.1 million during second quarter of 1998. The decrease was
principally a result of a reduction in gains generated from sales of loans into
the secondary market.
Revenue from mortgage banking activities declined during the three-month period
ending June 30, 1999 as a result of reduced sales volume. The market's
interest-rate environment heavily influences secondary market residential loan
originations and, correspondingly, consumer-refinance activity. For the second
quarter of 1999, market interest rates were above second quarter 1998 levels,
which led to lower secondary market originations and sales volumes. As a result,
gains from sale of loans decreased to $658,000 for the three month period ended
June 30, 1999 compared to $1.1 million during the same period in 1998. Net gains
as a percentage of loans sold were 1.41% and 1.45% for the three-month periods
ending June 30, 1999 and 1998, respectively. Given the rise in interest rates,
management believes that the secondary market sales volume, comprised of fixed
rate products, will continue to decline from current levels. Management also
believes that this reduction in secondary market gains on sale of loans will be
partially offset by increased interest income from expected growth in the
adjustable rate mortgage loan portfolio.
Non-interest income decreased from $10.0 million for the six months ended June
30,1998 to $6.0 million for the comparable period in 1999. The decrease was
primarily due to the one-time gain of $4.1 million from the sale of Mayfield
banking center deposits during 1998. Excluding that one-time gain on sale of
deposits, non-interest income increased for the first six months of 1999. This
increase was primarily due to Refunds Now ERC fees, which generated $1.1 million
in fee income during 1999 compared to $400,000 recognized by the Bank during the
comparable 1998 period.
Non-Interest Expense. Total non-interest expense was $9.3 million in second
quarter 1999, compared to $8.6 million for second quarter 1998. Non-interest
expense increased from $16.7 million for the six months ended June 30, 1998 to
$19.2 million for the comparable period in 1999. The increases for both the
three and six months ended June 30, 1999 were primarily attributable to costs
associated with salaries, employee benefits and occupancy and equipment.
Salary and employee benefit expenses increased $700,000 for the second quarter
1999 over second quarter, 1998 and $2.2 million for the six months ended June
30, 1999 compared to June 30, 1998. Republic's overall staffing level increased
to 488 full-time equivalent employees ("FTE's") at June 30, 1999, compared to
412 FTE's at June 30, 1998. The increases in salaries and employee benefits were
attributable to several factors. Republic opened two new banking centers and
expanded its Elizabethtown, Kentucky banking center, while also expanding its
commercial lending, cash management and trust activities. Additional expense was
also recognized as a result of the formation of an Employee Stock Ownership Plan
("ESOP").
Occupancy and equipment expense increased to $1.9 million in second quarter
1999, compared to $1.8 million for second quarter 1998. For the six months ended
June 30, 1999 occupancy and equipment expense increased 6% over the comparable
period in 1998. The increase is largely attributable to the costs associated
with the opening of two additional banking centers and the expansion and
relocation of the Elizabethtown, Kentucky banking center. These expenses may
continue to increase in the near term as the Bank intends to open a minimum of
two additional locations in its existing markets as well as the new loan
production office in Southern Indiana. It is also anticipated that additional
expenses will be incurred for technology enhancements for deposit, lending and
customer support systems, including Internet banking. (See also "YEAR 2000"
discussion)
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND DECEMBER 31, 1998
Securities available for sale. Securities available-for-sale consists primarily
of mortgage-backed securities, U.S. Treasury and U.S. Government Agencies and
Corporate bonds with a weighted average maturity of 3.4 years. Securities
available for sale increased from $187 million at December 31, 1998 to $200
million at June 30, 1999. 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
under changing market conditions.
Securities to be held to maturity . Securities to-be-held-to-maturity decreased
from $30 million at December 31, 1998 to $12 million at June 30, 1999. The
decrease was due to management's decision to reinvest maturing securities into
securities available for sale. Securities to-be-held-to-maturity consists
primarily of U.S. Treasury and U.S government Agencies with a weighted average
maturity of .3 years.
Loans. Net loans increased $74 million to $944 million at June 30, 1999 compared
to $870 million at December 31, 1998. The increase in loans was primarily in the
secured real estate lending portfolio. The rise in residential real estate loan
volume was a result of continued consumer demand for Republic's portfolio
products. Republic also had healthy growth in its commercial real estate lending
portfolio as a result of the Bank's continued emphasis on the active pursuit of
lending opportunities within the Bank's markets. The rise in the real estate
construction portfolio was due to steady demand for new single family housing.
By design, Republic's consumer loans decreased from $57 million at December 31,
1998 to $47 million at June 30, 1999. The consumer loan portfolio consists of
both secured and unsecured loans. Republic's consumer portfolio also includes
the "All Purpose" and "Pre Approved" unsecured loan products. Republic is
currently not originating these unsecured products and has elected to allow the
remaining portfolios to paydown. These portfolios had $20 million outstanding at
December 31, 1998 compared to $13 million at June 30, 1999.
Republic's home equity portfolio decreased from $107 million at December 31,
1998 to $97 million at June 30, 1999. Following strong growth in this product
during 1998, Republic experienced decreased credit utilization by existing
customers and increased product competition from other area banks for the
consumer home equity loan business.
Allowance and Provision for Loan Losses. The provision for loan losses was
$419,000 in the second quarter, 1999, compared to $741,000 in the second quarter
of 1998. Overall net charge-offs decreased 43% during the second quarter of 1999
compared to the same period in 1998. The reduction in charge-offs was primarily
due to the continued moderation of charge-offs in the unsecured consumer loan
portfolio.
The provision for loan losses was $1.3 million for the six months ended June 30,
1999, compared to $1.4 million for the six months ended June 30, 1998.
Charge-offs of $200,000 related to tax refund loans are included in the total
charge-offs for the six months ended June 30, 1999. No charge-offs for these
loans were attributed to the Bank during the second quarter of 1999. Republic
expects charge-offs for tax refund loans originated in 1999 to be minimal during
the remainder of the year. Excluding charge-offs related to tax refund loans,
net charge-offs decreased by more than 26% during year-to-date 1999 compared to
the same period in 1998.
The allowance for loan losses increased slightly from $7.9 million at December
31, 1998 to $8.0 million at June 30, 1999. Management believes, based on
information presently available, that it has adequately provided for loan losses
at June 30, 1999. Management has considered the effect of increased commercial
lending on the allowance, and that effect has been largely offset by the Bank's
decreased exposure in its unsecured consumer portfolio.
Table 5 below depicts the allowance activity by loan type for the three and six
months ended June 30, 1999 and 1998.
Table 5 - Summary of Loan Loss Experience
Three Months Ended Six months ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
(in thousands)
Allowance for loan losses:
Balance-beginning of period $ 7,962 $ 8,234 $ 7,862 $ 8,176
Charge-offs:
Real Estate (135) (59) (315) (78)
Commercial (21) (28)
Consumer (451) (820) (958) (1,503)
Tax Refund Loans (200)
-------- --------- -------- -------
Total (607) (879) (1,501) (1,581)
-------- --------- -------- -------
Recoveries:
Real Estate 3 2 9 5
Commercial 4
Consumer 185 136 319 246
-------- --------- -------- -------
Total 188 138 328 255
-------- --------- -------- -------
Net charge-offs (419) (741) (1,173) (1,326)
Provision for loan losses 419 741 1,273 1,384
-------- --------- -------- -------
Allowance for loan losses:
Balance-end of period $ 7,962 $ 8,234 $ 7,962 $ 8,234
======== ========= ======== =======
Deposits. Total deposits were $780 million at June 30, 1999 compared to $747
million at December 31, 1998. The increase in deposits was primarily in
Republic's lower cost transaction accounts. Non-interest bearing deposits have
increased by more than 10% since December 31, 1998. Republic's growth in
deposits was the result of management's ongoing emphasis on its commercial cash
management program and retail deposit gathering. Republic plans to continue its
deposit gathering initiatives by utilizing commissioned deposit originators and
offering competitive products in its existing markets, including its Internet
bank.
Securities sold under agreements to repurchase and other short-term borrowings.
Securities sold under agreements to repurchase and other short-term borrowings
decreased from $149 million at December 31, 1998 to $98 million at June 30,
1999. The decrease was primarily due to anticipated withdrawals of public fund
deposits.
Other borrowed funds. Other borrowed funds, which consist of FHLB advances,
increased from $190 million at December 31, 1998 to $240 million at June 30,
1999. The increase was primarily due to additional borrowings to fund loan
growth. Additional investment securities were also purchased to collateralize
deposits due to the bank's growth in commercial deposits.
Stockholders' equity. Total stockholders' equity decreased from $104 million at
December 31, 1998 to $101 million at June 30, 1999. The decrease is primarily
due to declines in the fair value of investment securities available for sale
and the formation of Republic's ESOP during January 1999. Under the terms of the
plan, the ESOP purchased 300,000 shares of Class A Common Stock that will be
allocated to Republic's employees over a ten-year period. (See discussion of
ESOP on page 15)
ASSET QUALITY
Loans, including impaired loans under SFAS 114 and excluding consumer loans, are
placed on non-accrual status when they become past due 90 days or more as to
principal or interest, unless they are adequately secured and in the process of
collection. When loans are placed on non-accrual status, all unpaid accrued
interest is reversed. These loans remain on non-accrual status until the
borrower demonstrates the ability to remain current or the loan is deemed
uncollectible and is charged off. Consumer loans are not placed on non-accrual
status but are reviewed periodically and charged off when they reach 120 days
past due or are deemed uncollectible. At June 30, 1999, Republic had $153,000 in
consumer loans 90 days or more past due compared to $256,000 at December 31,
1998.
The Bank's level of delinquent loans declined favorably to 1.65% at June 30,
1999, compared to 2.29% at December 31, 1998. Republic also had positive
declines in both its non-performing asset and loan categories. Table 6 provides
information related to non-performing assets and loans 90 days or more past due.
Table 6 - Non-Performing Loans
June 30, December 31,
(dollars in thousands) 1999 1998
Loans on non-accrual status (1)(2) $ 2,498 $ 3,258
Loans past due 90 days or more 1,862 1,731
--------- ---------
Total non-performing loans 4,360 4,989
Other real estate owned 723 540
--------- ---------
Total non-performing assets $ 5,083 $ 5,529
========= =========
Percentage of non-performing loans to total loans .46% .57%
Percentage of non-performing assets to total loans .53% .63%
(1) The table is exclusive of impaired loans which remained on accrual status.
(2) Interest income that would have been earned and received on non-accrual
loans was not material.
Republic defines impaired loans to be those commercial real estate and
commercial loans greater than $499,999 that management has classified as
doubtful (collection of all amounts due is highly questionable or improbable) or
loss (all or a portion of the loan has been written off or a specific allowance
for loss has been provided). Republic's policy is to charge off all or that
portion of its investment in an impaired loan upon a determination it is
probable the full amount may not be collected. Impaired loans consist of one
commercial real estate loan that decreased slightly from $1.1 million at
December 31, 1998 to $1.0 million at June 30, 1999.
LIQUIDITY
Republic maintains sufficient liquidity in order to fund loan demand and routine
deposit withdrawal activity. Liquidity is managed by retaining sufficient liquid
assets in the form of investment securities and core deposits to meet demand.
Funding and cash flows can also be realized from the available for sale portion
of the securities portfolio and paydowns from the loan portfolio. Republic's
banking centers also provide access to their retail deposit markets.
Approximately $45 million of repurchase agreements and money markets are
attributable to three customer relationships at June 30, 1999. These funds are
short-term in nature and subject to immediate withdrawal by these entities.
Should these funds be removed, Republic has the ability to replenish these funds
through various funding sources noted below. Republic has established lines of
credit with other financial institutions, the FHLB and brokerage firms. While
Republic utilizes numerous funding sources in order to meet liquidity
requirements, FHLB borrowings remain a material component of management's
balance sheet strategy.
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 steady loan demand, that
requires management to continue to monitor interest rate and liquidity risk and
implement appropriate funding and balance sheet strategies.
CAPITAL
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. Republic's average capital to average assets ratio was
8.56% at June 30, 1999 compared to 7.58% at December 31, 1998. Republic
continues to exceed the regulatory requirements for Tier I, Tier I Leverage and
total risk-based capital. The Bank expects to maintain a capital position that
meets or exceeds the "well capitalized" requirements as defined by the FDIC.
Table 7 below indicates the capital ratios at June 30, 1999.
Table 7 - Capital Ratios
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated $ 117,784 14.99% $ 62,847 8% $ 78,559 10%
Bank only $ 113,152 14.40% $ 62,845 8% $ 78,556 10%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 109,822 13.98% $ 31,424 4% $ 47,136 6%
Bank only $ 105,190 13.39% $ 31,422 4% $ 47,134 6%
Tier I Leverage Capital (to Average Assets)
Consolidated $109,822 9.06% $ 48,152 4% $ 60,190 5%
Bank only $ 105,190 8.68% $ 48,152 4% $ 60,190 5%
Kentucky banking regulations limit the amount of dividends that may be paid to
Republic by the Bank without prior approval of the Bank's regulatory agency.
Under these regulations, the amount of dividends that may be paid in any
calendar year is limited to the Bank's current year's net income, as defined in
the regulations, combined with the retained net income of the preceding two
years, less any dividends declared during those periods. At June 30, 1999, the
Bank had $18 million of retained earnings that could be utilized for payment of
dividends if authorized by the Board of Directors.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Asset/liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve acceptable net
interest income. Management considers interest rate risk to be Republic's most
significant market risk. Interest rate risk is the exposure to adverse changes
in the net interest income as a result of market fluctuations in interest rates.
Management regularly monitors interest rate risk in relation to prospective
market and business conditions. The Board of Directors sets policy guidelines
establishing maximum limits on the Bank's interest rate risk exposure.
Management monitors and adjusts exposure to interest rate fluctuations as
influenced by the Bank's loan and deposit portfolios.
Republic utilizes an earnings simulation model to analyze net interest income
sensitivity. Potential changes in market interest rates and their subsequent
effect on interest income are then evaluated. The model projects the effect of
instantaneous movements in interest rates of both 100 and 200 basis points.
Assumptions based on the historical behavior of Republic's deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. Actual
results will differ from the model's simulated results due to timing, magnitude
and frequency of interest rate changes as well as changes in market conditions
and the application and timing of various management strategies.
Interest rate risk management focuses on maintaining acceptable net interest
income within Board approved policy limits. Republic's Asset/Liability
Management Committee monitors and manages interest rate risk to maintain an
acceptable level of change to net interest income resulting from market interest
rate changes. Republic's Board approved policy established for interest rate
risk is stated in terms of the range of permissible change in net interest
income given a 100 and 200 basis point immediate and sustained increase or
decrease in market interest rates.
Republic's interest sensitivity profile changed slightly from December 31, 1998
to June 30, 1999. 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 8.9% at June 30, 1999 compared to a decrease of 16.2%
at December 31, 1998. Given a 200 basis point increase in the yield curve
Republic's base net interest income would increase by an estimated 3.6% at June
30, 1999 compared to 11.0% at December 31, 1998.
The interest sensitivity profile of Republic at any point in time will be
effected by a number of factors. These factors include the mix of interest
sensitive assets and liabilities as well as their relative pricing schedules.
The table below is representative only and is not a precise measurement of the
effect of changing interest rates on Republic's interest income in the future.
Table 8 - Interest Rate Sensitivity
June 30, 1999
Decrease in Rates Increase in Rates
200 100 100 200
Basis Points Basis Points Base Basis Points Basis Points
(dollars in thousands)
Projected interest income
Loans $ 70,442 $ 75,620 $ 80,742 $ 85,200 $ 89,344
Investments 12,336 12,767 13,231 13,602 13,964
Short-term investments 188 271 362 450 534
----------- ---------- ---------- ----------- ---------
Total interest income $ 82,966 $ 88,658 $ 94,335 $ 99,252 $ 103,842
Projected interest expense
Deposits $ 27,955 $ 29,614 $ 31,291 $ 33,030 $ 34,992
Other borrowings 13,247 15,222 17,196 19,298 21,335
----------- ---------- ---------- ----------- ---------
Total interest expense 41,202 44,836 48,487 52,328 56,327
Net interest income $ 41,764 $ 43,822 $ 45,848 $ 46,924 $ 47,515
Change from base $ (4,084) $ (2,026) $ 1,076 $ 1,667
% Change from base (8.91)% (4.42)% 2.35% 3.64%
December 31, 1998
Decrease in Rates Increase in Rates
200 100 100 200
Basis Points Basis Points Base Basis Points Basis Points
(dollars in thousands)
Projected interest income
Loans $ 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%
YEAR 2000
Management has assessed the operational and financial implications of its year
2000 needs and developed a plan to ensure that data processing systems can
properly handle the century change. Management has determined that if a business
interruption as a result of the year 2000 issue occurred, that such an
interruption could be material to the Bank's overall financial performance. The
primary task required to prevent a potential business interruption was the
installation of the most current software releases for major mainframe
applications developed by Republic's third party software application providers.
Mainframe software upgrades and modifications for major applications have been
installed and placed into production. Year 2000 Script Testing has been
conducted for mission-critical internal core processing systems for each of the
thirteen test dates identified by the FFIEC. The Bank's personal computer
network continues to be reviewed and upgraded. Minor software upgrades and
modifications have also been required for certain other data processing
applications.
Republic has identified selected employees whose primary function is year 2000
compliance. The loss of these employees could have a material adverse effect on
the implementation of Republic's year 2000 plan. Republic initiated a year 2000
employee retention program, that to date has been highly successful. The program
was designed to encourage and promote the retention of information system
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 is satisfactory and
in accordance with general industry and regulatory standards and
recommendations. Management has contacted its major suppliers and customers and
inquired about the status of their year 2000 readiness, with no material
problems being noted. At this time, the Bank believes that its software
providers have been able to adequately address the Bank's needs for year 2000
software functionality. However, Republic must also rely on the year 2000
readiness of additional third parties, not only its hardware and software
providers, but other third parties such as public utilities and governmental
units that provide important ongoing services to the Bank. Management has
therefore developed a bank-wide contingency plan in the event of unforeseen
circumstances in accordance with regulatory agency recommendations.
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 are being 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 incurred
costs of approximately $700,000 attributable to year 2000 remediation and
anticipates total costs and charges to be in an approximate range of $1.2 to
$1.6 million. The majority of the remaining costs to be incurred are related to
the year 2000 employee retention program that are anticipated to be paid in
2001. Actual expenses could vary from management's estimates if unforeseen
circumstances were to arise.
NEW ACCOUNTING PRONOUNCEMENTS
See discussion in Note 1 to financial statements for a discussion of recent
accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information for this item is incorporated by reference to the Asset
/Liability Management and Market Risks section of Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
PART II - OTHER INFORMATION
Item 2. Changes in securities
During the second quarter of 1999, Republic issued 55,000 shares of Class A
Common Stock upon conversion of shares of Class B Common Stock by shareholders
of Republic in accordance with the share-for-share conversion provision option
of the Class B Common Stock. The exemption from registration of the newly issued
Class A Common Stock relied upon was Section (3)(a)(9) of the Securities Act of
1933.
Item 6. Exhibits and Reports on Form 8-K
The exhibits required by Item 601 of Regulation S-K are attached to and
listed in the Exhibit Index on page 34.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Republic Bancorp, Inc.
(Registrant)
Principal Executive Officer:
Date: August 13, 1999 /s/ Steven E. Trager
------------------------- ----------------------------
Steven E. Trager
Chief Executive Officer
Principal Financial Officer:
Date: August 13, 1999 /s/ Mark A. Vogt
-------------------------- ----------------------------
Mark A. Vogt
Chief Financial Officer
EXHIBIT INDEX
Incorporated
Exhibit Description By Reference To
10.17 Lease between Republic Bank & Trust Filed as Exhibit 10.17 on page
Company and Jaytee Properties, dated 35 of this Form 10-Q for the
February 1, 1999, as amended, relating period ended June 30, 1999
to 661 South Hurstbourne Parkway,
Louisville
10.18 Lease between Republic Bank & Trust Filed as Exhibit 10.18 on page
Company and Jaytee Properties, dated 36 of this Form 10-Q for the
August 1, 1999, relating to 9600 period ended June 30, 1999
Brownsboro Road, Louisville
10.19 Lease between Republic Bank & Trust Filed as Exhibit 10.19 on page
Company and Jaytee Properties, dated 56 of this Form 10-Q for the
May 1, 1999, relating to 610 Eastern period ended June 30, 1999
Boulevard, Clarksville, Indiana
11 Statement Regarding Computation of Filed as Exhibit 11 on page
Per Share Earnings 73 of this Form 10-Q for the
period ended June 30, 1999
27 Financial Data Schedule Filed as Exhibit 27 on page
74 of this Form 10-Q for the
period endedJune 30, 1999