-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F2trFfKyyCcE7DLvAs70UMrT7F+JOu+/3O3AjVz9ymNMJNUqOtIcFIJU7Aa8JijV hqlUuv/i/TLFKcGmttFFzg== 0000921557-97-000001.txt : 19970401 0000921557-97-000001.hdr.sgml : 19970401 ACCESSION NUMBER: 0000921557-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REPUBLIC BANCORP INC /KY/ CENTRAL INDEX KEY: 0000921557 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 610862051 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-77324 FILM NUMBER: 97569024 BUSINESS ADDRESS: STREET 1: REPUBLIC CORPORATE CENTER STREET 2: 601 WEST MARKET ST CITY: LOUISVILLE STATE: KY ZIP: 40202 BUSINESS PHONE: 5025843600 10-K 1 FORM 10-K ANNUAL REPORT FOR REPUBLIC BANCORP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange as of 1934 for the fiscal year ended December 31, 1996 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 33-77324 REPUBLIC BANCORP, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0862051 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 601 West Market Street, Louisville, Kentucky 40202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (502) 584-3600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class on which registered None None 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 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. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 21, 1997, the estimated aggregate market value of the shares of the Registrant's Class A Common Stock and Class B Common Stock held by non-affiliates of the Registrant was approximately $13,732,000 and $2,436,000, respectively, (based on a $7.48 and $7.48 book value per share, respectively). As of March 14, 1997, Registrant had outstanding 6,051,611 shares of Class A Common Stock and 1,170,907 shares of Class B Common Stock. This report consists of 70 consecutively numbered pages. An index to the exhibits to this report appears on page 61. TABLE OF CONTENTS Page Item PART I 1. Business 3 2. Properties 5 3. Legal Proceedings 6 4. Submission of Matters to a Vote of Security Holders 6 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 6 6. Selected Consolidated Financial Data 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 8. Financial Statements and Supplementary Data 24 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 52 PART III 10. Directors and Executive Officers of the Registrant 53 11. Executive Compensation 55 12. Security Ownership of Certain Beneficial Owners and Management 58 13. Certain Relationships and Related Transactions 58 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 60 PART I ITEM 1. BUSINESS General Business Overview Republic Bancorp, Inc. ("Republic"), headquartered in Louisville, Kentucky, is a bank holding company for its subsidiary Republic Bank & Trust Company (the "Bank"). The Bank is a commercial banking and trust corporation organized and chartered under the laws of the Commonwealth of Kentucky. Republic was incorporated in Kentucky on January 2, 1974, as a bank holding company under the Bank Holding Company (BHC) Act of 1956, as amended. Republic's principal business, through its wholly owned subsidiary, provides banking services to individuals and businesses located principally within the Commonwealth of Kentucky. These banking services are offered through the Bank's twenty one banking centers located in eleven cities in the North Central, Central and Western regions of Kentucky. The Bank's lending activities include loans secured by residential and commercial properties, as well as the origination of general business and consumer loans. The primary regulator for Republic is the Board of Governors of the Federal Reserve System. The regulators for the Bank include both the Federal Deposit Insurance Corporation (FDIC) and the Commonwealth of Kentucky Department of Financial Institutions. Description of Business Republic primarily conducts business through its subsidiary, the Bank. The Bank's principal business activities include the acceptance of deposits for checking, savings and time deposit accounts and the origination of secured and unsecured loans. The Bank also engages in certain mortgage banking activities, and on a limited basis, provides trust services to its customers. The Bank's lending services include the origination of commercial, business, and consumer loans. Operating revenues are derived primarily from interest and fees earned from the Bank's loan portfolio, and interest on securities of the United States Government and agencies, states, and municipalities. The Bank also markets its unsecured consumer loan products through its banking center network and through direct mail delivery channels. The Bank's direct mail program extends to markets outside Kentucky. The Bank is not dependent upon a single customer, or a few customers, the loss of any one or more of which would have a material adverse effect on the Bank's business. Within the Commonwealth of Kentucky, the Bank has identified three predominant market areas comprised of the North Central market, the Central Kentucky market and the Western Kentucky market. The North Central market includes Louisville, the largest city in Kentucky. The Bank's principal office and seven of its banking centers are located in Louisville. The Bank's Central Kentucky market includes the cities of Shelbyville, Frankfort, Lexington, Elizabethtown, and Bowling Green. The Bank's Western Kentucky market is comprised of the cities of Owensboro, Mayfield, Paducah, Benton and Murray. Competition The Bank actively competes with several local and regional commercial banks for deposits, loans and other banking related financial services. There is strong competition in the Bank's markets from other financial institutions as well as other "non-bank" companies which engage in similar activities. Some of the Bank's competition are not subject to the degree of regulatory review and restrictions which apply to the Bank. In addition, the Bank must compete with much larger financial institutions which, while predominantly headquartered in other states, aggressively compete for market share in Kentucky. These competitors attempt to gain market share through their financial products mix, pricing strategies and banking center locations. Legislative developments related to interstate branching and banking in general, by providing large banking institutions easier access to a broader marketplace, are creating more pressure on smaller financial institutions to consolidate. The Bank also competes with insurance companies, savings banks, consumer finance companies, investment banking firms, brokerage houses, mutual fund managers, investment advisors and credit unions. Retail establishments compete for loans by offering credit cards and retail installment contracts for the purchase of goods and merchandise. It is anticipated that competition from both bank and "non-bank" entities will continue to grow in the near future. In addition, Kentucky banks will be permitted to merge with out of state banks effective June 1, 1997, subject to certain conditions. Governmental Policy and Regulation Republic and the Bank are subject to the policies of various regulatory authorities. In particular, bank holding companies and their subsidiaries are affected by the credit and monetary policies of the Federal Reserve Board and their activities are regulated under the Bank Holding Company Act. An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives include changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits. These policies have a significant effect on the operating results of financial institutions. It is not possible to predict the nature or timing of future changes in monetary and fiscal policies, or the effect such policies may have on the Bank's future earnings. Republic and the Bank are subject to numerous federal and state laws and regulations affecting their business and also must undergo periodic examination by federal and state financial institution examiners. The earnings of the Bank, and therefore the earnings of Republic, are affected not only by the laws and regulations applicable to the banking business, but also by the policies and interpretations of regulatory authorities. Business Segments The Bank engages in traditional commercial banking activities which include commercial, business, and consumer lending, as well as, the offering of deposit products. It is also engaged in trust, insurance, item processing, and other related financial institution lines of business. The Bank also conducts a mortgage banking operation as part of its core business activities. The primary function of the mortgage banking division is the origination, sale and servicing of single-family mortgage loans. These loans are originated by salaried employees and commissioned originators. The majority of loans are processed in accordance with secondary market underwriting guidelines. Typically, adjustable rate loans and other loans which do not precisely meet secondary market guidelines are held in the Bank's portfolio. Once closed, the secondary market loans are packaged into similar groups and sold principally to FNMA, FHLMC and other institutional investors. Substantially all fixed rate loans in process are covered by forward commitments to these investors which limits the Bank's interest rate risk. The Bank does not retain the servicing on the majority of its loans sold in the secondary market. When administering loans with the servicing retained by the Bank, the responsibility of collecting principal and interest payments, escrowing for taxes and insurance, and remitting payments to the secondary market investors remains with the Bank. A fee is received by the Bank for performing these standard servicing functions. It is the general policy of the Bank to sell its secondary market loans without recourse. Employee Relations As of December 31, 1996, the Bank had 450 employees of which 387 were full-time and 63 part-time. The Bank currently maintains an employee benefit program providing, among other benefits, a managed health care program, a 401(k) retirement plan and life insurance. These employee benefits, as a whole, are considered by management to be generally competitive with employee benefits provided by other employers in Kentucky. The Bank believes its future success will depend, in part, on its ability to continue to attract and retain highly skilled retail, technical, and managerial personnel in order to maintain its quality delivery of banking services. None of the Bank's employees are subject to a collective bargaining agreement, and neither Republic nor the Bank have ever experienced a work stoppage. The Bank's employee relations are deemed by management to be satisfactory. ITEM 2. PROPERTIES Republic's executive offices and principal support and operational functions are located at 601 West Market Street in Louisville, Kentucky. All of Republic's banking centers are located in Kentucky. The location of the twenty one banking centers, their respective approximate square footage and their form of occupancy is described in the following table: Square Owned (O)/ Banking Centers Footage Leased (L) NORTH CENTRAL MARKET 601 West Market Street, Louisville 43,000 L 2801 Bardstown Road, Louisville 5,000 L 661 South Hurstbourne Parkway, Louisville 14,000 L 4921 Old Brownsboro Road, Louisville 2,000 L 5320 Dixie Highway, Louisville 5,000 O 4655 Outer Loop, Louisville 3,000 L 3950 Kresge Way, Louisville 300 L CENTRAL KENTUCKY MARKET 1641 Midland Trail, Shelbyville 5,000 O 100 Highway 676, Frankfort 4,000 O 1001 Versailles Road, Frankfort 4,000 O 651 Perimeter Drive, Lexington 4,000 L 2401 Harrodsburg Road, Lexington 4,000 O 380 West Main Street, Lexington 750 L 502 West Dixie Avenue, Elizabethtown 4,000 O 1700 Scottsville Road, Bowling Green 2,000 O WESTERN KENTUCKY MARKET 3500 Frederica Street, Owensboro 5,000 O 408 East Broadway, Mayfield 6,000 O 507 Main Street, Benton 4,000 O 1201 Main Street, Murray 2,000 O 2701 Lone Oak, Paducah 5,000 O 1601 Broadway, Paducah 10,000 O During 1996, the West Market Street, Bardstown Road and South Hurstbourne Parkway locations, were leased from an affiliated person. (See details regarding these leases in Item 13, "Certain Relationships and Related Transactions"). Neither the location of any particular office nor the term of any lease is deemed material to the business of the Bank. There are no known environmental issues of a negative nature affecting the owned or leased properties of the Bank. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of operations, Republic and the Bank are defendants in various legal proceedings. In the opinion of management, there is no proceeding pending or, to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic and the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Pursuant to an amendment to its Articles of Incorporation effective February 20, 1996, Republic's existing Common Stock was reclassified as Class B Common Stock and a new class of Common Stock was created and designated as Class A Common Stock (see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations- Capital"). Neither class of Republic's Common Stock have an established public trading market. There were only a limited number of trading transactions in Republic's Common Stock during 1996 to the knowledge of Republic. As of March 14, 1997, Republic had approximately 418 holders of the Class A Common Stock and 356 holders of the Class B Common Stock. During 1996 and 1995, Republic declared and paid the following quarterly dividends per share on its Common Stock: 1996 First Second Third Fourth Quarter Quarter Quarter Quarter Class A Common Stock $.055 $.055 $.055 $.055 Class B Common Stock $.050 $.050 $.050 $.050 1995 First Second Third Fourth Quarter Quarter Quarter Quarter Common Stock $.25 $.25 $.25 $.25 Republic's dividend paying policy takes into account a number of factors, based on available information. These factors include the performance of the Bank, its dividend paying ability and regulatory considerations. Republic presently anticipates that comparable cash dividends (adjusted for the reclassification of the Common Stock and any additional stock splits or other similar transactions) will continue to be paid in the future. The Class A Common Stock was created pursuant to an amendment to Republic's Articles of Incorporation, effective February 20, 1996 (the "Amendment"), which reclassified Republic's Common Stock as Class B Common Stock. By an amendment to the Articles of Incorporation of Republic, each share of the outstanding common stock of Republic was automatically exchanged for the same number of shares of the Class B Common Stock of Republic effective February 20, 1996. A total of 1,203,578 shares of Class B Common Stock were outstanding by virtue of such amendment. On February 29, 1996, a total of 6,017,890 shares of Class A Common Stock were distributed as a dividend to the Company's common shareholders of record on February 20, 1996, at the rate of 5 shares of Class A Common Stock for each share of Class B Common Stock. No consideration was received by Republic in connection with the issuance of shares of Class A Common Stock and Class B Common Stock, as described above, and Republic does not admit that such issuance involved a "sale" of securities for the purpose of the Securities Act of 1933. To the extent the issuance is deemed to be a sale, under Rule 145 of the Securities Act of 1933, the sale was exempt under Section 3(a)(9) of that Act. The securities were issued in exchange by Republic with its existing shareholders exclusively, and no commission or other remuneration was paid or given, directly or indirectly, for soliciting such exchange. The Class B Common Stock is convertible into Class A Common Stock, at the rate of one share of Class A Common Stock for each share of Class B Common Stock, in accordance with the procedures set out in the Articles of Incorporation. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth Republic's selected historical financial information from 1992 through 1996. This information should be read in conjunction with the Consolidated Financial Statements of Republic and the related Notes. Factors affecting the comparability of certain indicated periods are discussed in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, (in thousands) 1996 1995 1994 1993 1992 INCOME STATEMENT DATA: Interest Income $81,986 $71,133 $47,375 $43,377 $46,333 Interest Expense 43,855 37,720 22,513 21,119 25,728 Net Interest Income 38,131 33,413 24,862 22,258 20,605 Provision for Loan Losses 9,149 4,268 537 391 244 Non-Interest Income 7,097 7,520 6,997 8,154 6,487 Non-Interest Expense 31,409 24,505 22,216 22,199 19,880 Income Before Taxes 4,670 12,160 9,106 7,822 6,968 Net Income 2,727 7,788 6,170 5,864 6,078 BALANCE SHEET DATA: Total Assets $1,140,882 $891,347 $736,009 $646,697 $603,831 Total Loans, Net of Unearned Income and Allowance for Loan Losses 759,424 668,193 571,950 516,414 479,244 Allowance for Loan Losses 6,241 3,695 1,827 1,627 1,622 Total Deposits 783,141 734,443 590,036 516,871 472,712 Repurchase Agreements and Other Short-Term Borrowings 181,634 21,729 12,732 13,228 30,091 Other Borrowed Funds 106,974 68,063 77,060 67,721 60,751 Total Stockholders' Equity 59,019 58,502 47,045 40,669 34,384
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Republic reported earnings of $2.7 million in 1996, a decrease from $7.8 million reported in 1995. During 1996, Republic maintained its quarterly dividend payments to shareholders. The decrease in earnings was primarily attributable to additional charge-offs in Republic's consumer loan portfolio, increased reserves for loan losses, a one-time charge of $2.3 million due to the federally mandated one-time assessment on the Bank's SAIF deposits, and additional expense associated with an aggressive expansion strategy during 1996 resulting in opening five additional banking centers. The expansion activity during 1996 provided Republic with additional growth opportunities in its markets. Assets continued to grow at a record pace during 1996, increasing 28% to $1.1 billion in total assets. Loans increased 14% in 1996 due to management's focus on its core business, residential lending. The asset growth was funded by increases in core deposits supplemented by borrowings.
Year Ended December 31, ------------------------------------------ 1996 1995 1994 1993 1992 Net income ($000's) $2,727 $7,788 $6,170 $5,864 $6,078 Net income per share $.30 $.99 $.86 $.84 $.88 Return on assets .29% 0.95% 0.93% 0.92% 1.01% Return on equity 4.57% 14.46% 13.71% 14.10% 16.79% Average Equity to 6.30% 6.56% 6.65% 5.95% 5.26% Average Assets Dividend Payout Ratio 68% 16% -- -- -- Cash Dividends Per Common Share: Class A Common Share $0.22 -- -- -- -- Class B Common Share $0.20 -- -- -- -- Common Shares -- $1.00 -- -- --
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. 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. RESULTS OF OPERATIONS Net Interest Income The principal source of Republic's revenue is net interest income. Net interest income is the difference between interest income on interest-earning assets such as loans and securities and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities and the level of interest rates. The change in net interest income is typically measured by net interest spread and net interest margin. Net interest spread is the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin is determined by dividing net interest income by average interest-earning assets. Table 1 on page 10 provides detailed information as to average balances, interest income/expense, and rates by major balance sheet category for fiscal years 1994 through 1996. Table 2 on page 11 provides an analysis of the changes in net interest income attributable to changes in rates and changes in volume of interest-earning assets and interest-bearing liabilities. Table 1 - Average Balance Sheet Rates - for December 31, 1996, 1995 and 1994 (dollars in thousands)
1996 1995 1994 ----------------------------- ---------------------------- ---------------------------- ASSETS Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Earning Assets: U.S.Treasury and U.S. Government Agency Securities $147,376 $9,040 6.13% $115,897 $7,469 6.44% $84,728 $3,808 4.49% State and Political Subdivision Securities 4,557 390 8.56% 4,689 407 8.68% 4,741 405 8.54% Other Investments 5,303 413 7.79% 5,055 342 6.77% 4,585 264 5.76% Mortgage-Backed Securities 705 36 5.11% 796 40 5.03% 924 34 3.68% Federal Funds Sold 23,847 1,276 5.35% 26,144 1,537 5.88% 13,014 494 3.80% Total Loans and Fees 724,669 70,831 9.77% 632,775 61,338 9.69% 519,658 42,370 8.15% -------- ------- -------- ------- -------- ------- Total Earning Assets 906,457 81,986 9.04% 785,356 71,133 9.06% 627,650 47,375 7.55% Less: Allowance for Loan Losses (6,196) (2,795) (1,687) Non-Earning Assets: Cash and Due From Banks 20,830 16,597 21,792 Bank Premises and Equipment, Net 14,391 11,284 10,873 Other Assets 10,974 11,195 6,924 -------- -------- -------- Total Assets $946,456 $821,637 $665,552 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Liabilities: Transaction Accounts $84,706 $2,308 2.72% $81,783 $2,448 2.99% $78,243 $1,933 2.47% Money Market Accounts 35,557 1,622 4.56% 18,999 892 4.69% 10,878 275 2.53% Individual Retirement Accounts 34,956 2,156 6.17% 31,089 1,949 6.27% 19,571 981 5.01% Certificates of Deposits and Other Time Deposits 515,436 29,998 5.82% 475,750 27,223 5.72% 360,684 15,406 4.27% Repurchase Agreements and Other Borrowings 148,026 7,771 5.25% 91,952 5,208 5.66% 86,380 3,918 4.54% -------- ------- -------- ------- -------- ------- Total Interest Bearing Liabilities 818,681 43,855 5.36% 699,573 37,720 5.39% 555,756 22,513 4.05% Non-Interest Bearing Liabilities: Non-Interest Bearing 57,041 54,540 50,826 Deposits Other Liabilities 11,090 13,657 13,955 Stockholders' Equity 59,644 53,867 45,015 -------- -------- -------- Total Liabilities and Stockholders' Equity $946,456 $821,637 $665,552 ======== ======== ======== Net Interest Income $38,131 $33,413 $24,862 ======= ======= ======= Net Interest Spread 3.68% 3.67% 3.50% ==== ==== ==== Net Interest Margin 4.21% 4.25% 3.96% ==== ==== ====
- -------------------------------------------------------------------------------- Calculations include non-accruing loans in the 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 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 2 - Volume/Rate Variance Analysis (in thousands)
Year Ended December 31, 1996 Year Ended December 31, 1995 compared to compared to Year Ended December 31, 1995 Year Ended December 31, 1994 ---------------------------- ---------------------------- INCREASE/(DECREASE) INCREASE/(DECREASE) due to due to Total Total Net Net Change Volume Rate Change Volume Rate INTEREST INCOME (1): U.S. Treasury and Government Agency Securities $1,571 $2,029 ($458) $3,661 $1,401 $2,260 State and Political Subdivision Securities (17) (11) (6) 2 (4) 6 Other Investments 71 17 54 78 27 51 Mortgage-Backed Securities (4) (5) 1 6 (5) 11 Federal Funds Sold (261) (135) (126) 1,043 495 548 Total Loans and Fees (2) 9,493 8,908 585 18,968 9,223 9,745 ------ ------ ----- ------ ------ ------ NET CHANGE IN INTEREST INCOME 10,853 10,803 50 23,758 11,137 12,621 ------ ------ ----- ------ ------ ------ INTEREST EXPENSE: Interest Bearing Transaction Accounts (140) 87 (227) 515 87 428 Money Market Accounts 730 777 (47) 617 205 412 Individual Retirement Accounts 207 242 (35) 968 577 391 Certificates of Deposit and Other Time Deposits 2,775 2,271 504 11,817 4,915 6,902 Repurchase Agreements and Other Borrowings 2,563 3,176 (613) 1,290 254 1,036 ------ ------ ------ ------- ------ ------ NET CHANGE IN INTEREST EXPENSE 6,135 6,553 (418) 15,207 6,038 9,169 ------ ------ ------ ------- ------ ------ INCREASE IN NET INTEREST INCOME $4,718 $4,250 $468 $8,551 $5,099 $3,452 ====== ====== ===== ====== ====== ======
(1) Interest for loans on non-accrual status has been excluded from Interest Income. (2) The amount of fees in interest on loans was $520, $139, and $475 for the years ended December 31, 1996, 1995, and 1994, respectively. Net interest income increased 14.1% in 1996, following a 34.4% increase in 1995. The increase in 1996 is attributable to Republic's loan growth, particularly residential lending (see "Loan Portfolio" for discussion on increase in loan volume). The increase in 1995 was due to substantial growth in the unsecured consumer loan portfolio which favorably impacted the Bank's spread. Average interest-earning assets increased 15.4% in 1996, compared to a 25.1% increase in 1995. The 1996 and 1995 growth resulted from increased loan volume supported by an increase in investment securities. During 1996, average interest-bearing liabilities grew $119.1 million to $818.7 million, an increase of 17% over 1995. Certificates of deposit increased as a result of continued competitive pricing and additional advertising. Republic's asset growth was also funded by an increase in overnight repurchase agreements (see discussion on "Short-Term Borrowings"). The Bank did not acquire any brokered deposits during 1996. In 1995, average interest-bearing liabilities grew 26% over 1994. The increase was primarily in certificates of deposit and other time deposits which rose $115 million. Brokered deposits represented $48 million of Republic's increase in other time deposits during 1995. Republic's net interest margin was 4.21% in 1996, 4.25% in 1995 and 3.96% in 1994. Net interest margin, net interest spread, average rate on earning assets, and average yield on costing liabilities were all substantially unchanged when comparing 1996 to 1995. The largest change in any one of these four categories was 4 basis points. This change occurred because loan growth, which occurred ratably during the year, was funded through deposit growth and other traditional financing sources. The increase in securities sold under agreements to repurchase and other borrowed funds occurred late in the year. Republic's increasing leverage from 1994 through 1996 has put some downward pressure on the net interest margin. Interest- bearing liabilities were 86% of total assets in 1996, compared to 85% and 84% in 1995 and 1994. As a result, a higher portion of Republic's assets are financed with interest-bearing liabilities rather than with equity. Equity financing does not result in a charge to earnings in the income statement. This increased leverage is the primary reason that Republic's net interest margin decreased 4 basis points from 1995 to 1996 while the net interest spread increased 1 basis point. Non-Interest Income Table 3 illustrates Republic's primary sources of non-interest income. Non-interest income decreased 5.6% to $7.1 million in 1996, compared to $7.5 million in 1995 and $7.0 million in 1994. Table 3 - Analysis of Non-Interest Income
Percent Increase Year Ended December 31, (Decrease) ------------------------------ ---------------------- (dollars in thousands) 1996 1995 1994 1996/95 1995/94 Service charges on deposit accounts $2,642 $1,974 $1,473 33.8% 34.0% Other service charges and fees 445 1,434 782 (69.0%) 83.4% Bank card services 1,010 1,263 819 (20.0%) 54.2% Net gain on sale of loans 1,212 1,083 1,625 11.9% (33.4%) Loan servicing income 829 895 915 (7.4%) (2.2%) Other 959 871 1,383 10.1% (37.0%) ------ ------ ------ Total $7,097 $7,520 $6,997 (5.6%) 7.5% ====== ====== ======
Service charges on deposit accounts increased during 1996 as a result of a rise in the number of transaction accounts. Management also restructured its fee schedule and reduced the level of fee waivers. The 1995 increase in service charges was primarily attributable to growth in the number of transaction accounts. Other service charges and fees, having shown a strong increase in 1995 over 1994, experienced a 69.0% decrease in 1996. The decline was a result of decreased credit life insurance commissions earned as Republic slowed its unsecured consumer loan originations. The decline in Bank card fees from 1995 to 1996 resulted from eliminating the annual fees on Republic's Bank card accounts. The increased Bank card fees in 1995 were due to increased transaction volume. This increase was also the result of an agreement with another financial institution. This agreement allowed for equal sharing of revenues and expenses and also provided additional servicing fees to Republic. Other non-interest income increased moderately in 1996 compared to 1995. In 1994, other non-interest income included a non-recurring payment from an affiliate pursuant to an agreement with one of the Bank's former regulatory agencies. Revenue from mortgage banking activities from 1994 through 1996 has been influenced by changes in origination and sales volume and the sale of most loans with servicing released. Proceeds from sales of loans were $104 million, $87 million, and $143 million in 1996, 1995, and 1994, respectively. Secondary market residential loan originations are heavily influenced by interest rates, which were primarily responsible for the changes in volume. Net gains from sales of loans closely follow sales volume. Net gains as a percentage of loans sold were 1.16%, 1.25%, and 1.14% in 1996, 1995, and 1994, respectively. Management made the change from selling loans with servicing retained to servicing released in 1995 to offset downward pressure on loan sale prices and maintain these percentages. However, the sale of most loans servicing released has resulted in a decline in the loan servicing portfolio and a related decline in loan servicing income. Non-Interest Expense As indicated in Table 4, total non-interest expense increased by 28% to $31.4 million in 1996, compared to $24.5 million in 1995 and $22.2 million in 1994. The increase in non-interest expense is primarily attributable to the addition of five new banking centers. Also during 1996, Republic paid a one-time FDIC assessment of $2.3 million with respect to the deposits of the Bank insured in the FDIC's Savings Association Insurance Fund (SAIF). Without this charge Republic's non-interest expense would have only increased by 19%. Non-interest expense levels are often measured using a non-interest expense ratio (non-interest expense divided by the sum of net interest income and non-interest income). Republic's non-interest expense ratio was 69% (64% exclusive of one-time SAIF Assessment) in 1996 compared to 60% in 1995 and 70% in 1994. Republic's expansion during 1996 and continued technology enhancements will result in increased non-interest expense during 1997. Management does not anticipate the opening of new banking centers in 1997 at the rate achieved during 1996 Table 4 - Analysis of Non-Interest Expense
Percent Year Ended December 31, Increase/(Decrease) ------------------------------------ ------------------- (dollars in thousands) 1996 1995 1994 1996/95 1995/94 Salaries and employee benefits $13,236 $11,334 $10,233 16.8% 10.8% Occupancy and equipment 6,623 5,346 4,758 23.9% 12.4% Communication and transportation 1,548 1,407 1,126 10.0% 25.0% Marketing and development 1,620 1,308 896 23.9% 46.0% FDIC Insurance 3,277 1,245 1,336 163.2% (6.8%) Supplies 973 883 702 10.2% 25.8% Litigation recovery (738) Other 4,132 3,720 3,165 11.1% 17.5% ------- ------- ------- Total $31,409 $24,505 $22,216 28.2% 10.3% ======= ======= =======
Salary and employee benefits expense increased approximately 16.8% and 10.8% in 1996 and 1995, respectively. This expense item comprised 42.1% of the total operating expenses in 1996, compared to 46.3% in 1995. Republic increased staffing levels in 1996 to 419 full-time equivalent employees (FTE's) compared to 361 FTE's in 1995 and 342 FTE's in 1994. The increase was primarily due to additional staffing requirements at the five new banking centers. Average earning assets per employee increased to $2.3 million in 1996 compared to $2.2 million in 1995 and $1.8 million in 1994. Occupancy and equipment expenses rose 23.9% in 1996 and 12.4% in 1995. The 1996 increases were primarily due to depreciation and equipment maintenance expenses associated with new enhancements to loan and customer support systems. The $1.3 million increase in 1996 also reflects the addition of five new banking centers. Republic's expansion during 1996 and continued technology enhancements will result in increased non-interest expense during 1997. Communication and transportation expenses increased 10.0% in 1996 and 25.0% in 1995. The 1996 increase was primarily a result of the five additional banking centers. Republic also incurred additional costs associated with telecommunication enhancements which are also expected to continue in 1997. Increases during 1995 resulted from additional mailing costs incurred for Republic's unsecured consumer loan programs. Marketing and development expense rose 23.9% in 1996, following a 46.0% increase in 1995. The increases in 1996 and 1995 primarily resulted from advertising and promotional expenditures incurred for Republic's unsecured consumer loan products and deposit gathering initiatives. Marketing expenses can fluctuate from period to period based upon the timing and scope of various management initiatives. Insurance expense increased $2 million from 1995 to 1996. This increase is principally a result of the federally mandated one-time assessment on the Bank's SAIF deposits in the amount of $2.3 million. Approximately 45% of the Bank's deposits are insured by the FDIC's Bank Insurance Fund (BIF). The remaining 55% are insured by the FDIC's Savings Association Insurance Fund (SAIF) resulting from the Bank's merger with Republic Savings Bank, F.S.B.. The recent federal legislation which mandated the one-time assessment provided for a future ongoing reduction in the FDIC's insurance rate premiums on SAIF insured deposits. Such legislation could increase the Bank's BIF deposit assessment in the future. Management anticipates that Republic will ultimately benefit from the charge attributable to the one-time SAIF assessment through a reduction of the FDIC's overall insurance rate premiums from their previous levels. Republic expensed $738,000 in 1993 as a result of an adverse legal verdict. The legal verdict was subsequently overturned in 1995 by a federal appellate court. This previously expensed judgment was reversed in 1995 which had a favorable impact on total non-interest expense. All other operating expenses during 1996, 1995 and 1994 experienced minor increases. Republic is required to reimburse the FDIC for tax benefits received resulting from tax deductions for losses on loans and OREO acquired through the acquisition of a failed institution. In the third quarter of 1995, Republic was notified by the FDIC that, under its interpretation of the agreement, Republic may be required to remit additional payments related to prior years. Management intends to vigorously contest any request by the FDIC for additional payments. There have been no new developments with respect to this matter during 1996. FINANCIAL CONDITION Loan Portfolio Republic experienced strong loan growth throughout its markets in 1996. Loans increased 14% to $768.1 million at December 31, 1996, compared to $675.7 million at December 31, 1995. The increase in loans was led by residential lending which increased $85 million since December 31, 1995. The rise in real estate loan volume was a result of a favorable rate environment, expanded market presence resulting from the opening of five new banking centers during 1996, and sustained customer demand for residential financing in the Bank's markets. Republic also experienced a 44% increase in Home Equity loans as a result of product enhancements and targeted marketing initiatives implemented during 1996. The product enhancements included elimination of up-front closing costs and a six month introductory interest rate. Republic's commercial real estate loan portfolio declined by 22% to $59 million at December 31, 1996, due to paydowns and payoffs. Republic is not currently aggressively pursuing commercial loan business as a result of increased competition. This competition has generally acted to reduce margins to a point which management deems undesirable relative to the associated risk factors. Republic's consumer and Bank card loans, exclusive of Home Equity lines, remained flat during 1996 at $195 million. The consumer loan portfolio consists of both secured and unsecured loans. Approximately 41% of loans in the consumer portfolio are unsecured. During 1995, this portfolio increased substantially as a result of new programs and products including "All Purpose Loans" and "Pre-Approved Loans". Republic's "All Purpose Loans", with total outstandings of $22 million at December 31, 1996 and $27 million at December 31, 1995, are originated through Republic's banking centers. This product has an average loan amount of $8,000 and an average percentage rate of 17.54% with a standard maximum maturity of five years. "Pre-Approved Loans", with total outstandings of $33 million at December 31, 1996 and $36 million at December 31, 1995, were delivered through direct mail, targeting customers both in and outside of Republic's traditional markets. The "Pre-Approved Loan" product has an average loan amount of $7,800 and an average annual percentage rate of 13.96% with a standard maximum maturity of five years. Table 5 - Loans by Type
(in thousands) As of December 31, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 Real Estate: Residential $457,204 $371,846 $346,649 $316,824 $297,957 Construction 32,130 31,230 21,919 24,316 10,511 Commercial 59,086 75,648 76,725 45,044 44,352 Commercial 25,115 21,042 18,542 45,522 72,681 Consumer 194,546 175,979 114,993 59,740 41,006 -------- -------- -------- -------- -------- Total Loans $768,081 $675,745 $578,828 $491,446 $466,507 ======== ======== ======== ======== ========
The mortgage banking division manages originations, secondary market sales and servicing of residential loans. This division primarily sells fixed rate originations in the secondary market without recourse. During 1996, Republic sold $104 million of residential mortgage loans into the secondary market compared to $87 million in 1995. At the end of 1996, Republic was servicing $297 million in mortgage loans for other investors compared to $327 million in 1995. The decline in the mortgage banking servicing portfolio from 1995 to 1996 resulted from management's election to sell a majority of its originations on a servicing released basis and normal portfolio paydowns. The table below illustrates Republic's fixed rate maturities and repricing frequency for the loan portfolio: Table 6 - Selected Loan Distribution
As of December 31, 1996 One Over One Over (in thousands) Year Through Five Total or Five Years Less Years Fixed Rate Maturities $193,756 $ 44,781 $100,772 $48,203 Variable Rate Repricing Frequency 574,325 444,974 129,351 -------- -------- -------- ------- Total $768,081 $489,755 $230,123 $48,203 ======== ======== ======== =======
Provision and Allowance for Loan Losses The allowance for loan losses is regularly evaluated by management and maintained at a level management believes to be adequate to absorb future loan losses in the Bank's portfolios. Management continually evaluates the adequacy of the allowance and makes periodic provisions as needed. The amount of the provision for loan losses necessary to maintain an adequate allowance is based upon management's assessment of current economic conditions, analysis of periodic internal loan reviews, delinquency trends and ratios, changes in the mixture and levels of the various categories of loans, historical charge-offs, recoveries, and other information. Management believes that the allowance for loan losses at December 31, 1996, was adequate. Although management believes it uses the best information available to make allowance provisions, future adjustments which could be material may be necessary if management's assumptions differ from the loan portfolio's actual performance. The allowance for loan losses increased $2.5 million from December 31, 1995 to $6.2 million at December 31, 1996. The increase is primarily attributable to charge-off experience and losses in the unsecured consumer loan portfolio. Republic's allowance for loan losses to total loan ratio increased from .55% at December 31, 1995, to .81% at December 31, 1996. Net charge-offs increased during 1996 to $6.6 million compared to $2.4 million and $337,000 for 1995 and 1994, respectively. Republic's unsecured consumer loan portfolio accounted for 96% of total charge-offs for the year ended December 31, 1996. The charge-offs in the unsecured loan portfolio were principally comprised of $2.8 million in the "All Purpose" program and $2.1 million in the "Pre-Approved" program (see description of programs under "Loan Portfolio"). This represents a 10% charge-off rate in the "All Purpose" program and 5% in the "Pre-Approved" program for fiscal 1996. As a result of the increase in charge-offs, management limited the "Pre-Approved" program to one mailing in the first quarter of 1996 and improved underwriting. Management also significantly reduced the volume of the "All Purpose" program by implementing more restrictive underwriting standards. These actions are intended to improve the average credit quality of these loan programs. Republic also experienced charge-offs in its Bank card portfolio of $1.6 million for the year ended December 31, 1996, compared to $941,000 for the comparable period in 1995. Management anticipates that charge-offs in the unsecured loan portfolio may continue at or near recent levels in the near future and believes, based on information presently available, that it has adequately provided for these losses as of December 31, 1996. Table 7 - Summary of Loan Loss Experience
Year Ended December 31, ----------------------------------------------------- (dollars in thousands) 1996 1995 1994 1993 1992 Allowance for loan losses: Balance-beginning of year $3,695 $1,827 $1,627 $1,622 $1,630 Charge-offs: Real Estate (242) (313) (83) (176) (23) Commercial (22) (107) (14) (47) (284) Consumer (6,865) (2,069) (362) (251) (171) ------ ------ ------ ------ ------ Total (7,129) (2,489) (459) (474) (478) ------ ------ ------ ------ ------ Recoveries: Real Estate 290 22 19 21 Commercial 25 29 165 Consumer 236 42 93 69 40 ------ ------ ------ ------ ------ Total 526 89 122 88 226 ------ ------ ------ ------ ------ Net charge-offs (6,603) (2,400) (337) (386) (252) Provision for loan losses 9,149 4,268 537 391 244 ------ ------ ------ ------ ------ Allowance for loan losses: Balance-end of year $6,241 $3,695 $1,827 $1,627 $1,622 ====== ====== ====== ====== ====== Ratios: Percentage of allowance for loan losses to total loans .81% .55% .32% .33% .35% Net loans charged off to average loans outstanding for the period .86% .38% .06% .08% .05% Allowance for loan losses to non-performing loans 78% 168% 97% 61% 54%
The following table is management's allocation of the allowance for loan losses by loan type. Allowance funding and allocation is based on management's assessment of economic conditions, past loss experience, loan volume, past due history and other factors. Since these factors are subject to change, the allocation is not necessarily predictive of future portfolio performance. Management has accounted for the increase in charge-offs in the unsecured consumer loan portfolio by increasing the allowance for consumer loans. Table 8 - Management's Allocation of the Allowance for Loan Losses
As of December 31, --------------------------------------------------------------------------------------------------------------------- (dollars 1996 1995 1994 1993 1992 in thousands) --------------------- ---------------------- ---------------------- --------------------- ---------------------- Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Real Estate $1,771 71.4% $957 70.9% $1,091 76.9% $953 78.6% $893 75.6% Commercial 46 3.3% 34 3.1% 157 3.2% 315 9.3% 439 15.6% Consumer 4,424 25.3% 2,704 26.0% 579 19.9% 359 12.1% 290 8.8% ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- Total $6,241 100% $3,695 100% $1,827 100% $1,627 100% $1,622 100% ====== ==== ====== ==== ====== ==== ====== ==== ====== ===
Asset Quality Loans (including impaired loans under SFAS 114 but excluding consumer loans) are placed on non-accrual status when they become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of collection. When loans are placed on non-accrual status, all unpaid accrued interest is reversed. These loans remain on non-accrual status until the borrower demonstrates the ability to remain current or the loan is deemed uncollectible and is charged off. Consumer loans are not placed on non-accrual status but are reviewed and charged off no later than 120 days past due. At December 31, 1996, Republic had $278,000 in consumer loans 90 days or more past due compared to $361,000 at December 31, 1995. Table 9 on page 19 provides information related to non-performing assets and loans 90 days or more past-due. Accruing loans contractually past due 90 days or more increased from $1.5 million at December 31, 1995, to $5.0 million at December 31, 1996. This rise is primarily attributable to Republic's secured residential loan portfolio. These loans are evaluated individually and in those cases where the underlying collateral is deemed insufficient to satisfy the obligation, the loan is classified and the allowance is increased accordingly. Historically, Republic's collateral position on residential loans has been adequate and has limited the losses to the Bank. Loans in non-accrual status increased by $2.3 million from December 31, 1995, to December 31, 1996. The change primarily was the result of one commercial credit relationship which accounted for $1.7 million of the total increase. Republic defines impaired loans to be those commercial real estate and commercial loans greater than $499,999 that management has classified as doubtful (collection of all amounts due is highly questionable or improbable) or loss (all or a portion of the loan has been written off or a specific allowance for loss has been provided). Republic's policy is to charge off all or that portion of its investment in an impaired loan upon a determination it is probable the full amount will not be collected. Impaired loans decreased from $3.6 million at December 31, 1995 to $1.4 million at December 31, 1996. Table 9 - Non-Performing Assets
As of December 31, -------------------------------------------------------- (dollars in thousands) 1996 1995 1994 1993 1992 Loans on non-accrual status(1)(2) $3,055 $742 $1,285 $2,230 $2,283 Loans past due 90 days or more 4,955 1,463 606 421 717 ------ ----- ------ ------ ------ Total non-performing loans 8,010 2,205 1,891 2,651 3,000 Other real estate owned 104 552 791 1,023 3,320 ------ ------ ------ ------ ------ Total non-performing assets $8,114 $2,757 $2,682 $3,674 $6,320 ====== ====== ====== ====== ====== Percentage of non-performing loans to total loans 1.04% .33% .33% .51% .63% Percentage of non-performing assets to total loans 1.06% .41% .46% .75% 1.35%
(1) Loans on non-accrual status is exclusive of impaired loans as such loans remain on accrual status as of December 31, 1996. See note 4 to the Consolidated Financial Statements for additional discussion on impaired loans. (2) The interest income earned and received on non-accrual loans was not material. Investment Securities The investment portfolio consists primarily of U.S. Treasury and U.S. Government Agency Obligations with relatively short maturities. Securities, including those classified as held to maturity and available for sale, increased from $114.7 million at December 31, 1995, to $281.9 million at December 31, 1996. The investment portfolio increased as additional securities were purchased with funds provided by Republic's growth in deposits and repurchase agreements. During the fourth quarter of 1996, certain maturing securities and new funds provided by deposit growth were used to purchase "Available for Sale" securities. The change from previous policy provides Republic with additional alternatives for managing liquidity requirements. Table 10 - Investment Securities Held to Maturity
As of December 31, 1996 ----------------------- Average Weighted (dollars in thousands) Carrying Fair Maturity in Average Value Value Years Yield U.S. Treasury and U.S. Government Agencies: Within one year $69,406 $69,457 .6 5.88% Over one through five years 84,755 84,753 2.1 6.03% Over five through ten years 14,636 14,239 5.8 6.43% Over ten years -- -- -- -- ------- ------- Total 168,797 168,449 2.3 6.00% ------- ------- Obligations of states and political subdivision: Within one year 246 247 .6 6.62% Over one through five years 773 817 3.5 8.77% Over five through ten years 700 809 8.9 11.44% Over ten years 2,739 2,751 15.3 10.01% ------ ------ Total 4,458 4,624 7.2 9.86% Mortgage-backed securities 663 622 20.5 6.08% ------ ------ Total Investment Securities $173,918 $173,695 ======= =======
Table 11 - Investment Securities Available For Sale
As of December 31, 1996 ----------------------- Average Weighted (dollars in thousands) Carrying Fair Maturity in Average Value Value Years Yield U.S. Treasury and U.S. Government Agencies: Over one through five years $107,937 $107,937 2.2 5.79%
Deposits Total deposits increased to $783 million at December 31, 1996, compared to $734 million at December 31, 1995. With Republic's increased loan demand, management actively sought to increase deposits through new products and initiatives. Republic's certificate of deposit portfolio grew 6.0% through various promotions, competitive pricing and increased advertising. Republic also established procedures to improve retention of maturing certificates of deposit. In addition, Republic has $50.1 million in brokered deposits. The brokered deposits have stated rates ranging from 5.35% to 6.15% and maturities ranging from 3 to 5 years. Republic does not have a large liability dependency ratio as evidenced by the level of deposit customers with deposits larger than $100,000. The ratio of those deposits to average earning assets stood at 6.9% at the end of 1996 and 7.1% at the end of 1995. Table 12 provides a maturity distribution of time deposits $100,000 and over. Table 12 - Maturity of Time Deposits $100,000 and over (in thousands) As of December 31, 1996 Three months or less $11,452 Over three months through six months 7,390 Over six months through twelve months 18,250 Over twelve months 23,798 ------- Total $60,890 ======= 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. During 1996, short-term borrowings increased from $21.8 million at December 31, 1995, to $181.6 million at December 31, 1996. Approximately $92 million of the December 31, 1996, balance represents funds received from a local governmental organization. Substantially all of these funds received from the governmental organization will be withdrawn from Republic by March 31, 1997. Other Borrowed Funds To the extent that increases in the loan portfolio exceed core deposit growth, management supplements Republic's funding requirements with other wholesale funding sources. These sources are primarily the Federal Home Loan Bank, Federal Reserve, and other regional financial institutions. Other borrowed funds increased $38.9 million to $107 million at December 31, 1996. The increase was primarily in borrowings from the Federal Reserve and the Federal Home Loan Bank. Liquidity Asset/liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve an acceptable net interest margin. Management regularly monitors interest rate and liquidity risk in relation to prospective market and business conditions and implements appropriate funding and balance sheet strategies. Republic's objectives include providing consistent earnings, and preserving an adequate liquidity position. Republic has access to numerous sources of additional liquidity if needed. Substantial funding can be realized from the investment portfolio, of which $40 million matures or is putable within one year. Republic also has access to $107 million of investment securities which have been designated as "Available for Sale". Republic's banking centers also provide access to a broad retail deposit market. Republic has established additional lines of credit with various financial institutions which can provide a source for liquidity if needed. Capital Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the risk profiles of financial institutions. At December 31, 1996, Republic exceeded the basic regulatory requirements for Tier I risk based, Tier I leverage and total risked based capital. The Bank intends to maintain a capital position that meets or exceeds the "well capitalized" requirements as defined by the FDIC. See Notes to Financials, page 30, for detailed capital calculations and ratios. In 1995, Republic issued 50,000 shares of Series A Convertible Preferred Stock with a stated value of $100 per share and raised $5 million in new capital. At December 31, 1995, there were 1,203,578 shares of no par common stock issued and outstanding. On January 8, 1996 the stockholders approved an amendment to Republic's Articles of Incorporation to authorize 15,000,000 shares of Class A Common Stock, no par value and 2,000,000 shares of Class B Common Stock, no par value. On February 16, 1996, the Board of Directors declared a stock dividend of five shares of Class A Common Stock and one share of Class B Common Stock in exchange for each share of Common Stock owned by stockholders of record on February 20, 1996 payable on February 29, 1996. The stock dividend has been treated as a stock split and all share and earnings per share amounts have been retroactively restated. The Class A shares are entitled to cash dividend equal to 110% of the dividend paid per share on the Class B Common Stock. Class A shares have one vote per share and Class B shares have ten votes per share. Class B stock may be converted, at the option of the holder, to Class A Common Stock on a share-for-share basis. The Class A Common Stock is not convertible into any other class of Republic's capital stock. Republic maintains a leveraged capital position as a result of management's emphasis on asset growth. Historically, Republic's earnings have not been sufficient to support the sustained asset growth. To supplement Republic's capital position management has utilized alternative capital sources. During the first quarter of 1997, Republic issued through a newly formed subsidiary, Republic Capital Trust, $6.4 million in 8.5% Trust Preferred Securities. Each preferred security, par value $100, can be converted to five shares of Republic Class A Common Stock. Holders of the Trust Preferred Securities are entitled to the payments made on Republic's subordinated convertible debentures issued to that subsidiary which have a thirty year maturity with a right of redemption at par after five years, subject to certain restrictions. Interest Rate Risk Management Republic's policy is to maintain a reasonable balance of rate sensitive assets and liabilities on a cumulative basis, thus minimizing the interest rate risks associated with fluctuating market interest rates. At December 31, 1996, Republic had a one year repricing gap of a negative $2.9 million (see table 13 on page 22) compared to a positive gap of $12.3 million at December 31, 1995. The change in the one year gap is not considered significant in relation to Republic's total assets. This one year gap indicates that Republic was liability-sensitive (i.e. liabilities will reprice faster than assets) during the period. A rise in interest rates under this liability-sensitive position could cause earnings and cash flow to decrease. Republic's earnings could be positively affected by a decrease in rates. Some degree of interest rate risk is both inherent and appropriate in the banking industry. The Bank's Board of Directors sets policy guidelines establishing maximum limits on the Bank's interest rate risk exposure. Republic's management monitors and adjusts exposure to interest rate fluctuations as influenced by the Bank's loan and deposit volume. In addition, the Investment Committee of the Bank monitors Republic's interest rate sensitivity on a quarterly basis. Table 13 - Interest Rate Sensitivity (Gap Analysis)
As of December 31, 1996 (in thousands) Total 0-90 91-180 181-365 1-5 5 Years Days Days Days Years and Over Interest-Earning Assets: Loans $768,081 $235,305 $91,557 $175,760 $215,873 $49,586 Investments 287,404 164,331 12,129 21,261 75,221 14,462 Federal Funds Sold 16,650 16,650 ---------- -------- -------- -------- -------- ------ Total Interest Earning Assets $1,072,135 $416,286 $103,686 $197,021 $291,094 $64,048 Interest Bearing Liabilities: NOW, Super NOW, Money Market and Savings 131,021 131,021 Other Interest-Bearing Deposits 585,151 70,415 113,733 140,498 260,505 Repurchase Agreements and Other Short-Term Borrowings 181,634 164,019 2,758 9,742 5,090 25 Long-term Debt 106,974 86,000 1,639 19,335 ---------- -------- -------- -------- -------- ------- Total Interest Bearing Liabilities 1,004,780 451,455 116,491 151,879 284,930 25 ---------- -------- -------- -------- -------- ------- Total Gap $67,355 ($35,169) ($12,805) $45,142 $6,164 $64,023 ========== ========= ======== ======== ======== ======= Cumulative Gap ($35,169) ($47,974) ($2,832) $3,332 $67,355
New Accounting Pronouncements In June 1996 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 125). SFAS No. 125 provides new guidance for determining the circumstances under which transfers of financial assets are considered sales or financing and extends the accounting guidance of SFAS No. 122 for accounting for mortgage servicing rights to all servicing rights and liabilities. Under this standard, accounting for transfers of financial assets and extinguishments of liabilities is based on control. After a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. This statement is effective for fiscal years beginning after December 31, 1996 and early adoption is not permitted. The FASB is currently considering a proposal to delay the implementation date of certain sections of the standard. The impact of SFAS No. 125 on Republic's financial statements is not considered to be material. In March 1997, the accounting requirements for calculating earnings per share were revised. Basic earnings per share for 1997 and later will be calculated solely on average common shares outstanding. Diluted earnings per share will reflect the potential dilution of stock options and other common stock equivalents. All prior calculations will be restated to be comparable to the new methods. As Republic has not had significant dilution from stock options, the new calculation methods will not significantly affect future Basic earnings per share and diluted earnings per share. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index of Financial Statements REPORT OF INDEPENDENT AUDITORS 25 REPORT OF INDEPENDENT AUDITORS 26 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1996 and 1995 27 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 28 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994 29 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 30 Notes to Consolidated Financial Statements 31 -51 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders of Republic Bancorp, Inc. We have audited the accompanying consolidated balance sheets of Republic Bancorp, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of Republic's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Republic Bancorp, Inc. and subsidiaries as of December 31, 1995, and 1994 were audited by other auditors whose report dated March 1, 1996 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Republic Bancorp, Inc. and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year ended December 31, 1996, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP Louisville, Kentucky January 17, 1997 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders of Republic Bancorp, Inc. We have audited the consolidated balance sheet of Republic Bancorp, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of Republic's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Republic Bancorp, Inc. and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Louisville, Kentucky March 1, 1996 REPUBLIC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
1996 1995 ------------ ------------ ASSETS: Cash and cash equivalents: Cash and due from banks $ 40,021 $ 30,988 Federal funds sold 16,650 44,325 ------------ ------------ Total cash and cash equivalents 56,671 75,313 Securities available for sale 107,937 Securities to be held to maturity 173,918 114,654 Mortgage loans held for sale 7,624 5,988 Loans, less allowance for loan losses of $6,241 (1996) and $3,695 (1995) 759,424 668,193 Federal Home Loan Bank stock 5,548 5,176 Accrued interest receivable 9,685 7,244 Premises and equipment, net 17,509 12,015 Other assets 2,566 2,764 ------------ ------------ TOTAL $ 1,140,882 $ 891,347 ============ ============ LIABILITIES: Deposits: Non-interest bearing $ 66,969 $ 63,304 Interest bearing 716,172 671,139 Securities sold under agreements to repurchase and other short-term borrowings 181,634 21,729 Other borrowed funds 106,974 68,063 Accrued interest payable 5,643 4,314 Other liabilities 4,471 4,296 ------------ ------------ Total liabilities 1,081,863 832,845 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, no par value, 100,000 shares authorized, Series A 8.5% noncumulative convertible, 50,000 shares issued and outstanding (liquidation preference $5,000) 5,000 5,000 Class A common stock, no par value, 15,000,000 shares authorized, 6,051,611 shares (1996) and 0 shares (1995) issued and outstanding; Class B common stock, no par value, 2,000,000 shares authorized, 1,169,857 shares (1996) and 0 shares (1995) issued and outstanding; Common stock no par value 0 shares (1996) and 7,221,468 (1995) issued and outstanding 3,491 3,491 Additional paid-in capital 6,817 6,817 Retained earnings 43,930 43,194 Net unrealized depreciation on securities available for sale, net of tax of $113. (219) ------------ ------------ Total Stockholders' equity 59,019 58,502 ------------ ------------ TOTAL $ 1,140,882 $ 891,347 ============ ============ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994(IN THOUSANDS EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
1996 1995 1994 ------------- ------------ ------------ INTEREST INCOME: Loans, including fees $ 70,831 $ 61,338 $ 42,370 Securities: Taxable 9,375 7,781 3,842 Non-taxable 127 139 405 FHLB dividends 378 338 264 Other 1,275 1,537 494 ------------- ------------ ------------ Total interest income 81,986 71,133 47,375 ------------- ------------ ------------ INTEREST EXPENSE: Deposits 36,084 32,512 18,595 Securities sold under agreements to repurchase and short-term borrowings 3,481 975 653 Other borrowed funds 4,290 4,233 3,265 ------------- ------------ ------------ Total interest expense 43,855 37,720 22,513 ------------- ------------ ------------ NET INTEREST INCOME 38,131 33,413 24,862 PROVISION FOR LOAN LOSSES 9,149 4,268 537 ------------- ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 28,982 29,145 24,325 ------------- ------------ ------------ NON-INTEREST INCOME: Service charges on deposit accounts 2,642 1,974 1,473 Other service charges and fees 445 1,434 782 Bank card services 1,010 1,263 819 Net gain on sale of loans 1,212 1,083 1,625 Loan servicing income 829 895 915 Other 959 871 1,383 ------------- ------------ ------------ Total non-interest income 7,097 7,520 6,997 ------------- ------------ ------------ NON-INTEREST EXPENSE: Salaries and employee benefits 13,236 11,334 10,233 Occupancy and equipment 6,623 5,346 4,758 Communication and transportation 1,548 1,407 1,126 Marketing and development 1,620 1,308 896 FDIC Deposit Insurance 3,277 1,245 1,336 Supplies 973 883 702 Litigation recovery - (738) - Other 4,132 3,720 3,165 ------------- ------------ ------------ Total non-interest expense 31,409 24,505 22,216 ------------- ------------ ------------ INCOME BEFORE INCOME TAXES 4,670 12,160 9,106 INCOME TAXES 1,943 4,372 2,936 ------------ ----------- ----------- NET INCOME $ 2,727 $ 7,788 $ 6,170 ============ =========== ========== NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .30 $ .99 $ .86 ============= ============ =========== See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------
COMMON STOCK NET UNREALIZED ------------------------------- ADDITIONAL DEPRECIATION ON TOTAL PREFERRED STOCK CLASS A CLASS B PAID-IN RETAINED AVAILABLE FOR SALE STOCKHOLDERS' SHARES AMOUNT SHARES SHARES SHARES AMOUNT CAPITAL EARNINGS SECURITIES EQUITY BALANCE, January 1, 1994 7,126 $3,437 $6,433 $ 30,799 $ 40,669 Sale of common stock 6 5 43 48 Stock options exercised 48 26 160 186 Purchases and retirements of common stock (6) (1) (27) (28) Net income 6,170 6,170 ------ ------ ------- -------- -------- BALANCE, December 31, 1994 7,174 3,467 6,609 36,969 47,045 Sale of preferred stock 50 $ 5,000 5,000 Sale of common stock 54 27 279 306 Purchases and retirements of common stock (6) (3) (71) (74) Dividends declared: Preferred($7.28 per share) (364) (364) Common($.17 per share) (1,199) (1,199) Net income 7,788 7,788 ------- ------- ------ ------ -------- ------- -------- BALANCE, December 31, 1995 50 5,000 7,222 3,491 6,817 43,194 58,502 Stock split 6,018 1,204 (7,222) Conversions of Class B common to Class A common 34 (34) Dividends declared: Preferred ($8.50 per share) (425) (425) Common: Class A($. 22 per share) (1,330) (1,330) Class B($. 20 per share) (236) (236) Net changes in unrealized depreciation on securities available for sale, net of tax of $113. $ (219) (219) Net income 2,727 2,727 ------- ------- ------- ------ ------ ------ -------- ------- -------- -------- BALANCE, December 31,1996 50 $ 5,000 6,052 1,170 - $3,491 $ 6,817 $43,930 $ (219) $ 59,019 ======= ======= ======= ====== ====== ======= ======== ======== ======== ========
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS) - --------------------------------------------------------------------------------
1996 1995 1994 OPERATING ACTIVITIES: Net income $ 2,727 $ 7,788 $ 6,170 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 3,179 2,353 2,024 Amortization and accretion of securities (124) (370) 131 FHLB stock dividends (372) (331) (264) Provision for loan losses 9,149 4,268 537 Net gain on sale of mortgage loans held for sale (1,212) (1,083) (1,625) Proceeds from sale of mortgage loans held for sale 104,115 86,808 142,871 Origination of mortgage loans held for sale (104,539) (91,407) (113,249) Changes in assets and liabilities: Accrued interest receivable (2,441) (1,968) (1,625) Other assets 415 960 1,108 Accrued interest payable 1,329 755 1,118 Other liabilities 83 (1,281) (190) ------------- ------------ ------------ Net cash provided by operating activities 12,309 6,492 37,006 INVESTING ACTIVITIES: Purchases of securities available for sale (108,350) Purchases of securities to be held to maturity (215,655) (100,039) (103,821) Proceeds from maturities of securities to be held to maturity 156,596 86,460 73,190 Purchases of FHLB stock (221) Net increase in loans (100,484) (101,313) (85,262) Purchases of premises and equipment (8,673) (2,922) (4,896) ------------- ------------ ------------ Net cash used in investing activities (276,566) (117,814) (121,010) FINANCING ACTIVITIES: Net increase in deposits 48,698 144,407 73,165 Net increase (decrease) in securities sold under agree- ments to repurchase and other short-term borrowings 159,905 8,997 (496) Payments on other borrowed funds (77,089) (19,997) (23,760) Proceeds from other borrowed funds 116,000 11,000 33,100 Purchases and retirements of common stock (74) (28) Sale of common stock and stock options exercised 306 234 Sale of preferred stock 5,000 Dividends (1,899) (1,563) ------------- ------------ ------------ Net cash provided by financing activities 245,615 148,076 82,215 ------------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,642) 36,754 (1,789) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 75,313 38,559 40,348 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 56,671 $ 75,313 $ 38,559 ============= ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 42,526 $ 36,965 $ 21,395 ============= ============ ============ Income taxes $ 2,902 $ 3,920 $ 1,266 ============= ============ ============ Transfers from loans to real estate acquired in settlement of loans $ 104 $ 802 $ 884 ============= ============ ============
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BUSINESS - The consolidated financial statements include the accounts of Republic Bancorp, Inc. (Parent Company) and its wholly-owned subsidiaries; Republic Bank & Trust Company (Bank), Republic Mortgage Company and Republic Insurance Agency, Inc. (collectively Republic). All significant intercompany balances and transactions have been eliminated. Republic operates 21 banking centers primarily in the retail banking industry and conducts its operations predominately in metropolitan Louisville and in Central and Western Kentucky. Republic's consolidated results of operations are dependent upon net interest income, which is the difference between the interest income on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning assets are securities and commercial, real estate mortgage and consumer loans. Interest-bearing liabilities consist of interest-bearing deposit accounts and short-term and long-term borrowings. Other sources of income include fees charged to customers for a variety of banking services such as credit cards, transaction deposit accounts, and trust services. Republic also generates revenue from its mortgage banking activities including the origination and sale of loans in the secondary market and servicing loans for others. Republic's operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communications and transportation costs and other general and administrative expenses. Republic's results of operations are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies. SECURITIES - Securities to be held to maturity are those which Republic has the positive intent and ability to hold to maturity and are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Securities available for sale consist of securities not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses, net of tax, on securities available for sale are reported in a separate component of shareholders' equity until realized. Gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Declines in the fair value of individual securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. Federal Home Loan Bank stock is not considered a marketable equity security under Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and, therefore, is carried at cost. LOANS - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamoritized premiums or discounts on purchased loans. Interest on loans is computed on the principal balance outstanding. Loan origination fees and certain direct loan origination costs relating to successful loan origination efforts are deferred and recognized over the lives of the related loans as an adjustment to yield. Generally, the accrual of interest on loans, including loans impaired under SFAS No. 114, is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. When loans are placed on non-accrual status, all unpaid accrued interest is reversed. Such loans remain on non-accrual status until the borrower demonstrates the ability to remain current or the loan is deemed uncollectible and is charged off. Consumer loans generally are not placed on non-accrual status but are reviewed periodically and charged off when deemed uncollectible. ALLOWANCE FOR LOAN LOSSES - Republic implemented SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, effective January 1, 1995. SFAS 114 defines a loan as "impaired" when it is probable that a creditor will be unable to collect all principal and interest due according to the contractual terms of the loan agreement. Republic has defined its population of impaired loans to be those commercial real estate and commercial loans $500,000 or greater that management has classified as doubtful (collection of all amounts due under the terms of the loan is highly questionable or improbable) or loss (all or a portion of the loan has been written off or a specific allowance for loss has been provided). Republic's policy is to charge off all or that portion of its investment in an impaired loan upon determination that it is probable the full amount will not be collected. Impairment of smaller balance, homogeneous loans (commercial real estate and commercial loans less than $500,000, residential real estate, consumer, home equity, and credit card loans) is measured on an aggregate basis giving consideration to historical charge-off experience of the related portfolios. Republic recognizes interest income on an impaired loan when earned, unless the loan is on non-accrual status, in which case interest income is recognized when received. The allowance for loan losses is an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Although management believes it uses the best information available to make determinations with respect to Republic's allowance for loan losses, future adjustments, which could be material, may be necessary if original assumptions differ from actual performance. MORTGAGE BANKING ACTIVITIES - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Republic controls its interest rate risk with respect to mortgage loans held for sale and loan commitments expected to close by entering into option agreements to sell loans. The aggregate market value of mortgage loans held for sale considers the sales prices of such agreements. Republic also provides currently for any losses on uncovered commitments to lend or sell. On January 1, 1996, Republic adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" which requires an enterprise with mortgage banking activities to recognize the right to service mortgage loans for others as a separate asset, however those rights were acquired. Under previous accounting guidance, a separate asset was recognized for purchased, but not originated, mortgage servicing rights. Under SFAS No. 122, the total cost of mortgage loans originated with the intent to sell is allocated between the servicing right and the loan without the servicing right based on their relative fair values at the date of origination. The capitalized cost of servicing rights are amortized in proportion to, and over the period of, the estimated net servicing income. The mortgage servicing asset is periodically evaluated for impairment. Since adoption of this Statement, loans sold in the secondary market have been primarily servicing released. Accordingly, adoption of SFAS No. 122 has had no material impact on Republic's financial position or results of operations. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over the estimated useful lives of the related assets on the straight-line method. Estimated lives are 25 to 31 1/2 years for buildings and improvements, 3 to 5 years for furniture, fixtures and equipment and 3 to 9 years for leasehold improvements. ACQUISITION INTANGIBLES - The cost in excess of fair value of net assets acquired in business combinations is amortized to expense on a constant level yield in direct relation to the estimated remaining lives of long-term interest bearing assets acquired. The premium resulting from the valuation of core deposits in business combinations or in the purchase of branch offices from other financial institutions is amortized over a period not exceeding the lesser of the estimated average remaining life of the existing customer deposit base acquired, or ten years. Amortization is provided at the same rate the related deposits are expected to be withdrawn. The amortization periods for intangible assets are continually monitored to determine if events and circumstances require such periods to be reduced. IMPAIRMENT OF LONG LIVED ASSETS - Effective January 1, 1996, Republic adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets", which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The effect of adopting this standard is considered to be a component of other operating expense and was not significant. LOAN SERVICING - Loan servicing income is recorded as principal payments are collected and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. Costs of loan servicing are charged to expense as incurred. STOCK OPTION PLANS - On January 1, 1996, Republic adopted SFAS No. 123, "Accounting for Stock Based Compensation." This Statement establishes a fair value based method of accounting for stock options and similar equity instruments such as warrants. Companies may either adopt the fair value method of accounting introduced in SFAS No. 123 or continue to apply the intrinsic value method required under current accounting methods. Under current accounting methods, because the exercise price of Republic's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Companies which elect to remain with the current method of accounting must make pro-forma disclosures of net income and earnings per share as if the fair value method provided for in SFAS No. 123 had been adopted. Management has elected to continue applying the intrinsic value method and has made the required pro forma disclosures. INCOME TAXES - Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. EARNINGS PER SHARE - Earnings per common and common equivalent share is based upon the weighted average of common and common equivalent shares outstanding during the year. Primary and fully diluted earnings per share are approximately the same. The number of common and common equivalent shares utilized in the per share computations was approximately 7,624,000, 7,527,000, and 7,140,000 in 1996, 1995 and 1994, respectively. All per share amounts have been restated to reflect the stock split described in Note 12. USE OF ESTIMATES - Financial statements prepared in conformity with generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. CURRENT ACCOUNTING ISSUES - During 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued, and it will apply in 1997. This statement extends the requirements of SFAS No. 122 to all servicing rights and establishes standards for determining the circumstances under which transfers of financial assets should be considered sales or as secured borrowings and the related accounting requirements for each. Republic has not yet determined the impact of this standard on the financial statements. 2. RESTRICTIONS ON CASH AND DUE FROM BANKS Republic is required by the Federal Reserve Bank to maintain average reserve balances. Cash and due from banks in the consolidated balance sheet includes $6.8 million of reserve balances at December 31, 1996. 3. SECURITIES Securities available for sale:
DECEMBER 31, 1996 (IN THOUSANDS) GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE U.S. Treasury securities and U.S. government agencies $ 108,269 $ (332) $ 107,937 =========== =========== ===========
Securities to be held to maturity:
DECEMBER 31, 1996 (IN THOUSANDS) GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE U.S. Treasury securities and U.S. government agencies $ 168,797 $ 452 $ (800) $ 168,449 Obligations of state and political subdivisions 4,458 167 (1) 4,624 Mortgage-backed securities 663 (41) 622 ----------- ----------- ----------- ----------- Total securities to be held to maturity $ 173,918 $ 619 $ (842) $ 173,695 =========== =========== =========== ===========
DECEMBER 31, 1995 (IN THOUSANDS) GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE U.S. Treasury securities and U.S. government agencies $ 109,282 $ 777 $ (823) $ 109,236 Obligations of state and political subdivisions 4,629 176 (1) 4,804 Mortgage-backed securities 743 (34) 709 ----------- ----------- ----------- ----------- Total securities to be held to maturity $ 114,654 $ 953 $ (858) $ 114,749 =========== =========== =========== ===========
Securities having an amortized cost of $263.5 million and $58.2 million and fair value of $262.9 million and $58.4 million at December 31, 1996 and 1995, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law. The amortized cost and fair value of securities, by contractual maturity, are as follows:
DECEMBER 31, 1996 (IN THOUSANDS) SECURITIES TO BE SECURITIES AVAILABLE HELD TO MATURITY FOR SALE ----------------------------- ---------------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE Due in one year or less $ 69,652 $ 69,704 Due after one year through five years 85,528 85,570 $ 108,269 $ 107,937 Due after five through ten years 15,336 15,048 Due after ten years 3,402 3,373 ------------ ------------- ------------ ------------ Total $ 173,918 $ 173,695 $ 108,269 $ 107,937 ============ ============= ============ ============
4. LOANS
DECEMBER 31, ----------------------------- 1996 1995 (IN THOUSANDS) Residential real estate $ 457,204 $ 371,846 Commercial real estate 59,086 75,648 Real estate construction 32,130 31,230 Commercial 25,115 21,042 Consumer 96,138 98,730 Home equity 69,572 48,244 Bank card 24,527 25,581 Other 4,309 3,424 ------------ ------------ Total loans 768,081 675,745 Less: Unearned interest income and unamortized loan fees 2,416 3,857 Allowance for loan losses 6,241 3,695 ------------ ------------ Loans, net $ 759,424 $ 668,193 ============ ============
Substantially all loans are to borrowers in Republic's primary market areas. Republic's policy is to make residential real estate loans that generally do not exceed 80% of appraised value of the underlying property for conventional loans, and to require borrowers to purchase private mortgage insurance where the borrower's down payment is less than 20%. Republic generally also requires collateral on commercial real estate loans, commercial loans and home equity loans. All bank card loans and approximately $55.0 million and $64.4 million of consumer loans at December 31, 1996 and 1995, respectively, are on an unsecured basis. Republic monitors its exposure to credit risk by performing ongoing credit evaluations of the borrowers' financial condition and maintains an allowance for potential credit losses. Activity in the allowance for loan losses is summarized as follows:
DECEMBER 31, -------------------------------------------- 1996 1995 1994 (IN THOUSANDS) Balance, beginning of year $ 3,695 $ 1,827 $ 1,627 Provision for loan losses charged to income 9,149 4,268 537 Charge-offs (7,129) (2,489) (459) Recoveries 526 89 122 ------------ ------------ ------------ Balance, end of year $ 6,241 $ 3,695 $ 1,827 ============ ============ ============
The level of charge offs in 1996 and 1995 significantly exceeded losses incurred in prior periods and were directly related to two unsecured credit programs initiated in 1995. The net charge offs related to loans arising under these programs were $4.8 million and $1.0 million in 1996 and 1995, and accounted for 73% and 43% of net charge offs in each of those years. Originations of loans under these programs were reduced in 1996, and such originations were underwritten to more restrictive standards than in 1995. Information about Republic's investment in impaired loans is as follows:
AS OF AND FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 (IN THOUSANDS) Gross impaired loans which have allowances $ 1,638 $ 4,064 Less: related allowances for loan losses 240 589 ------------ ------------ Net impaired loans with related allowances 1,398 3,475 Impaired loans with no related allowances 0 87 ------------ ------------ Total $ 1,398 $ 3,562 ============ ============ Average impaired loan outstanding $ 1,638 $ 3,432 ============ ============ Interest income recognized $ 110 $ 358 ============ ============ Interest income received $ 110 $ 337 ============ ============
Loans made to executive officers and directors of Republic and their related interests in the ordinary course of business, subject to substantially the same credit policies as other loans and current in their terms, are as follows:
BALANCE, BALANCE, BEGINNING NEW END PERIOD OF PERIOD LOANS REPAYMENTS OF PERIOD (IN THOUSANDS) Year ended December 31, 1996 $ 8,305 $ 961 $ 3,159 $ 6,107 ============ ============ ============ ============
5. LOAN SERVICING Republic was servicing loans for others (primarily FHLMC) totaling $296.8 million and $327.1 million at December 31, 1996 and 1995, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. In connection with these loans serviced for others, Republic held borrowers' escrow balances of $.6 million and $1.4 million at December 31, 1996 and 1995, respectively. 6. ACCRUED INTEREST RECEIVABLE
DECEMBER 31, ------------------------------ 1996 1995 (IN THOUSANDS) Investment Securities $ 4,331 $ 2,204 Loans 5,354 5,040 ------------ ------------ $ 9,685 $ 7,244 ============ ===========
7. PREMISES AND EQUIPMENT
DECEMBER 31, ----------------------------- 1996 1995 (IN THOUSANDS) Land $ 1,699 $ 1,194 Office buildings and improvements 8,718 7,298 Furniture, fixtures and equipment 18,608 12,183 Leasehold improvements 869 677 ------------ ------------ Total premises and equipment 29,894 21,352 Less accumulated depreciation and amortization 12,385 9,337 ------------ ------------ Net premises and equipment $ 17,509 $ 12,015 ============ ============
8. INTEREST BEARING DEPOSITS
DECEMBER 31, ----------------------------- 1996 1995 (IN THOUSANDS) Demand (interest bearing): NOW and Super NOW $ 75,040 $ 76,972 Money market 41,140 26,772 Savings 14,840 15,395 Money market certificates of deposit 63,423 58,599 Individual retirement accounts 35,845 34,275 Certificates of deposit, $100,000 and over 60,890 55,708 Other certificates of deposit 374,864 355,344 Brokered deposits 50,130 48,074 ------------ ------------ Total interest bearing deposits $ 716,172 $ 671,139 ============ ============
At December 31, 1996, the scheduled maturities of time deposits are as follows: Less than 1 year $ 260,772 Over 1 year through 3 years 234,865 Over 3 years through 5 years 26,092 ------------ $ 521,729 ============ 9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT TERM BORROWINGS These 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.
DECEMBER 31, ------------------------------ 1996 1995 (DOLLARS IN THOUSANDS) Average outstanding balance during the year $ 74,531 $ 27,828 Average interest rate during the year 4.74% 4.08% Maximum month end balance during the year $ 182,485 $ 31,617
Approximately $92 million of the December 31, 1996 balance represents funds received from local governmental organizations. Substantially all of these amounts are expected to be returned by March 31, 1997. All securities underlying the agreements were under Republic's control. 10. OTHER BORROWED FUNDS
DECEMBER 31, ----------------------------- 1996 1995 (IN THOUSANDS) Subordinated debentures bearing interest from 9.75% to 10.0% $ 188 $ 538 Note payable to a financial institution bearing interest at 7.75% 1,450 1,450 Federal Reserve Discount Borrowings bearing interest at 5.00% due 1/9/97 21,000 Federal Home Loan Bank variable interest rate advances, with weighted average interest rate of 5.47% at December 31, 1996, due through 1999 65,000 54,000 Federal Home Loan Bank fixed interest rate advances, with weighted average interest rate of 5.54% at December 31, 1996, due through 2000 19,336 12,075 ------------ ------------ $ 106,974 $ 68,063 ============ ============
The principal and interest on the note payable to a financial institution is due quarterly. Republic has pledged 51% of the Bank's outstanding common stock as collateral for this note. The loan agreement sets forth restrictive covenants that include maintenance of minimum insurance, minimum net worth and capital ratios and restrictions on dividends. Republic is in compliance with these covenants at December 31, 1996 and 1995. 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 had available $26.6 million at December 31, 1996, on a total line of credit of $111.0 million with the Federal Home Loan Bank. Republic also has lines of credit totaling $15.0 million available through various financial institutions. Aggregate future principal payments on borrowed funds as of December 31, 1996 are as follows: YEAR (IN THOUSANDS) 1997 $ 45,649 1998 53,988 1999 6,044 2000 1,103 2001 and thereafter 190 ------------ $ 106,974 ============ 11. INCOME TAXES The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31, ----------------------------- 1996 1995 (IN THOUSANDS) Deferred tax assets: Depreciation $ 232 $ 59 Loan fees 186 101 Purchased mortgage servicing rights 17 Allowance for loan losses 1,040 450 FAS 115 valuation reserve 113 Other 14 ------------ ------------ Total deferred tax assets 1,571 641 ------------ ------------ Deferred tax liabilities: FHLB dividends 488 362 Other 74 ------------ Total deferred tax liabilities 562 362 ------------ ------------ Net deferred tax asset, included in other assets $ 1,009 $ 279 ============ ============
YEAR ENDED DECEMBER 31, 1996 1995 1994 (IN THOUSANDS) Income tax expense consisted of: Current $ 2,560 $ 4,443 $ 2,894 Deferred expense (benefit) (617) (71) 42 ------------ ------------ ------------ Total $ 1,943 $ 4,372 $ 2,936 ============ ============ ============
The provision for income taxes differs from the amount computed at the statutory rate as follows:
YEARS ENDED DECEMBER 31, 1996 1995 1994 Federal statutory rate 34.0% 34.0% 34.0% ======== ======= ======= Increase (decrease) resulting from: Tax-exempt interest income (1.4) (0.7) (1.0) Net operating loss carryforward (1.8) (25.0) Federal Deposit Insurance Corporation tax assistance 1.8 25.0 Acquisition intangibles 6.5 Other 2.5 2.6 (0.8) -------- ------- ------- Effective rate 41.6% 35.9% 32.2% ======== ======= =======
Republic is required to pay the Federal Deposit Insurance Corporation (FDIC) for the tax benefits resulting from tax deductions for losses on loans and real estate acquired in settlement of loans which were acquired under the 1985 Federal Savings and Loan Insurance Corporation assistance agreement for Home Federal Savings and Loan Association and the 1988 merger with the First Federal Savings and Loan Association. Income taxes in the accompanying consolidated statements of income include certain amounts owed to the FDIC for such tax benefits. Republic is involved in discussions with the FDIC concerning interpretations of certain provisions of the agreements and may be required to remit additional payments related to prior years. Management intends to vigorously contest any request by the FDIC for additional payments. There have been no new developments with respect to this matter during the period. 12. STOCKHOLDERS' EQUITY COMMON STOCK - At December 31, 1995, there were 1,203,578 shares of no par common stock issued and outstanding. On January 8, 1996 the stockholders approved an amendment to Republic's Articles of Incorporation to authorize 15,000,000 shares of Class A Common Stock, no par value and 2,000,000 shares of Class B Common Stock, no par value. On February 16, 1996, the Board of Directors declared a stock dividend of five shares of Class A Common Stock and one share of Class B Common Stock in exchange for each share of Common Stock owned by stockholders of record on February 20, 1996 payable on February 29, 1996. The stock dividend has been treated as a stock split and all share and earnings per share amounts have been retroactively restated. The Class A shares are entitled to cash dividends equal to 110% of the dividend paid per share on the Class B Common Stock. Class A shares have one vote per share and Class B shares have ten votes per share. Class B stock may be converted, at the option of the holder, to Class A stock on a share-for-share basis. The Class A Common Stock is not convertible into any other class of Republic's capital stock. PREFERRED STOCK - Each share of Series A preferred stock is convertible into one share of common stock at any time at the option of the holder. Republic may redeem the shares at its option, in whole or in part, beginning January 1, 1996 at 105% of the share price ($100) and declining 1% per annum to 100% at January 1, 2001 and thereafter. In the event of any dissolution or reduction in capital resulting in any distribution of assets, the stockholders shall be entitled to receive one hundred dollars for each share of Series A preferred stock held. DIVIDEND LIMITATIONS - Banking regulations limit the amount of dividends that may be paid to Republic without prior approval of the Bank's regulatory agency. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years, less any dividends declared during those periods. At December 31, 1996, the Bank had $8.6 million of retained earnings available for such purposes. REGULATORY CAPITAL REQUIREMENTS - Republic and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Republic's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Republic and the Bank must meet specific capital guidelines that involve quantitative measures of the bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the bank must maintain minimum Total Risk-Based, Tier I Risk-Based, and Tier I Leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
MINIMUM MINIMUM REQUIREMENT REQUIREMENT TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS ---------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO (DOLLARS IN THOUSANDS) As of December 31, 1996 Total Risk Based Capital (to Risk Weighted Assets) CONSOLIDATED $ 65,449 10.10% $ 51,818 8% $ 64,773 10% Bank only $ 66,590 10.31% $ 51,687 8% $ 64,609 10% Tier I Capital (to Risk Weighted Assets) CONSOLIDATED $ 59,208 9.14% $ 25,909 4% $ 38,864 6% Bank only $ 60,349 9.34% $ 25,843 4% $ 38,765 6% Tier I Leverage Capital (to Average Assets) CONSOLIDATED $ 59,208 5.76% $ 41,097 4% $ 51,372 5% Bank only $ 60,349 5.87% $ 41,097 4% $ 51,372 5%
13. STOCK OPTION PLAN Under a stock option plan, certain key employees and directors are granted options to purchase shares of Republic's common stock at fair value at the date of the grant. Options granted become fully exercisable at the end of two to six years of continued employment and must be exercised within one year. A summary of Republic's stock option activity, and related information for the years ended December 31 follows:
1996 1995 1994 -------------------------------------------- --------------------- -------------------- OPTIONS WEIGHTED- OPTIONS WEIGHTED- OPTIONS WEIGHTED- OPTIONS WEIGHTED- CLASS A AVERAGE CLASS B AVERAGE COMMON AVERAGE COMMON AVERAGE SHARES EXERCISE SHARES EXERCISE STOCK EXERCISE STOCK EXERCISE PRICE PRICE PRICE PRICE Outstanding beginning of year 228,000 $ 7.72 42,000 $ 3.76 90,000 $ 3.71 Stock Split 190,000 $ 7.72 (190,000) $ 7.72 Granted 311,500 $ 11.94 228,000 $ 7.72 Exercised (42,000) $ 3.76 (48,000) $ 3.67 Forfeited (33,000) $ 10.76 (4,000) $ 10.00 ------- -------- ------- -------- Outstanding year end 468,500 $ 10.31 34,000 $ 7.45 228,000 $ 7.72 42,000 $ 3.76 ======= ======== ======= ======== Exercisable (vested) end of year --- --- --- 7,000
As discussed in Note 12, on February 16, 1996, common stock was split into five shares of Class A Common Stock and one share of Class B Common Stock for every share of common stock owned by stockholders of record on February 20, 1996. Exercise prices for options outstanding as of December 31, 1996 ranged from $ 6.56 to $ 12.00. The weighted average remaining contractual life of those options is 5.18 years. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if Republic had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The weighted average assumptions for options granted during the year and the resulting estimated weighted average fair values per share used in computing pro forma disclosures are as follows: 1996 1995 ---- ---- Assumptions: Risk-free interest rate 6.29% 7.37% Expected dividend yield 2.95% 1.84% Expected life (years) 6.00 5.66 Expected common stock market price volatility .1256 .1256 Estimated fair value per share $ 2.85 $ 2.01 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period on an accelerated basis. Republic's pro forma information follows (in thousands except for earnings per share information); 1996 1995 ---- ---- Pro forma net income $ 2,572 $ 7,726 Pro forma earnings per share .28 .97 Future pro forma net income will be negatively impacted should Republic choose to grant additional options. 14. EMPLOYEE BENEFIT PLAN Republic maintains a 401(k) plan for full-time employees who have been employed for 1,000 hours in a plan year and have reached the age of 21. Participants in the plan may elect to contribute from 1% to 15% of their annual compensation. Republic matches 50% of participant contributions up to 5% of each participant's annual compensation. Republic's contribution may increase if certain operating ratios are achieved. Republic's matching contributions were $284,000, $240,000, and $215,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 15. NON-INTEREST INCOME AND EXPENSE Republic had previously recorded in 1993 non-interest expense of $738,000 due to an adverse legal verdict. The legal verdict was subsequently overturned by the federal appellate court and Republic believes that the matter has been finally concluded. As a result, $738,000 was recorded as litigation cost recovery in non-interest expense during 1995. Other non-interest income for 1994 includes approximately $500,000 received from a related party relating to a prior year regulatory matter. 16. LEASES AND TRANSACTIONS WITH AFFILIATES Republic leases office facilities from an affiliated company owned by Republic's Chairman and Chief Executive Officer under operating leases that expire July 1998. Rent expense for the years ended December 31, 1996, 1995 and 1994 under these leases was $1,054,000, $951,000 and $921,000, respectively. Total rent expense on all operating leases was $1,343,000, $1,200,000 and $1,100,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The total minimum lease commitments under noncancelable operating leases are as follows:
DECEMBER 31, 1996 --------------------------------------------- YEAR AFFILIATE OTHER TOTAL (IN THOUSANDS) 1997 $ 1,051 $ 253 $ 1,304 1998 960 144 1,104 1999 833 144 977 2000 833 111 944 Thereafter 555 207 762 ------------ ------------ ------------ $ 4,232 $ 859 $ 5,091 ============ ============ ============
Republic made payments to companies owned by directors of the Bank for the construction of branches totaling $711,000, $11,000, and $1,800,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 17. SAIF ASSESSMENT In November 1994, Republic completed a merger with its affiliated savings association, Republic Savings Bancorp, Inc. Subsequent to the merger, a portion of Republic's deposits continue to be insured by the Savings Association Insurance Fund (the SAIF). A bill was passed on September 30, 1996, which included a provision to replenish the SAIF through a special assessment. The one-time assessment was imposed on SAIF assessable deposits held at March 31, 1995. Republic's assessment of approximately $2.3 million is included in FDIC deposit insurance expense in the accompanying consolidated Statements of Income. 18. OFF-BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES Republic is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the extent of involvement Republic has in particular classes of financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with Republic's credit policies. Collateral, if deemed necessary, is based on management's credit evaluation of the counterparty and may include business assets of commercial borrowers as well as personal property and real estate of individual borrowers or guarantors. Republic extends binding commitments to prospective customers. Such commitments assure the borrower of financing for a specified period of time at a specified rate. The risk to Republic under such loan commitments is limited by the terms of the contract. For example, Republic may not be obligated to advance funds if the customer's financial condition deteriorates or if the customer fails to meet specific covenants. An approved, but undrawn, loan commitment represents a potential credit risk once the funds are advanced to the customer, a liquidity risk since the customer may demand immediate cash that would require a funding source, and an interest rate risk since interest rates may rise above the rate committed to the customer. Republic's current liquidity position continues to meet its need for funds. In addition, since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time will not require a funding source. As of December 31, 1996 and 1995, Republic had outstanding loan commitments totaling $154.8 million and $100.6 million. Loan commitments include unused credit card lines and home equity lines of credit totaling $100.2 million and $66.2 million as of December 31, 1996 and 1995, respectively. Substantially all commitments at December 31, 1996 and 1995 are at variable rates. Standby letters of credit are conditional commitments issued by Republic to guarantee the performance of a customer to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. At December 31, 1996 and 1995, commitments outstanding under standby letters of credit totaled $1.9 million and $2.1 million, respectively. 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by Republic using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts Republic could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------------------- ---------------------- (IN THOUSANDS) CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Assets: Cash and cash equivalents $ 56,671 $ 56,671 $ 75,313 $ 75,313 Securities available for sale 107,937 107,937 Securities to be held to maturity 173,918 173,827 114,654 114,749 Mortgage loans held for sale 7,624 7,700 5,988 6,197 Loans 759,424 761,915 668,193 669,092 Federal Home Loan Bank stock 5,548 5,548 5,176 5,176 Liabilities: Deposits: Certificate of deposit and individual retirement accounts $ 521,729 $ 521,333 $ 493,401 $ 499,149 Non interest-bearing accounts 66,969 66,969 63,304 63,304 Transaction accounts 194,443 196,578 177,738 177,738 Securities sold under agreements to repurchase and other short-term borrowings 181,634 181,428 21,729 21,729 Other borrowed funds 106,974 107,134 68,063 68,183
CASH AND CASH EQUIVALENTS - The carrying amount is a reasonable estimate of fair value. SECURITIES AVAILABLE FOR SALE, SECURITIES TO BE HELD TO MATURITY AND FEDERAL HOME LOAN BANK STOCK - Fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. For Federal Home Loan Bank stock, the carrying amount is a reasonable estimate of fair value. LOANS - The fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. MORTGAGE LOANS HELD FOR SALE - Estimated fair value is defined as the current quoted secondary market price for such loans without regard to Republic's other commitments to make and sell loans. DEPOSITS - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS - The carrying amount is a reasonable estimate of fair value. OTHER BORROWED FUNDS - The fair value is estimated based on the estimated present value of future cash outflows using the current rates at which similar loans with the same remaining maturities could be obtained. COMMITMENTS TO EXTEND CREDIT - The fair value of commitments to extend credit is based upon the difference between the interest rate at which Republic is committed to make the loans and the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for the estimated volume of loan commitments actually expected to close. The fair value of such commitments is not material. COMMITMENTS TO SELL LOANS - The fair value of commitments to sell loans is based upon the difference between the interest rates at which Republic is committed to sell the loans and the current quoted secondary market price for similar loans. The fair value of such commitments is not material. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1996 and 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 20. SEGMENT INFORMATION Republic's operations include two reportable segments: banking and mortgage banking. The banking segment is composed of those operations involved in making loans, investing in government and government agencies' securities and receiving deposits from customers. The mortgage banking segment consists of those operations involved in originating residential mortgage loans for resale in the secondary mortgage market and in servicing loans for others. Intersegment interest income and expense represent interest on loans and advances from the bank segment to the mortgage banking segment are computed at the Bank's prime rate.
YEAR ENDED DECEMBER 31, 1996 -------------------------------------------------------------------------- (IN THOUSANDS) MORTGAGE PARENT BANKING BANKING COMPANY ELIMINATIONS CONSOLIDATED Interest income: Unaffiliated customers $ 81,296 $ 575 $ 115 $ 81,986 Intersegment 538 $ (538) ----------- ----------- ----------- ----------- ----------- Total interest income 81,834 575 115 (538) 81,986 ----------- ----------- ----------- ----------- ----------- Interest expense: Unaffiliated customers 43,689 166 43,855 Intersegment 115 423 (538) ----------- ----------- ----------- ----------- ----------- Total interest expense 43,804 423 166 (538) 43,855 ----------- ----------- ----------- ----------- ----------- Net interest income 38,030 152 (51) 38,131 Provision for loan losses 9,149 9,149 Non-interest income 5,195 1,902 7,097 Non-interest expense 30,189 1,178 42 31,409 ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes $ 3,887 $ 876 $ (93) $ - $ 4,670 =========== =========== =========== =========== =========== Identifiable assets $ 1,131,681 $ 9,180 $ 62,146 $ (62,125) $ 1,140,882 =========== =========== =========== =========== =========== Depreciation and amortization of premises and equipment $ 3,094 $ 85 $ 3,179 =========== =========== =========== Capital expenditures $ 8,641 $ 32 $ 8,673 =========== =========== ===========
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------------------------- (IN THOUSANDS) MORTGAGE PARENT BANKING BANKING COMPANY ELIMINATIONS CONSOLIDATED Interest income: Unaffiliated customers $ 70,394 $ 578 $ 161 $ 71,133 Intersegment 459 $ (459) ----------- ----------- ----------- ----------- ----------- Total interest income 70,853 578 161 (459) 71,133 ----------- ----------- ----------- ----------- ----------- Interest expense: Unaffiliated customers 37,502 218 37,720 Intersegment 459 (459) ----------- ----------- ----------- ----------- ----------- Total interest expense 37,502 459 218 (459) 37,720 ----------- ----------- ----------- ----------- ----------- Net interest income 33,351 119 (57) 33,413 Provision for loan losses 4,268 4,268 Non-interest income 5,661 1,859 7,520 Non-interest expense 23,419 1,069 17 24,505 ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes $ 11,325 $ 909 $ (74) $ - $ 12,160 =========== =========== =========== =========== =========== Identifiable assets $ 884,274 $ 7,062 $ 61,902 $ (61,891) $ 891,347 =========== =========== =========== =========== =========== Depreciation and amortization of premises and equipment $ 2,235 $ 118 $ 2,353 =========== =========== =========== Capital expenditures $ 2,908 $ 14 $ 2,922 =========== =========== ===========
YEAR ENDED DECEMBER 31, 1994 -------------------------------------------------------------------------- (IN THOUSANDS) MORTGAGE PARENT BANKING BANKING COMPANY ELIMINATIONS CONSOLIDATED Interest income: Unaffiliated customers $ 46,516 $ 859 $ 47,375 Intersegment 534 $ (534) ----------- ----------- ----------- ----------- Total interest income 47,050 859 (534) 47,375 ----------- ----------- ----------- ----------- Interest expense: Unaffiliated customers 22,235 $ 278 22,513 Intersegment 534 (534) ----------- ----------- ----------- ----------- ----------- Total interest expense 22,235 534 278 (534) 22,513 ----------- ----------- ----------- ----------- ----------- Net interest income 24,815 325 (278) 24,862 Provision for loan losses 537 537 Non-interest income 5,355 1,642 6,997 Non-interest expense 20,803 1,399 14 22,216 ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes $ 8,830 $ 568 $ (292) $ - $ 9,106 =========== =========== =========== =========== =========== Identifiable assets $ 735,082 $ 879 $ 50,582 $ (50,534) $ 736,009 =========== =========== =========== =========== =========== Depreciation and amortization of premises and equipment $ 1,880 $ 144 $ 2,024 =========== =========== =========== Capital expenditures $ 4,768 $ 128 $ 4,896 =========== =========== ===========
21. PARENT COMPANY CONDENSED FINANCIAL INFORMATION BALANCE SHEETS
DECEMBER 31, ----------------------------- (IN THOUSANDS) 1996 1995 Assets: Cash and cash equivalents $ 551 $ 573 Due from subsidiaries 542 507 Investment in subsidiaries 60,181 56,014 Repurchase agreements 851 4,785 Other 21 23 ------------- ------------ Total assets $ 62,146 $ 61,902 ============= ============ Liabilities: Long-term debt $ 1,638 $ 1,988 Other 1,489 1,412 ------------- ------------ Total liabilities 3,127 3,400 ------------- ------------ Stockholders' equity: Preferred stock 5,000 5,000 Common stock 3,491 3,491 Additional paid-in capital 6,817 6,817 Retained earnings 43,930 43,194 Net unrealized appreciation on securities available for sale, net of tax of $113 (219) -------------- ------------ Total stockholders' equity 59,019 58,502 ------------- ------------ Total $ 62,146 $ 61,902 ============= ============
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, --------------------------------------------- (IN THOUSANDS) 1996 1995 1994 Income: Dividends from subsidiary $ 2,400 $ 2,000 $ 500 Interest 115 160 ------------ ------------- ------------ Total income 2,515 2,160 500 ------------ ------------- ------------ Expenses: Interest expense 166 218 278 Other expense 42 16 13 ------------ ------------- ------------ Total expenses 208 234 291 ------------ ------------- ------------ Income before income taxes 2,307 1,926 209 Income tax benefit 33 26 130 ------------ ------------- ------------ Income before equity in undistributed net income of subsidiaries 2,340 1,952 339 Equity in undistributed net income of subsidiaries 387 5,836 5,831 ------------ ------------- ------------ Net income $ 2,727 $ 7,788 $ 6,170 ============ ============= ============
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 Operating activities: Net income $ 2,727 $ 7,788 $ 6,170 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiaries (387) (5,836) (5,831) Change in due from subsidiary (35) (220) (111) Change in other assets (63) 1 (184) Change in other liabilities (15) 850 470 ------------ ------------- ------------ Net cash provided by operating activities 2,227 2,583 514 ------------ ------------- ------------ Investment activities: Purchases of repurchase agreements (55,292) Purchase of common stock of subsidiary bank (3,999) Proceeds from maturities of repurchase agreements 3,999 50,507 ------------ ------------- ------------ Net cash used in investing activities (4,785) ------------ ------------- ------------ Financing activities: Sale of preferred stock 5,000 Dividends paid (1,899) (1,563) Sale of common stock and stock options exercised 306 235 Purchase and retirement of common stock (74) (28) Payments on long-term debt (350) (987) (650) ------------ ------------- ------------ Net cash provided by (used in) financing activities (2,249) 2,682 (443) ------------ ------------- ------------ Net increase (decrease) in cash and cash equivalents (22) 480 71 Cash and cash equivalents, beginning of year 573 93 22 ------------ ------------- ------------ Cash and cash equivalents, end of year $ 551 $ 573 $ 93 ============ ============= ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Deloitte & Touche LLP were the principal accountants for Republic Bancorp, Inc. since 1983. As reported on Form 8-K filed with the Securities and Exchange Commission on May 31, 1996, Deloitte & Touche LLP were dismissed as the principal accountants and Crowe, Chizek and Company LLP were engaged as the principal accountants. The audit reports of Deloitte & Touche LLP on the consolidated financial statements of Republic Bancorp, Inc. as of and for the years ended December 31, 1995 and 1994 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. The audit reports of Crowe, Chizek and Company LLP on the consolidated financial statements as of and for the year ended December 31, 1996 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. There have been no disagreements with the independent accountants. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following directors of Republic were elected at the most recent annual meeting of shareholders held on January 13, 1997. All directors of Republic were elected to a one year term. The table also includes, as designated, Republic's executive officers.
DIRECTORS & EXECUTIVE OFFICERS OF REPUBLIC Name, Age and Principal Occupation Class of During the Past Five Years Director Common Since Stock Number Percent BERNARD M. TRAGER, 68, has served as 1982 A 2,728,020(1) 45.07% Chairman of Republic since 1982 and as B 621,008(2) 53.08% Chairman & CEO since 1994. STEVEN E. TRAGER, 36, has served as 1988 A 598,116(3) 9.88% President & Secretary of Republic B 81,656(4) 6.97% since 1994. From 1993 to 1994 he served as Vice Chairman, General Counsel & Secretary. In 1990, he was promoted from Vice President, General Counsel & Secretary to Senior Vice President, General Counsel & Secretary. A. SCOTT TRAGER, 44, has served as 1990 A 48,966(5) .80% Vice Chairman of Republic since 1994 B 9,738(6) .83% and has served as President of the Bank (North Central region) since 1984. L. LEE KINSOLVING, JR., 44, has served 1982 A 126,250(7) 2.09% as Vice Chairman of Republic since B 25,250(8) 2.16% 1994. Prior to 1994, he served as Senior Vice President of Republic Savings Bancorp from 1990 to 1994. E. WILLIAM PETTER, JR., 47, has served 1995 A 31,500 .52% as Vice Chairman & Chief Financial B 6,300 .53% Officer of Republic since 1995. He served as Executive Vice President and Chief Financial Officer of the Bank since 1993. From 1990 to 1993 he served as Senior Vice President and Chief Financial Officer of the Bank. R. WAYNE STRATTON, 49, is a partner in 1995 A 1,750 .03% the CPA firm of Jones, Nale & B 350 .03% Mattingly PLC since 1974. LARRY M. HAYES, 48, is president of 1995 A 6,735 .11% Midwest Construction Company, Inc., B 1,347 .11% Lexington, Kentucky since 1989. Mr. Hayes is Vice Chairman of the Board of Directors of Louisville Gardens, Inc.; a member of the Board of Trustees of St. Catherine College and the Greater Louisville Economic Development Partnership. JAMES B. BRIEN, JR., 54, is a partner 1995 A 2,755 .05% with the law firm of Neely & Brien in B 551 .05% Mayfield, Kentucky since 1971. REED CONDER, 70, is retired but 1995 A 37,115 .61% formerly served as the Superintendent B 8,423 .72% of the Marshall County School System, a position held for 23 years. He is a member of the Board of Directors of the Purchase Area Economic Opportunity Council and the Marshall County School for Exceptional Children. D. HARRY JONES, 66, is an Executive 1995 A 6,735 .11% Vice President of Jones Plastic and B 1,347 .11% Engineering Corporation since 1961. He serves as Trustee for the University of Louisville; Chairman of the Board of Trustees of Suburban Hospital; and a member of the Kentucky Personnel Board. All Executive Officers and Directors A 3,587,842 59.29% as a Group (10 persons) B 755,970 64.62%
1) Includes 2,144,225 shares in the name of Jaytee Properties Limited Partnership of which Mr. Bernard M. Trager is a general partner and Mrs. Jean S. Trager, his wife, is a limited partner. 2) Includes 290,418 shares in the name of Jaytee Properties Limited Partnership of which Mr. Bernard M. Trager is a general partner and Mrs. Jean S. Trager, his wife, is a limited partner. 3) Includes 588,116 shares in the name of Jaytee Properties Limited Partnership of which Mr. Steven E. Trager is a general partner and Mr. Trager's two minor children are limited partners. 4) Includes 79,656 shares in the name of Jaytee Properties Limited Partnership of which Mr. Steven E. Trager is a general partner and Mr. Trager's two minor children are limited partners. 5) Includes 861 shares in the name of Jaytee Properties Limited Partnership of which Mr. A. Scott Trager is a limited partner. 6) Includes 117 shares in the name of Jaytee Properties Limited Partnership of which Mr. A. Scott Trager is a limited partner. 7) Includes 124,855 shares owned directly by Mr. Kinsolving and 1,395 shares owned by Mr. Kinsolving's minor children. 8) Includes 23,408 shares owned directly by Mr. Kinsolving and 1,842 shares owned by Mr. Kinsolving's minor children. None of the directors listed above hold any directorships in companies with a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended. FAMILY RELATIONSHIPS Relationship between any director or Name of Director/Executive Officer executive officer of Republic Bernard M. Trager Father of Steven E. Trager Uncle of A. Scott Trager Steven E. Trager Son of Bernard M. Trager Cousin of A. Scott Trager A. Scott Trager Nephew of Bernard M. Trager Cousin of Steven E. Trager LEGAL PROCEEDINGS No legal events have occurred during the past five years that are material to an evaluation of the ability or integrity of any Director and/or Executive Officer of Republic. ITEM 11. EXECUTIVE COMPENSATION The following table contains the compensation of the named executive officers for Republic for years ended December 31, 1996, 1995, and 1994. Summary Compensation Table
Annual Long Term Compensation Compensation Awards Securities Underlying Name & Principal Bonus Options/ All Other Position Year Salary (1) SARs (#) Compensation Bernard M. Trager, 1996 $220,000 $100,000 --- $61,216(2) Chairman & CEO 1995 220,000 140,000 0 60,856(3) 1994 140,000 157,000 --- 99,520(4) Steven E. Trager, 1996 $160,000 $100,000 --- $6,825(2) President,Secretary 1995 160,000 50,000 5,000 6,921(3) & Director 1994 125,000 50,000 --- 5,792(4) L. Lee Kinsolving, 1996 $160,000 $100,000 --- $6,825(2) Jr., Vice Chairman 1995 160,000 50,000 5,000 6,825(3) & Director 1994 130,000 67,000 --- 9,075(4) A. Scott Trager, 1996 $160,000 $100,000 --- $6,825(2) Vice Chairman & 1995 160,000 50,000 5,000 6,825(3) Director 1994 130,000 50,000 --- 13,125(5) E. William Petter, 1996 $160,000 $100,000 --- $6,825(2) Jr., Vice Chairman 1995 160,000 50,000 5,000 7,134(3) & Director 1994 125,000 50,000 --- 5,759(4)
(1) Represents incentive bonuses for achievement of corporate, individual and organizational objectives in fiscal years 1995, 1994 and 1993. Executive management will not be paid a bonus in 1997 based on the Bank's fiscal 1996 performance. (2) Includes mating contributions to 401(k) Retirement Plan, ($5,625 for Bernard M. Trager, $5,625 for Steven E. Trager, $5,625 for L. Lee Kinsolving, Jr., $5,625 for A. Scott Trager, and $5,625 for E. William Petter, Jr.), amount paid on split dollar life insurance policy ($54,031 for Bernard M. Trager) and on life insurance policies ($1,560 for each of Bernard M. Trager, Steven E. Trager, L. Lee Kinsolving, Jr., A. Scott Trager, and E. William Petter, Jr.). (3) Includes matching contributions to 401(k) Retirement Plan, ($5,625 for Bernard M. Trager, $5,721 for Steven E. Trager, $5,625 for L. Lee Kinsolving, Jr., $5,625 for A. Scott Trager, and $5,934 for E. William Petter, Jr.), amount paid on split dollar life insurance policy ($54,031 for Bernard M. Trager) and on life insurance policies ($1,200 for each of Bernard M. Trager, Steven E. Trager, L. Lee Kinsolving, Jr., A. Scott Trager, and E. William Petter, Jr.). (4) Includes matching contributions to 401(k) Retirement Plan, ($5,250 for Bernard M. Trager, $4,592 for Steven E. Trager, $4,875 for L. Lee Kinsolving, Jr., $2,925 for A. Scott Trager, and $4,559 for E. William Petter, Jr.), amount paid on split dollar life insurance policy ($51,070 for Bernard M. Trager) and on life insurance policies ($1,200 for each of Bernard M. Trager, Steven E. Trager, L. Lee Kinsolving, Jr., A. Scott Trager, and E. William Petter, Jr.), and director fees ($42,000 for Bernard M. Trager, $3,000 for L. Lee Kinsolving, Jr., and $9,000 for A. Scott Trager). Stock Options During 1996, no stock options were granted to executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR Name Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at December 31,1996 at December 31, 1996 Class of Common Stock Exercisable(#) Unexercisable(#) Exercisable(#) Unexercisable(#) (1) Bernard M. Trager A 0 -- 0 0 B 0 -- 0 0 Steven E. Trager A 0 25,000 0 $6,500 B 0 5,000 0 $1,300 A. Scott Trager A 0 25,000 0 $23,000 B 0 5,000 0 $4,600 L. Lee Kinsolving,Jr. A 0 25,000 0 $23,000 B 0 5,000 0 $4,600 E. William Petter, Jr. A 0 25,000 0 $23,000 B 0 5,000 0 $4,600
(1) Value is based on closing book value per share on December 31, 1996 minus the exercise price. Republic's common stock has no established public trading market. Therefore, amounts were computed based on book value per share. Compensation Committee Interlocks and Insider Participation Certain directors and executive officers, including certain members of the Human Resources and Compensation Committee of the Bank were customers of and had transactions with Republic during 1996. The members of the committee are Karen W. Bearden, Gordon C. Duke, D. Harry Jones, and Charles L. Weisberg, and this committee sets the compensation for the Bank's executive officers. Transactions which involved loans or commitments by the Bank were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features. The Bank's Human Resources and Compensation Committee considers recommendations of the Chairman and CEO regarding executive compensation as part of the committee's deliberations. Death Benefit Agreement The Bank entered into a Death Benefit Agreement with Bernard M. Trager which became effective September 10, 1996. This agreement provides for the payment of three years compensation to the estate of Bernard M. Trager in the event of death while a full- time employee of the Bank. In the event of a change in control the Agreement terminates. Change in Control Arrangements Republic entered into Officer Compensation Continuation Agreements with each of Steven E. Trager, A. Scott Trager, L. Lee Kinsolving, Jr., and E. William Petter, Jr., which became effective January 12, 1995. These Agreements provide for the payment of the executive officer's base salary and continuation of such executive officer's other employment benefits for up to a period of two years in the event of a change in control of Republic. In addition, any stock options or other similar rights will become immediately exercisable upon a change in control which results in termination. For purposes of these Agreements, a change in control includes a substantial reduction in the voting power of the stock held by the Trager family. Compensation of Directors As of December 31, 1996, no directors were paid for their services rendered to Republic. During 1996, certain directors of Republic received fees from the Bank for services rendered as Bank directors as follows: R. Wayne Stratton $9,850 Larry M. Hayes (1) $9,500 James B. Brien (1) $8,900 Reed Conder $11,900 D. Harry Jones $5,100 (1) See also Item 13 "Other Transactions" ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of Republic's Class A Common Stock and Class B Common Stock as of March 7, 1996 held by each person who is known by Republic to own beneficially more than five percent (5%) of such class. Except as otherwise indicated, no person named in the table shares voting or investment power with respect to his or her beneficially owned shares.
5% Stockholders Shares Beneficially Owned Class of Common Stock Number Percent Bernard M. Trager A 2,728,020(1) 45.07% 601 West Market Street B 621,008(2) 53.08% Louisville, Kentucky 40202 Shelley Kusman A 627,958(3) 10.37% 601 West Market Street B 88,210(4) 7.54% Louisville, Kentucky 40202 Steven E. Trager A 598,116(5) 9.88% 601 West Market Street B 81,656(6) 6.97% Louisville, Kentucky 40202
1) Includes 2,144,225 shares in the name of Jaytee Properties Limited Partnership of which Mr. Bernard M. Trager is a general partner and Mrs. Jean S. Trager, his wife, is a limited partner. 2) Includes 290,418 shares in the name of Jaytee Properties Limited Partnership of which Mr. Bernard M. Trager is a general partner and Mrs. Jean S. Trager, his wife, is a limited partner. 3) Includes 98,962 shares owned by Bankers Insurance Agency, Inc., a corporation, the majority of which is owned by Ms. Kusman, and 528,996 shares in the name of Jaytee Properties Limited Partnership of which Ms. Kusman is a limited partner. 4) Includes 16,562 shares in the name of Bankers Insurance Agency, Inc., a corporation, the majority of which is owned by Ms. Kusman, and 71,648 shares in the name of Jaytee Properties Limited Partnership of which Ms. Kusman is a limited partner. 5) Includes 588,116 shares in the name of Jaytee Properties Limited Partnership of which Mr. Steven E. Trager is a general partner and Mr. Trager's two minor children are limited partners. 6) Includes 79,656 shares in the name of Jaytee Properties Limited Partnership of which Mr. Steven E. Trager is a general partner and Mr. Trager's two minor children are limited partners. See Item 10, "Directors and Executive Officers of the Registrant", with respect to security ownership by Republic's directors and executive officers. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Leasing Arrangements - Republic leases space in three buildings owned by Bernard M. Trager, Chairman of Republic, and Jean Trager, his wife. Republic Corporate Center at 601 West Market Street, Louisville, Kentucky is utilized as both a downtown banking center location and as Republic's administrative headquarters. The Bank leases approximately 43,000 square feet for which it pays $69,417 per month with lease terms beginning in October 1, 1996 and expiring September 30, 2001. The remaining two locations leased from Bernard M. Trager and Jean Trager by Republic are Hurstbourne Parkway and Bardstown Road banking centers. Rental payments for the Bardstown Road banking center were $2,083 each month during 1996. Rental payments for the Hurstbourne banking center were $14,417 per month for January 1996 through February 1996 and $16,117 per month from March 1996 through December 1996. These leases will expire June 30, 1998 for Hurstbourne Parkway and July 31, 1998 for Bardstown Road. Each of the above transactions were obtained on terms comparable to those which could have been obtained from an unaffiliated party. Transactions With Directors - The law firm of Wyatt, Tarrant & Combs provides legal services to Republic. A. Wallace Grafton, Jr., a director of the Bank, is a partner in Wyatt, Tarrant & Combs. Fees paid to Wyatt, Tarrant & Combs totaled $17,793 in 1996. During 1996, the Bank paid $711,000 to Midwest Construction Company, Inc. for banking center construction. Larry Hayes, a director of the Bank and Republic is President of Midwest Construction Company, Inc. The law firm of Neely & Brien also provides legal services to Republic. James B. Brien, a director of Republic, is a partner in Neely & Brien. Fees paid to Neely & Brien for legal services totaled $15,207 in 1996. Other Transactions - Steven E. Trager, a director, and Shelley Kusman, a more than five percent shareholder of Republic, and Jean Trager, Bernard M. Trager's wife, are directors of Bankers Insurance Agency, Inc., a title insurance agency which provides title and coverage to customers of Republic. These services resulted in commissions to Bankers Insurance Agency of $408,000 in 1996. The majority owner of Bankers Insurance Agency is Shelley Kusman. Minority shareholders in Bankers Insurance Agency include Steven E. Trager, Jean Trager, and the grandchildren of Bernard M. Trager; Michael Kusman, Andrew Kusman, Brett Kusman, Kevin Trager and Emily Trager. Steven E. Trager and Shelley Kusman are children of Bernard M. Trager. Indebtedness of Management - Federal banking laws require that all loans or extensions of credit by the Bank to its executive officers and directors be made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to Bank directors must be approved in advance by a majority of the disinterested members of the Board of Directors. The Bank has made loans to executive officers, holders of ten percent (10%) or more of the shares of any class of its common stock and affiliates and directors in the ordinary course of business, on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. As of December 31, 1996, directors and executive officers of Republic had loans outstanding of $6.1 million. All such loans are in the ordinary course of business and do not have favorable terms nor involve more than the normal risk of collectibility or present unfavorable features as compared to comparable transactions with the general public. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K (a) The following documents are filed as a part of this Report: Page(s) 1. Financial Statements: The Consolidated Financial Statements of Republic Bancorp, Inc. and Report of Independent Auditors have been included as Item 8- Part II of this filing and consist of the following: Report on Independent Auditors 25 Report on Independent Auditors 26 Consolidated Balance Sheet - December 31, 1996 and 1995 27 Consolidated Statements of Income - Years Ended December 31, 1996, 1995, and 1994 28 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1996, 1995, and 1994 29 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995, and 1994 30 Notes to Consolidated Financial Statements 31 - -51 2. Financial Statement Schedules: Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. (b) Reports on Form 8-K: None during fourth quarter, 1996. (c) Exhibits: The exhibits listed in the Index To Exhibits appears on page 61. 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. By: /s/ Bernard M. Trager Bernard M. Trager Chairman of the Board Dated: March 31, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By:/s/Bernard M. Trager Chief Executive Officer and Director (Principal Bernard M. Trager Executive Officer) Date: March 31, 1997 By:/s/E. William Petter, Jr. Chief Financial Officer and Director (Principal E. William Petter, Jr. Financial and Accounting Officer) Date: March 31, 1997 By:/s/Steven E. Trager Director Steven E. Trager Date: March 31, 1997 By:/s/L. Lee Kinsolving, Jr. Director L. Lee Kinsolving, Jr. Date: March 31, 1997 By:/s/A. Scott Trager Director A. Scott Trager Date: March 31, 1997 By:/s/R. Wayne Stratton Director R. Wayne Stratton Date: March 31, 1997 EXHIBIT INDEX Incorporated Numbers Description By Reference To 3(i) Articles of Incorporation Articles of Incorporation, as amended, of Republic or incorporated by reference to Form 10-K for the year ended December 31, 1995. 3(ii) Bylaws Bylaws of Republic are Incorporated by Reference to Exhibit of the Registrant Statement on Form S-4(File No. 33-77324) filed by Republic with the Commission. 4.1 Provisions of Articles of See Articles of Incorporation, as Incorporation of Republic amended, of Republic incorporated as Defining the Rights of Exhibit 3(i) herein. Security Holders 4.2 Agreement Pursuant to Item Reported as Exhibit 4.2 on page 63 of 601 (b)(iii) of Regulation this Form 10-K for the year ended S-K filed as Exhibit 4.2 December 31, 1996. herein. 10.1* Officer Compensation Reported as Exhibit 10.1 on Form 10-K Continuation Agreement with for the year ended December 31, 1995 and Steven E. Trager, dated filed by Republic with the Commission. January 12, 1995 10.2* Stock Option Plan Agreement Reported as Exhibit 10.2 on From 10-K with Steven E. Trager, dated for the year ended December 31, 1995 January 12, 1996 and filed by Republic with the Commission. 10.3* Officer Compensation Reported as Exhibit 10.3 on Form 10-K Continuation Agreement with L. for the year ended December 31, 1995 Lee Kinsolving, Jr. dated and filed by Republic with the January 12, 1995 Commission. 10.4* Stock Option Plan Agreement Reported as Exhibit 10.4 on Form 10-K with L. Lee Kinsolving, Jr. for the year ended December 31, 1995 and dated January 12, 1996 filed by Republic with the Commission. 10.5* Officer Compensation Continuation Agreement with A. Reported as Exhibit 10.5 on Form 10-K Scott Trager, dated January for the year ended December 31, 1995 and 12, 1995 filed by Republic with the Commission. 10.6* Stock Option Plan Agreement with A. Scott Trager dated Reported as Exhibit 10.6 on Form 10-K January 12, 1996 for the year ended December 31, 1995 and filed by Republic with the Commission. 10.7* Officer Compensation Continuation Agreement with E. Reported as Exhibit 10.7 on Form 10-K William Petter,Jr., dated for the year ended December 31, 1995 and January 12, 1995 filed by Republic with the Commission. 10.8* Stock Option Plan Agreement Reported as Exhibit 10.8 on Form 10-K with E. William Petter, Jr., for the year ended December 31, 1995 and dated January 12, 1996 filed by Republic with the Commission. 10.9* Death Benefit Agreement with Death Benefit Agreement Bernard M.Trager with Bernard M. Trager dated reported as Exhibit 10.9 on page 64 of September 10, 1996 this Form 10-K for the year ended December 31, 1996. 11 Statement regarding Reported as Exhibit 11 on page 67 of Compensation of Per Share this Form 10-K for the year ended Earnings December 31, 1996. 21 Subsidiaries of the Reported as Exhibit 21 on page registrant 68 of this Form 10-K for the year ended December 31, 1996. 27 Financial Data Schedule Reported as Exhibit 27 on page 69 of this Form 10-K for the year ended December 31, 1996. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. EXHIBIT 4.2 Agreement Pursuant to Item 601(b)(4)(iii) of Regulation S-K The registrant hereby agrees to furnish to the Securities and Exchange Commission upon request a copy of any instrument relating to long-term debt of the registrant and its subsidiaries that at any time is not filed in reliance on Item 601(b)(4)(iii)(A) of Regulation S-K. Date: March 27, 1997 REPUBLIC BANCORP, INC. By: /s/ E. William Petter, Jr. Title: Executive Vice President & Chief Financial Officer EXHIBIT 10.9 REPUBLIC BANK & TRUST COMPANY DEATH BENEFIT AGREEMENT REPUBLIC BANK & TRUST COMPANY, a corporation organized and existing under the laws of the Commonwealth of Kentucky, with its principal office and place of business in Louisville, Kentucky (the "Bank"), hereby establishes and enters into effective the 10th day of September, 1996, this Death Benefit Agreement (the "Agreement") for the benefit of Bernard Trager, (the "Covered Employee"). 1. PURPOSE. The purpose of the Agreement is to provide the Bank's key executive employees with additional incentive to remain in the employ of the Bank until death or retirement age, by providing the Designated Beneficiary of a Covered Employee with a benefit in the event of the death of the Covered Employee. The Covered Employees have acquired experience and knowledge of value to the Bank and the Bank wishes to further induce the Covered Employees to remain in the Bank's employ by providing this additional benefit. 2. COVERAGE. The Agreement shall be for the benefit of Bernard Trager who has been properly designated by its Board of Directors. The term Designated Beneficiary shall mean the person(s) and/or entity(ies) designated in writing by the Covered Employee to the Bank, which designation may be amended or revoked at any time, and from time to time as determined by the Covered Employee. If any Covered Employee fails to so name a Designated Beneficiary, the Death Benefit shall be paid to the estate of the deceased Covered Employee. 3. PAYMENT AND AMOUNT OF DEATH BENEFIT. If a Covered Employee dies while he is in the employ of the Bank, on a full-time basis in good standing, a death benefit in an amount equal to the Covered Employee's average gross IRS W-2 compensation during the covered employee's two prior years from the terminating event multiplied by three ("Death Benefit"), shall be paid to the Designated Beneficiary after the Covered Employee's death in thirty-six consecutive equal monthly installments commencing no later than 60 days after the death of the Covered Employee, without interest. At the bank's election, the Bank may pay the entire amount or the remaining balance in a lump sum to the designated beneficiary. If the Bank elects to make such a lump payment, then the amount of the payment will be discounted by an interest rate equal to the Bank's "prime rate" as defined by the Bank. 4. CHANGE IN CONTROL. In the event of a bulk transfer, sale or assignment of more than fifty-five per cent (55%) of the Bank's outstanding voting rights prior to a payable claim having been made pursuant to this Agreement, this Agreement shall immediately terminate and become null and void. 5. CLAIMS FOR DEATH BENEFITS. No claims need to be made by the Designated Beneficiary in order for the Death Benefit to be made after death of the Covered Employee. The Bank shall voluntarily commence such payments in accordance with the terms of this Agreement. 6. ASSIGNMENT. Neither Employee, Employee's spouse nor any other beneficiary will have the right to commute, sell, alienate, assign, transfer or otherwise convey any right hereunder to receive any payment, and all payments and the rights thereto pursuant to this Agreement are expressly declared to be nonassignable and nontransferable. In the event of any attempted assignment or transfer of any payment provided for hereunder, or the right to such payments, the Bank will have the option to declare this Agreement null and void, and in the event of such declaration, the Bank will be relieved of all liability hereunder. 7. EMPLOYMENT. Bank hereby desires to continue the Covered Employee's employment to carry out such duties as the Bank's Board of Directors delegate to him, continuing with this Agreement and terminating at the will of either party. Covered Employee accepts the benefits of this Agreement, and agrees to perform all the work required by the Bank promptly, fully and faithfully. Covered Employee will not have any other gainful employment without the approval of the Bank's Board of Directors. The Covered Employee agrees that during the period of employment with the Bank, the parties agree that the Covered Employee has no right to continued employment with the Bank and employee's employment is terminable by either party, at will, at any time, for any reason. This Agreement creates no promise, guarantee, contract or agreement of continued employment. Covered Employee's compensation will continue to be determined by the Bank's Board of Directors. 8. NON-SOLICITATION CONTINGENCY. By accepting the terms of this Agreement Employee agrees that, should the Employee's employment with the Bank discontinue, Employee will not directly or indirectly solicit the Bank's or its affiliates' customers or employees for a period of one year nor will Employee share any of the Bank's or its affiliates' trade secrets or other proprietary information. 9. MODIFICATION OF AGREEMENT. This Agreement shall be subject to amendment, modification or termination at any time by the Bank, provided, that such amendment, modification or termination shall not diminish any right to benefits with respect to a deceased Covered Employee arising prior thereto. 10. SOURCE OF FUNDS. All payments under this Agreement shall be made from the general assets of the Bank. Nothing in this Agreement shall be construed to give any Covered Employee, Designated Beneficiary or any other person claiming through or for them any specific asset, policy, fund, reserve, account or property of any kind whatsoever owned by the Bank or in which it may have any right, title or interest now or in the future. The Covered Employee and/or the Designated Beneficiary shall solely have the right to enforce the Plan terms and rights in the same manner as unsecured creditors of the Bank. 11. WAGE WITHHOLDING. The Bank's payments of the Deferred Compensation Benefit will be subject to appropriate Federal and State withholding and employment taxes (including social security, etc.), and it is agreed and understood that the Bank and the Employee will comply with such provisions as required by law. 12. ARBITRATION. In the event of a disagreement in regard to any of the terms and conditions of this Agreement, the parties will submit the disputed issues to final and binding arbitration, and such dispute will not be subject to appeal to any court except to permit a party to seek court enforcement of any arbitration award rendered hereunder. If the parties agree to the appointment of a single arbitrator, then the single arbitrator will determine and decide any dispute arising hereunder. If the parties cannot agree to the selection of a single arbitrator, then each party will designate an attorney to serve as an arbitrator, and the selected attorneys will select an arbitrator, who is a certified public accountant, to be the third arbitrator. The panel of three arbitrators will then establish rules for the conduct of the arbitration consistent with the rules of the American Arbitration Association, and KRS 417.050 et. seq. The arbitrators will be impartial and will have no prior or present relationship with any of the parties. The arbitration hearing and proceedings will take place in the Commonwealth of Kentucky, and will be enforceable in the Commonwealth of Kentucky. The arbitration panel will be empowered to hear, conclusively determine and resolve all claims and disputes between the parties. The arbitration panel's fees and expenses will be shared equally by the parties to the arbitration. 13. GOVERNING LAW. This Agreement shall be construed under and governed by the laws of the Commonwealth of Kentucky. 14. SUCCESSION. This Agreement will be binding upon and will be for the benefit of the parties, their heirs, personal representatives, legaltees, successors and assigns. 15. GENDER. Whenever the context hereof so permits or requires, any gender shall include all other genders. 16. BINDING EFFORT. The Agreement shall bind the Bank and its successors and assigns, subject only to the provisions of Section 6 above. To evidence their understanding of, and agreement to, all the terms and conditions of this Agreement, the parties have executed this Agreement in multiple copies, each one of which when signed by all the parties will be considered an original. REPUBLIC BANK & TRUST COMPANY By /s/ E. William Petter, Jr. E. William Petter, Jr. Executive Vice President COVERED EMPLOYEE By /s/ Bernard M. Trager Exhibit 11. Statement Regarding Computation of Per Share Earnings in thousands, except per share amounts
December 31, 1996 1995 1994 Primary earnings per common share: Weighted average common shares outstanding 7,221 7,189 7,110 Common stock equivalents due to dilutive effect of stock options 103 81 30 Common stock equivalents due to dilutive effect of Convertible Preferred Stock 300 257 ----- ----- ----- Average shares and equivalents outstanding 7,624 7,527 7,140 Net income $2,727 $7,788 $6,170 Less preferred stock dividends (425) (364) ------ ------ ------ Income available for common stock $2,302 $7,424 $6,170 Primary net income per share $0.30 $0.99 $0.86 ====== ===== =====
EXHIBIT 21 Subsidiaries of Republic Bancorp, Inc.* Name of Subsidiary State in Which Organized Republic Bank & Trust Company Kentucky Republic Capital Trust Delaware *Certain subsidiaries are not listed since, considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary at December 31, 1996 EX-27 2 FDS --
9 This schedule contains summary financial information extracted from the consolidated balance sheet, the consolidated statement of income and bank records and is qualified in its entirety by reference to such report on Form 10-K. dollars in thousands, except earnings per share figures 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 40,021 0 16,650 0 0 281,855 281,632 759,424 6,241 1,140,882 783,141 181,634 10,114 106,974 0 5,000 3,941 50,528 1,140,882 70,831 9,880 1,275 81,986 36,084 43,855 38,131 9,149 0 31,409 4,670 2,727 0 0 2,727 0.30 0.30 9.04 3,055 17,906 1,809 3,645 3,695 7,129 526 6,241 6,241 0 6,241
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