UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 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: 14,518,581 shares of Class A Common Stock and 2,143,957
shares of Class B Common Stock as of November 5, 1999.
The Exhibit index is on page 34. This filing contains 36 pages (including this
facing sheet).
REPUBLIC BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 3-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-31
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)
September 30, December 31,
1999 1998
ASSETS:
Cash and due from banks $ 20,929 $ 37,446
Federal funds sold 2,500
Securities available for sale 185,505 186,936
Securities to be held to maturity 33,066 29,985
Mortgage loans held for sale 10,370 38,167
Loans, less allowance for loan losses of
$7,862 (1999) and $7,862 (1998) 990,060 870,031
Federal Home Loan Bank stock 14,784 14,036
Accrued interest receivable 8,752 8,825
Premises and equipment, net 18,252 15,870
Other assets 4,769 3,888
------------ -------------
TOTAL $ 1,286,487 $ 1,207,684
============ =============
LIABILITIES:
Deposits:
Non-interest bearing $ 90,107 $ 80,345
Interest bearing 719,821 666,802
Securities sold under agreements to repurchase and
other short-term borrowings 129,977 148,659
Other borrowed funds 224,998 190,222
Accrued interest payable 3,862 3,769
Guaranteed preferred beneficial interests in
Company's subordinated debentures 6,352 6,402
Other liabilities 8,768 7,643
------------ -------------
Total liabilities 1,183,885 1,103,842
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A and Class B Common stock, no par value 4,102 4,149
Additional paid-in capital 33,630 34,014
Retained earnings 71,369 65,469
Unearned Employee Stock Ownership Plan shares (3,691)
Net unrealized appreciation (depreciation) on securities
Available for sale, net of tax (2,808) 210
------------ -------------
Total stockholders' equity 102,602 103,842
------------ -------------
TOTAL $ 1,286,487 $ 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)
Three Months Ended Nine Months Ended
September 30, September 30,
INTEREST INCOME: 1999 1998 1999 1998
Loans, including fees $ 20,986 $ 19,826 $ 61,547 $ 58,046
Securities available for sale 2,715 2,440 8,315 6,251
Securities to be held to maturity:
Taxable 217 914 706 3,434
Non-taxable 24 28 72 84
FHLB dividends 250 214 757 598
Other 95 36 918
---------- --------- ---------- ---------
Total interest income 24,192 23,517 71,433 69,331
---------- --------- ---------- ---------
INTEREST EXPENSE:
Deposits 8,304 8,505 24,332 25,858
Short-term borrowings 1,212 1,221 3,595 3,604
Long-term debt 3,050 3,081 8,134 8,472
---------- --------- --------- ---------
Total interest expense 12,566 12,807 36,061 37,934
---------- --------- ---------- ---------
NET INTEREST INCOME 11,626 10,710 35,372 31,397
PROVISION FOR LOAN LOSSES 204 303 1,477 1,687
---------- --------- ---------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,422 10,407 33,895 29,710
---------- --------- ---------- ---------
NON-INTEREST INCOME:
Service charges on deposit accounts 914 810 2,675 2,413
Electronic refund check fees 180 1,238 379
Other service charges and fees 107 91 402 316
Loan servicing income 110 140 348 455
Net gain on sale of deposits 4,116
Net gain on sale of loans 446 1,002 2,501 3,154
Net gain on sale of securities 331 184 822
Other 241 154 657 858
---------- --------- ---------- ---------
Total non-interest income 1,998 2,528 8,005 12,513
---------- --------- ---------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,785 4,249 15,616 12,864
Occupancy and equipment 1,847 1,852 5,763 5,555
Communication and transportation 432 401 1,302 1,235
Marketing and development 308 296 999 1,008
Supplies 226 264 718 780
Other 1,347 1,464 3,748 3,753
---------- --------- ---------- ---------
Total non-interest expense 8,945 8,526 28,146 25,195
---------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES 4,475 4,409 13,754 17,028
INCOME TAXES 1,468 1,609 4,615 6,102
---------- --------- ---------- ---------
NET INCOME $ 3,007 $ 2,800 $ 9,139 $ 10,926
========== ========= ========== =========
(Continued)
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(CONTINUED)
( in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Change in unrealized gain (loss) on securities $ (363) $ 1,414 $ (2,897) $ 1,714
Reclassification of realized amount (215) (121) (534)
---------- --------- ---------- -------
Net unrealized gain (loss) recognized in
comprehensive income (363) 1,199 (3,018) 1,180
---------- --------- ---------- -------
COMPREHENSIVE INCOME $ 2,644 $ 3,999 $ 6,121 $12,106
========== ========= ========== =======
EARNINGS PER SHARE
Class A $ .18 $ .17 $ .54 $ .71
Class B $ .18 $ .17 $ .54 $ .70
EARNINGS PER SHARE ASSUMING DILUTION
Class A $ .17 $ .16 $ .52 $ .68
Class B $ .17 $ .16 $ .52 $ .67
See accompanying notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands, except for per share data)
Net Unrealized
UnearnedAppreciation/
Empl.Stock (Depreciation)
Common Stock Additional Ownershipon Securities Total
Class A Class B Paid-In Retained Plan Available Stockholders'
Shares Shares Amount Capital Earnings Shares For Sale 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 151 (151)
Dividend Declared
Common: Class A ($.0825 per share) (1,202) (1,202)
Class B ($.0750 per share) (163) (163)
Repurchase of Class A Common (205) (48) (406) (1,874) (2,328)
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 14,134 shares to be released
under the Employee Stock Ownership Plan 14 (27) 182 155
Net changes in unrealized appreciation/
(depreciation) on securities available
for sale (3,018) (3,018)
Net Income 9,139 9,139
------ ------ ------ ------- ------ ------- ------ -------
BALANCE, September 30, 1999 14,534 2,154 $ 4,102 $ 33,630 $71,369 $ (3,691) $(2,808) $102,602
====== ====== ====== ======= ======= ======= ====== =======
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (in thousands)
1999 1998
OPERATING ACTIVITIES:
Net income $ 9,139 $ 10,926
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 2,755 2,493
Amortization and accretion of securities 347 232
FHLB stock dividends (748) (598)
Provision for loan losses 1,477 1,687
Net gain on sale of securities (184) (822)
Net gain on sale of loans (2,501) (3,154)
Net gain on sale of deposits (4,116)
Proceeds from sale of loans 181,947 199,962
Origination of mortgage loans held for sale (151,649) (202,824)
Employee Stock Ownership Plan expense 155
Changes in assets and liabilities:
Accrued interest receivable 73 (295)
Other assets 2,760 (73)
Accrued interest payable 93 (1,687)
Other liabilities 1,147 2,165
----------- -----------
Net cash provided by operating activities 44,811 3,896
----------- -----------
INVESTING ACTIVITIES:
Purchases of securities available for sale (89,042) (187,024)
Purchases of securities to be held to maturity (21,445)
Purchases of Federal Home Loan Bank stock (5,098)
Proceeds from maturities of securities to be held to maturity 18,389 52,443
Proceeds from maturities and paydowns of securities available for sale 65,652 2,718
Proceeds from sales of securities available for sale 20,060 109,445
Net increase in loans (123,592) (75,487)
Purchases of premises and equipment (5,146) (5,286)
Disposal of premises and equipment 9 985
----------- -----------
Net cash used in investing activities (135,115) (107,304)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 62,781 67,682
Sale of deposits (61,564)
Net change in securities sold under agreement to
repurchase and other short-term borrowings (18,682) 5,922
Payments on other borrowings (52,574) (167,632)
Proceeds from other borrowings 87,350 237,620
Proceeds from issuance of common stock and stock options exercised 23,640
Purchase of shares for Employee Stock Ownership Plan (3,873)
Repurchase of Class A Common Stock (2,328)
Cash dividends paid (1,387) (1,269)
----------- -----------
Net cash provided by financing activities 71,287 104,399
----------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (19,017) 991
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,946 24,546
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,929 $ 25,537
=========== ===========
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (in
thousands)
1999 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 35,968 $ 39,621
=========== ===========
Income taxes $ 4,349 $ 7,598
=========== ===========
Transfers from loans to real estate
acquired in settlement of loans $ 2,086 $ 803
=========== ===========
See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION (AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES)
Basis of Presentation - The consolidated financial statements include the
accounts of Republic Bancorp, Inc. and its wholly-owned subsidiaries; Republic
Mortgage Company, Republic Insurance Agency, Inc., Republic Capital Trust, and
Republic Bank & Trust Company (Bank) 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 nine-month periods
ending September 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.
New Accounting Pronouncements - In September 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:
September 30, 1999
(in thousands)
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
U.S. Treasury Securities and U.S.
Government Agencies $ 99,111 $ 11 $ (1,366) $ 97,756
Mortgage-backed securities 71,367 (2,087) 69,280
Corporate bonds 19,282 (813) 18,469
----------- --------- --------- -----------
Total securities available for sale $ 189,760 $ 11 $ (4,266) $ 185,505
=========== ========= ========= ===========
Securities To Be Held To Maturity:
September 30, 1999
(in thousands)
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
U.S. Treasury Securities and U.S.
Government Agencies $ 25,331 $ $ (55) $ 25,276
Obligations of state and political
subdivisions 3,905 115 4,020
Mortgage-backed securities 3,830 (30) 3,800
----------- --------- --------- -----------
Total securities to be held to maturity $ 33,066 $ 115 $ (85) $ 33,096
=========== ========= ========= ===========
Securities having an amortized cost of $178 million and a fair value of $175
million at September 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
September 30, 1999 December 31, 1998
------------------------------------------
(in thousands)
Residential real estate $ 614,779 $ 520,583
Commercial real estate 152,593 118,293
Real estate construction 58,532 47,396
Commercial 29,276 26,381
Consumer 42,194 56,728
Home equity 99,521 106,845
Other 2,314 3,146
----------- -----------
Total loans 999,209 879,372
Less:
Unearned interest income and unamortized
loan fees (1,287) (1,479)
Allowance for loan losses (7,862) (7,862)
----------- -----------
Loans, net $ 990,060 $ 870,031
=========== ===========
The following table sets forth the changes in the allowance for loan losses:
Three months ended Sept. 30, Nine months ended Sept. 30,
1999 1998 1999 1998
(in thousands)
Balance, beginning of period $ 7,962 $ 8,234 $ 7,862 $ 8,176
Provision charged to income 204 303 1,477 1,687
Charge-offs (425) (702) (1,926) (2,283)
Recoveries 121 127 449 382
--------- --------- --------- ---------
Balance, end of period $ 7,862 $ 7,962 $ 7,862 $ 7,962
========= ========= ========= =========
Information about Republic's investment in impaired loans is as follows:
September 30, 1999 December 31, 1998
--------------------------------------------
(in thousands)
Gross impaired loans $ 1,081 $ 1,116
Less: Related allowance for loan losses 700 100
--------- ---------
Net impaired loans with related allowances 381 1,016
Impaired loans with no related allowances
--------- ---------
Total $ 381 $ 1,016
========= =========
Average impaired loans outstanding $ 1,081 $ 1,116
========= =========
4. DEPOSITS
September 30, 1999 December 31, 1998
-------------------------------------------
(in thousands)
Demand (NOW, Super NOW and Money Market) $ 199,164 $ 179,804
Internet money market accounts 21,761
Savings 11,840 12,330
Money market certificates of deposit 45,825 35,139
Individual retirement accounts 28,072 23,353
Certificates of deposit, $100,000 and over 83,808 77,365
Other certificates of deposit 309,462 309,938
Brokered deposits 19,889 28,873
----------- -----------
Total interest bearing deposits 719,821 666,802
Total non-interest bearing deposits 90,107 80,345
----------- -----------
Total $ 809,928 $ 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.
September 30, 1999 December 31, 1998
-----------------------------------------------
(in thousands)
Average outstanding balance $ 115,632 $ 115,280
Average interest rate 4.14% 4.21%
Maximum outstanding at month end $ 129,977 $ 148,659
End of period $ 129,977 $ 148,659
6. OTHER BORROWED FUNDS
September 30, December 31,
1999 1998
---------------------------------
(in thousands)
Federal Home Loan Bank convertible fixed rate
advances (1) $ 50,000 $ 50,000
Federal Home Loan Bank overnight advances, with
weighted average interest rate of 5.33% at
September 30, 1999 47,350 31,800
Federal Home Loan Bank variable interest rate advances,
with weighted average interest rate of 5.50% at
September 30, 1999, due through 2001 41,000 21,000
Federal Home Loan Bank fixed interest rate advances,
with weighted average interest rate of 5.57% at
September 30, 1999, due through 2003 86,648 87,422
------------ ------------
Total $ 224,998 $ 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. In October 1999, a $30 million convertible fixed rate
advance was called by the Federal Home Loan Bank. This advance was replaced
by a $30 million variable FHLB advance tied to the 1-month LIBOR with a
current rate of 5.53%.
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 $95 million additional funds from the Federal Home Loan Bank.
Republic also has unsecured lines of credit totaling $40 million and secured
lines of $115 million available through various financial institutions.
Aggregate future principal payments on borrowed funds as of September 30, 1999
are as follows:
Year
(in thousands)
1999 $ 48,615
2000 26,099
2001 40,284
2002
Thereafter 110,000
Total $ 224,998
============
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(in thousands)
Earnings Per Share
Net Income available to common shares
outstanding $ 3,007 $ 2,800 $ 9,139 $ 10,926
========= ========= ========= ==========
Weighted average shares outstanding 16,708 16,480 16,801 15,472
========= ========= ========= ==========
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(in thousands)
Earnings Per Share Assuming Dilution
Net Income $ 3,007 $ 2,800 $ 9,139 $ 10,926
Add: Interest expense, net of tax benefit,
on assumed conversion of guaranteed
preferred beneficial interests in
Republic's subordinated debentures 86 88 258 263
--------- --------- --------- ----------
Net Income available to common
Shareholder assuming conversion $ 3,093 $ 2,888 $ 9,397 $ 11,189
========= ========= ========= ==========
Weighted average shares outstanding 16,708 16,480 16,801 15,472
Add dilutive effects of assumed
conversion and exercise:
Convertible guaranteed preferred
beneficial interest in Republic's
subordinated debentures 635 645 635 645
Stock options 471 626 522 444
--------- --------- --------- ----------
Weighted average shares and dilutive
potential shares outstanding 17,814 17,751 17,958 16,561
========= ========= ========= ==========
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 nine months of
1999, 14,134 shares of stock were committed to be released, resulting in
ESOP compensation expense of approximately $155,000. For the quarter ended
September 30, 1999; 5,380 shares were committed to be released resulting in
ESOP compensation expense of approximately $55,000 for the quarter. On
September 30, 1999, none of the 300,000 shares in the plan had been
allocated. The fair value of the unallocated shares was approximately $3.0
million.
The cost of shares issued to the employee stock ownership plan but not yet
committed to be released 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 September 30, 1999
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 11,548 $ 78 $ 11,626
Provision for loan loss 204 204
Net gain on sale of loans 446 446
Other revenues 1,471 81 1,552
Income tax expense 1,454 14 1,468
Segment profit 2,982 25 3,007
Segment assets 1,275,051 11,436 1,286,487
Three Months Ended September 30, 1998
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 10,614 $ 96 $ 10,710
Provision for loan loss 303 303
Net gain on sale of loans 1,002 1,002
Other revenues 1,508 18 1,526
Income tax expense 1,394 215 1,609
Segment profit 2,417 383 2,800
Segment assets 1,151,177 16,640 1,167,817
9. SEGMENT INFORMATION (Continued)
Nine Months Ended September 30, 1999
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 35,114 $ 258 $ 35,372
Provision for loan loss 1,477 1,477
Net gain on sale of loans 2,501 2,501
Other revenues 5,424 80 5,504
Income tax expense 4,278 337 4,615
Segment profit 8,486 653 9,139
Segment assets 1,275,051 11,436 1,286,487
Nine Months Ended September 30, 1998
Mortgage Consolidated
Banking Banking Totals
(in thousands)
Net interest income $ 31,152 $ 245 $ 31,397
Provision for loan loss 1,687 1,687
Net gain on sale of loans 3,154 3,154
Other revenues 9,359 9,359
Income tax expense 5,450 652 6,102
Segment profit 9,767 1,159 10,926
Segment assets 1,151,177 16,640 1,167,817
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 20 banking centers throughout Kentucky and a loan
production office in southern Indiana. The Bank's activities include the
acceptance of deposits for checking, savings and time deposit accounts, making
secured and unsecured loans, investing in securities and trust services. The
Bank's lending services include the origination of real estate, commercial and
consumer loans. Operating revenues are derived primarily from interest and fees
on domestic real estate, commercial and consumer loans, and from interest on
securities of the United States Government and Agencies, states, and
municipalities. Regulators for Republic include the Federal Deposit Insurance
Corporation (FDIC), the Board of Governors of the Federal Reserve System (and
the Federal Reserve Bank of St. Louis) and the Kentucky Department of Financial
Institutions.
- --------------------------------------------------------------------------------
REPUBLIC HAS MADE, AND MAY CONTINUE TO MAKE, VARIOUS FORWARD-LOOKING STATEMENTS
WITH RESPECT TO CREDIT QUALITY (INCLUDING DELINQUENCY TRENDS AND THE ALLOWANCE
FOR LOAN LOSSES), CORPORATE OBJECTIVES AND OTHER FINANCIAL AND BUSINESS MATTERS.
WHEN USED IN THIS DISCUSSION THE WORDS "ANTICIPATE," "PROJECT," "EXPECT,"
"BELIEVE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. REPUBLIC CAUTIONS THAT THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO NUMEROUS ASSUMPTIONS, RISKS AND UNCERTAINTIES, ALL OF WHICH MAY CHANGE OVER
TIME. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM FORWARD-LOOKING STATEMENTS.
- --------------------------------------------------------------------------------
In addition to factors disclosed by Republic, the following factors, among
others, could cause actual results to differ materially from such
forward-looking statements: pricing pressures on loan and deposit products;
competition; changes in economic conditions both nationally and in the Bank's
markets; the extent and timing of actions of the Federal Reserve Board;
customers' acceptance of the Bank's products and services; and the extent and
timing of legislative and regulatory actions and reforms.
OVERVIEW
Net income for the quarter ended September 30, 1999 was $3.0 million up from
$2.8 million for the same period in 1998. The increase in earnings during the
third quarter of 1999 reflects consistent financial performance in many areas of
the Bank. During the third quarter Republic's earnings benefited from increased
net interest income, reduced cost of funds, as well as continued declining
provisions for loan losses due to lower charge-offs.
Net income for the nine months ended September 30, 1999 was $9.1 million
compared to net income of $8.3 million for the same period in 1998, excluding
the one-time gain on sale of deposits. Despite the issuance of an additional 2
million shares as part of Republic's public offering in July 1998, diluted
earnings per share was constant at $.52 for both the nine months ended September
30, 1999 and 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
Nine Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per share data) 1999 1998 1999 1998
Gross Operating Profit $ 13,754 $ 12,912 $ 13,754 $ 17,028
Net Income 9,139 8,292 9,139 10,926
Basic Class A Common Earnings Per Share .54 .53 .54 .71
Diluted Class A Common Earnings Per Share .52 .52 .52 .68
Republic's total assets at September 30, 1999 grew to approximately $1.29
billion compared to $1.21 billion at December 31, 1998. Net loans increased $120
million from December 31, 1998 to $990 million at September 30, 1999. The
residential real estate portfolio grew $94 million while the commercial real
estate portfolio increased $34 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 1.52% at
September 30, 1999, compared to 2.29% at December 31, 1998.
Funding for the growth in the loan portfolio was derived from deposits and
Federal Home Loan Bank advances. Deposits increased to $810 million as of
September 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 $225 million at September 30, 1999.
During the quarter the Bank completed its move into the newly completed facility
in the Springhurst area in Louisville. A loan production office in southern
Indiana was also opened; the Bank's first location outside of Kentucky.
Construction continues to proceed on schedule for two new full-service banking
centers in Louisville, that would bring the total number of banking centers in
Kentucky's largest city to eleven upon completion.
Republic continues to expand its product lines and service delivery through the
Internet bank. Since the Internet bank's inception, 10% of the Bank's checking
account clients are transacting business through the Internet bank. Deposit
originations total approximately $28 million from 45 states. While continuing to
provide full banking services to existing customers through the Internet bank,
management also continues to explore opportunities to attract new customers
through this service delivery channel.
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 nine months ended September 30, 1999, Refunds Now generated
$944,000 in electronic tax refund loan fees and $1.2 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 third quarter 1999, net interest income was $11.6
million, up $916,000 over the $10.7 million attained during third quarter 1998.
Overall, the net interest rate spread increased from 3.14% during third quarter
of 1998 to 3.25% in the comparable quarter of 1999. The Bank's net interest
margin increased from 3.81% in third quarter 1998 to 3.87% in third quarter
1999. The increase in the net interest spread and margin occurred because the
yield on interest earning assets decreased 22 basis points while the rate paid
on liabilities decreased 43 basis points. During the third quarter 1999, average
interest-earning assets were $1.2 billion, an increase of $77 million over third
quarter 1998. Total average interest bearing liabilities increased from $979
million in the third quarter of 1998 to $1.0 billion in the third quarter of
1999.
Net interest income for the nine months ended September 30, 1999 was $35.4
million, up from $31.4 million attained in the same period during 1998.
Republic's net interest spread and margin increased 18 basis points for the nine
months ended September 30, 1999 over the comparable period in 1998. Supporting
Republic's increased net interest spread was $655,000 in additional loan fees
provided by Refunds Now and, to a lesser extent, mortgage banking activities
during the nine months ended September 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 nine
months ended September 30, 1999 and 1998.
Table 2 - Average Balance Sheet Rates for Third Quarter, 1999 and 1998
(dollars in thousands)
- --------------------------------------------------------------------------------
Three Months Ended Sept. 30, 1999 Three Months Ended Sept. 30, 1998
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $ 110,470 $ 1,490 5.40% $ 187,392 $ 2,702 5.77%
State and Political Subdivision
Securities 3,905 85 8.71% 4,188 92 8.79%
Other Investments 33,299 523 6.28% 11,807 217 7.35%
Mortgage-Backed Securities 71,028 1,108 6.24% 38,615 585 6.06%
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 6,455 95 5.87%
Total Loans and Fees 982,639 20,986 8.54% 875,954 19,826 9.05%
------- ------ ------- ------
Total Earning Assets 1,201,341 24,192 8.05% 1,124,411 23,517 8.37%
--------- ------ --------- ------
Less: Allowance for Loan Losses (7,894) (8,150)
Non-Earning Assets:
Cash and Due From Banks 21,502 22,223
Bank Premises and Equipment, Net 17,873 14,476
Other Assets 13,873 15,971
------ ------
Total Assets $ 1,246,695 $ 1,168,931
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 124,800 $ 831 2.66% $ 105,961 $ 850 3.21%
Money Market Accounts 160,484 1,850 4.61% 118,689 1,406 4.74%
Individual Retirement Accounts 27,016 357 5.29% 21,986 315 5.73%
Certificates of Deposit and Other
Time Deposits 404,413 5,265 5.21% 407,331 5,934 5.83%
Repurchase Agreements and Other
Borrowings 329,909 4,262 5.17% 324,990 4,302 5.29%
------- ----- ------- -----
Total Interest Bearing Liabilities 1,046,622 12,565 4.80% 978,957 12,807 5.23%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 86,030 82,143
Other Liabilities 11,935 13,241
Stockholders' Equity 102,108 94,590
------- ------
Total Liabilities and Stockholders'
Equity $ 1,246,695 $ 1,168,931
=========== ===========
Net Interest Income $ 11,627 $ 10,710
======= =========
Net Interest Spread 3.25% 3.14%
==== ====
Net Interest Margin 3.87% 3.81%
==== ====
- --------------------------------------------------------------------------------
For the purposes of these calculations, non-accruing loans are included in the
quarterly average loan amounts outstanding.
Table 3 - Average Balance Sheet Rates for Nine Months, 1999 and 1998
(dollars in thousands)
- --------------------------------------------------------------------------------
Nine months ended Sept. 30, 1999 Nine months ended Sept. 30, 1998
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earning Assets:
U.S. Treasury and U.S. Government
Agency Securities $ 126,885 $ 5,162 5.42% $ 173,659 $ 7,594 5.83%
State and Political Subdivision
Securities 3,944 260 8.79% 4,222 276 8.72%
Other Investments 32,572 1,546 6.33% 10,961 598 7.27%
Mortgage-Backed Securities 63,402 2,882 6.06% 41,056 1,899 6.17%
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 1,054 36 4.55% 21,687 918 5.64%
Total Loans and Fees 947,570 61,547 8.66% 842,072 58,046 9.19%
------- ------ ------- ------
Total Earning Assets 1,175,427 71,433 8.10% 1,093,657 69,331 8.45%
Less: Allowance for Loan Losses (7,928) (8,201)
Non-Earning Assets:
Cash and Due From Banks 20,151 20,439
Bank Premises and Equipment, Net 17,177 13,600
Other Assets 13,495 14,603
------ ------
Total Assets $ 1,218,322 $ 1,134,098
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Transaction Accounts $ 118,890 $ 2,392 2.68% $ 101,150 $ 2,450 3.23%
Money Market Accounts 138,886 4,661 4.47% 99,288 3,570 4.79%
Individual Retirement Accounts 25,565 1,019 5.31% 22,468 995 5.90%
Certificates of Deposit and Other
Time Deposits 411,782 16,260 5.26% 428,827 18,843 5.86%
Repurchase Agreements and Other
Borrowings 320,869 11,729 4.87% 309,567 12,076 5.20%
------- ------ ------- ------
Total Interest Bearing Liabilities 1,015,992 36,061 4.73% 961,300 37,934 5.26%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Deposits 87,753 78,315
Other Liabilities 11,816 13,435
Stockholders' Equity 102,761 81,048
------- ------
Total Liabilities and Stockholders'
Equity $ 1,218,322 $ 1,134,098
=========== ===========
Net Interest Income $ 35,372 $ 31,397
========= =========
Net Interest Spread 3.37% 3.19%
==== ====
Net Interest Margin 4.01% 3.83%
==== ====
- --------------------------------------------------------------------------------
For the purposes of these calculations, non-accruing loans are included in the
nine-month 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 September 30, 1999 Nine months ended September 30, 1999
Compared to Compared to
Three Months Ended September 30, 1998 Nine months ended September 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 $ (1,212) $ (1,109) $ (103) $ (2,432) $ (2,045) $ (387)
State and Political
Subdivision Securities (7) (6) (1) (16) (18) 2
Other Investments 306 395 (89) 948 1,208 (260)
Mortgage-Backed Securities 523 491 32 983 1,034 (51)
Federal Funds Sold (95) (95) (882) (896) 14
Total Loans and Fees (2) 1,160 2,415 (1,255) 3,501 7,272 (3,771)
----- ----- ----- ----- ----- -----
Net Change in Interest Income 675 2,091 (1,416) 2,102 6,555 (4,453)
--- ----- ----- ----- ----- -----
Interest Expense:
Interest Bearing
Transaction Accounts (19) 151 (170) (58) 430 (488)
Money Market Accounts 444 495 (51) 1,091 1,424 (333)
Individual Retirement Accounts 42 72 (30) 24 137 (113)
Certificates of Deposit and
Other Time Deposits (669) (43) (626) (2,583) (749) (1,834)
Repurchase Agreements and
Other Borrowings (40) 65 (105) (347) 441 (788)
-- -- --- --- --- ---
Net Change in Interest Expense (242) 740 (982) (1,873) 1,683 (3,556)
--- --- --- ----- ----- -----
Increase in Net Interest Income $ 917 $ 1,351 $ (434) $ 3,975 $ 4,872 $ (897)
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
(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 $1,709 and $1,054
for the periods ended September 30, 1999 and 1998, respectively.
NON-INTEREST INCOME. Non-interest income was $2.0 million during third quarter
1999, down from $2.5 million during third quarter of 1998. The decrease was
principally a result of a reduction in gains generated from sales of loans into
the secondary market and sales of securities.
Revenue from mortgage banking activities declined during the three-month period
ending September 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 third
quarter of 1999, market interest rates were above third quarter 1998 levels,
which led to lower secondary market originations and sales volumes. As a result,
gains from sales of loans decreased to $446,000 for the three-month period ended
September 30, 1999 compared to $1.0 million during the same period in 1998. Net
gains as a percentage of loans sold were 1.22% and 1.64% for the three-month
periods ending September 30, 1999 and 1998, respectively. Given the rise in
interest rates from 1998, management believes that the secondary market sales
volume, comprised of fixed rate products, will continue at current levels.
Management also believes that this reduction in secondary market gains on the
sale of loans will be partially offset by increased interest income from
expected growth in the Bank's adjustable-rate mortgage loan portfolio.
Non-interest income decreased from $12.5 million for the nine months ended
September 30, 1998 to $8.0 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, as well as reduced gains on the
sale of loans into the secondary market during 1999. This decrease was partially
offset by Refunds Now ERC fees, which generated $1.2 million in fee income
during 1999 compared to $379,000 recognized by the Bank during the comparable
1998 period.
NON-INTEREST EXPENSE. Total non-interest expense was $8.9 million in third
quarter 1999, compared to $8.5 million for third quarter 1998. Non-interest
expense increased from $25.2 million for the nine months ended September 30,
1998 to $28.1 million for the comparable period in 1999. The increases for both
the three and nine months ended September 30, 1999 were primarily attributable
to costs associated with salaries, employee benefits and occupancy and
equipment.
Salary and employee benefit expenses increased $536,000 for the third quarter
1999 over third quarter 1998, and $2.8 million for the nine months ended
September 30, 1999 compared to September 30, 1998. Republic's overall staffing
level increased to 466 full-time equivalent employees ("FTE's") at September 30,
1999, compared to 425 FTE's at September 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 the
Employee Stock Ownership Plan ("ESOP").
Occupancy and equipment expense decreased slightly from third quarter 1999,
compared to third quarter 1998. For the nine months ended September 30, 1999
occupancy and equipment expense increased 3.7% 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. 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 SEPTEMBER 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 3.5 years. Securities
available for sale decreased from $187 million at December 31, 1998 to $186
million at September 30, 1999. Republic has elected to primarily 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 increased
from $30 million at December 31, 1998 to $33 million at September 30, 1999.
Securities to-be-held-to-maturity consists primarily of U.S. Treasury and U.S
government Agencies with a weighted average maturity of 1.9 years.
LOANS. Net loans increased $120 million to $990 million at September 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, primarily consisting of adjustable-rate mortgages. 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.
By design, Republic's consumer loans decreased from $57 million at December 31,
1998 to $42 million at September 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 $10 million at September 30, 1999.
Republic's home equity portfolio decreased from $107 million at December 31,
1998 to $100 million at September 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
$204,000 in the third quarter of 1999, compared to $303,000 in the third quarter
of 1998. Overall net charge-offs decreased 47% during the third 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 $1.5 million for the nine months ended
September 30, 1999, compared to $1.7 million for the nine months ended September
30, 1998. Charge-offs of $200,000 related to tax refund loans are included in
the total charge-offs for the nine months ended September 30, 1999. No
charge-offs for these loans were attributed to the Bank during the third 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 approximately 33% during
year-to-date 1999 compared to the same period in 1998.
The allowance for loan losses remained at $7.9 million from December 31, 1998 to
September 30, 1999. Management believes, based on information presently
available, that it has adequately provided for loan losses at September 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 nine
months ended September 30, 1999 and 1998.
Table 5 - Summary of Loan Loss Experience
Three Months Ended Nine months ended
September 30, September 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 (134) (449) (78)
Commercial (40) (25) (68) (25)
Consumer (251) (677) (1,209) (2,180)
Tax Refund Loans (200)
-------- -------- -------- --------
Total (425) (702) (1,926) (2,283)
-------- -------- -------- --------
Recoveries:
Real Estate 1 10 5
Commercial 1 1 4
Consumer 119 127 438 373
-------- -------- -------- --------
Total 121 127 449 382
-------- -------- -------- --------
Net charge-offs (304) (575) (1,477) (1,901)
Provision for loan losses 204 303 1,477 1,687
-------- -------- -------- --------
Allowance for loan losses:
Balance-end of period $ 7,862 $ 7,962 $ 7,862 $ 7,962
======== ======== ======== ========
DEPOSITS. Total deposits were $810 million at September 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 12% since December 31, 1998. Republic's growth in
deposits was the result of management's ongoing emphasis on its commercial cash
management program, retail deposit gathering and its successful Internet bank.
As of September 30, 1999, Republic had $21.8 million in money market accounts
and $6.8 million in CD's which had been opened through the Internet. 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 $130 million at September
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 $225 million at September
30, 1999. The increase was primarily due to additional borrowings to fund loan
growth.
STOCKHOLDERS' EQUITY. Total stockholders' equity decreased from $104 million at
December 31, 1998 to $103 million at September 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 September 30, 1999, Republic had
$109,000 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 1.52% at September
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
September 30, December 31,
(dollars in thousands) 1999 1998
Loans on non-accrual status (1)(2) $ 3,416 $ 3,258
Loans past due 90 days or more 923 1,731
--------- ---------
Total non-performing loans 4,339 4,989
Other real estate owned 161 540
--------- ---------
Total non-performing assets $ 4,500 $ 5,529
========= =========
Percentage of non-performing loans to total loans .43% .57%
Percentage of non-performing assets to total loans .45% .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 December 31, 1998 to
$1.1 million at September 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 $51 million of repurchase agreements and money markets are
attributable to three customer relationships at September 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.
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
8.43% at September 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 September 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 $ 119,606 14.67% $ 65,243 8% $ 81,553 10%
Bank only $ 115,162 14.12% $ 65,240 8% $ 81,549 10%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 111,744 13.70% $ 32,621 4% $ 48,932 6%
Bank only $ 107,300 13.16% $ 32,620 4% $ 48,930 6%
Tier I Leverage Capital (to Average Assets)
Consolidated $ 111,744 8.96% $ 48,733 4% $ 60,916 5%
Bank only $ 107,300 8.61% $ 48,728 4% $ 60,910 5%
Kentucky banking regulations limit the amount of dividends that may be paid to
Republic by the Bank without prior approval of the Bank's regulatory agency.
Under these regulations, the amount of dividends that may be paid in any
calendar year is limited to the Bank's current year's net income, as defined in
the regulations, combined with the retained net income of the preceding two
years, less any dividends declared during those periods. At September 30, 1999,
the Bank had $20 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. Republic continues to experience steady loan demand that
requires management to continue to monitor interest rate and liquidity risk and
implement appropriate funding and balance sheet strategies. Management considers
interest rate risk to be Republic's most significant market risk. Interest rate
risk is the exposure to adverse changes in the net interest income as a result
of market fluctuations in interest rates.
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 From December 31, 1998 to
September 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 5.6% at September 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 decrease by an estimated 0.5% at
September 30, 1999 compared to an increase of 11.0% at December 31, 1998.
The change in Republic's interest sensitivity profile resulted from an increase
in the origination of longer term adjustable rate mortgage (ARM) products and
further enhancements to assumptions used in the model. In order to moderate the
interest rate sensitivity, Republic promoted the 5/1, 7/1, and 10/1 ARM
products. Republic ceased offering the 10/1 and 7/1 products and is currently
primarily marketing the 3/1 ARM product.
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
September 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 $ 75,579 $ 80,436 $ 85,339 $ 89,694 $ 93,583
Investments 13,134 13,538 13,952 14,239 14,520
Short-term investments 191 262 338 401 453
----------- ---------- ---------- ----------- ---------
Total interest income $ 88,904 $ 94,236 $ 99,629 $ 104,334 $ 108,556
Projected interest expense
Deposits $ 30,100 $ 32,007 $ 33,914 $ 35,882 $ 38,094
Other borrowings 13,424 15,522 17,620 20,176 22,623
----------- ---------- ---------- ----------- ---------
Total interest expense 43,524 47,529 51,534 56,058 60,717
Net interest income $ 45,380 $ 46,707 $ 48,095 $ 48,276 $ 47,839
Change from base $ (2,715) $ (1,388) $ 181 $ (256)
% Change from base (5.65)% (2.89)% 0.38% (0.53)%
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 has implemented its plan to ensure that data processing systems
can properly handle the century change. Management does not expect, based on its
testing of critical systems, that a business interruption is likely; however,
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. These mainframe software upgrades and
modifications for major applications have been installed, tested 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 upgraded,
with final upgrades scheduled for completion by December 1, 1999.
Republic has identified selected employees whose primary function is year 2000
compliance. The loss of these employees could have a significant adverse effect
on the final implementation of Republic's year 2000 plan. Republic initiated a
year 2000 employee retention program, that to date remains highly successful.
The program was designed to encourage and promote the retention of key
information system employees.
Year 2000 remediation has resulted in minimal 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 management believes that both the Bank
and its software providers have been able to adequately address the Bank's
requirements 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 for use in
the event of unexpected circumstances in compliance with regulatory agency
recommendations.
In carrying out its overall year 2000 plan, Republic will incur certain
operational expenses and has replaced 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 will be charged off when
the applicable software is removed from service. Republic has incurred costs of
approximately $732,000 attributable to year 2000 remediation and anticipates
total costs and charges to be in an approximate range of $1.2 to $1.5 million. A
large proportion of the remaining budgeted costs to be incurred are related to
the year 2000 employee retention program, with the majority not being fully
earned until the end of 2000. 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 third quarter of 1999, Republic issued 17,000 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: November 15, 1999 /s/ Steven E. Trager
Steven E. Trager
Chief Executive Officer
Principal Financial Officer:
Date: November 15, 1999 /s/ Mark A. Vogt
Mark A. Vogt
Chief Financial Officer
EXHIBIT INDEX
Incorporated
Exhibit Description By Reference To
- ------- ----------- ---------------
11 Statement Regarding Computation Filed as Exhibit 11 on page 35 of
of Per Share Earnings this Form 10-Q for the period ended
September 30, 1999
27 Financial Data Schedule Filed as Exhibit 27 on page 36 of
this Form 10-Q for the period ended
September 30, 1999
Exhibit 11.
Statement Regarding Computation of Per Share Earnings
See Item 1, Note 7 "Earnings Per Share" for calculations.