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 March 31, 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: 14,594,825 shares of Class A Common Stock and 2,169,444 shares of Class B Common Stock as of May 11, 1999. The Exhibit index is on page 32. This filing contains 35 pages (including this facing sheet).
REPUBLIC BANCORP, INC. FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements 3-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 PART II - OTHER INFORMATION Item 2. Changes in Securities 30 Item 6. Exhibits and Reports on Form 8-K 30 Signatures 31
PART I ITEM 1 REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> March 31, December 31, 1999 1998 ASSETS: <S> <C> <C> Cash and due from banks $ 29,191 $ 37,446 Federal funds sold 1,200 2,500 Securities available for sale 211,020 186,936 Securities to be held to maturity 11,733 29,985 Mortgage loans held for sale 10,854 38,167 Loans, less allowance for loan losses of $7,962 (1999) and $7,862 (1998) 896,291 870,031 Federal Home Loan Bank stock 14,284 14,036 Accrued interest receivable 8,657 8,825 Premises and equipment, net 16,532 15,870 Other assets 4,761 3,888 ------------ ------------- TOTAL $ 1,204,523 $ 1,207,684 ============ ============= LIABILITIES: Deposits: Non-interest bearing $ 87,005 $ 80,345 Interest bearing 676,741 666,802 Securities sold under agreements to repurchase and other short-term borrowings 114,928 148,659 Other borrowed funds 205,592 190,222 Accrued interest payable 3,923 3,769 Guaranteed preferred beneficial interests in Company's subordinated debentures 6,352 6,402 Other liabilities 8,729 7,643 ------------ ------------- Total liabilities 1,103,270 1,103,842 ------------ ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Class A and Class B Common stock, no par value 4,134 4,149 Additional paid-in capital 33,916 34,014 Retained earnings 67,659 65,469 Unearned Employee Stock Ownership Plan shares (3,828) Net unrealized appreciation (depreciation) on securities Available for sale, net of tax (628) 210 ------------ ------------- Total stockholders' equity 101,253 103,842 ------------ ------------- TOTAL $ 1,204,523 $ 1,207,684 ============ ============= </TABLE> See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(UNAUDITED) THREE MONTHS ENDED MARCH 31, 1999 AND 1998(in thousands, except per share data) <TABLE> <CAPTION> 1999 1998 <S> <C> <C> INTEREST INCOME: Loans, including fees $ 20,511 $ 19,123 Securities available for sale 2,707 1,725 Securities to be held to maturity: Taxable 332 1,367 Non-taxable 23 28 FHLB dividends 250 188 Other 32 354 ----------- ----------- Total interest income 23,855 22,785 ----------- ----------- INTEREST EXPENSE: Deposits 8,063 8,532 Short-term borrowings 1,245 1,216 Long-term debt 2,404 2,667 ----------- ----------- Total interest expense 11,712 12,415 ----------- ----------- NET INTEREST INCOME 12,143 10,370 PROVISION FOR LOAN LOSSES 854 643 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,289 9,727 ----------- ----------- NON-INTEREST INCOME: Net gain on sale of loans 1,397 1,009 Electronic refund check fees 861 297 Service charges on deposit accounts 848 753 Other service charges and fees 143 100 Loan servicing income 118 166 Net gain on available for sale securities 130 324 Net gain on sale of deposits 4,116 Other 171 147 ----------- ----------- Total non-interest income 3,668 6,912 ----------- ----------- NON-INTEREST EXPENSE: Salaries and employee benefits 5,630 4,076 Occupancy and equipment 1,982 1,862 Communication and transportation 454 426 Marketing and development 333 305 Supplies 254 260 Other 1,236 1,145 ----------- ----------- Total non-interest expense 9,889 8,074 ----------- ----------- INCOME BEFORE INCOME TAXES 5,068 8,565 INCOME TAXES 1,704 3,041 ----------- ----------- NET INCOME $ 3,364 $ 5,524 =========== =========== </TABLE> See notes to consolidated financial statements. (Continued)
REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(CONTINUED) (in thousands, except per share data) <TABLE> <CAPTION> 1999 1998 <S> <C> <C> OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Change in unrealized gain (loss) on securities $ (752) $ 81 Reclassification of realized amount (86) (211) ------------- ------------ Net unrealized gain (loss) recognized in comprehensive income (838) (130) ------------- ------------ COMPREHENSIVE INCOME $ 2,526 $ 5,394 ============= ============ EARNINGS PER SHARE Class A $ .20 $ .37 Class B $ .20 $ .37 EARNINGS PER SHARE ASSUMING DILUTION Class A $ .19 $ .35 Class B $ .19 $ .35 </TABLE> 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) <TABLE> <CAPTION> Net Unrealized Unearned Appreciation/ Empl.Stock (Depreciation) Common Stock Additional Ownershipon Available Total Class A Class B Paid-In Retained Plan For Sale Stockholders' Shares Shares Amount Capital Earnings Shares Securities Equity <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE, January 1, 1999 14,869 2,305 $ 4,149 $ 34,014 $ 65,469 $ 210 $ 103,842 Conversion of Class B to Class A 101 (101) Dividend Declared Common: Class A ($.0275 per share) (401) (401) Class B ($.0250 per share) (55) (55) Repurchase of Class A Common (72) (16) (143) (718) (877) 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) 3,470 shares committed to be released under the Employee Stock Ownership Plan 3 (4) 45 41 Net changes in unrealized appreciation/ (depreciation) on securities available for sale (838) (838) Net Income 3,364 3,364 ------- ------ ------- -------- -------- ------- -------- -------- BALANCE, March 31, 1999 14,606 2,204 $ 4,134 $ 33,916 $ 67,659 $(3,828) $(628) $101,253 ======= ====== ======= ======== ======== ======= ======== ======== </TABLE> See notes to consolidated financial statements.
REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (in thousands) <TABLE> <CAPTION> 1999 1998 <S> <C> <C> OPERATING ACTIVITIES: Net income $ 3,364 $ 5,524 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization of premises and equipment 950 838 Amortization and accretion of securities 171 57 FHLB stock dividends (248) (188) Provision for loan losses 854 643 Net gain on sale of securities (130) (324) Net gain on sale of loans (1,397) (1,009) Net gain on sale of deposits (4,116) Proceeds from sale of loans 97,642 58,043 Origination of mortgage loans held for sale (68,932) (73,164) Employee Stock Ownership Plan expense 41 Changes in assets and liabilities: Accrued interest receivable 168 (230) Other assets 298 (595) Accrued interest payable 154 4,116 Other liabilities 1,097 (2,108) ----------- ----------- Net cash provided by (used in) operating activities 34,032 (12,513) ----------- ------------ INVESTING ACTIVITIES: Purchases of securities available for sale (62,123) (81,269) Purchases of Federal Home Loan Bank stock (2,404) Proceeds from maturities of securities to be held to maturity 18,280 18,522 Proceeds from maturities and paydowns of securities available for sale 16,511 794 Proceeds from sales of securities available for sale 20,190 39,928 Net (increase) decrease in loans (27,854) 10,208 Purchases of premises and equipment (1,612) (2,001) Disposal of premises and equipment 878 ----------- ----------- Net cash used in investing activities (36,608) (15,344) ------------ ------------ FINANCING ACTIVITIES: Net increase in deposits 16,599 62,151 Sale of deposits (61,564) Net change in securities sold under agreement to repurchase and other short-term borrowings (33,731) (660) Payments on other borrowings (52,055) (35,241) Proceeds from other borrowings 67,425 90,000 Proceeds from stock options exercised 59 Purchase of shares for Employee Stock Ownership Plan (3,873) Repurchase of Class A Common Stock (877) Cash dividends paid (467) (405) ------------ ------------ Net cash provided by (used in) financing activities (6,979) 54,340 ------------ ----------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (9,555) 26,483 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,946 24,546 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,391 $ 51,029 =========== =========== </TABLE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (in thousands) <TABLE> <CAPTION> 1999 1998 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: <S> <C> <C> Cash paid during the period for: Interest $ 11,558 $ 8,299 =========== =========== Income taxes $ 302 $ 2,581 =========== =========== </TABLE> 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 (dba 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 period ending March 31, 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 June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This standard changes the way public companies report information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Operating segments are parts of a company for which separate information is available which is evaluated by the chief operating decision maker in deciding how to allocate resources and in evaluating performance. Required disclosures for operating segments include total segment revenues, total segment profit or loss, and total segment assets. The standard also requires disclosures regarding revenues derived from products or services (or similar groups of products or services), countries in which the company derives revenue or holds assets, and about major customers, regardless of whether this information is used in operating decision making. Republic adopted the disclosure requirements in its 1998 annual report, and in interim periods in 1999. The 1999 interim period disclosures are required to include comparable 1998 information. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This new standard requires companies to record derivatives on the balance sheet as assets or liabilities at fair value. Depending on the use of the derivative and whether it qualifies for hedge accounting, gains or losses resulting from changes in the values of those derivatives would either be recorded as a component of net income or as a change in stockholders' equity. Republic is required to adopt this new standard January 1, 2000. Management has not yet determined the impact of this standard. 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: <TABLE> <CAPTION> March 31, 1999 (in thousands) Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value <S> <C> <C> <C> <C> U.S. Treasury Securities and U.S. Government Agencies $ 129,939 $ 185 $ (342) $ 129,782 Mortgage-backed securities 62,721 22 (491) 62,252 Corporate bonds 19,311 (325) 18,986 ----------- --------- ---------- ----------- Total securities available for sale $ 211,971 $ 207 $ (1,158) $ 211,020 =========== ========= ========== =========== </TABLE> Securities To Be Held To Maturity: <TABLE> <CAPTION> March 31, 1999 (in thousands) Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value <S> <C> <C> <C> U.S. Treasury Securities and U.S. Government Agencies $ 7,302 $ $ (66) $ 7,236 Obligations of state and political subdivisions 3,966 162 4,128 Mortgage-backed securities 465 (25) 440 ----------- --------- --------- ----------- Total securities to be held to maturity $ 11,733 $ 162 $ (91) $ 11,804 =========== ========= ========= =========== </TABLE> Securities having an amortized cost of $156.3 million and a fair value of $155.9 million at March 31, 1999, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.
<TABLE> <CAPTION> 3. LOANS March 31, 1999 December 31, 1998 -------------------------------------------- (in thousands) <S> <C> <C> Residential real estate $ 547,118 $ 520,583 Commercial real estate 124,766 118,293 Real estate construction 56,933 47,396 Commercial 27,099 26,381 Consumer 50,754 56,728 Home equity 96,723 106,845 Other 2,290 3,146 ---------- ---------- Total loans 905,683 879,372 Less: Unearned interest income and unamortized loan fees (1,430) (1,479) Allowance for loan losses (7,962) (7,862) ---------- ----------- Loans, net $ 896,291 $ 870,031 ========== =========== </TABLE> The following table sets forth the changes in the allowance for loan losses: <TABLE> <CAPTION> Three months ended March 31, 1999 1998 (in thousands) <S> <C> <C> Balance, beginning of period $ 7,862 $ 8,176 Provision charged to income 854 643 Charge-offs (894) (702) Recoveries 140 117 ---------- --------- Balance, end of period $ 7,962 $ 8,234 ========== ========= </TABLE> Information about Republic's investment in impaired loans is as follows: <TABLE> <CAPTION> March 31, 1999 December 31, 1998 -------------------------------------------- (in thousands) <S> <C> <C> Gross impaired loans $ 1,107 $ 1,116 Less: Related allowance for loan losses 100 100 --------- -------- Net impaired loans with related allowances 1,007 1,016 Impaired loans with no related allowances --------- -------- Total $ 1,007 $ 1,016 ========= ======== Average impaired loans outstanding $ 1,007 $ 1,116 ========= ======== </TABLE>
4. DEPOSITS <TABLE> <CAPTION> March 31, 1999 December 31, 1998 -------------------------------------------- (in thousands) <S> <C> <C> Demand (NOW, Super NOW and Money Market) $ 180,096 $ 179,804 Savings 12,873 12,330 Money market certificates of deposit 43,650 35,139 Individual retirement accounts 24,721 23,353 Certificates of deposit, $100,000 and over 77,868 77,365 Other certificates of deposit 308,617 309,938 Brokered deposits 28,916 28,873 ----------- ----------- Total interest bearing deposits 676,741 666,802 Total non-interest bearing deposits 87,005 80,345 ----------- ----------- Total $ 763,746 $ 747,147 =========== =========== </TABLE> 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. <TABLE> <CAPTION> March 31, 1999 December 31, 1998 --------------------------------------------- (in thousands) <S> <C> <C> Average outstanding balance $ 122,086 $ 115,280 Average interest rate 4.08% 4.21% Maximum outstanding at month end $ 127,084 $ 148,659 End of period $ 114,928 $ 148,659 </TABLE>
6. OTHER BORROWED FUNDS <TABLE> <CAPTION> March 31, December 31, 1999 1998 --------------------------------- (in thousands) <S> <C> <C> Federal Home Loan Bank convertible fixed rate advance (1) $ 50,000 $ 50,000 Federal Home Loan Bank variable interest rate advances, with weighted average interest rate of 4.79% at March 31, 1999, due through 1999 68,425 52,800 Federal Home Loan Bank fixed interest rate advances, with weighted average interest rate of 5.30% at March 31, 1999, due through 2008 87,167 87,422 ------------ ------------ Total $ 205,592 $ 190,222 ============ ============ </TABLE> (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 $71 million additional from the Federal Home Loan Bank. Republic also has unsecured lines of credit totaling $40 million and secured lines and letters of credit of $180 million available through various financial institutions. Aggregate future principal payments on borrowed funds as of March 31, 1999 are as follows: Year (in thousands) 1999 $ 69,210 2000 26,098 2001 284 2002 Thereafter 110,000 ------------ Total $ 205,592 ============
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: <TABLE> <CAPTION> Three Months Ended March 31, 1999 1998 <S> <C> <C> Earnings Per Share Net Income available to common shares outstanding $ 3,364 $ 5,524 ============ ========== Weighted average shares outstanding 16,934 14,958 ============ ========== </TABLE> <TABLE> <CAPTION> Three Months Ended March 31, 1999 1998 <S> <C> <C> Earnings Per Share Assuming Dilution Net Income $ 3,364 $ 5,524 Add: Interest expense, net of tax benefit, on assumed conversion of guaranteed preferred beneficial interests in Republic's subordinated debentures 89 90 ------------ ------------ Net Income available to common shareholder assuming conversion $ 3,453 $ 5,614 ============ ============ Weighted average shares outstanding 16,934 14,958 Add dilutive effects of assumed conversion and exercise: Convertible guaranteed preferred beneficial interest in Republic's subordinated debentures 640 646 Stock options 563 294 ------------ ------------ Weighted average shares and dilutive potential shares outstanding 18,137 15,898 ============ ============ </TABLE> 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 quarter of 1999, 3,470 shares of stock were committed to be released, resulting in ESOP compensation expense of $90,000. On March 31, 1999, none of the 300,000 shares in the plan had been allocated. The fair value of the unallocated shares was $3.3 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. <TABLE> <CAPTION> March 31, 1999 Mortgage Consolidated Banking Banking Totals (in thousands) <S> <C> <C> <C> Net interest income $ 12,048 $ 95 $ 12,143 Other revenues 2,313 1,355 3,668 Provision for loan loss 854 854 Net gain on sale of loans 1,397 1,397 Income tax expense 1,434 270 1,704 Segment profit 2,840 524 3,364 Segment assets 1,193,024 11,499 1,204,523 </TABLE> <TABLE> <CAPTION> March 31, 1998 Mortgage Consolidated Banking Banking Totals (in thousands) <S> <C> <C> <C> Net interest income $ 10,291 $ 79 $ 10,370 Other revenues 5,999 913 6,912 Provision for loan loss 643 643 Net gain on sale of loans 1,009 1,009 Income tax expense 2,846 195 3,041 Segment profit 5,178 346 5,524 Segment assets 1,085,820 26,756 1,112,576 </TABLE>
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 three months ended March 31, 1999 decreased $2.2 million compared to the first quarter of 1998. This decrease was solely attributable to the one-time gain realized from the sale of deposits at the Mayfield banking center, which occurred in January 1998. Excluding this one-time gain, net income for the three months ended March 31, 1999 increased $474,000, or 16%, over the comparable 1998 period. On a per share basis, Class A and B Common Stock diluted earnings for the quarter ending March 31, 1999 was down $.16 compared to the first quarter of 1998. Excluding the one-time gain on sale of deposits, Class A and B Common Stock diluted earnings per share for the quarter ending March 31, 1999 was $0.19, up from $0.18 per share in first quarter 1998. Diluted earnings per share, excluding the one-time gain on sale of deposits, increased during 1999 even though an additional 2 million shares of Common Stock were issued during Republic's public offering in July 1998. Republic's book value per common share increased over 23% from $4.91 at March 31, 1998 to $6.06 per share at March 31, 1999.
The following table summarizes selected financial information regarding Republic's financial performance. <TABLE> <CAPTION> Table 1 Excluding One-Time Including One-Time Deposit Sales Deposit Sales Quarters Ended March 31, Quarters Ended March 31, (in thousands, except per share data) 1999 1998 1999 1998 <S> <C> <C> <C> <C> Gross Operating Profit $ 5,068 $ 4,449 $ 5,068 $ 8,565 Net Income 3,364 2,890 3,364 5,524 Basic Class A and B Common Earnings Per Share 0.20 0.19 0.20 0.37 Diluted Class A and B Common Earnings Per Share 0.19 0.18 0.19 0.35 </TABLE> The increase in earnings during the first quarter of 1999, excluding the one-time gain on sale of deposits, reflects solid financial performance in many areas of the Bank, particularly mortgage lending. Republic's loan originations increased 14% to $198 million during the first quarter of 1999 over the comparable period in 1998. This growth in loan volume resulted in not only additional interest income, but also contributed significantly to increased earnings realized from the sale of loans into the secondary market. While portfolio loan growth remained strong, Republic's total assets remained constant at $1.2 billion during the first quarter of 1999. This was primarily due to a reduction in mortgage loans held for sale from $38 million at December 31, 1998 to $11 million at March 31, 1999. This reduction is attributable to a moderation of secondary market loan refinancings during the period, indicating that income from secondary market loan sales may not continue at recent levels. Net portfolio loans increased $26 million from December 31, 1998 to $896 million at March 31, 1999. The residential real estate portfolio grew $27 million. In addition to the strong increase in residential real estate lending, the construction loan portfolio increased $10 million and the commercial real estate loan portfolio increased $6 million during the period. This growth was attributable to continued portfolio loan demand in Republic's markets as well as increased production from Republic's construction and commercial loan business lines. The home equity portfolio decreased $10 million while the consumer loan portfolio decreased by $6 million during the first quarter of 1999 (See discussion of loans on page 23). Funding for the growth in the loan portfolio was derived from retail deposits and Federal Home Loan Bank (FHLB) advances. Deposits increased to $764 million at first quarter 1999 from $747 million at year-end 1998. Of this increase, non-interest bearing deposits accounted for $7 million. FHLB advances increased from $190 million at December 31, 1998 to $206 million at March 31, 1999. Republic is on schedule to open a loan production office in Clarksville, Indiana during the summer of 1999, the Bank's first presence in Indiana. Republic will also be adding two new full-service banking centers in Louisville later this year, bringing its total number of banking centers in Kentucky's largest city to eleven. The Bank also expects to further develop its product lines and delivery system capabilities. By third quarter 1999, Republic plans to introduce its Internet bank operations, providing for a full range of personal computer accessible services to the Bank's existing retail and commercial clients. Internet banking is also expected to expand Republic's potential client base by providing deposit and loan products to clients outside of the Bank's traditional service area. Additionally, the Bank will also be offering for the first time, a full range of investment and trust services to its clients beginning in the second quarter of 1999.
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 Mayfield banking center loan portfolio in that transaction. 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 first quarter of 1999, Refunds Now generated $889,000 in electronic tax refund loan fees and $861,000 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 first quarter 1999, net interest income was $12.1 million, up $1.7 million over the $10.4 million attained during first quarter 1998. Overall, the net interest rate spread increased from 3.31% during first quarter of 1998 to 3.51% in the comparable quarter of 1999. The Bank's net interest margin increased from 3.92% in first quarter 1998 to 4.20% in first quarter 1999. The increase in the net interest spread and margin occurred because the yield on interest earning assets decreased 37 basis points while the rate paid on liabilities decreased 57 basis points. Also supporting Republic's increased net interest spread was $649,000 in additional loan fees provided by Refunds Now and mortgage banking activities during the first quarter of 1999 over the comparable period in 1998. Net interest margin increased more than net interest spread because the amount of assets supported by non-interest bearing deposits, other liabilities, and equity increased to 17.4% from 14.6% in 1998. During the first quarter 1999, average interest-earning assets were $1.16 billion, an increase of $99 million over first quarter 1998. Total average interest bearing liabilities increased from $935 million in the first quarter of 1998 to $988 million in the first quarter of 1999. Tables 2 and 3 provide detailed information as to average balance, interest income/expense, and rates by major balance sheet category for the three months ended March 31, 1999 and 1998.
Table 2 - Average Balance Sheet Rates for March 31, 1999 and 1998 (dollars in thousands) <TABLE> <CAPTION> 1999 1998 ---- ---- Average Average Average Average ASSETS Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- Earning Assets: <S> <C> <C> <C> <C> <C> <C> U.S. Treasury and U.S. Government Agency Securities $138,471 $1,891 5.46% $ 157,199 $ 2,307 5.87% State and Political Subdivision Securities 3,990 87 8.72% 4,263 92 8.63% Other Investments 31,594 492 6.23% 10,166 188 7.40% Mortgage-Backed Securities 56,760 842 5.93% 46,773 721 6.17% Federal Funds Sold and Securities Purchased Under Agreements to Resell 2,876 32 4.45% 24,783 354 5.71% Total Loans and Fees 922,226 20,511 8.90% 814,254 19,123 9.39% ------- ------ ------- ------ Total Earning Assets 1,155,917 23,855 8.25% 1,057,438 22,785 8.62% --------- ------ --------- ------ Less: Allowance for Loan Losses (7,929) (8,221) Non-Earning Assets: Cash and Due From Banks 18,447 21,199 Bank Premises and Equipment, Net 16,460 12,795 Other Assets 12,883 12,410 ------ ------ Total Assets $ 1,195,778 $ 1,095,621 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Liabilities: Transaction Accounts $ 73,414 $ 349 1.90% $ 94,303 $ 762 3.23% Money Market Accounts 121,993 1,342 4.40% 79,333 986 4.97% Individual Retirement Accounts 23,953 322 5.38% 22,739 339 5.96% Certificates of Deposit and Other Time Deposits 458,606 6,050 5.28% 438,325 6,445 5.88% Repurchase Agreements and Other Borrowings 309,644 3,649 4.71% 300,799 3,883 5.16% ------- ----- ------- ----- Total Interest Bearing Liabilities 987,610 11,712 4.74% 935,499 12,415 5.31% Non-Interest Bearing Liabilities: Non-Interest Bearing Deposits 92,899 72,663 Other Liabilities 11,949 14,157 Stockholders' Equity 103,320 73,302 ------- ------ Total Liabilities and Stockholders' Equity $ 1,195,778 $ 1,095,621 =========== =========== Net Interest Income $12,143 $ 10,370 ======= ======== Net Interest Spread 3.51% 3.31% ===== ===== Net Interest Margin 4.20% 3.92% ===== ===== </TABLE> 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 3 - Volume/Rate Variance Analysis (in thousands) <TABLE> <CAPTION> Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Increase/(Decrease) due to Total Net Change Volume Rate <S> <C> <C> <C> Interest Income (1): U.S. Treasury and Government Agency Securities $ (395) $ (275) $ (120) State and Political Subdivision Securities (26) (6) (20) Other Investments 304 396 (92) Mortgage-Backed Securities 121 154 (33) Federal Funds Sold and Securities Purchased Under Agreements to Resell (322) (313) (9) Total Loans and Fees (2) 1,388 2,536 (1,148) ----- ----- ----- Net Change in Interest Income 1,070 2,492 (1,422) ----- ----- ----- Interest Expense: Interest Bearing Transaction Accounts (413) (169) (244) Money Market Accounts 356 530 (174) Individual Retirement Accounts (17) 18 (35) Certificates of Deposit and Other Time Deposits (395) 298 (693) Repurchase Agreements and Other Borrowings (234) 114 (348) ---- --- --- Net Change in Interest Expense (703) 791 (1,494) --- --- ----- Increase in Net Interest Income $ 1,773 $ 1,701 $ 72 ======= ======= ==== </TABLE> (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 $1,122,000 and $473,000 for the three months ended March 31, 1999 and 1998, respectively.
NON-INTEREST INCOME. Non-interest income was $3.7 million during first quarter 1999, down from $6.9 million during first quarter of 1998. 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 sale of deposits, non-interest income increased by $872,000. The increase was principally a result of gains generated from sales of loans into the secondary market, ERC fees from Refunds Now and sales of investment securities. Revenue from mortgage banking activities during the three-month period ending March 31, 1999 has been positively influenced by an increase in secondary market sales volume. Management anticipates that this sales volume may decrease as secondary market loan originations have moderated during the current period. Gains from sales of loans were $1.4 million and $1.0 million for the three-month periods ending March 31, 1999 and 1998, respectively. The market interest rate environment heavily influences secondary market residential loan originations and correspondingly, consumer refinance activity. Net gains as a percentage of loans sold were 1.43% and 1.74% for the three-month periods ending March 31, 1999 and 1998, respectively. Republic continually evaluates the decision to sell servicing or retain servicing rights on loans sold in the secondary market. Management anticipates that it will begin retaining servicing on loans sold in the second quarter of 1999. However, since 1995 Republic has traditionally sold loans servicing released in order to offset downward market pressure on loan sale pricing. The sale of a significant number of loans with servicing released, coupled with normal loan paydowns and payoffs, has resulted in a decline in the size of the loan servicing portfolio and a corresponding decline in loan servicing income compared to the same period in 1998. As of March 31, 1999, Republic's $220 million servicing portfolio generated income of $118,000 compared to $166,000 during the comparable 1998 period. Refunds Now ERC fees also generated $861,000 in fee income compared to $297,000 recognized by the Bank during the comparable 1998 period, an increase of 190%. The increase in Electronic tax refund check fees during the first quarter of 1999 was attributable to both the acquisition of Refunds Now, Inc. and a 45% increase in products sold. Service charges on deposit accounts increased to $848,000 from $753,000 for the three-month period ended March 31, 1999 and 1998. Republic continues to market its transaction accounts and actively manage its deposit account service charge collection activities. NON-INTEREST EXPENSE. Total non-interest expense was $9.9 million in first quarter 1999, compared to $8.1 million for first quarter 1998. The increase for the three months ended March 31, 1999 was primarily attributable to costs associated with salaries and employee benefits. Excluding the one-time gain on sale of deposits, Republic's non-interest expense ratio (non-interest expense divided by the sum of net interest income and non-interest expense) at March 31, 1999 was 63% compared to 61% at March 31, 1998. Salary and employee benefit expense increased 38% for the first quarter 1999 over first quarter, 1998. Republic opened two new banking centers in its Louisville, Kentucky market and expanded its Elizabethtown, Kentucky banking center. Additional expense was also recognized as a result of the formation of an Employee Stock Ownership Plan ("ESOP") during the first quarter of 1999. Republic actively expanded its Commercial Lending, Cash Management, and Trust activities during the period. This rise was also attributable to increased commissions through Republic's mortgage banking activities and annual merit salary increases. Republic's overall staffing level increased to 480 full-time equivalent employees ("FTE's") at March 31, 1999, compared to 406 FTE's at March 31, 1998. Occupancy and equipment expense increased to $2.0 million in first quarter 1999, compared to $1.9 million for first quarter 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 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 proposed 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 MARCH 31, 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 3.15 years. Securities available for sale increased from $187 million at December 31, 1998 to $211 million at March 31, 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 March 31, 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 6.16 years. LOANS. Net loans increased $26 million to $896 million at March 31, 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 a continued favorable rate environment and consumer demand for Republic's portfolio products. Republic also had healthy growth in its real estate construction portfolio due to steady demand for new single family housing. The rise in commercial real estate lending was primarily due to the Bank's continued emphasis on the active pursuit of lending opportunities within the Bank's markets. By design, Republic's consumer loans decreased from $57 million at December 31, 1998 to $51 million at March 31, 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's "All Purpose" loans, with total outstandings of $6 million at March 31, 1999 and $8 million at December 31 1998, are originated through Republic's banking centers. "Pre Approved" loans decreased from $12 million at December 31, 1998 to $10 million at March 31, 1999. These loans were originated through direct mail. Management plans to continue to allow the "All Purpose" and "Pre Approved" portfolios to reduce in the near term. Republic's home equity portfolio decreased from $107 million at December 31, 1998 to $97 million at March 31, 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 $854,000 in the first quarter, 1999, compared to $643,000 in the first quarter of 1998. Charge-offs of $200,000 related to tax refund loans are included in the total charge-offs for the first quarter of 1999. No charge-offs for these loans were attributed to the Bank during the first quarter of 1998. 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 slightly during first quarter 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 March 31, 1999. Management believes, based on information presently available, that it has adequately provided for loan losses at March 31, 1999.
Table 5 below depicts the allowance activity by loan type for the three months ended March 31, 1999 and 1998. Table 5 - Summary of Loan Loss Experience <TABLE> <CAPTION> Three Months Ended March 31, 1999 1998 (in thousands) <S> <C> <C> Allowance for loan losses:, Balance-beginning of period $ 7,862 $ 8,176 Charge-offs: Real Estate (180) (19) Commercial (7) Consumer (507) (683) Tax Refund Loans (200) --------- --------- Total (894) (702) --------- --------- Recoveries: Real Estate 6 3 Commercial 4 Consumer 134 110 --------- --------- Total 140 117 --------- --------- Net charge-offs (754) (585) Provision for loan losses 854 643 --------- --------- Allowance for loan losses: Balance-end of period $ 7,962 $ 8,234 ========= ========= </TABLE> DEPOSITS. Total deposits were $764 million at March 31, 1999 compared to $747 million at December 31, 1998. Republic's growth in deposits was the result of management's ongoing emphasis on retail deposit gathering and its recently instituted commercial cash management program. Republic plans to continue its deposit gathering initiatives by utilizing aggressive pricing strategies and offering competitive products in its existing markets. OTHER BORROWED FUNDS. Other borrowed funds, which consist of FHLB advances, increased from $190 million at December 31, 1998 to $206 million at March 31, 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 public funds and high balance commercial accounts. STOCKHOLDERS' EQUITY. Total stockholders' equity decreased from $104 million at December 31, 1998 to $101 million at March 31, 1999. The decrease is primarily due to 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.
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. The Bank's level of delinquent loans declined favorably to 1.90 % at March 31, 1999, compared to 2.29 % at December 31, 1998. At March 31, 1999, Republic had $234,000 in consumer loans 90 days or more past due compared to $256,000 at December 31, 1998. Table 6 provides information related to non-performing assets and loans 90 days or more past due. Total non-performing assets increased slightly from December 31, 1998 to March 31, 1999. Table 6 - Non-Performing Loans <TABLE> <CAPTION> March 31, December 31, (dollars in thousands) 1999 1998 <S> <C> <C> Loans on non-accrual status (1)(2) $ 3,223 $ 3,258 Loans past due 90 days or more 2,176 1,731 --------- --------- Total non-performing loans 5,399 4,989 Other real estate owned 704 540 --------- --------- Total non-performing assets $ 6,103 $ 5,529 ========= ========= Percentage of non-performing loans to total loans .60% .57% Percentage of non-performing assets to total loans .67% .63% </TABLE> (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 remained constant from December 31, 1998 to March 31, 1999 at $1.1 million.
LIQUIDITY Republic maintains sufficient liquidity in order to fund loan demand and routine deposit withdrawal activity. Liquidity is managed by retaining sufficient liquid assets in the form of investment securities and core deposits to meet demand. Funding and cash flows can also be realized from the available for sale portion of the securities portfolio and paydowns from the loan portfolio. Republic's banking centers also provide access to their retail deposit markets. Approximately $49 million of repurchase agreements and money markets are attributable to three customer relationships at March 31, 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 capital to assets ratio was 8.64% at March 31, 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 March 31, 1999. Table 7 - Capital Ratios <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> <C> Total Risk Based Capital (to Risk Weighted Assets) Consolidated $ 116,177 15.48% $ 60,051 8% $ 75,064 10% Bank only $ 110,934 14.78% $ 60,048 8% $ 75,060 10% Tier I Capital (to Risk Weighted Assets) Consolidated $ 108,215 14.42% $ 30,025 4% $ 45,038 6% Bank only $ 102,972 13.72% $ 30,024 4% $ 45,036 6% Tier I Leverage Capital (to Average Assets) Consolidated $ 108,215 9.05% $ 47,831 4% $ 59,789 5% Bank only $ 102,972 8.61% $ 47,829 4% $ 59,787 5% </TABLE> 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 March 31, 1999, the Bank had $16 million of retained earnings available for payment of dividends.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK Asset/liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be Republic's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income as a result of market fluctuations in interest rates. Management regularly monitors interest rate risk in relation to prospective market and business conditions. The Board of Directors sets policy guidelines establishing maximum limits on the Bank's interest rate risk exposure. Management monitors and adjusts exposure to interest rate fluctuations as influenced by the Bank's loan and deposit portfolios. Republic 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 during the first quarter. 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 13.7% at March 31, 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 7.7% at March 31, 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 <TABLE> <CAPTION> March 31, 1999 Decrease in Rates Increase in Rates 200 100 100 200 Basis Points Basis Points Base Basis Points Basis Points (dollars in thousands) <S> <C> <C> <C> <C> <C> Projected interest income Loans $ 65,113 $ 70,901 $ 77,057 $ 82,703 $ 88,009 Investments 11,778 12,494 13,125 13,562 13,988 Short-term investments 166 253 358 460 564 ----------- ---------- ---------- ----------- --------- Total interest income $ 77,057 $ 83,648 $ 90,540 $ 96,725 $ 102,561 Projected interest expense Deposits $ 27,472 $ 29,377 $ 31,280 $ 33,251 $ 35,469 Other borrowings 11,640 13,471 15,303 17,589 19,732 ----------- ---------- ---------- ----------- --------- Total interest expense 39,112 42,848 46,583 50,840 55,201 Net interest income $ 37,945 $ 40,800 $ 43,957 $ 45,885 $ 47,360 Change from base $ (6,012) $ (3,157) $ 1,928 $ 3,403 % Change from base (13.68)% (7.18)% 4.39% 7.74% </TABLE> <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> Projected interest income Loans $ 63,043 $ 68,835 $ 75,394 $ 81,537 $ 86,959 Investments 11,111 12,011 13,060 13,583 14,102 Short-term investments 240 354 493 635 773 ----------- ---------- ---------- ----------- --------- Total interest income $ 74,394 $ 81,200 $ 88,947 $ 95,755 $ 101,834 Projected interest expense Deposits $ 27,287 $ 29,197 $ 31,126 $ 33,111 $ 35,446 Other borrowings 12,368 14,366 16,364 18,361 20,359 ----------- ---------- ---------- ----------- --------- Total interest expense 39,655 43,563 47,490 51,472 55,805 Net interest income $ 34,739 $ 37,637 $ 41,457 $ 44,283 $ 46,029 Change from base $ (6,718) $ (3,820) $ 2,826 $ 4,572 % Change from base (16.20)% (9.21)% 6.82% 11.03% </TABLE>
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 will also be required for certain other data processing applications. Republic has identified selected employees whose primary function is year 2000 compliance. The loss of these employees could have a material adverse effect on the implementation of Republic's year 2000 plan. Republic 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 will be 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 is therefore developing and implementing contingency plans that are scheduled to be in place by the end of the second quarter of 1999. In carrying out its overall year 2000 plan, Republic will incur certain operational expenses and may replace some existing software that has not been fully amortized. Most of the expenditures associated with software application upgrades represent capitalizable costs that would have been incurred in the normal course of business. The operating expenses will be expensed as incurred, and the unamortized cost of software replaced, if any, will be charged off when the applicable software is removed from service. Republic has 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. 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 first quarter of 1999, the Company issued 101,000 shares of Class A Common Stock upon conversion of shares of Class B Common Stock by shareholders of the Company 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. During the first quarter of 1999, the Company also issued 5,000 shares of Class A Common Stock upon conversion of 500 shares of Trust Preferred Securities (liquidation amount $50,000). The Trust Preferred Securities represent beneficial interests in convertible subordinated debt securities of the company and through those debt securities can be converted into Class A Common Stock at a conversion rate of 10 shares of Class A Common for each Trust Preferred Security. The exemption from registration relied upon was Section (3)(a)(9) of the Securities Act of 1933, and when the trust preferred securities were originally sold, Rule 506 of Regulation D 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 32.
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: 05/14/99 /s/ Steven E. Trager Steven E. Trager Chief Executive Officer Principal Financial Officer: Date: 05/14/99 /s/ Mark A. Vogt Mark A. Vogt Chief Financial Officer
EXHIBIT INDEX <TABLE> <CAPTION> Incorporated Exhibit Description By Reference To <S> <C> <C> 11 Statement Regarding Computation Filed as Exhibit 11 on page 33 of this of Per Share Earnings Form 10-Q for the period ended March 31, 1999 27 Financial Data Schedule Filed as Exhibit 27 on page 34 of this Form 10-Q for the period ended March 31, 1999 </TABLE>