<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-56583
2,140,000 SHARES
[LOGO]
CLASS A COMMON STOCK
Of the 2,140,000 shares of Class A Common Stock, no par value (the "Class A
Common Stock") offered hereby (the "Offering"), 1,740,000 shares will be sold by
Republic Bancorp, Inc., a Kentucky corporation ("Republic" or the "Company"),
and 400,000 shares will be sold by Mr. Bernard M. Trager (sometimes referred to
as the "Selling Shareholder"). Republic will not receive any proceeds from the
sale of shares by the Selling Shareholder.
Republic has applied for listing the Class A Common Stock on the Nasdaq
National Market ("Nasdaq") under the symbol "RBCAA." Prior to this Offering,
there has been no public market for the Class A Common Stock. The initial public
offering price has been determined by negotiations between the Company and
representatives of the Underwriters. For factors considered in determining the
initial public offering price, see "UNDERWRITING."
Republic, a bank holding company headquartered in Louisville, Kentucky, is
the parent of Republic Bank & Trust Company (the "Bank"). Republic's authorized
capital stock consists of Class A Common Stock and Class B Common Stock, no par
value ("Class B Common Stock") (collectively, the "Common Stock"), and Preferred
Stock. The Class A Common Stock is substantially identical to the Class B Common
Stock, except with respect to voting and dividend rights. The Class A Common
Stock is entitled to one vote per share and the Class B Common Stock is entitled
to ten votes per share. The Class A Common Stock is entitled to cash dividends
in an amount per share equal to 110% of the per share cash dividends, if any,
paid on the Class B Common Stock. See "DESCRIPTION OF CAPITAL STOCK." Upon
completion of the Offering, Mr. Bernard M. Trager, Chairman of Republic, and
members of his immediate family will hold approximately 61% of the voting power,
based on their beneficial ownership of Common Stock, and will be able to control
the outcome of all matters submitted to shareholders which are decided by a
majority or plurality vote. See "PRINCIPAL SHAREHOLDERS."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF MATERIAL RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
DISCOUNTS PROCEEDS TO THE THE SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) SHAREHOLDER
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...... $13.00 $.91 $12.09 $12.09
Total(3)....... $27,820,000 $1,947,400 $21,036,600 $4,836,000
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "UNDERWRITING."
(2) Calculated before deducting expenses of the Offering payable by the Company
estimated at $271,000.
(3) The Company has granted an option to the Underwriters, exercisable within 30
days of the date of this Prospectus, to purchase up to 260,000 additional
shares of Class A Common Stock on the terms set out above, less the
Underwriting Discounts and Commissions shown above, solely to cover
over-allotments, if any. If the over-allotment option is exercised in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $31,200,000, $2,184,000 and $24,180,000,
respectively. See "UNDERWRITING."
------------------------
The shares of Class A Common Stock are offered by the Underwriters, subject
to prior sale, when, as and if received and accepted by the Underwriters, and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the certificates for the shares of Class A
Common Stock will be made against payment therefor in Memphis, Tennessee on or
about July 27, 1998.
MORGAN KEEGAN & COMPANY, INC. J.J.B. HILLIARD, W.L. LYONS, INC.
THE DATE OF THIS PROSPECTUS IS JULY 21, 1998.
<PAGE>
[MAP]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE
OF THE CLASS A COMMON STOCK, THE PURCHASE OF CLASS A COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE AFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE COMPANY INTENDS TO FURNISH ITS SHAREHOLDERS WITH ANNUAL REPORTS
CONTAINING AUDITED FINANCIAL STATEMENTS.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL PER
SHARE DATA OF REPUBLIC INCLUDED IN THIS PROSPECTUS HAVE BEEN RESTATED TO REFLECT
A STOCK SPLIT EFFECTED AS A STOCK DIVIDEND IN FEBRUARY, 1996. IN CONJUNCTION
WITH THE STOCK SPLIT, A RECLASSIFICATION WAS ALSO EFFECTED, AND, AS A RESULT OF
THE RECLASSIFICATION AND SPLIT, TWO CLASSES OF COMMON STOCK, THE CLASS A AND
CLASS B COMMON STOCK, REPLACED THE COMMON STOCK OF THE COMPANY THEN OUTSTANDING.
SHARE INFORMATION INCLUDED IN THIS PROSPECTUS ALSO HAS BEEN RESTATED TO REFLECT
A TWO-FOR-ONE SPLIT OF THE COMMON STOCK EFFECTIVE JULY 1, 1998. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. IN ADDITION, UNLESS OTHERWISE INDICATED,
ALL REFERENCES TO "THE COMPANY" OR "REPUBLIC" IN THIS PROSPECTUS REFER TO
REPUBLIC BANCORP, INC. AND ITS CONSOLIDATED SUBSIDIARIES, INCLUDING THE BANK.
THE COMPANY
Republic, a bank holding company headquartered in Louisville, Kentucky,
derives substantially all of its revenue and income from the operation of its
wholly-owned subsidiary, a Kentucky state bank. As a result of the efforts of a
group of local businessmen headed by Mr. Bernard M. Trager, the Bank became a
full service commercial bank in Louisville, Kentucky in 1982. In 1994, the Bank
expanded its operations in Kentucky by combining with Republic Bank of Shelby
County, a state chartered bank, and Republic Savings Bank, F.S.B., a federal
savings bank, which also were controlled by Mr. Bernard M. Trager and members of
his family. The Bank has 18 full-service banking locations, eight of which are
located in the Louisville metropolitan area, including the Company's principal
offices, and four of which are located in the Lexington metropolitan area,
Kentucky's two largest urban areas. At March 31, 1998, Republic had total assets
of $1.1 billion, total deposits of $728 million and total stockholders' equity
of $73 million. Republic is the fourth largest independent Kentucky based bank
holding company.
In 1997 Republic made the strategic decision to concentrate its Kentucky
banking operations in the North Central and Central Kentucky markets. As a
result, the Company entered into a series of transactions in which it sold the
deposits and fixed assets of substantially all of its Western Kentucky banking
centers. The last of these transactions was completed during the first quarter
of 1998. In total, Republic sold approximately $180 million in deposits and
approximately $3.7 million in fixed assets while initially retaining
substantially all of the loan portfolio associated with those banking centers.
Republic's business continues to reflect the Company's successful community
banking origins by providing a broad line of financial products and services to
individuals, professionals and businesses. Republic believes that its "super
community" brand of banking is an important factor in the success and growth of
the Company. This philosophy allows for flexible, responsive decision making at
each banking center in Republic's banking network and focuses on long-standing
client relationships and personalized service. Management believes that its
community oriented approach and commitment to customer service afford Republic a
distinct competitive advantage in its markets.
Republic's overall business strategy is to (i) continue to service
individuals, professionals and businesses by providing personal, responsive,
quality service through its super community banking network, (ii) continue to
coordinate its loan and deposit growth and thereby enrich its earning asset mix,
(iii) expand its commercial banking and preferred client services, and (iv)
expand its business through internal growth and selective acquisitions in
product lines or markets considered strategically attractive by management. In
implementing its strategy, management emphasizes the following services and
product lines:
- RELATIONSHIP BANKING. Republic serves all of its clients with highly
skilled retail, technical, and managerial personnel in order to maintain
its quality delivery of banking services at each of its banking centers.
Republic believes a key to establishing and maintaining a long-term
relationship with its banking clients is to offer competitively priced
products tailored to meet clients' needs with personalized service and
professional delivery. The advisory boards that the Bank maintains in each
3
<PAGE>
of its banking center communities further enhance client relationships and
community awareness and establish local involvement.
- CUSTOMER SERVICE AND CONVENIENCE. Through extended lobby and drive-up
hours and experienced personnel, clients of Republic can obtain full
banking services at any banking center. Seventeen of the Company's banking
centers are open on Saturdays. Republic strives to develop customer
loyalty by promoting a "hands-on" approach and offering quick
decision-making in its delivery of banking products and services to
existing and potential clients. The Company enhances its client service by
marketing loan and deposit products through its telebanking services.
Republic offers telebanking services during normal business hours and
account information access 24 hours a day, 7 days a week. To further
enhance customer service and convenience, all executive officers spend
time each month in banking centers assessing the needs of both clients and
the Republic associates serving those clients.
- DEDICATED, SALES-ORIENTED ASSOCIATES. Republic instills within its work
force a sales-oriented culture to promote customer service and market
penetration. Republic seeks to enhance employee performance through
training and Company-wide annual evaluations. To further promote customer
service and enhance performance, Republic emphasizes performance-based
compensation, rewarding employees who achieve or exceed corporate
objectives and effectively cross-sell the organization's services.
- MORTGAGE LENDING. Republic uses its banking centers and commissioned
originators to offer a variety of single family residential mortgage
products. The Company generally retains mortgage loans with variable rates
and sells fixed rate loans into the secondary market. During the year
ended December 31, 1997, Republic originated $430 million of mortgage
loans. Mortgage loan originations during the three months ended March 31,
1998, totaled $141 million.
- PREFERRED CLIENT SERVICES. Republic has established extensive long
standing relationships with the medical communities in its primary
markets. Special loan and deposit products, including 100% financing on
first home purchases for medical students and residents, personalized
deposit products and affinity cards, have been tailored to meet the needs
of physicians and their practices. In addition to its exclusive
participation in various programs at the two state medical schools,
Republic has received the exclusive endorsement of the Jefferson County
Medical Society, the members of which account for nearly 600 depository
relationships representing $41 million in deposits as of April 30, 1998.
Republic intends to expand these services to other special business
groups.
- CONSUMER BANKING. Republic continues to expand its retail client base with
the aid of competitive consumer loan and deposit products. Republic has
developed an attractive home equity loan product with competitive terms,
generating over $118 million in new lines of credit since June, 1996.
Traditional checking combined with preferential money market accounts and
certificates of deposit have resulted in increased fee income and deposit
balances.
- COMMERCIAL BANKING. In response to client demand, Republic has increased
its emphasis on commercial loan and cash management services by
establishing centralized commercial lending and cash management
departments. The Company intends to expand this business by broadening its
relationships with its current as well as prospective commercial clients.
The Company was incorporated in Kentucky in 1974 and became a registered
bank holding company in 1982, when the Bank commenced its commercial banking
business. The executive offices of Republic are located at 601 West Market
Street, Louisville, Kentucky 40202, telephone number (502) 584-3600.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered by
the Company..................... 1,740,000 shares. See "DESCRIPTION OF CAPITAL STOCK."
Class A Common Stock offered by
the Selling Shareholder......... 400,000 shares
Class A Common Stock outstanding
prior to the Offering........... 12,541,062 shares
Class A Common Stock to be
outstanding after the
Offering........................ 14,281,062 shares(1)
Class B Common Stock
outstanding..................... 2,418,074 shares
Total Class A and Class B Common
Stock to be outstanding after
the Offering.................... 16,699,136 shares(1)
Nasdaq symbol..................... RBCAA
Use of Proceeds................... The proceeds of the Offering are expected to be used for
continued banking center expansion, broadening of
existing business lines, potential acquisitions and
other general corporate purposes. See "USE OF PROCEEDS."
</TABLE>
COMPARISON OF CLASS A AND CLASS B COMMON STOCK
<TABLE>
<S> <C> <C>
Voting rights Class A........... One (1) vote per share.
Class B........... Ten (10) votes per share.
Dividend Class A........... 110% of any cash dividend paid on Class B Common Stock.
rights If a non-cash dividend is paid on Class B Common Stock,
an equal dividend must be paid on Class A Common Stock.
Class B........... Subject to dividend differential on Class A Common
Stock.
Convertibility Class A........... Not convertible.
Class B........... Convertible into Class A Common Stock on a share for
share basis.
</TABLE>
RISK FACTORS
A number of factors should be considered by potential investors before
purchasing shares of the Class A Common Stock in the Offering. See "RISK
FACTORS."
- ------------------------
(1) Excludes 1,963,000 shares of Class A Common Stock reserved for future
issuance to employees under the Company's Stock Option Plan (options to
purchase approximately 995,000 shares of which were outstanding at June 30,
1998, and options to purchase an additional 250,000 shares are to be granted
at or prior to the closing of the Offering at the initial public offering
price), 645,200 shares reserved for issuance upon conversion of outstanding
Trust Preferred securities, and 260,000 shares issuable upon exercise of the
Underwriters' over-allotment option. Also excludes shares of Class A Common
Stock issuable upon conversion of shares of Class B Common Stock.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company are derived
from the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and the information contained in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." The unaudited consolidated financial statements for the three
months ended March 31, 1998 and 1997 include all adjustments (consisting of
normal recurring adjustments) which management of the Company considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the three months ended March
31, 1998, are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1998. For preliminary financial information
as of and for the periods ended June 30, 1998, see "SELECTED CONSOLIDATED
FINANCIAL DATA-- RECENT DEVELOPMENTS."
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED MARCH 31,
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------ -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------------- ------------ ----------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income............... $ 22,785 $ 22,610 $ 91,194 $ 81,986 $ 71,133 $ 47,375 $ 43,377
Interest expense.............. 12,415 12,603 50,856 43,855 37,720 22,513 21,119
Net interest income........... 10,370 10,007 40,338 38,131 33,413 24,862 22,258
Provision for loan losses..... 643 1,298 7,251 9,149 4,268 537 391
Non-interest income........... 2,796 2,096 7,743 7,097 7,520 6,997 8,154
Gain on sale of deposits...... 4,116 7,527
Gain on sale of Bankcard...... 3,660
Non-interest expense.......... 8,074 7,995 32,880 31,409 24,505 22,216 22,199
Income before taxes........... 8,565 2,810 19,137 4,670 12,160 9,106 7,822
Net income.................... 5,524 1,880 12,259 2,727 7,788 6,170 5,864
BALANCE SHEET DATA:
Total assets.................. $ 1,112,576 $ 1,090,616 $ 1,054,950 $ 1,140,882 $ 891,347 $ 736,009 $ 646,697
Total securities.............. 214,467 229,374 192,372 281,855 114,654 100,705 69,193
Total loans, net.............. 783,505 760,749 794,939 759,424 668,193 571,950 488,109
Allowance for loan losses..... 8,234 6,281 8,176 6,241 3,695 1,827 1,627
Total deposits................ 728,069 812,442 731,598 783,141 734,443 590,036 516,871
Repurchase agreements and
other short-term
borrowings.................. 110,477 87,451 111,137 181,634 21,729 12,732 13,228
Other borrowed funds.......... 179,164 111,746 124,405 106,974 68,063 77,060 67,721
Total stockholders' equity.... 73,434 59,738 68,386 59,019 58,502 47,045 40,669
PER SHARE DATA:(1)
Net income per Class A
common...................... $ 0.37 $ 0.12 $ 0.82 $ 0.16 $ N/A $ N/A $ N/A
Net income per Class B
common...................... 0.37 0.12 0.81 0.15 N/A N/A N/A
Net income per common......... N/A N/A N/A N/A 0.52 0.43 0.42
Book value.................... 4.91 3.79 4.58 3.74 3.71 3.28 2.86
Cash dividends per Class A
common...................... 0.0275 0.0275 0.1100 0.1100 N/A N/A N/A
Cash dividends per Class B
common...................... 0.0250 0.0250 0.1000 0.1000 N/A N/A N/A
Cash dividend per common N/A N/A N/A N/A 0.0850 N/A N/A
PERFORMANCE RATIOS:
Return on average assets...... 1.29%(2) .69% 1.12% .29% .95% .93% .92%
Return on average common
equity...................... 19.19(2) 12.64 18.81 4.57 14.46 13.71 14.10
Net interest margin........... 3.92 3.82 3.85 4.21 4.25 3.96 3.69
Efficiency ratio.............. (361) 66 68(4) 64(5) 60 70 73
ASSET QUALITY RATIOS:
Nonperforming assets to total
loans....................... 1.02% 0.94% 0.90% 1.06% 0.41% 0.46% 0.75%
Net loan charge-offs to
average loans............... 0.29 0.64 0.66 0.91 0.38 0.06 0.08
Allowance for loan losses to
total loans................. 1.04 0.82 1.02 0.81 0.55 0.32 0.33
Allowance for loan losses to
non-performing loans........ 108 88 115 78 168 97 61
CAPITAL RATIOS:
Leverage ratio................ 7.31% 6.11% 6.99% 5.76% 6.62% 6.40% 6.93%
Average stockholders' equity
to average total assets..... 6.69 5.43 5.97 6.30 6.56 6.65 5.95
Tier 1 risk-based capital
ratio....................... 11.49 10.17 10.57 9.14 10.29 10.19 11.30
Total risk-based capital
ratio....................... 12.67 11.13 11.73 10.10 10.96 10.60 11.71
Dividend payout ratio......... 7 22 13 68 16 N/A N/A
</TABLE>
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(1) In 1996 the Company's common stock was replaced by Class A Common Stock and
Class B Common Stock. See Note 14 to the Consolidated Financial Statements.
(2) For purposes of calculation, pre-tax gain on sale of deposits of $4.1
million is not annualized.
(3) Excludes pre-tax gain on sale of deposits of $4.1 million.
(4) Excludes pre-tax gain on sale of deposits of $7.5 million and pre-tax gain
on sale of Bankcard of $3.7 million.
(5) Excludes one time Savings Association Insurance Fund ("SAIF") assessment of
$2.3 million.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN
RISKS. A PROSPECTIVE INVESTOR SHOULD CAREFULLY REVIEW THE FOLLOWING RISK FACTORS
AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE DECIDING TO
MAKE AN INVESTMENT IN SHARES OF CLASS A COMMON STOCK. INFORMATION CONTAINED IN
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY
THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY,"
"WILL," "COULD," "SHOULD," "INTEND," "ESTIMATED," "PROJECTED," "CONTEMPLATED" OR
"ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS OR COMPARABLE
TERMINOLOGY. NO ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS COVERED BY THE
FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. THESE STATEMENTS, BY THEIR TERMS,
INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE
COMPANY'S CONTROL. THE FOLLOWING FACTORS COULD CAUSE ACTUAL EXPERIENCE TO VARY
MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING STATEMENTS.
OTHER FACTORS, SUCH AS THE GENERAL STATE OF THE ECONOMY, COULD ALSO CAUSE ACTUAL
EXPERIENCE TO VARY MATERIALLY FROM THE MATTERS COVERED IN SUCH FORWARD-LOOKING
STATEMENTS.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS. The Company's success is dependent
to a significant extent upon economic conditions in Kentucky generally and in
the Louisville and Lexington metropolitan areas in particular. The banking
industry in Kentucky is affected by general economic conditions such as
inflation, recession, unemployment and other factors beyond the Company's
control. Economic recession over a prolonged period or other economic
dislocation in Kentucky and the Louisville and Lexington areas could have a
material adverse impact on the quality of the loan portfolios and the demand for
products and services. Therefore, there can be no assurance that future adverse
changes in the Kentucky or Louisville or Lexington economies would not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
INTEREST RATE RISK. The Company's earnings depend to a great extent on
"rate differentials," which are the differences between interest income that the
Company earns on loans and investments and the interest expense paid on deposits
and other borrowings. These rates are highly sensitive to many factors which are
beyond Republic's control, including general economic conditions and the
policies of various government and regulatory authorities. Changes in interest
rate policy by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") affect the Company's interest income, interest expense and
investment portfolio. Also, governmental policies such as the creation of a tax
deduction for individual retirement accounts can increase savings and affect the
cost of funds. A rapid increase or decrease in interest rates could have an
adverse effect on the net interest margin and results of operations of the
Company. The nature, timing and effect of any future changes in federal monetary
and fiscal policies on Republic and its results of operations are not
predictable. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--ASSET/LIABILITY MANAGEMENT AND MARKET RISK."
CREDIT QUALITY. A significant source of risk for the Company arises from
the possibility that losses will be sustained because borrowers, guarantors and
related parties fail to perform in accordance with the terms of their loans. The
Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Company's credit portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could materially adversely
affect the results of operations of the Company. See "THE COMPANY--GENERAL
BUSINESS OVERVIEW."
RISKS INHERENT IN COMMERCIAL LENDING. The Company has recently expanded its
commercial loan business, establishing a commercial lending unit in 1997.
Commercial lending entails greater risks than traditional single-family
residential lending. Commercial loans typically involve larger loan balances to
single borrowers or groups of related borrowers, resulting in a more
concentrated loan portfolio, and the analysis of commercial loans often requires
an expertise in evaluating the commercial enterprise or valuing its collateral
that is different in significant respects from that which is required for
residential mortgage
7
<PAGE>
lending. Like consumer loans, commercial loans are also subject to adverse
conditions in the economy, as well as the market for the specific goods and
services sold by the commercial borrower. Loans secured by commercial real
estate can also be affected by trends in the local real estate market, including
declines in the market price of local real estate.
COMPETITION. The banking business is highly competitive, and the
profitability of the Company depends principally upon its ability to compete in
the market areas where its banking operations are located. The Company competes
with other commercial banks, savings banks, savings and loan associations,
credit unions, mortgage companies, finance companies, mutual funds, insurance
companies, brokerage and investment banking firms, asset-based non-bank lenders
and certain other non-financial entities, including retail stores which may
maintain their own credit programs and certain governmental organizations which
may offer more favorable financing than the Company. Many of these competitors
have greater financial and other resources than the Company, and certain larger
competitors are recent entrants into the Company's markets. The Company has been
able to compete effectively with other financial institutions by emphasizing
customer service and local office decision-making; by establishing long-term
customer relationships and building customer loyalty; and by providing products
and services designed to address the specific needs of its clients. Although the
Company has been able to compete effectively in the past, no assurances may be
given that the Company will continue to be able to compete effectively in the
future. Various legislative acts in recent years have led to increased
competition among financial institutions. There can be no assurance that the
United States Congress or the Kentucky legislature will not enact legislation
that may further increase competitive pressures on the Company. Competition from
both financial and nonfinancial institutions is expected to continue. See "THE
COMPANY-- COMPETITION."
DEPENDENCE ON KEY PERSONNEL. The Company and the Bank are dependent on
certain key personnel, including Messrs. Bernard M. Trager, Steven E. Trager,
Scott Trager, E. William Petter, Jr., and Mark A. Vogt, each of whom is
considered to be important to the success of the Company. The unexpected loss of
any of these persons could have an adverse effect on the Company and the Bank.
The Company has entered into employment agreements with Messrs. Steven E.
Trager, Scott Trager, E. William Petter and Mark A. Vogt. See "MANAGEMENT."
SUPERVISION AND REGULATION. Bank holding companies and banks operate in a
highly regulated environment and are subject to extensive supervision and
examination by several federal and state regulatory agencies. The Company is
subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to
regulation and supervision by the Federal Reserve Board. The Bank, as a Kentucky
state banking corporation, is subject to regulation and supervision by the
Kentucky Department of Financial Institutions and, as a result of the insurance
of its deposits, by the Federal Deposit Insurance Corporation ("FDIC"). These
regulations are intended primarily for the protection of depositors and clients,
rather than for the benefit of investors. The Company and the Bank are subject
to changes in federal and state laws, as well as changes in regulations and
governmental policies, income tax laws and accounting principles. The effects of
any potential changes cannot be predicted but could adversely affect the
business and operations of the Company and the Bank in the future. See
"SUPERVISION AND REGULATION."
The Federal Reserve Board has adopted a policy that requires a bank holding
company such as the Company to serve as a source of financial strength to its
banking subsidiaries. The Federal Reserve Board has required bank holding
companies to contribute cash to their troubled bank subsidiaries based upon this
"source of strength" policy, which could have the effect of decreasing funds
available for distributions to shareholders. In addition, a bank holding company
in certain circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary. See "SUPERVISION AND REGULATION."
RESTRICTIONS ON ABILITY TO PAY DIVIDENDS. While the Company has paid cash
dividends on the Common Stock since 1995, there is no assurance that the Company
will pay dividends on the Common Stock in the future. The declaration and
payment of dividends on the Common Stock will depend upon the earnings
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<PAGE>
and financial condition of the Company, liquidity and capital requirements, the
general economic and regulatory climate, the Company's ability to service any
equity or debt obligations senior to the Common Stock and other factors deemed
relevant by the Company's board of directors. It is the policy of the Federal
Reserve Board that bank holding companies should pay cash dividends on common
stock only out of income available over the past year and only if prospective
earnings retention is consistent with the organization's expected future needs
and financial condition. The policy provides that bank holding companies should
not maintain a level of cash dividends that undermines the bank holding
company's ability to serve as a source of strength to its banking subsidiaries.
The Company's principal source of funds to pay dividends will be cash
dividends that the Company receives from the Bank. The payment of dividends by
the Bank to the Company is subject to certain restrictions imposed by federal
and state banking laws, regulations and authorities. As of March 31, 1998,
approximately $13 million was available for payment of dividends by the Bank to
the Company under applicable restrictions, without regulatory approval. See
"SUPERVISION AND REGULATION--THE BANK."
The federal banking statutes prohibit federally insured banks from making
any capital distributions (including a dividend payment) if, after making the
distribution, the institution would be "undercapitalized" as defined by statute.
In addition, the relevant federal regulatory agencies also have authority to
prohibit an insured bank from engaging in an unsafe or unsound practice, as
determined by the agency, in conducting an activity. The payment of dividends
could be deemed to constitute such an unsafe or unsound practice, depending on
the financial condition of the Bank. Regulatory authorities could impose
administratively stricter limitations on the ability of the Bank to pay
dividends to the Company if such limits were deemed appropriate to preserve
certain capital adequacy requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-- CAPITAL" and "SUPERVISION AND
REGULATION."
DISPROPORTIONATE VOTING RIGHTS. While the shares of Class A Common Stock
are entitled to one vote per share, shares of Class B Common Stock are entitled
to ten votes per share. At March 31, 1998, there were 5 million shares of Class
B Common Stock authorized, of which 2,418,074 shares were issued and
outstanding. The voting rights of Class A Common Stock can be diluted through
the issuance of additional shares of Class B Common Stock. Based on the number
of shares outstanding as of March 31, 1998, as adjusted to give effect to the
issuance of shares in the Offering, the outstanding shares of Class A Common
Stock will have 37% of the shareholder voting power and the outstanding shares
of Class B Common Stock will have 63% of the shareholder voting power.
CONCENTRATION OF OWNERSHIP; VOTING CONTROL. After the consummation of the
Offering, the executive officers and directors of the Company will beneficially
own approximately 54% of the outstanding shares of Class A Common Stock, and
approximately 53% of such shares of the Class A Common Stock if the
Underwriters' over-allotment option is fully exercised. These percentages may
increase to the extent directors and executive officers of the Company purchase
shares in this Offering. Collectively, they beneficially own approximately 67%
of the outstanding shares of Class B Common Stock, and, upon completion of the
Offering, will hold approximately 62% of the shareholder voting power. Of this
amount, Mr. Bernard M. Trager and members of his immediate family will, upon
completion of the Offering, beneficially own 7,547,410 shares of Class A Common
Stock and 1,589,482 shares of Class B Common Stock, representing approximately
61% of the shareholder voting power. Accordingly, these executive officers and
directors will be able to influence, to a significant extent, the outcome of all
matters required to be submitted to the Company's shareholders for approval,
including decisions relating to the election of directors of the Company, the
determination of day-to-day corporate and management policies of the Company and
other significant corporate transactions. See "MANAGEMENT," "PRINCIPAL
SHAREHOLDERS" and "DESCRIPTION OF CAPITAL STOCK."
LIMITATIONS ON TAKEOVERS. Certain corporate governance and statutory
provisions may inhibit changes in control of the Company. The Company's Articles
of Incorporation allow the board of directors to issue
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and establish all relevant provisions of preferred stock without further action
by the shareholders. Such preferred stock could be used, for example, in a
shareholders' rights plan designed to restrict or delay a change in control of
the Company. The Company's Class B Common Stock, which has voting rights of 10
votes per share compared to Class A Common Stock's one vote per share, could
also be used to resist a change in control of the Company. The Company's
Articles of Incorporation limit the persons who may call a special meeting of
the shareholders. In addition, Mr. Bernard M. Trager will beneficially own stock
entitled to a majority of the voting power of all of the Company's outstanding
Common Stock after the Offering. These provisions and Mr. Bernard M. Trager's
stock ownership could make a takeover more difficult or discourage a person from
attempting a takeover, including a takeover that some shareholders may deem to
be in their best interests. See "DESCRIPTION OF CAPITAL STOCK."
DILUTION. Investors purchasing shares of Class A Common Stock in the
Offering will incur immediate dilution of approximately 57% in their investment,
in that the tangible book value of the Company after the Offering will be
approximately $5.64 compared with an assumed initial public offering price of
$13.00 per share. Options to purchase a total of 995,000 shares of Class A and
57,000 shares of Class B Common Stock were outstanding under the Company's stock
option plan at June 30, 1998, exercisable at prices ranging from $3.28 to $8.75
per share. In addition, Republic Capital Trust, a subsidiary of the Company, has
outstanding Trust Preferred securities which can be converted into 645,200
shares of Class A Common Stock at an effective price of $10.00 per share. The
Class B Common Stock can also be converted into Class A Common Stock, on a
share-for-share basis. If the shares subject to these options under the
Company's stock option plan or upon conversion of the Trust Preferred securities
or Class B Common Stock were included in the foregoing calculations, further
dilution to new shareholders would be incurred.
NO PRIOR TRADING MARKET. Prior to the Offering, there has been no public
market for the shares of Class A Common Stock. An application has been filed to
have the Class A Common Stock approved for quotation on the Nasdaq National
Market under the symbol "RBCAA." The Underwriters have advised the Company that
they intend to make a market in the Class A Common Stock as long as the volume
of trading activity in the Class A Common Stock and certain other market making
conditions justify doing so. Nonetheless, there can be no assurance that an
active public market will develop or be sustained after the Offering or that if
such a market develops, investors in the Class A Common Stock will be able to
resell their shares at or above the initial public offering price. Making a
market involves maintaining bid and asked quotations for the Class A Common
Stock and being available as principal to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of willing buyers and sellers of the Class A Common Stock at any
given time, which presence is dependent upon the individual decisions of
investors over which neither the Company nor any market maker has any control.
See "LIMITED TRADING MARKET."
DETERMINATION OF MARKET PRICE AND POSSIBLE VOLATILITY OF STOCK PRICE. The
initial public offering price of the shares of Class A Common Stock has been
determined by negotiations between Republic and representatives of the
Underwriters and does not necessarily bear any relationship to the Company's
book value, past operating results, financial condition or other established
criteria of value and may not be indicative of the market price of the Class A
Common Stock after the Offering. Among the factors considered in these
negotiations are prevailing market and general economic conditions, the market
capitalizations, trading histories and stages of development of other comparable
publicly traded companies, the results of operations and the current financial
position of the Company, estimates of business potential and the present state
of the Company's development, and the level of demand for Class A Common Stock.
Additionally, consideration has been given to the general status of the
securities market, the market conditions for new issues of securities and the
demand for securities of comparable companies at the time the Offering was made.
See "UNDERWRITING" for information relating to the method of determining the
initial public offering price. The stock market has from time to time
experienced price and volume volatility. These market fluctuations may be
unrelated to the operating performance of particular
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<PAGE>
companies whose shares are traded and may adversely affect the market price of
the Class A Common Stock. There can be no assurance that the market price of the
Class A Common Stock will not decline below the initial public offering price.
SHARES ELIGIBLE FOR FUTURE SALE. The Company will have 14,281,062 shares of
Class A Common Stock outstanding after the Offering. The Company, its executive
officers and directors and certain shareholders (who collectively will own
approximately 59% of the outstanding shares of Class A Common Stock after the
consummation of the Offering) have agreed with the Underwriters not to offer,
sell, contract to sell or otherwise dispose of any of their shares of Class A
Common Stock for a period of 180 days after the date of this Prospectus without
the permission of the Underwriters. Currently 4,154,044 outstanding shares of
Class A Common Stock are not subject to such agreement and are freely tradable
in accordance with Rule 144(k) under the Securities Act of 1933 (the "Securities
Act"). In addition, the outstanding Class B Common Stock and Trust Preferred
securities held by nonaffiliates can be converted into approximately 1,329,388
shares of Class A Common Stock, which, upon conversion, will be tradable in
accordance with Rule 144. All of the shares of Class A Common Stock sold in the
Offering will generally be freely tradable under the Securities Act. No
prediction can be made about the effect, if any, that future sales of Class A
Common Stock or the availability of Class A Common Stock for future sale will
have on the market price of the Class A Common Stock prevailing from time to
time. Sales of a substantial number of such shares in the future, or the
perception that such sales could occur, could adversely affect the market price
of the Class A Common Stock. See "MANAGEMENT," "PRINCIPAL SHAREHOLDERS," and
"SHARES ELIGIBLE FOR FUTURE SALE."
REGULATION OF CONTROL. Individuals, alone or acting in concert with others,
seeking to acquire 25% or more of any class of voting securities of the Company
must comply with the Change in Bank Control Act, which requires the prior
approval of the Federal Reserve Board for any such acquisition. Entities seeking
to acquire control of the Company, or bank holding companies seeking to acquire
5% or more of any class of voting securities of the Company, must obtain the
prior approval of the Federal Reserve Board under the BHCA. Acquisitions of
control are also subject to prior notice and prior approval requirements under
the Kentucky banking statutes. Accordingly, prospective investors need to be
aware of and to comply with these requirements, if applicable, in connection
with any purchase of shares of the Class A Common Stock in the Offering. See
"SUPERVISION AND REGULATION."
YEAR 2000. The Company continues to implement plans to address the Year
2000 issue. The issue arises from the fact that many existing computer programs
use only two digits to identify a year in the computer's date field. These
programs were designed without having considered the impact of the upcoming
change in the century. If not corrected, computer applications could fail or
create inaccurate results by or at the Year 2000. The Company has retained
certain employees whose primary function is related to Year 2000 compliance. The
loss of these employees could have a material adverse effect on the
implementation of the Company's Year 2000 plan. Failure to correct the Year 2000
problem could disrupt the operations of Republic and the Bank, or governmental
or private entities with which they conduct business. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION--YEAR
2000."
BROAD DISCRETION IN USE OF PROCEEDS. Republic intends to use substantially
all of the net proceeds of the Offering for continued banking center expansion,
broadening business lines, potential acquisitions in the financial and financial
services industries and other general corporate purposes. Accordingly, the
Company will have broad discretion as to the application of such proceeds. An
investor will not have the opportunity to evaluate the economic, financial and
other relevant information which will be utilized by the Company in determining
the application of such proceeds. See "USE OF PROCEEDS."
11
<PAGE>
THE COMPANY
BACKGROUND
Republic is a registered bank holding company headquartered in Louisville,
Kentucky. Incorporated in Kentucky on January 2, 1974, Republic became a bank
holding company under the BHCA when the Bank became authorized to conduct a
commercial banking business in Kentucky in 1982. The principal business of
Republic is directing, planning and coordinating the business activities of the
Bank. The financial condition and results of operations of Republic are
primarily dependent upon the operations of the Bank. At March 31, 1998, Republic
had total assets of $1.1 billion, total deposits of $728 million and total
stockholders' equity of $73 million. Based on total assets as of March 31, 1998,
Republic ranks as the second largest independent bank holding company
headquartered in Louisville, Kentucky, and the fourth largest independent bank
holding company in the state. The executive offices of Republic are located at
601 West Market Street, Louisville, Kentucky 40202, telephone number (502)
584-3600.
The Bank became a full service Kentucky banking corporation and began its
banking business in Louisville, Kentucky in 1982 as a result of the efforts of a
group of local businessmen headed by Mr. Bernard M. Trager. At that time, Mr.
Trager already owned a majority of the outstanding shares of Republic Bank of
Shelby County, a Kentucky banking corporation headquartered in Shelbyville,
Kentucky, and in 1983, he acquired a majority of the outstanding shares of the
predecessor of Republic Savings Bank, F.S.B. In November 1994, Republic Bank of
Shelby County and Republic Savings Bank, F.S.B., were merged into the Bank,
immediately after Republic acquired all of the outstanding shares of Republic
Bank of Shelby County in a share exchange transaction, and Republic merged with
Republic Savings Bancorp, Inc., the unitary savings and loan association holding
company of Republic Savings Bank, F.S.B., in a stock merger transaction. Both
the share exchange and stock merger transaction were accounted for in a manner
similar to a pooling of interests.
Republic Bank of Shelby County was a state chartered commercial bank in
Shelbyville, Kentucky, approximately half way between Louisville and Lexington
along Interstate 64, which had conducted business in Shelby County since 1888.
Mr. Trager acquired control of that bank in 1977, when it had total assets of
approximately $5 million. As of the end of the quarter immediately preceding the
merger transaction (September 30, 1994), Republic Bank of Shelby County had
total assets of $84 million, total deposits of $55 million, and stockholders'
equity of $7 million.
Republic Savings Bank, F.S.B., was organized as a state savings and loan
association in 1956. In 1984 it converted to a federal savings bank, and in 1988
became the subsidiary of Republic Savings Bancorp, Inc., a unitary savings and
loan holding company. Mr. Trager first acquired an interest in the savings bank
in the early 1980s, when it was headquartered in Western Kentucky and in
troubled condition. By 1994, as a result of acquisitions and expansion, Republic
Savings Bank, F.S.B., had 11 banking centers across Kentucky, with operating
activities and assets in Lexington, Louisville, Mayfield, Murray, Owensboro,
Paducah, Benton, Bowling Green, Elizabethtown, and Frankfort. As of September
30, 1994, Republic Savings Bancorp, Inc. had consolidated total assets of $444
million, total deposits of $355 million, and stockholders' equity of $31
million.
Through the combination with Republic Bank of Shelby County and Republic
Savings Bank, F.S.B., in 1994, Republic established a banking network in 11
Kentucky communities. Through its banking center network, Republic engages in
full service commercial banking and limited trust business, accepting deposits
for checking, savings and time deposit accounts, making secured and unsecured
loans, and investing in securities. Lending services include the origination of
real estate, commercial and consumer loans. Operating revenues are derived
primarily from interest and fees on domestic real estate, commercial and
consumer loans, and from interest on securities of the United States government
and agencies, states, and municipalities.
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<PAGE>
In 1997, Republic made the strategic decision to concentrate its resources
in the North Central and Central Kentucky banking markets and entered into a
series of transactions in which it sold the deposits and fixed assets of
substantially all of its Western Kentucky banking centers. The banking centers
(deposits and fixed assets) in the Western Kentucky cities of Murray, Benton and
Paducah were sold in 1997. The final Western Kentucky banking center sale in
Mayfield was completed during the first quarter of 1998. In the branch sale
transactions, Republic sold approximately $180 million in deposits and
approximately $3.7 million of fixed assets and initially retained substantially
all of the loan portfolio associated with the Western Kentucky banking centers.
GENERAL BUSINESS OVERVIEW
Today Republic has a total of 18 banking centers, including a branch under
construction, serving seven Kentucky communities. Its two primary market areas
are located in North Central and Central Kentucky. The North Central Kentucky
market includes Louisville, the largest city in Kentucky, where Republic is
headquartered and has eight banking centers. Republic's Central Kentucky market
includes ten banking centers in the following Kentucky cities: Shelbyville (1);
Frankfort (2); Lexington, the second largest city in Kentucky (4); Elizabethtown
(1); Owensboro (1); and Bowling Green (1).
Republic has developed a super community banking network, with most of its
offices located either in separate communities or portions of urban areas that
function as distinct communities. Lending and investment activities are funded
from a core deposit base consisting of approximately 63,000 deposit accounts
from approximately 38,000 clients. Each of Republic's banking centers has a
manager with the authority to make pricing and loan decisions within overall
ranges developed by the Company as a form of quality control, and the Bank has
local advisory boards of directors to enhance Republic's awareness of the
particular needs of the communities served. Republic believes that its
responsiveness to local clients and ability to adjust deposit rates and price
loans at each location within prescribed policy limitations give it a distinct
competitive advantage. Adequate staffing is provided at each location to ensure
that clients' needs are well addressed, and employees are committed to quality
service and developing long-term client relationships. The Company provides
economic incentives to its associates to develop additional business for the
Company and to cross sell additional products and services to existing clients.
Republic continues to look for additional expansion opportunities, either by
establishing de novo banking offices and/or through acquisitions of existing
institutions in the financial services industry and ancillary nonbanking
businesses. The Company intends to consider various strategic acquisitions of
banks, banking assets or financial services entities related to banking in those
areas that management believes would complement and increase Republic's existing
business, or expansion in market areas or product lines that management
considers attractive.
The Company has historically extended credit and provided general banking
services through its banking center network to individuals, professionals, and
businesses. Over the past several years the Company began to seek new lines of
business to diversify its asset mix and further enhance its profitability. While
each new line of business reflects the Company's efforts to enrich its asset
mix, each of these lines of business is an outgrowth of the community banking
and lending that the Company has performed over the years. Reflective of the
Company's operating philosophy, each of these businesses has been carefully
developed and is subject to various quality controls. The Company's principal
lines of business are the following:
MORTGAGE LENDING. The Company utilizes its banking centers and
commissioned originators to offer a complete line of single family
residential mortgage products. The Company generally retains mortgage loans
with variable rates and sells fixed rate loans into the secondary market.
Once closed, the secondary market loans are sold without recourse
principally to the Federal National Mortgage
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<PAGE>
Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and
other institutional investors. Generally, fixed rate loans in process are
covered by forward commitments to these investors which limit Republic's
interest rate risk.
Republic does not retain the servicing on the majority of its loans sold
in the secondary market, a practice started in 1995. Management's decision
to retain or release servicing rights is largely dependent upon market
conditions. When administering loans with the servicing retained by the
Company, the responsibility of collecting principal and interest payments,
escrowing for taxes and insurance, and remitting payments to the secondary
market investors remains with Republic. A fee is received by Republic for
performing these standard servicing functions.
PREFERRED CLIENT SERVICES. Republic has established extensive long
standing relationships with the medical communities in its primary markets.
Special loan and deposit products, including 100% financing on first home
purchases for medical students and residents, personalized deposit products
and affinity cards, have been tailored to meet the needs of physicians and
their practices. In addition to its exclusive participation in various
programs at the two state medical schools, Republic has received the
exclusive endorsement of the Jefferson County Medical Society, the members
of which account for nearly 600 depository relationships representing $41
million in deposits as of April 30, 1998. Republic intends to expand these
services to other business groups.
CONSUMER LENDING. Consumer loans made by the Company include automobile
loans, home improvement and home equity loans, operating lines of credit,
and personal loans (both secured and unsecured). Home equity lending is a
growing segment in the Company's consumer loan portfolio. This product
typically offers more attractive yields than traditional residential real
estate lending, and consumer demand has been strong. Republic is currently
emphasizing this product line in its consumer marketing, in place of two
unsecured consumer loan products which were marketed through the mail and
Republic's banking center network prior to 1997. The Company intends to
target continued growth in this segment of the portfolio, and has developed
an attractive product offering competitive terms and introductory rates to
enhance loan originations. Republic's home equity loan product has generated
over $118 million in new lines of credit since June, 1996.
COMMERCIAL LENDING. In 1997, the Company established a separate
commercial lending unit as an outgrowth of the Company's historical business
of making loans to small and medium-sized businesses from its various
locations. Commercial loans are generated at each banking office through
solicitations of potential clients primarily in the Company's market areas.
As a general practice, the Company takes a lien on any available real
estate, equipment or other assets and obtains the personal guaranty of the
owner or owners of the business. The Company makes commercial loans to a
variety of industries. The Company intends to expand this business through
aggressive targeted calling programs, seeking to broaden relationships with
commercial clients with both loan and deposit accounts and cash management
services.
SPECIALIZED LENDING. Republic pursues specialized lending strategies to
complement its traditional lending segments. These specialized product lines
include Refunds Now, a program offering tax refund anticipation services
through a joint venture with a local vendor, public sector lending, and
sub-prime loan originations. The sub-prime market represents a new
initiative for Republic. The product is targeted toward clients with a heavy
debt load who generally do not meet the underwriting criteria for loans sold
in the secondary market but who have been home owners for three years or
longer. The loans are structured to generate fee income upon origination,
and are sold immediately to finance companies or other sub-prime loan
originators, without recourse and with servicing released.
DEPOSITS AND OTHER BORROWINGS. Deposits are also a key component to the
Company's banking business, serving as a source of funding for lending as
well as increasing client account relationships. The Company offers
competitively priced deposit products, including checking, savings and time
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deposit accounts, seeking to increase core deposits and market share. In
addition, cash management services are made available to commercial clients
through Republic's centralized commercial banking operations. Borrowings,
principally from the Federal Home Loan Bank ("FHLB"), and repurchase
agreements, provide other sources of liquidity.
OTHER BANKING SERVICES. The Bank also provides, on a limited basis,
trust services and engages in credit life insurance sales, item processing,
and other related financial institution lines of business.
INVESTMENTS. The Company's investment securities, together with cash
and cash equivalents, provide an important source of liquidity. The Company
uses its investments as collateral for borrowings and to secure public fund
deposits. The investment portfolio is managed by a chief investment officer
in accordance with policies approved by the Company's board of directors.
Republic's operating revenues are derived primarily from interest earned
from its loan and investment securities portfolios and fee income from loan and
deposit products. The Bank is not dependent upon a single client, or a few
clients, the loss of any one or more of which would have a material adverse
effect on the statement of condition or results of operations.
FACILITIES
The Company'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 18
banking centers, the deposits at each location as of March 31, 1998, their
respective approximate square footage and their form of occupancy is described
in the following table:
<TABLE>
<CAPTION>
SQUARE OWNED (O)/ DEPOSITS AS OF
BANKING CENTERS FOOTAGE LEASED (L) MARCH 31, 1998
- ------------------------------------------------------------------- --------- --------------- ----------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
LOUISVILLE
601 West Market Street, Louisville................................. 43,000 L $ 144,947
2801 Bardstown Road, Louisville.................................... 5,000 L 65,141
661 South Hurstbourne Parkway, Louisville.......................... 21,000 L 75,932
4921 Brownsboro Road, Louisville................................... 2,000 L 35,992
5320 Dixie Highway, Louisville..................................... 5,000 O 23,013
4655 Outer Loop, Louisville........................................ 3,000 L 22,455
9600 Brownsboro Road, Louisville................................... 1,300 L 1,500
3950 Kresge Way, Louisville........................................ 400 L 7,800
LEXINGTON
651 Perimeter Drive, Lexington..................................... 4,000 L 55,621
2401 Harrodsburg Road, Lexington................................... 4,000 O 47,674
641 East Euclid Avenue, Lexington.................................. 3,500 O 9,809
3098 Helmsdale Place, Lexington.................................... 4,000 O Under Construction
FRANKFORT
100 Highway 676, Frankfort......................................... 4,000 O 33,630
1001 Versailles Road, Frankfort.................................... 4,000 O 10,985
BOWLING GREEN, 1700 Scottsville Road............................... 4,000 O 56,264
OWENSBORO, 3500 Frederica Street................................... 5,000 O 54,105
ELIZABETHTOWN, 502 West Dixie Avenue............................... 4,000 L 30,851
SHELBYVILLE, 1641 Midland Trail.................................... 5,000 O 52,350
</TABLE>
The West Market Street, Bardstown Road, 9600 Brownsboro Road and South
Hurstbourne Parkway locations are leased from partnerships principally owned by
Mr. Bernard M. Trager and members of his
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family, and such leases present inherent conflicts of interest. For additional
information regarding these leases, see "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
MARKET AREAS
The Company operates principally in the North Central and Central Kentucky
market areas. As defined by Republic, the North Central Kentucky market includes
the Louisville, Kentucky metropolitan area. Republic's Central Kentucky market
is defined broadly to include the Lexington, Kentucky metropolitan area and the
cities of Shelbyville, Frankfort, Elizabethtown, Owensboro and Bowling Green,
Kentucky. The following discussion of communities in which Republic operates
contains deposit, population and household income information available from
Sheshunoff, THE BRANCHES OF KENTUCKY 1998. Population figures and average
household income are estimated as of June 1997, and deposit data is as of June
30, 1997. Unemployment rates are estimated as of May 1998 based on information
available from the Commonwealth of Kentucky Cabinet for Workforce Development,
Department for Employment Services. Economic information was derived from
publicly available information obtained from the Kentucky Resources for Economic
Development reports for each of the cities currently available through the
Kentucky Cabinet for Economic Development and newspaper reports.
LOUISVILLE. Republic's largest community served is Louisville, the largest
metropolitan area in Kentucky. For the twelve (12) months ending June 30, 1997,
total deposits of banks, thrifts and credit unions in Jefferson County increased
10.45%, from $11.8 billion to $13.0 billion. The Company has eight banking
centers in Louisville, including its main office, and approximately 52% of its
March 31, 1998, deposits are located there. Republic is focusing on expanding
its current 1.67% market share in Jefferson County where it competes with
several regional and super-regional banking institutions, independent banking
organizations as well as the numerous smaller community banks and credit unions.
With an estimated population of 676,065, Jefferson County is Kentucky's
largest urban area, and had an estimated average household income of
approximately $56,921. The unemployment rate for the county was 3.3%.
Louisville's economic base includes a mix of service occupations, trade,
manufacturing and government. There were 2,502 physicians and 723 dentists, with
16 hospitals in Jefferson County. Major manufacturing employers were General
Electric Appliances, with 1996 average employment of 10,000, and the Ford Motor
Company Assembly Plant and Kentucky Truck Plant, with 1996 average employment of
3,700 and 4,400, respectively. While employment at General Electric Appliances'
Louisville facility has declined, UPS has announced an estimated $860 million
expansion of its hub located in Louisville which is estimated to result in the
creation of 6,000 additional jobs by the end of 2005.
LEXINGTON. Lexington, Fayette County, is the second largest community
served by Republic. For the year ending June 30, 1997, total deposits for all
commercial banks, thrifts and credit unions in Fayette County increased 6.07%
from $3.2 billion to $3.4 billion. The Company has four banking centers in
Lexington, including one under construction, and approximately 16% of its March
31, 1998, deposits are located there. Republic is focusing on expanding its
current 3.42% market share in Fayette County where it competes with several
regional and super-regional banking institutions as well as smaller community
banks and credit unions.
With an estimated population of 243,119, Lexington is Kentucky's second
largest urban area, and had an estimated average household income of
approximately $62,864. The unemployment rate for the county was 1.7%.
Lexington's economic base is a mix of government, manufacturing, education
and professional services, with the University of Kentucky being the largest
employer with employment of 11,300. Lexmark International, Inc. ranked the
largest among the major Lexington based manufacturing firms based on 1996
average employment, with 5,000 employees.
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SHELBYVILLE AND FRANKFORT. Shelbyville and Frankfort are located on
Interstate 64, between Louisville and Lexington. The Company serves the
Shelbyville market through one banking center. Frankfort, the capital of
Kentucky, is served by Republic with two banking centers. For the year ending
June 30, 1997, total deposits for all commercial banks, savings institutions and
credit unions in Shelby County have decreased (.65)%, from $393 million to $390
million; in Franklin County, where Frankfort is located, total deposits
increased 2.94%, from $887 million to $912 million. As of June 30, 1997,
Republic had a 13.71% share of the Shelby County market and 4.11% of the
Frankfort market, based on June 30, 1997 deposits in banks, thrifts and credit
unions located there.
Shelbyville is located in Shelby County which had an estimated population of
28,507, an average household income of $54,198 and an unemployment rate of 1.8%.
Frankfort is located in Franklin County which had an estimated population of
46,312, an average household income of $47,570, and an unemployment rate of
2.9%. Approximately 41% of Shelby County's nonagricultural employment is in
manufacturing. In Franklin County, government accounts for approximately 50% of
the nonagricultural employment.
ELIZABETHTOWN AND BOWLING GREEN. Elizabethtown and Bowling Green are
located south of Louisville on Interstate 65. Elizabethtown is located in Hardin
County, which had an estimated population of 91,697, average household income of
$42,660 and an unemployment rate of 3.9%. Bowling Green, situated in Warren
County, had an estimated population of 85,354, average household income of
$46,538, and an unemployment rate of 4.2%. Republic has a 4.93% market share of
the total deposits from banks, thrifts and credit unions in Hardin County; its
market share in Warren County was 3.19%.
The economic base of each of these communities includes a mix of trade,
manufacturing, services and government employment. The largest major
Elizabethtown manufacturing firm, in terms of 1995 average employment, is AP
Technologlass, a manufacturer of laminated automotive windshields, tempered
automotive windows, with 644 employees. General Motors Corporation's Bowling
Green Plant ranked as the largest major Bowling Green manufacturing firm, with
1996 average employment of 1,100.
OWENSBORO. Located in Daviess County in Western Kentucky, along the Ohio
River, Owensboro is approximately 110 miles from Louisville. Republic has
retained a presence in Owensboro with one banking center located there. Daviess
County had an estimated population of 91,769, with average household income of
$36,016 and an unemployment rate of 4.5%. Republic has 4.37% of the market share
in Daviess County, based on June 30, 1997 deposits in banks, thrifts and credit
unions located there.
The economic base of each of these communities includes a mix of trade,
manufacturing, services and government employment. The largest major
non-manufacturing employers are Owensboro-Mercy Health System, with employment
of approximately 2,000, and the Daviess County Board of Education, with
employment of 1,400.
EMPLOYEE RELATIONS
As of March 31, 1998, the Bank had 442 employees of which 369 were full-time
and 73 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 and disability insurance. The Bank provides a bonus
program and an incentive stock option program for selected key employees. 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 has ever experienced a work stoppage.
At or prior to the Closing, the Company intends to grant options to purchase
250,000 shares of Class A Common Stock, at an exercise price equal to the
initial public offering price, under the Company's stock option plan.
17
<PAGE>
No sooner than 90 days following the closing of the Offering, Republic plans
to establish a leveraged Employee Stock Ownership Plan ("ESOP"). The Company
presently intends to fund the ESOP by obtaining a line of credit of up to $5
million, which could be used by the ESOP to purchase shares of Class A Common
Stock from time to time either in the open market, in privately negotiated
transactions or directly from Republic. It is expected that the Company would be
obligated, either directly or as guarantor, on any loan obtained to finance the
purchase of shares by the ESOP, and that such loan would be secured by the
shares acquired by the ESOP, to the extent they have not been paid for.
COMPETITION
The Company actively competes with several local and regional commercial
banks, thrifts, credit unions and mortgage companies for deposits, loans and
other banking related financial services. There is intense 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 Company's competitors
are not subject to the degree of regulatory review and restrictions which apply
to the Bank. In addition, the Company must compete with much larger financial
institutions which have greater financial resources than the Company and, 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
Company 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.
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 BHCA. 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 and other 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 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. See "SUPERVISION AND REGULATION."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,740,000 shares of Class A Common Stock in the Offering will be used for
continued banking center expansion, broadening business lines, potential
acquisitions in the financial and financial services industries and other
general corporate purposes. The Company currently does not have any commitments
or agreements or letters of intent for any potential business acquisitions.
Pending application of the net proceeds of the Offering, Republic plans to
invest the net proceeds in short-term, investment-grade securities or money
market instruments. The Company will not receive any of the proceeds from the
sale of shares of Class A Common Stock being sold by the Selling Shareholder in
the Offering.
CAPITALIZATION
The following table sets forth the consolidated capitalization of Republic
at March 31, 1998, and as adjusted to give effect to the consummation of the
issuance of 1,740,000 shares of Class A Common Stock by the Company in the
Offering.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT:
Guaranteed preferred beneficial interests in Republic's
subordinated debentures......................................... $ 6,452 $ 6,452
Other borrowed funds.............................................. 179,164 179,164
---------- --------------
Total long-term debt............................................ $ 185,616 $ 185,616
---------- --------------
---------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 100,000 shares authorized
Class A common stock, no par value, 30,000,000 shares authorized,
12,541,062 shares and 14,281,062 shares issued and outstanding;
Class B common stock, no par value, 5,000,000 shares authorized,
2,418,074 shares issued and outstanding......................... $ 3,615 $ 8,790
Additional paid-in capital........................................ 10,890 26,481
Retained earnings................................................. 59,113 59,113
Net unrealized depreciation on securities available for sale, net
of tax.......................................................... (184) (184)
---------- --------------
Total stockholders' equity...................................... $ 73,434 $ 94,200
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(1) Based upon 1,740,000 shares of Class A Common Stock being sold by the
Company at $13.00 per share ($22,620,000 in the aggregate), and assumes that
the net proceeds received by the Company from the Offering are approximately
$20,766,000. If the Underwriters' over-allotment option is exercised in
full, 2,000,000 shares of Class A Common Stock would be sold by the Company
resulting in net proceeds to the Company from the Offering of $23,909,000.
19
<PAGE>
The following table shows the capital ratios of the Company at March 31,
1998, and as adjusted to give effect to the sale by the Company of 1,740,000
shares of Class A Common Stock in the Offering, prepared on the basis of
currently existing capital guidelines of the Federal Reserve Board and assuming
investment of the net proceeds in short-term, investment-grade securities or
money market instruments.
<TABLE>
<CAPTION>
MARCH 31, 1998
MARCH 31, 1998 AS ADJUSTED(1)
-------------- --------------
<S> <C> <C>
Tier 1 leverage ratio........................................ 7.31% 9.03%
Tier 1 capital to risk-weighted assets ratio................. 11.49 14.38
Total risk-based capital to risk-weighted assets ratio....... 12.67 15.56
</TABLE>
- ------------------------
(1) See note (1) to the preceding table.
DILUTION
As of March 31, 1998, the tangible book value of the Class A and Class B
Common Stock was $4.91 per share. "Tangible book value per share" represents the
amount of total tangible assets less total liabilities divided by the number of
shares of Class A and Class B Common Stock outstanding. After giving effect to
the sale by the Company of 1,740,000 shares of Class A Common Stock offered
hereby (after deducting underwriting discount and other estimated Offering
expenses to be paid by the Company) the pro forma tangible book value of the
Company as of March 31, 1998 would have been $5.64 per share. This represents an
immediate increase in net tangible book value of $.73 per share to current
shareholders and an immediate dilution of $7.36 per share to new investors. The
following table illustrates this per share dilution.
<TABLE>
<CAPTION>
<S> <C> <C>
Price to public................................................................................. $ 13.00
Tangible book value per share before Offering................................................. 4.91
Increase per share attributable to new investors.............................................. .73
---------
Pro forma tangible book value per share after Offering.......................................... 5.64
---------
Dilution to new investors....................................................................... $ 7.36
---------
---------
</TABLE>
The foregoing computations do not take into account the possible exercise of
outstanding stock options granted under the Company's stock option plan, the
possible issuance of shares of Class A Common Stock upon the conversion of
outstanding Trust Preferred securities or the possible issuance of up to an
additional 260,000 shares of Class A Common Stock to new investors pursuant to
the exercise of an option granted by the Company to the Underwriters solely to
cover over-allotments, if any, in connection with the Offering. See
"UNDERWRITING." Options to purchase a total of 995,000 shares of Class A Common
Stock and 57,000 shares of Class B Common Stock were outstanding under the
Company's stock option plan at June 30, 1998, with exercise prices ranging from
$3.28 to $8.75 per share, of which options to purchase 22,500 shares of Class A
Common Stock and 4,500 shares of Class B Common Stock were exercisable at $3.61
per share. In addition, a total of 645,200 shares of Class A Common Stock were
issuable upon conversion of outstanding Trust Preferred securities at an
effective price of $10.00 per share. If the shares subject to such outstanding
options under the Company's stock option plan and conversion rights under the
trust preferred securities were included in the foregoing calculations, further
dilution to new shareholders would be incurred.
20
<PAGE>
DIVIDEND POLICY
Holders of Common Stock are entitled to receive dividends when, as and if
declared by Republic's board of directors out of funds legally available
therefor. Under Republic's Articles of Incorporation, the shares of Class A
Common Stock are entitled to cash dividends declared by the board of directors.
If cash dividends are paid on Class B Common Stock, shares of Class A Common
Stock are entitled to cash dividends equal to 110% of the cash dividend paid per
share on the Class B Common Stock.
During 1997 and 1996, Republic declared and paid the following quarterly
cash dividends per share on its Common Stock:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A Common Stock........................ $ .0275 $ .0275 $ .0275 $ .0275
Class B Common Stock........................ $ .0250 $ .0250 $ .0250 $ .0250
<CAPTION>
1996
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A Common Stock........................ $ .0275 $ .0275 $ .0275 $ .0275
Class B Common Stock........................ $ .0250 $ .0250 $ .0250 $ .0250
</TABLE>
During the quarter ended March 31, 1998, Republic paid a cash dividend of
$.0275 and $.0250 on each of its outstanding shares of Class A Common Stock and
Class B Common Stock, respectively.
Republic currently intends to continue to pay regular quarterly cash
dividends on the Common Stock, subject to Republic's needs for funds. However,
payment of dividends is subject to the discretion of Republic's board of
directors. In determining whether to continue such dividend payments and in
establishing the amount of any dividends to be paid, the board of directors will
consider Republic's earnings, capital requirements and financial condition,
prospects for future earnings, federal economic and regulatory policies, general
business conditions and other relevant factors, certain of which are beyond the
control of Republic. See "SUPERVISION AND REGULATION" and "DESCRIPTION OF
CAPITAL STOCK."
The primary source of funds for dividends paid by Republic to its
shareholders is the dividend income received from the Bank. There are certain
restrictions on the payment of such dividends imposed by federal and state
banking laws, regulations and authorities. The ability of the Bank to pay
dividends is regulated by the Kentucky Department of Financial Institutions and
the FDIC. The FDIC also has the authority to prohibit a regulated depository
institution from engaging in what in such agency's opinion constitutes an unsafe
or unsound practice for conducting business. Depending upon the financial
condition of the depository institution, payment of dividends could be deemed to
constitute such an unsafe or unsound practice. In addition, a depository
institution may not pay a dividend or otherwise make a capital distribution if
the payment thereof would cause such institution to fail to satisfy its capital
requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CAPITAL" and "SUPERVISION AND REGULATION--THE BANK."
As of March 31, 1998, approximately $13 million was available for payment of
dividends by the Bank to the Company under applicable restrictions, without
regulatory approval. Regulatory authorities could impose administratively
stricter limitations on the ability of the Bank to pay dividends to the Company
if such limits were deemed appropriate to maintain certain capital adequacy
requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CAPITAL" and "SUPERVISION AND REGULATION."
21
<PAGE>
Although management believes that the Bank will be able to generate
sufficient earnings to pay dividends to Republic in amounts sufficient to
continue Republic's current dividend policy with respect to the Common Stock,
there can be no assurance that the Bank will be able to generate such earnings
or to pay such dividends in the future. The instruments under which the Trust
Preferred securities of Republic's subsidiary, Republic Capital Trust, are
outstanding prohibit the payment of dividends on the Common Stock if the Company
elects to defer payments of those securities, as permitted by those instruments.
LIMITED TRADING MARKET
As of March 24, 1998, Republic had approximately 440 holders of the Class A
Common Stock and 390 holders of the Class B Common Stock. Prior to the Offering,
there has been no public market for the shares of Class A or Class B Common
Stock and there can be no assurance that an active public market for the Class A
Common Stock will develop or be sustained after the Offering or that if such a
market develops, investors in the Class A Common Stock will be able to resell
their shares at or above the initial public offering price. Application has been
made for quotation of the shares of Class A Common Stock on the Nasdaq National
Market under the symbol RBCAA. The Underwriters have advised the Company that
they intend to make a market in the Class A Common Stock as long as the volume
of trading activity in the Class A Common Stock and certain other market making
conditions justify doing so. Nonetheless, there can be no assurance that an
active public market will develop or be sustained after the Offering or that if
such a market develops, investors in the Class A Common Stock will be able to
resell their shares at or above the initial public offering price. Making a
market involves maintaining bid and asked quotations for the Class A Common
Stock and being available as principal to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of willing buyers and sellers of the Class A Common Stock at any
given time, which presence is dependent upon the individual decisions of
investors over which neither the Company nor any market maker has any control.
See "RISK FACTORS--NO PRIOR TRADING MARKET."
The initial public offering price of the shares of Class A Common Stock has
been determined by negotiations between Republic and representatives of the
Underwriters and does not necessarily bear any relationship to Republic's book
value, past operating results, financial condition or other established criteria
of value and may not be indicative of the market price of the Class A Common
Stock after the Offering.
Among the factors considered in such negotiations are prevailing market and
general economic conditions, the market capitalizations, trading histories and
stages of development of other traded companies that Republic and the
Underwriters believed to be comparable to Republic, the results of operations of
the Company in recent periods, the current financial position of the Company,
estimates of the business potential of the Company and the present state of the
Company's development and the availability for sale in the market of a
significant number of shares of Class A Common Stock.
Additionally, consideration has been given to the general status of the
securities market, the market conditions for new issues of securities and the
demand for securities of comparable companies at the time the Offering was made.
See "UNDERWRITING" for information relating to the method of determining the
initial public offering price.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth Republic's selected historical financial
information from 1993 through March 31, 1998. The selected consolidated
financial data for the three months ended March 31, 1998 and 1997, are derived
from unaudited consolidated financial statements. The unaudited consolidated
financial statements include all adjustments (consisting of normal recurring
adjustments) which management of the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended March 31, 1998, are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1998. This information should be read in conjunction with
the Consolidated Financial Statements and the related Notes. Factors affecting
the comparability of certain indicated periods are discussed below under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE
MONTHS ENDED MARCH 31, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994
----------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income......................... $ 22,785 $ 22,610 $ 91,194 $ 81,986 $ 71,133 $ 47,375
Interest expense........................ 12,415 12,603 50,856 43,855 37,720 22,513
Net interest income..................... 10,370 10,007 40,338 38,131 33,413 24,862
Provision for loan losses............... 643 1,298 7,251 9,149 4,268 537
Non-interest income..................... 2,796 2,096 7,743 7,097 7,520 6,997
Gain on sale of deposits................ 4,116 7,527
Gain on sale of Bankcard................ 3,660
Non-interest expense.................... 8,074 7,995 32,880 31,409 24,505 22,216
Income before taxes..................... 8,565 2,810 19,137 4,670 12,160 9,106
Net income.............................. 5,524 1,880 12,259 2,727 7,788 6,170
BALANCE SHEET DATA:
Total assets............................ $ 1,112,576 $ 1,090,616 $ 1,054,950 $ 1,140,882 $ 891,347 $ 736,009
Total securities........................ 214,467 229,374 192,372 281,855 114,654 100,705
Total loans, net........................ 783,505 760,749 794,939 759,424 668,193 571,950
Allowance for loan losses............... 8,234 6,281 8,176 6,241 3,695 1,827
Total deposits.......................... 728,069 812,442 731,598 783,141 734,443 590,036
Repurchase agreements and other
short-term borrowings................. 110,477 87,451 111,137 181,634 21,729 12,732
Other borrowed funds.................... 179,164 111,746 124,405 106,974 68,063 77,060
Total stockholders' equity.............. 73,434 59,738 68,386 59,019 58,502 47,045
PER SHARE DATA:(1)
Net income per Class A common........... $ 0.37 $ 0.12 $ 0.82 $ 0.16 $ N/A $ N/A
Net income per Class B common........... 0.37 0.12 0.81 0.15 N/A N/A
Net income per common................... N/A N/A N/A N/A 0.52 0.43
Book value.............................. 4.91 3.79 4.58 3.74 3.71 3.28
Cash dividends per Class A common....... 0.0275 0.0275 0.1100 0.1100 N/A N/A
Cash dividends per Class B common....... 0.0250 0.0250 0.1000 0.1000 N/A N/A
Cash dividend per common................ N/A N/A N/A N/A 0.0850 N/A
PERFORMANCE RATIOS:
Return on average assets................ 1.29%(2) .69% 1.12% .29% .95% .93%
Return on average common equity......... 19.19(2) 12.64 18.81 4.57 14.46 13.71
Net interest margin..................... 3.92 3.82 3.85 4.21 4.25 3.96
Efficiency ratio........................ 61(3) 66 68(4) 64(5) 60 70
<CAPTION>
1993
---------
<S> <C>
INCOME STATEMENT DATA:
Interest income......................... $ 43,377
Interest expense........................ 21,119
Net interest income..................... 22,258
Provision for loan losses............... 391
Non-interest income..................... 8,154
Gain on sale of deposits................
Gain on sale of Bankcard................
Non-interest expense.................... 22,199
Income before taxes..................... 7,822
Net income.............................. 5,864
BALANCE SHEET DATA:
Total assets............................ $ 646,697
Total securities........................ 69,193
Total loans, net........................ 488,109
Allowance for loan losses............... 1,627
Total deposits.......................... 516,871
Repurchase agreements and other
short-term borrowings................. 13,228
Other borrowed funds.................... 67,721
Total stockholders' equity.............. 40,669
PER SHARE DATA:(1)
Net income per Class A common........... $ N/A
Net income per Class B common........... N/A
Net income per common................... 0.42
Book value.............................. 2.86
Cash dividends per Class A common....... N/A
Cash dividends per Class B common....... N/A
Cash dividend per common................ N/A
PERFORMANCE RATIOS:
Return on average assets................ .92%
Return on average common equity......... 14.10
Net interest margin..................... 3.69
Efficiency ratio........................ 73
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE
MONTHS ENDED MARCH 31, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994
----------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS:
Nonperforming assets to total loans..... 1.02% 0.94% 0.90% 1.06% 0.41% 0.46%
Net loan charge-offs to average loans... 0.29 0.64 0.66 0.91 0.38 0.06
Allowance for loan losses to total
loans................................. 1.04 0.82 1.02 0.81 0.55 0.32
Allowance for loan losses to
non-performing loans.................. 108 88 115 78 168 97
CAPITAL RATIOS:
Leverage ratio.......................... 7.31% 6.11% 6.99% 5.76% 6.62% 6.40%
Average stockholders' equity to average
total assets.......................... 6.69 5.43 5.97 6.30 6.56 6.65
Tier 1 risk-based capital ratio......... 11.49 10.17 10.57 9.14 10.29 10.19
Total risk-based capital ratio.......... 12.67 11.13 11.73 10.10 10.96 10.60
Dividend payout ratio................... 7 22 13 68 16 N/A
<CAPTION>
1993
---------
<S> <C>
ASSET QUALITY RATIOS:
Nonperforming assets to total loans..... 0.75%
Net loan charge-offs to average loans... 0.08
Allowance for loan losses to total
loans................................. 0.33
Allowance for loan losses to
non-performing loans.................. 61
CAPITAL RATIOS:
Leverage ratio.......................... 6.93%
Average stockholders' equity to average
total assets.......................... 5.95
Tier 1 risk-based capital ratio......... 11.30
Total risk-based capital ratio.......... 11.71
Dividend payout ratio................... N/A
</TABLE>
- ------------------------------
(1) In 1996 the Company's common stock was replaced by Class A Common Stock and
Class B Common Stock. See Note 14 to the Consolidated Financial Statements.
(2) For purposes of calculation, pre-tax gain on sale of deposits of $4.1
million is not annualized.
(3) Excludes pre-tax gain on sale of deposits of $4.1 million.
(4) Excludes pre-tax gain on sale of deposits of $7.5 million and pre-tax gain
on sale of Bankcard of $3.7 million.
(5) Excludes one time Savings Association Insurance Fund ("SAIF") assessment of
$2.3 million.
24
<PAGE>
RECENT DEVELOPMENTS
The following table presents certain unaudited information for the second
quarter of 1998 and for the six months then ended, as contained in Republic's
Current Report on Form 8-K dated July 1, 1998, as filed with the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------------------
1998 1997 1998 1997
--------- -------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................................... $ 23,029 $ 23,242 $ 45,814 $ 45,852
Interest expense.................................. 12,712 13,002 25,127 25,605
Net interest income............................... 10,317 10,240 20,687 20,247
Provision for loan losses......................... 741 1,416 1,384 2,714
Non-interest income............................... 3,073 1,747 5,869 3,843
Gain on sale of deposits.......................... 4,116
Gain on sale of Bankcard.......................... 3,410 3,410
Non-interest expense.............................. 8,595 8,291 16,669 16,286
Income before taxes............................... 4,054 5,690 12,619 8,500
Net Income........................................ 2,602 3,656 8,126 5,536
BALANCE SHEET DATA:
Total assets...................................... 1,161,723 1,109,713
Total securities.................................. 230,146 221,958
Total loans, net.................................. 828,556 796,403
Allowance for loan losses......................... 8,234 6,281
Total deposits.................................... 745,553 830,325
Repurchase agreements and other short-term
borrowings....................................... 102,597 86,080
Other borrowed funds.............................. 219,020 110,065
Total stockholders' equity........................ 75,742 63,444
PER SHARE DATA:
Net income per Class A common..................... $ .17 $ .25 $ .54 $ .37
Net income per Class B common..................... .17 .24 .54 .36
Book value........................................ 5.06 4.05 5.06 4.05
Cash dividends per Class A common................. .0275 .0275 .055 .055
Cash dividends per Class B common................. .0250 .0250 .050 .050
PERFORMANCE RATIOS:
Return on average assets.......................... .89% .73%(1) 1.19%(2) .81%(1)
Return on average common equity................... 13.59 13.22(1) 18.30(2) 14.75(1)
Net interest margin............................... 3.76 3.88 3.84 3.85
Efficiency ratio.................................. 64 69(3) 63(4) 68(3)
ASSET QUALITY RATIOS:
Nonperforming assets to total loans............... .88% .80%
Net loan charge-offs to average loans............. .34 .68
Allowance for loan losses to total loans.......... .98 .78
Allowance for loan losses to non-performing
loans............................................ 117 105
CAPITAL RATIOS:
Leverage ratio.................................... 7.24% 6.38% 7.24% 6.38%
Average stockholders' equity to average total
assets........................................... 6.53 5.55 6.51 5.49
Dividend payout ratio............................. 16 11 10 15
</TABLE>
- ------------------------------
(1) For purposes of calculation, pre-tax gain on sale of Bankcard of $3.4
million is not annualized.
(2) For purposes of calculation, pre-tax gain on sale of deposits of $4.1
million is not annualized.
(3) Excludes pre-tax gain on sale of Bankcard of $3.4 million.
(4) Excludes pre-tax gain on sale of deposits of $4.1 million.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Republic analyzes the major elements of Republic's balance sheets
and statements of income. This section should be read in conjunction with the
Company's Consolidated Financial Statements and accompanying Notes and other
detailed information appearing elsewhere in this Prospectus.
THIS DISCUSSION INCLUDES VARIOUS FORWARD-LOOKING STATEMENTS WITH RESPECT TO
CREDIT QUALITY (INCLUDING DELINQUENCY TRENDS AND THE ALLOWANCE FOR LOAN LOSSES),
CORPORATE OBJECTIVES AND OTHER FINANCIAL AND BUSINESS MATTERS. WHEN USED IN THIS
DISCUSSION THE WORDS "ANTICIPATE," "PROJECT," "EXPECT," "BELIEVE," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. REPUBLIC
CAUTIONS THAT THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS
ASSUMPTIONS, RISKS AND UNCERTAINTIES, ALL OF WHICH MAY CHANGE OVER TIME. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM FORWARD-LOOKING STATEMENTS.
IN ADDITION TO FACTORS DISCLOSED BY REPUBLIC ELSEWHERE IN THIS PROSPECTUS,
INCLUDING THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS", THE FOLLOWING
FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
FORWARD-LOOKING STATEMENTS: PRICING PRESSURES ON LOAN AND DEPOSIT PRODUCTS;
COMPETITION; CHANGES IN ECONOMIC CONDITIONS BOTH NATIONALLY AND IN THE BANK'S
MARKETS; THE EXTENT AND TIMING OF ACTIONS OF THE FEDERAL RESERVE BOARD; CLIENTS'
ACCEPTANCE OF THE BANK'S PRODUCTS AND SERVICES; AND THE EXTENT AND TIMING OF
LEGISLATIVE AND REGULATORY ACTIONS AND REFORMS.
OVERVIEW
Republic reported strong net income of $5.5 million, or $.37 per common
share, for the first quarter of 1998. Earnings for the first quarter of 1998
produced an annualized return on average assets of 1.29% and a return on average
stockholders' equity of 19.19%, compared to returns of .69% and 12.64%,
respectively, for the comparable period in 1997. Excluding the one-time gain on
sale of deposits and related fixed assets (see discussion on "Disposition of
Assets"), Republic's net income after tax for the first quarter of 1998 would
have been $2.9 million with a return on average assets of 1.05% and a return on
average stockholders' equity of 15.66%.
Republic reported earnings of $12.3 million in 1997, an increase from $2.7
million reported in 1996. Republic's return on average assets and return on
average equity reflected significant improvement over 1996. Return on average
equity was up to 18.81% in 1997. Additionally, Republic's return on average
assets was up to 1.12% in the same period. Earnings in 1997 were positively
impacted by the sale of Republic's banking centers in Western Kentucky as well
as the sale of Bankcard (see discussion on "Disposition of Assets"). Excluding
the gains received from these sales, Republic's 1997 net income would have been
$5.1 million resulting in a return on average assets of .47% and a return on
average equity of 7.83%. Excluding the one-time SAIF assessment, Republic's 1996
net income would have been $4.2 million resulting in a return on average assets
of .45% and a return on average equity of 7.12%. During 1997, Republic
maintained its quarterly dividend payments of $.0275 per share on Class A Common
Stock and $.0250 per share on Class B Common Stock.
Republic's total assets increased slightly in the first quarter of 1998 from
$1.05 billion at December 31, 1997 to $1.1 billion at March 31, 1998. Overall
loan origination volume has continued to be strong and charge-offs have
continued to moderate. Republic was also able to substantially replace the
volume of the Mayfield branch deposits sold during the quarter with additional
deposit growth from its retail operations.
Assets declined slightly from year end 1996 to $1.1 billion at year end
1997. Net loans increased $35 million in 1997 due to management's focus on its
core business, residential lending. Republic's deposits decreased $52 million
primarily as a result of Western Kentucky deposit sales. The increased earnings
and premiums received from the sale of assets increased Republic's stockholders'
equity 16% to $68 million at year end 1997.
26
<PAGE>
DISPOSITION OF ASSETS
During 1997, Republic elected to focus its resources on its North Central
and Central Kentucky markets. As a result of this decision, management pursued
opportunities to sell certain fixed assets and deposits of its Western Kentucky
banking centers, with the exception of Owensboro. Republic's Western Kentucky
assets sold during 1997 included banking centers in the cities of Murray, Benton
and Paducah. The sale of Republic's Mayfield banking center was completed during
the first quarter of 1998. These banking centers were comprised of approximately
$180 million in deposits and approximately $3.7 million in fixed assets.
Republic initially retained substantially all of the loan portfolio associated
with these banking centers.
The pricing and other terms of these asset dispositions were finalized
through arms-length negotiations with numerous parties. In addition to comparing
offers, management evaluated terms offered by prospective purchasers to
information regarding pricing of similar transactions. To the extent the
purchase price in a transaction was less than the deposit liabilities being
assumed by the purchaser, the transaction involved a cash payment by Republic to
the purchaser. Management primarily funded the transactions closed during 1997
with $14 million in additional deposits at its existing banking centers,
liquidation of investment securities and overnight fed funds in the amount of
$40 million and additional advances from the FHLB totaling approximately $85
million.
The following highlights information about each of the banking center sale
transactions:
On April 1, 1997, Republic entered into an agreement to sell its Murray
banking center to United Commonwealth Bank, FSB. The transaction included the
sale of real estate located in Murray, Kentucky, certain fixed assets, and a
transfer of certain deposit liabilities totaling approximately $18 million. The
transaction was closed on July 30, 1997 and Republic recognized a pre-tax gain
of approximately $1.7 million.
On July 21, 1997, Republic entered into an agreement to sell its Benton
banking center to The Peoples First National Bank and Trust Company of Paducah.
The transaction included the sale of real estate located in Benton, Kentucky,
certain fixed assets, and a transfer of certain deposit liabilities totaling
approximately $31 million. The transaction was closed on September 23, 1997 and
Republic recognized a pre-tax gain of approximately $2.2 million.
On July 18, 1997, Republic entered into an agreement to sell its two Paducah
banking centers to The Paducah Bank and Trust Company. The transaction included
the sale and lease of real estate located in Paducah, Kentucky, certain fixed
assets, and a transfer of certain deposit liabilities totaling approximately $65
million. The transaction was closed on November 7, 1997 and Republic recognized
a pre-tax gain of approximately $3.6 million.
On September 12, 1997, Republic entered into an agreement to sell the
Mayfield banking center to First Federal Savings Bank of Leitchfield, Kentucky.
This sale included approximately $65.7 million in deposits and certain other
fixed assets. Republic retained substantially all of its Mayfield banking center
loan portfolio. The transaction was closed on January 8, 1998, and Republic
realized a pre-tax gain of approximately $4.1 million. The Mayfield transaction
represented the final Western Kentucky banking center sale.
Also during 1997, Republic decided to change its strategy toward credit card
lending. In the second quarter of 1997, Republic sold its $17 million credit
card portfolio, its merchant processing assets and its $6 million, 50% interest
in a joint venture credit card arrangement, totaling $23 million. Collectively,
these asset sales resulted in a pre-tax gain of $3.7 million. The portfolio sale
to the joint venture partner contained a limited recourse provision in the event
losses on the portfolio exceed certain defined loss rates. The gain on the sale
of the portfolio was recorded net of an accrual for the estimated liability
under the provision.
27
<PAGE>
As part of the sale of its credit card portfolio, Republic retained the
right to become an agent bank for another financial institution. As part of this
agreement, Republic is able to continue to offer credit cards in its name. While
Republic will not own the receivables, it will receive an origination fee for
all approved applications.
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
Net interest income increased 5% in 1997, following a 14% increase in 1996.
The increase in 1997 is attributable to Republic's loan growth, particularly
residential and home equity lending. The increase in 1996 was due to substantial
growth in the unsecured consumer loan portfolio which also favorably impacted
the Bank's net interest spread.
Average interest-earning assets increased 16% in 1997, compared to a 15%
increase in 1996. The 1997 and 1996 growth resulted from increased loan volume
(see "Loan Portfolio" for discussion on increase in loan volume) supported by an
increase in investment securities.
During 1997, average interest-bearing liabilities grew $127 million to $945
million, an increase of 15% over 1996. Certificates of deposit remained flat due
to the sale of deposits associated with the Western Kentucky banking centers.
Republic's loan growth was primarily funded by an increase in other borrowings
(see discussion on "Other Borrowed Funds"). In 1996, average interest-bearing
liabilities grew 17% over 1995. The increase of $119 million was primarily in
certificates of deposit, other time deposits and overnight repurchase
agreements.
Republic's net interest margin was 3.85% in 1997, 4.21% in 1996 and 4.25% in
1995. The reduction in net interest margin and net interest spread in 1997
compared to 1996 is attributable to a decline in the overall yield on
interest-earning assets of 33 basis points while Republic's cost of funds
increased by 2 basis points. The decline in rate on interest-earning assets
resulted from a change in the overall loan portfolio mix. The reduction in the
unsecured loan portfolio was largely replaced by increased growth in Republic's
traditional secured residential loan products. These residential loan products
have lower yields and reduced credit risk compared to the Bank's unsecured loan
products.
The net interest margin may be negatively impacted by the current interest
rate environment and changes in loan mix due to the higher yielding unsecured
consumer loans being replaced by lower yielding home equity loans. Approximately
$116 million of Republic's other borrowings from the FHLB are adjustable rate
advances and are subject to changes in market interest rates. Increased rates
may negatively impact Republic's borrowing costs as these wholesale funds
comprise a significant portion of interest-bearing liabilities.
Table 1 provides detailed information as to average balances, interest
income/expense, and rates by major balance sheet category for fiscal years 1995
through 1997. Table 2 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.
28
<PAGE>
TABLE 1--AVERAGE BALANCE SHEETS AND RATES FOR DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------- ----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
--------- ----------- ----------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
EARNING ASSETS:
U.S. Treasury and U.S. Government
Agency Securities............... $ 209,599 $ 12,473 5.95% $ 147,376 $ 9,040 6.13% $ 115,897 $ 7,469
State and political subdivision
securities...................... 4,447 381 8.57 4,557 390 8.56 4,689 407
Other investments................. 6,952 497 7.15 5,303 414 7.79 5,055 342
Mortgage-backed securities........ 4,415 263 5.96 705 36 5.11 796 40
Federal funds sold................ 12,452 691 5.55 23,847 1,275 5.35 26,144 1,537
Total loans and fees(1)........... 809,700 76,889 9.50 724,669 70,831 9.77 632,775 61,338
--------- ----------- --- --------- ----------- --- --------- -----------
TOTAL EARNING ASSETS.............. 1,047,565 91,194 8.71 906,457 81,986 9.04 785,356 71,133
--------- ----------- --- --------- ----------- --- --------- -----------
Less: Allowance for loan losses... (6,278) (6,196) (2,795)
NON-EARNING ASSETS:
Cash and due from banks........... 20,338 20,830 16,597
Bank premises and equipment,
net............................. 16,793 14,391 11,284
Other assets...................... 13,198 10,974 11,195
--------- --------- ---------
TOTAL ASSETS...................... $1,091,616 $ 946,456 $ 821,637
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Transaction accounts.............. $ 124,062 $ 4,250 3.43 $ 149,383 $ 5,163 3.46 $ 144,105 $ 5,122
Money market accounts............. 47,036 2,329 4.95 35,557 1,622 4.56 18,999 892
Individual retirement accounts.... 35,641 2,090 5.86 34,956 2,156 6.17 31,089 1,949
Certificates of deposits and other
time deposits................... 512,260 30,271 5.91 450,759 27,143 6.02 413,428 24,549
Repurchase agreements and other
borrowings...................... 226,400 11,916 5.26 148,026 7,771 5.25 91,952 5,208
--------- ----------- --- --------- ----------- --- --------- -----------
TOTAL INTEREST BEARING
LIABILITIES..................... 945,399 50,856 5.38 818,681 43,855 5.36 699,573 37,720
--------- ----------- --- --------- ----------- --- --------- -----------
NON-INTEREST BEARING LIABILITIES:
Non-interest bearing deposits..... 68,184 57,041 54,540
Other liabilities................. 12,875 11,090 13,657
Stockholders' equity.............. 65,158 59,644 53,867
--------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............ $1,091,616 $ 946,456 $ 821,637
--------- --------- ---------
--------- --------- ---------
Net interest income............... $ 40,338 $ 38,131 $ 33,413
----------- ----------- -----------
----------- ----------- -----------
Net interest spread............... 3.33% 3.68%
--- ---
--- ---
Net interest margin............... 3.85% 4.21%
--- ---
--- ---
<CAPTION>
<S> <C>
AVERAGE
RATE
-----------
EARNING ASSETS:
U.S. Treasury and U.S. Government
Agency Securities............... 6.44%
State and political subdivision
securities...................... 8.68
Other investments................. 6.77
Mortgage-backed securities........ 5.03
Federal funds sold................ 5.88
Total loans and fees(1)........... 9.69
---
TOTAL EARNING ASSETS.............. 9.06
---
Less: Allowance for loan losses...
NON-EARNING ASSETS:
Cash and due from banks...........
Bank premises and equipment,
net.............................
Other assets......................
TOTAL ASSETS......................
INTEREST BEARING LIABILITIES:
Transaction accounts.............. 3.55
Money market accounts............. 4.69
Individual retirement accounts.... 6.27
Certificates of deposits and other
time deposits................... 5.94
Repurchase agreements and other
borrowings...................... 5.66
---
TOTAL INTEREST BEARING
LIABILITIES..................... 5.39
---
NON-INTEREST BEARING LIABILITIES:
Non-interest bearing deposits.....
Other liabilities.................
Stockholders' equity..............
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............
Net interest income...............
Net interest spread............... 3.67%
---
---
Net interest margin............... 4.25%
---
---
</TABLE>
- ------------------------
Note: Calculations include non-accruing loans in the average loan amounts
outstanding.
(1) The amount of fee income included in interest on loans was $837,000,
$520,000, and $139,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
29
<PAGE>
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities affected Republic's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate), (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume), and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
TABLE 2--VOLUME/RATE VARIANCE ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
--------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
--------------------------------- -------------------------------
<CAPTION>
TOTAL NET TOTAL NET
CHANGE VOLUME RATE CHANGE VOLUME RATE
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME(1):
U.S. Treasury and Government Agency Securities.... $ 3,433 $ 3,817 $ (384) $ 1,571 $ 2,029 $ (458)
State and political subdivision securities........ (9) (10) 1 (17) (11) (6)
Other investments................................. 83 127 (44) 71 17 54
Mortgage backed securities........................ 227 189 38 (4) (5) 1
Federal funds sold................................ (584) (609) 25 (261) (135) (126)
Total loans and fees(2)........................... 6,058 8,311 (2,253) 9,493 8,908 585
----------- --------- --------- --------- --------- ---------
TOTAL INCREASE (DECREASE) IN INTEREST INCOME...... 9,208 11,825 (2,617) 10,853 10,803 50
----------- --------- --------- --------- --------- ---------
INTEREST EXPENSE:
Interest bearing transaction accounts............. (913) (875) (38) 41 188 (147)
Money market accounts............................. 707 524 183 730 777 (47)
Individual retirement accounts.................... (66) 42 (108) 207 242 (35)
Certificates of deposit and other time deposits... 3,128 3,703 (575) 2,594 2,217 377
Repurchase agreements and other borrowings........ 4,145 4,114 31 2,563 3,176 (613)
----------- --------- --------- --------- --------- ---------
TOTAL INCREASE (DECREASE) IN INTEREST EXPENSE..... 7,001 7,508 (507) 6,135 6,600 (465)
----------- --------- --------- --------- --------- ---------
INCREASE (DECREASE) IN NET INTEREST INCOME........ $ 2,207 $ 4,317 $ (2,110) $ 4,718 $ 4,203 $ 515
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Interest income for loans on non-accrual status has been excluded from
interest income.
(2) The amount of fee income included in interest on loans was $837,000,
$520,000, and $139,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
30
<PAGE>
NON-INTEREST INCOME
Table 3 illustrates Republic's primary sources of non-interest income.
Non-interest income increased 167% to $19.0 million in 1997, compared to $7.1
million in 1996 and $7.5 million in 1995.
TABLE 3--ANALYSIS OF NON-INTEREST INCOME
<TABLE>
<CAPTION>
PERCENT
INCREASE (DECREASE)
YEAR ENDED DECEMBER 31,
------------------------------- ------------------------
1997 1996 1995 1997/96 1996/95
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts.............................. $ 3,284 $ 2,642 $ 1,974 24.3% 33.8%
Other service charges and fees................................... 661 445 1,434 48.5 (69.0)
Bankcard services................................................ 457 1,010 1,263 (54.8) (20.0)
Net gain on sale of deposits..................................... 7,527 nm
Net gain on sale of Bankcard..................................... 3,660 nm
Net gain on available for sale securities........................ 81 nm
Net gain on sale of loans........................................ 1,852 1,212 1,083 52.8 11.9
Loan servicing income............................................ 734 829 895 (11.5) (7.4)
Other............................................................ 674 959 871 (29.7) 10.1
--------- --------- ---------
Total............................................................ $ 18,930 $ 7,097 $ 7,520 166.7% (5.6%)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The large increase in non-interest income is principally due to the one time
gains realized from the sale of deposits at the Bank's Western Kentucky banking
centers and the gain realized from the sale of the Bankcard portfolio. The Bank
also realized a modest net gain on the sale of securities of $81,000 during
1997. Bankcard service fees declined during 1997 as a result of the sale.
Service charges on deposit accounts increased during 1997 as a result of an
increase in the number of transaction accounts. Management also restructured its
fee schedule and further reduced its previous level of fee waivers. The 1996
increase in service charges on deposit accounts was primarily attributable to
overall growth in the number of the Bank's transaction accounts. Other service
charges and fees, having shown a strong decline during 1996 from 1995 levels,
experienced an increase of $216,000 in 1997. The decline in 1996 was a result of
decreased credit life insurance commissions earned as Republic slowed its
unsecured consumer loan originations, a practice which continued into 1997.
Other non-interest income decreased moderately to $674,000 in 1997 compared to
$959,000 in 1996.
Revenue from mortgage banking activities from 1995 through 1997 has been
positively influenced by increases in origination and sales volume and the sale
of most loans with servicing released. Proceeds from sales of loans were $124
million, $104 million, and $87 million in 1997, 1996, and 1995, respectively.
Secondary market residential loan originations are heavily influenced by
interest rates, which was the primary factor for the increased volume. Net gains
from sales of loans closely track loan origination volume. Net gains as a
percentage of loans sold were 1.49%, 1.16%, and 1.25% in 1997, 1996, and 1995,
respectively. Management made a change from selling loans with servicing
retained to servicing released in 1995 to offset downward market pressure on
loan sale pricing. The sale of a significant number of loans with servicing
released, coupled with normal loan paydowns and payoffs, has resulted in a
decline in the size of the loan servicing portfolio and a corresponding decline
in loan servicing income. As of December 31, 1997, Republic was servicing $263
million in mortgage loans for other investors compared to $297 million in 1996.
31
<PAGE>
NON-INTEREST EXPENSE
As shown in Table 4, total non-interest expense increased by 4.7% to $32.9
million in 1997, compared to $31.4 million in 1996 and $24.5 million in 1995.
The costs associated with Republic's addition of five new banking centers in
1996 and continued technology enhancements during 1997 resulted in increased
non-interest expense during 1997. While Republic anticipates receiving the
benefit from reduced non-interest expense at the Western Kentucky banking
centers, this benefit was not fully realized throughout 1997 due to the timing
of those transactions.
Non-interest expense levels are often measured using an efficiency ratio
(non-interest expense divided by the sum of net interest income and non-interest
income). Excluding its one-time gains from the sale of deposits and related
fixed assets and Bankcard, Republic's efficiency ratio was 68% in 1997 compared
to 69% (64% exclusive of a one-time SAIF deposit insurance assessment) in 1996
and 60% in 1995.
TABLE 4--ANALYSIS OF NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
PERCENT
INCREASE
YEAR ENDED DECEMBER 31, (DECREASE)
------------------------------- ------------------------
1997 1996 1995 1997/96 1996/95
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits......................... $ 15,444 $ 13,236 $ 11,334 16.7% 16.8%
Occupancy and equipment................................ 8,562 6,623 5,346 29.3 23.9
Communication and transportation....................... 1,796 1,548 1,407 16.0 10.0
Marketing and development.............................. 1,299 1,620 1,308 (19.8) 23.9
FDIC deposit insurance................................. 107 3,277 1,245 (96.7) 163.2
Supplies............................................... 1,013 973 883 4.1 10.2
Litigation recovery.................................... (738) nm
Other.................................................. 4,659 4,132 3,720 12.8 11.1
--------- --------- ---------
Total.................................................. $ 32,880 $ 31,409 $ 24,505 4.7% 28.2%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Salary and employee benefits expense increased approximately 16.7% and 16.8%
in 1997 and 1996, respectively. The increase was primarily due to additional
data processing and mortgage origination staffing requirements as well as other
additional operational support personnel and annual merit increases. Overall
Republic's staffing levels at year-end 1997 were 418 full-time equivalent
employees (FTE's) compared to 419 FTE's in 1996 and 361 FTE's in 1995. Overall
FTE's remained constant at year-end 1997 compared to year-end 1996 as several of
the Western Kentucky positions were reallocated to other retail and operational
areas of the Bank.
Occupancy and equipment expenses rose 29.3% in 1997 and 23.9% in 1996. The
1996 increases were primarily due to depreciation and equipment maintenance
expenses associated with new enhancements to loan and customer support systems.
The $1.9 million increase in 1997 also reflects a full year of operating
expenses associated with the addition of five new banking centers opened in 1996
in Louisville (3), Frankfort and Paducah.
Communication and transportation expenses increased 16.0% in 1997 and 10.0%
in 1996. Republic incurred additional costs for telecommunication enhancements
which are associated with Republic's platform, call center and computer
networks.
Marketing and development expense decreased 19.8% in 1997, following a 23.9%
increase in 1996. The increases in 1996 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.
32
<PAGE>
FDIC deposit insurance expense decreased $3.2 million from 1996 to 1997.
This decrease is principally a result of the federally mandated one-time
assessment on the Bank's deposits insured in the FDIC's Savings Association
Insurance Fund (SAIF) deposits in the amount of $2.3 million during 1996. The
1996 federal legislation which mandated the one-time assessment provided for a
future ongoing reduction in the FDIC's insurance rate premiums on SAIF insured
deposits. Republic benefitted from this one time charge as it resulted in a
reduction of the FDIC's overall insurance rate premium charges during 1997.
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 reversal had a favorable impact on
total non-interest expense in 1995. All other operating expenses during 1997,
1996 and 1995 experienced minor increases.
Republic was contractually required to reimburse the FDIC for tax benefits
received resulting from tax deductions for losses on loans and other real estate
owned (OREO) acquired through the acquisition of two failed institutions in 1985
and 1988. In the third quarter of 1995, Republic was notified by the FDIC that,
under its interpretation of the agreements, Republic may be obligated to remit
additional payments related to prior years. Republic disputed this
interpretation by the FDIC and final settlement of this matter was reached with
the FDIC during the second quarter of 1997. The terms of the settlement had no
significant impact on the financial position and results of operation of
Republic and provided for a release by the FDIC of any further obligations of
Republic under the agreements.
FINANCIAL CONDITION
LOAN PORTFOLIO
Republic continued to experience overall loan growth throughout its markets
in 1997. Total loans increased 5% to $805 million at December 31, 1997, compared
to $768 million at December 31, 1996. This growth was accomplished after taking
into account Republic's sale of its $23 million credit card portfolio. The
increase in loans was led by residential real estate and the home equity
component of consumer lending which combined increased $57 million from December
31, 1996. The rise in real estate loan volume was a result of a continuing
favorable interest rate environment and sustained customer demand for
residential financing throughout the Bank's markets. Republic also experienced a
47% increase in home equity lending as a result of the product's competitive
features and continuing consumer demand. The home equity product features
include elimination of up-front closing costs and an attractive six month fixed
introductory interest rate. After the introductory period, the loans convert to
an adjustable rate product.
Republic's commercial real estate loan portfolio increased by 29% to $76
million at December 31, 1997. Republic's increased commercial real estate demand
has risen principally from the Bank's existing customer base. As a result of
this increased demand, Republic has allocated additional resources to the
commercial lending function. In conjunction with its commercial real estate
lending, emphasis has also been placed on acquiring the associated deposit
relationships from these clients.
Republic's consumer loans decreased during 1997 to $189 million. The
consumer loan portfolio consists of both secured (home equity, auto, etc.) and
unsecured loans. Approximately 20% of loans in the consumer portfolio are
unsecured, including loans originated under both the "All Purpose" and "Pre-
Approved" loan programs. Republic's "All Purpose Loans," with total outstandings
of $13 million at December 31, 1997 and $22 million at December 31, 1996, are
originated through Republic's banking centers. This product has an average loan
amount of $7,000 and an annual average percentage rate of 16.98% with a standard
maximum maturity of five years. "Pre-Approved Loans," with total outstandings of
$25 million at December 31, 1997 and $33 million at December 31, 1996, were
delivered through direct mail, targeting clients both in and outside of
Republic's traditional markets. The "Pre-Approved Loan" product has an average
loan amount of $6,000 and an average annual percentage rate of 13.96% with a
33
<PAGE>
standard maximum maturity of five years. Republic is not currently marketing
these two loan products and plans to continue to allow its unsecured loan
portfolio to reduce in the near term.
Republic expects loan originations to continue at strong levels in the near
term. The rate of loan growth on the balance sheet may, however, slightly lag
behind the rate of originations. Republic's loan portfolio is comprised
primarily of adjustable rate single family loans which are subject to
refinancing pressures in a declining interest rate environment. Also, Republic
anticipates that the loan portfolio retained from the Western Kentucky deposit
sales will be subject to a higher level of prepayments than its overall loan
portfolio in general. Republic will continue to provide service to these clients
through its centralized loan operations, but a percentage of these clients may
elect to refinance with other local institutions. Republic is not able to
predict the rate at which the Western Kentucky loan portfolio will pre-pay.
TABLE 5--LOANS BY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential........................................ $ 480,874 $ 457,204 $ 371,846 $ 346,649 $ 316,824
Construction....................................... 37,940 32,130 31,230 21,919 24,316
Commercial......................................... 76,306 59,086 75,648 76,725 45,044
Commercial........................................... 21,552 25,115 21,042 18,542 45,522
Consumer............................................. 188,573 194,546 175,979 114,993 59,740
---------- ---------- ---------- ---------- ----------
Total Loans.......................................... $ 805,245 $ 768,081 $ 675,745 $ 578,828 $ 491,446
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The mortgage banking operation manages originations and secondary market
sales of first mortgage residential loans. This operation primarily sells fixed
rate originations in the secondary market without recourse. During 1997,
Republic sold $124 million of residential mortgage loans into the secondary
market compared to $104 million in 1996. At the end of 1997, Republic was
servicing $263 million in mortgage loans for other investors compared to $297
million in 1996 and $87 million in 1995. The decline in the mortgage banking
servicing portfolio from 1996 to 1997 resulted from management's election to
sell a majority of its originations on a servicing released basis combined with
regular loan principal paydowns.
The table below illustrates Republic's fixed rate maturities and repricing
frequency for the loan portfolio:
TABLE 6--SELECTED LOAN DISTRIBUTION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------------------------------
ONE OVER ONE OVER
YEAR THROUGH FIVE FIVE
TOTAL OR LESS YEARS YEARS
---------- ---------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate maturities........................................... $ 178,471 $ 44,668 $ 83,732 $ 50,071
Variable rate repricing frequency............................... 626,774 463,161 162,703 910
---------- ---------- ------------ ---------
Total........................................................... $ 805,245 $ 507,829 $ 246,435 $ 50,981
---------- ---------- ------------ ---------
---------- ---------- ------------ ---------
</TABLE>
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is regularly evaluated by management and
maintained at a level believed to be adequate to absorb future loan losses in
the Bank's portfolios. Periodic provisions to the allowance
34
<PAGE>
are made as needed. The amount of the provision for loan losses necessary to
maintain an adequate allowance is based upon an assessment of current economic
conditions, analysis of periodic internal loan reviews, delinquency trends and
ratios, changes in the mixture and levels of the various categories of loans,
historical charge-offs, recoveries, and other information. Management believes
that the allowance for loan losses at December 31, 1997 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 future
performance.
The allowance for loan losses increased $1.9 million from December 31, 1996
to $8.2 million at December 31, 1997. The increase is primarily attributable to
an increase in commercial real estate and home equity lending which generally
present greater credit risk than 1-4 family residential loans, as well as
continued charge-off experience and losses in the unsecured consumer loan
portfolio. Republic's allowance for loan losses to total loan ratio increased
from .81% at December 31, 1996, to 1.02% at December 31, 1997.
Net charge-offs were $5.3 million during 1997 compared to $6.6 million and
$2.4 million for 1996 and 1995, respectively. Republic's unsecured consumer loan
portfolio accounted for 83% of total charge-offs for the year ended December 31,
1997. The charge-offs in the unsecured loan portfolio were primarily comprised
of $1.8 million in the "All Purpose" program compared to $2.4 million during
1996 and $2.3 million in the "Pre-Approved" program compared to $2.1 million
during 1996 (see description of programs under "Loan Portfolio"). Beginning in
1996 and continuing through 1997, management significantly reduced the volume of
new originations under the "All Purpose" and "Pre-Approved" loan programs.
Republic also experienced charge-offs in its Bankcard portfolio of $844,000 for
the year ended December 31, 1997, compared to $1.6 million for the comparable
period in 1996.
TABLE 7--SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year................ $ 6,241 $ 3,695 $ 1,827 $ 1,627 $ 1,622
Charge-offs:
Real estate................................................. (358) (242) (313) (83) (176)
Commercial.................................................. (43) (22) (107) (14) (47)
Consumer.................................................... (5,458) (6,865) (2,069) (362) (251)
--------- --------- --------- --------- ---------
Total..................................................... (5,859) (7,129) (2,489) (459) (474)
--------- --------- --------- --------- ---------
Recoveries:
Real estate................................................. 23 290 22 19
Commercial.................................................. 25 29
Consumer.................................................... 520 236 42 93 69
--------- --------- --------- --------- ---------
Total..................................................... 543 526 89 122 88
--------- --------- --------- --------- ---------
Net loan charge-offs.......................................... (5,316) (6,603) (2,400) (337) (386)
Provision for loan losses..................................... 7,251 9,149 4,268 537 391
--------- --------- --------- --------- ---------
Allowance for loan losses at end of year...................... $ 8,176 $ 6,241 $ 3,695 $ 1,827 $ 1,627
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratios:
Allowance for loan losses to total loans.................... 1.02% .81% .55% .32% .33%
Net loan charge-offs to average loans outstanding for the
period.................................................... .66 .91 .38 .06 .08
Allowance for loan losses to non-performing loans........... 115 78 168 97 61
</TABLE>
35
<PAGE>
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 during 1996 and 1997
compared to previous years in the unsecured consumer loan portfolio by
increasing the allowance for unsecured consumer loans.
TABLE 8--MANAGEMENT'S ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994
-------------------------- -------------------------- -------------------------- -----------
<CAPTION>
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
ALLOCATED TO TOTAL ALLOCATED TO TOTAL ALLOCATED TO TOTAL ALLOCATED
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE
----------- ------------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate................. $ 3,590 73.9% $ 1,771 71.4% $ 957 70.9% $ 1,091
Commercial.................. 46 2.7 46 3.3 34 3.1 157
Consumer.................... 4,540 23.4 4,424 25.3 2,704 26.0 579
----------- --- ----------- --- ----------- --- -----------
Total....................... $ 8,176 100% $ 6,241 100% $ 3,695 100% $ 1,827
----------- --- ----------- --- ----------- --- -----------
----------- --- ----------- --- ----------- --- -----------
<CAPTION>
<S> <C> <C> <C>
1993
--------------------------
PERCENT PERCENT
OF LOANS OF LOANS
TO TOTAL ALLOCATED TO TOTAL
LOANS ALLOWANCE LOANS
------------- ----------- -------------
<S> <C> <C> <C>
Real estate................. 76.9% $ 953 78.6%
Commercial.................. 3.2 315 9.3
Consumer.................... 19.9 359 12.1
--- ----------- ---
Total....................... 100% $ 1,627 100%
--- ----------- ---
--- ----------- ---
</TABLE>
ASSET QUALITY
Loans (including impaired loans under SFAS 114 and 118 but excluding
consumer loans) are placed on non-accrual status when they become past due 90
days or more as to principal or interest, unless they are adequately secured and
in the process of collection. When loans are placed on non-accrual status, all
unpaid accrued interest is reversed. These loans remain on non-accrual status
until the borrower demonstrates the ability to remain current or the loan is
deemed uncollectible and is charged off. Consumer loans are not placed on
non-accrual status, but are reviewed and charged off when they reach 120 days
past due. At December 31, 1997, Republic had $497,000 in consumer loans 90 days
or more past due compared to $278,000 at December 31, 1996.
Table 9 provides information related to non-performing assets and loans 90
days or more past due. Accruing loans contractually past due 90 days or more
decreased slightly from $5.0 million at December 31, 1996, to $4.5 million at
December 31, 1997. These loans are primarily secured 1-4 family residential
loans. Should the underlying collateral be determined to be insufficient to
satisfy the obligation, the loan is classified and the Bank's allowance is
increased accordingly. Historically, Republic's security in residential loans
has been adequate and has acted to limit the Bank's exposure to loss. Loans in
non-accrual status decreased marginally from $3.1 million to $2.7 million from
December 31, 1996, to December 31, 1997.
36
<PAGE>
TABLE 9--NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans on non-accrual status(1)(2)................................ $ 2,676 $ 3,055 $ 742 $ 1,285 $ 2,230
Loans past due 90 days or more................................... 4,459 4,955 1,463 606 421
--------- --------- --------- --------- ---------
Total non-performing loans....................................... 7,135 8,010 2,205 1,891 2,651
Other real estate owned.......................................... 22 104 552 791 1,023
--------- --------- --------- --------- ---------
Total non-performing assets...................................... $ 7,157 $ 8,114 $ 2,757 $ 2,682 $ 3,674
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Percentage of non-performing loans to total loans................ .90% 1.04% .33% .33% .54%
Percentage of non-performing assets to total loans............... .90% 1.06% .41% .46% .75%
</TABLE>
- ------------------------
(1) Loans on non-accrual status are exclusive of impaired loans as these loans
remain on accrual status. See note 4 to the Consolidated Financial
Statements for additional discussion on impaired loans.
(2) The interest income that would have been earned and received on non-accrual
loans was not material.
Republic defines impaired loans to be those commercial real estate and other
commercial loans greater than $499,999 that management has classified as
doubtful (collection of all amounts due is highly questionable or improbable) or
loss (all or a portion of the loan has been written off or a specific allowance
for loss has been provided). Republic's policy is to charge off all or that
portion of its investment in an impaired loan upon a determination it is
probable the full amount will not be collected. Impaired loans remained constant
from December 31, 1996 to December 31, 1997 at $1.6 million. Impaired loans
consists of one secured commercial real estate loan.
INVESTMENT SECURITIES
The investment portfolio consists of U.S. Treasury and U.S. Government
Agency Obligations and mortgage-backed securities. The mortgage-backed
securities (MBS's) consist of 15 year fixed and 7.5 year balloon mortgage
securities, underwritten and guaranteed by FNMA, a government-sponsored agency.
Securities, including those classified as held to maturity and available for
sale, decreased from $282 million at December 31, 1996, to $192 million at
December 31, 1997. The investment portfolio decreased as funds were used to
replace the sold Western Kentucky deposits and fund continued loan growth.
In order to enhance the oversight of the Bank's investment portfolio,
Republic hired a chief investment officer during the second quarter of 1997.
Management also made certain modifications to its existing investment policy.
The policy changes will permit management to take advantage of market changes
and permit investments in additional MBS's and collateralized mortgage
obligations. The policy changes will also permit management to extend maturities
beyond prior limits.
37
<PAGE>
TABLE 10--INVESTMENT SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------------------
<S> <C> <C> <C> <C>
AVERAGE WEIGHTED
CARRYING MATURITY AVERAGE
VALUE FAIR VALUE IN YEARS YIELD
--------- ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government Agencies:
Over one through five years......................................... $ 44,559 $ 44,559 1.5 5.83%
Mortgage-backed securities:
Over five through ten years......................................... 34,158 34,158 6.6 6.30
Over ten years...................................................... 15,109 15,109 14.2 6.48
--------- -----------
Total................................................................. 49,267 49,267 8.9 6.35
--------- -----------
Total available for sale investment securities........................ $ 93,826 $ 93,826
--------- -----------
--------- -----------
</TABLE>
TABLE 11--INVESTMENT SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------------------
<S> <C> <C> <C> <C>
AVERAGE WEIGHTED
CARRYING MATURITY AVERAGE
VALUE FAIR VALUE IN YEARS YIELD
--------- ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government Agencies:
Within one year..................................................... $ 52,786 $ 52,775 .6 5.99%
Over one through five years......................................... 30,269 30,212 1.7 6.07
Over five through ten years......................................... 10,638 10,557 5.4 6.22
--------- -----------
Total............................................................... 93,693 93,544 1.5 6.04
Obligations of states and political subdivision:
Within one year
Over one through five years......................................... 781 816 2.8 9.10
Over five through ten years......................................... 800 929 7.6 11.03
Over ten years...................................................... 2,689 2,702 18.1 9.86
--------- -----------
Total............................................................... 4,270 4,447 13.4 8.77
Mortgage-backed securities............................................ 583 549 25.5 6.15
--------- -----------
Total held to maturity investment securities.......................... $ 98,546 $ 98,540
--------- -----------
--------- -----------
</TABLE>
DEPOSITS
Total deposits decreased from $783 million at December 31, 1996, to $732
million at December 31, 1997 as a result of the sale of $108 million of deposits
in Western Kentucky. If Republic had retained its Western Kentucky banking
centers, total deposits would have increased $64 million based on the level of
deposits at those banking centers at the time of sale. Management continues to
seek retail and commercial deposits through new products and initiatives. As
part of Republic's strategy to further reduce its cost of funds, money market
deposits were increased by 67% over year end 1996 to $69 million. The increase
was primarily in new funds resulting from the Bank's marketing programs designed
to attract large balance money market clients. The certificate of deposit
portfolio decreased by $20 million as a result of the sale of $79 million of
certificates of deposits in Western Kentucky. If Republic had retained its
Western Kentucky banking centers, certificates of deposit would have increased
$59 million.
38
<PAGE>
TABLE 12--DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
(IN THOUSANDS)
Demand (NOW, SuperNOW and Money Market)............................... $ 118,870 $ 116,180
Savings............................................................... 12,165 14,840
Money market certificates of deposit.................................. 41,307 63,423
Individual retirement accounts........................................ 30,167 35,845
Certificates of deposit, $100,000 and over............................ 63,045 60,890
Other certificates of deposit......................................... 352,478 374,864
Brokered deposits..................................................... 47,653 50,130
---------- ----------
Total interest bearing deposits....................................... 665,685 716,172
Total non-interest bearing deposits................................... 65,913 66,969
---------- ----------
Total................................................................. $ 731,598 $ 783,141
---------- ----------
---------- ----------
</TABLE>
Republic does not have a high liability dependency ratio as evidenced by the
comparatively low level of deposit clients with deposits larger than $100,000.
The ratio of those deposits to average earning assets was 6.0% at the end of
1997 and 6.7% at the end of 1996. Table 13 provides a maturity distribution of
time deposits $100,000 and over.
TABLE 13--MATURITY OF TIME DEPOSITS $100,000 AND OVER
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
----------------------
(IN THOUSANDS)
<S> <C>
Three months or less.................................................. $ 5,685
Over three months through six months.................................. 11,661
Over six months through twelve months................................. 24,511
Over twelve months.................................................... 21,188
-------
Total............................................................... $ 63,045
-------
-------
</TABLE>
Republic's $48 million in brokered deposits remained steady during 1997.
Republic did not solicit or add any additional brokered deposits during 1997.
The brokered deposits have stated rates ranging from 5.35% to 6.15% and original
contractual maturities ranging from 3 to 5 years. Table 14 provides a maturity
distribution of brokered deposits, which are excluded from the maturity schedule
in Table 13:
TABLE 14--MATURITY OF BROKERED DEPOSITS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
----------------------
(IN THOUSANDS)
<S> <C>
1998.................................................................. $ 18,470
1999.................................................................. 12,581
2000.................................................................. 16,602
-------
Total............................................................... $ 47,653
-------
-------
</TABLE>
SHORT-TERM BORROWINGS
Short-term borrowings consist of short term excess funds from correspondent
banks, repurchase agreements and overnight liabilities to deposit clients
arising from Republic's cash management program.
39
<PAGE>
During 1997, short-term borrowings decreased from $182 million at December 31,
1996, to $111 million at December 31, 1997. Approximately $92 million of the
December 31, 1996 balance represented short-term funds received from a local
governmental organization. As anticipated, substantially all of these funds
received from that governmental organization were withdrawn by March 31, 1997.
OTHER BORROWED FUNDS
Other borrowed funds which consist principally of FHLB advances increased
from $107 million to $124 million at December 31, 1997. Republic increased its
borrowings from the FHLB from $84 million to $124 million at December 31, 1997.
These additional advances from the FHLB were primarily used to replace deposits
associated with the sale of the Western Kentucky banking centers. Republic's
management expects to continue to utilize FHLB borrowings as a source of funds
in addition to its utilization of retail deposits. Additional FHLB borrowings
above current levels will be evaluated by management, with consideration given
to the growth of the Bank's loan portfolio, liquidity needs, cost of retail
deposits, market conditions, and other factors.
LIQUIDITY
Republic maintains sufficient liquidity in order to fund loan demand and
deposit withdrawals. Liquidity is managed by retaining sufficient liquid assets
in the form of investment securities and core deposits to meet demand. Funding
and cash flows can also be realized from the investment portfolio and paydowns
from within the loan portfolio. Republic's banking centers also provide access
to the retail deposit market. In addition, Republic has established lines of
credit with other financial institutions, the FHLB and brokerage firms. While
Republic utilizes numerous funding sources in order to meet its liquidity
requirements, FHLB borrowings remain a material component of management's
balance sheet strategies.
Republic's objectives include preserving an adequate liquidity position.
Asset/liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve an acceptable
net interest margin. Republic continues to experience strong loan demand and
management continues to monitor interest rate and liquidity risk while
implementing appropriate funding and balance sheet strategies.
CAPITAL
To further enhance Republic's capital position, management has utilized
alternative capital sources. During the first quarter of 1997, Republic issued
$6.4 million in 8.5% Quarterly Income Trust Preferred Securities (the "Trust
Preferred securities") through a newly formed subsidiary, Republic Capital
Trust. The effective cost of these securities is 5.5%. The interest paid on
these securities is deductible to Republic. Each Trust Preferred security, par
value $100, can be converted to ten shares of Class A Common Stock. Holders of
the Trust Preferred securities are entitled to the payments made on Republic's
subordinated convertible debentures issued to that subsidiary which have a
thirty year maturity with a right of redemption at par after five years, subject
to certain restrictions. See Note 11 to the Consolidated Financial Statements.
On December 31, 1997, Republic redeemed its $5 million outstanding Series A
Convertible Preferred stock. At the option of each shareholder, each security
was either convertible to 10 shares of Class A Common Stock and 2 shares of
Class B Common Stock, or redeemable in cash for the initial offering price of
$100 per share plus a 20% premium. As a result of this redemption approximately
80% of the outstanding securities were converted to Common Stock. The remaining
securities were redeemed for cash. The $1.2 million payout to those shareholders
included the 20% premium of $203,000 which was charged to retained earnings.
40
<PAGE>
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. Republic improved its capital position during 1997 due
to the increased retained earnings achieved during the period. As a result of
the improved capital position, Republic's capital to average assets ratio
increased to 6.26% at December 31, 1997 compared to 6.24% at year end 1996.
Republic continues to exceed the regulatory requirements for Tier I, Tier I
leverage and total risk-based capital. The Bank intends to maintain a capital
position that meets or exceeds the "well capitalized" requirements as defined by
the FDIC. See Note 14 to the Consolidated Financial Statements.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Asset/liability management control is designed to ensure safety and
soundness, maintain liquidity and regulatory capital standards, and achieve
acceptable net interest income. Management considers interest rate risk to be
Republic's most significant market risk. Interest rate risk is the exposure to
adverse changes in the net interest income as a result of market fluctuations in
interest rates.
Management regularly monitors interest rate risk in relation to prospective
market and business conditions. The Bank's board of directors sets policy
guidelines establishing maximum limits on the Bank's interest rate risk
exposure. Republic's management monitors and adjusts exposure to interest rate
fluctuations as influenced by the Bank's loan and deposit portfolios.
Republic uses an earnings simulation model to analyze net interest income
sensitivity. Potential changes in market interest rates and their subsequent
effect on interest income are then evaluated. The model projects the effect of
instantaneous movements in interest rates of both 100 and 200 basis points.
Assumptions based on the historical behavior of Republic's deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in market interest rates on net interest income. Actual results
will differ from the model's simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and
the application of various management strategies.
Interest rate risk management focuses on maintaining acceptable net interest
income within policy limits approved by the board of directors. The Bank's
Asset/Liability Management Committee monitors and manages interest rate risk to
maintain an acceptable level of change to net interest income resulting from
market interest rate changes. Republic's board approved policy established for
interest rate risk is stated in terms of the change in net interest income given
a 100 and 200 basis point immediate and sustained increase or decrease in market
interest rates. The current limits approved by the board of directors are plus
or minus 8% for a 100 basis point change and plus or minus 12% for a 200 basis
point movement.
41
<PAGE>
The following table illustrates Republic's estimated annualized earnings
sensitivity profile as of December 31, 1997:
TABLE 15--INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DECREASE IN RATES INCREASE IN RATES
------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
200 100 100 200
BASIS BASIS BASIS BASIS
POINTS POINTS BASE POINTS POINTS
----------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
PROJECTED INTEREST INCOME
Loans........................................... $ 65,254 $ 70,528 $ 75,721 $ 80,555 $ 85,190
Investments..................................... 11,061 11,655 12,337 12,692 13,045
Short-term investments.......................... 39 69 109 148 182
----------- ----------- --------- ----------- -----------
TOTAL INTEREST INCOME........................... $ 76,354 $ 82,252 $ 88,167 $ 93,395 $ 98,417
PROJECTED INTEREST EXPENSE
Deposits........................................ $ 32,209 $ 33,735 $ 35,261 $ 36,844 $ 38,877
Other borrowings................................ 7,418 9,584 11,750 13,916 16,081
Short-term borrowings........................... 95 117 136 157 179
----------- ----------- --------- ----------- -----------
TOTAL INTEREST EXPENSE.......................... 39,722 43,436 47,147 50,917 55,137
----------- ----------- --------- ----------- -----------
NET INTEREST INCOME............................. $ 36,632 $ 38,816 $ 41,020 $ 42,478 $ 43,280
Change from base................................ $ (4,388) $ (2,204) $ 1,458 $ 2,260
% Change from base.............................. (10.70)% (5.37)% 3.56% 5.51%
</TABLE>
Given an immediate, sustained 100 basis point upward shock to the yield
curve used in the simulation model, it is estimated net interest income would
increase by 3.56% compared to an increase of 5.51% given a 200 basis point
increase. A 100 basis point immediate, sustained downward shock to the yield
curve would decrease net interest income by an estimated 5.37% compared to a
decrease of 10.70% given a 200 basis point decrease. These potential changes in
net interest income are within the policy guidelines established by Republic's
board of directors.
These interest rate sensitivity profiles of Republic at any point in time
will be affected by a number of factors. These factors include the mix of
interest sensitive assets and liabilities as well as their relative repricing
schedules. The table above may not be a precise measurement of the effect of
changing interest rates on Republic in the future.
YEAR 2000
Republic continues to implement plans to address the Year 2000 issue. The
issue arises from the fact that many existing computer programs use only two
digits to identify a year in the computer's date field. These programs were
designed without having considered the impact of the upcoming change in the
century. If not corrected, computer applications could fail or create inaccurate
results by or at the Year 2000. The Bank must not only evaluate, install and
test for its own Year 2000 readiness, it must also coordinate with other
entities with which it routinely interacts such as suppliers, creditors,
borrowers, clients, regulators and other financial service organizations.
Republic has retained certain employees whose primary function is related Year
2000 compliance. The loss of these employees could have a material adverse
effect on the implementation of Republic's Year 2000 plan.
Republic has determined that the Year 2000 issue may be material to its
business, operations and suppliers. Customer readiness is not deemed by
management to be material to the Bank's overall financial performance. The Year
2000 issue principally involves the installation of selected software releases
which meet Year 2000 functional requirements. Many of these installations would
have been scheduled for
42
<PAGE>
completion by the Year 2000 in the normal course of business. The performance of
the Bank's software suppliers will be essential for the Bank's successful
implementation of its Year 2000 objectives.
The Bank has completed the Year 2000 assessment stage and has actively
entered into the remediation phase. The Bank has initiated an implementation
plan providing for Year 2000 readiness by the end of 1998, with the year of 1999
available for testing and the performance of any required corrective actions.
The Bank projects that the cost of the remediation will be in a range of $1.2
million to $1.8 million. These costs are expected to impact Republic's
non-interest expenses in a range of approximately $400,000 to $600,000 for 1998.
These expenses could vary from management's estimates if the scope of the Bank's
Year 2000 remediation exceeds management's projections.
Suppliers and any large computer dependent borrowers either have or will be
contacted by the Bank in order to evaluate their response capabilities and
readiness for Year 2000. At this time, the Bank has no reason to believe that
its software providers will not be able to adequately address the Bank's needs
for Year 2000 software functionality.
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
RESULTS OF OPERATIONS
For the first quarter 1998, net interest income increased $363,000 over the
$10.0 million attained during the first quarter of 1997. During the first
quarter 1998, average interest-earning assets were $1.1 billion, an increase of
$9.9 million over first quarter 1997. The yield on average interest-earning
assets decreased slightly from 8.63% during first quarter of 1997 to 8.62%
during first quarter of 1998. As a result of these small changes, interest
income was effectively unchanged. Total average interest-bearing liabilities
decreased from $948 million in the first quarter of 1997 to $935 million in the
first quarter of 1998. This reduction in interest-bearing liabilities was
primarily due to the sale of deposits from Republic's Western Kentucky banking
centers. The cost of average interest-bearing liabilities decreased slightly
from 5.32% during first quarter of 1997 to 5.31% in the first quarter of 1998.
Overall, the net interest rate spread remained unchanged at 3.31% from the
first quarter of 1997 compared to the first quarter of 1998. The Bank's net
interest margin increased from 3.82% in first quarter 1997 to 3.92% in first
quarter 1998. The increase in the net interest margin occurred because of an
increase in average earning assets over the prior period while average
interest-bearing liabilities decreased from the prior period. Also as a result
of the gains realized on the sale of assets during 1997 and the first quarter of
1998, Republic was able to fund a greater portion of interest-earning assets
through equity. The changes in average earning assets and average
interest-bearing liabilities led to an overall increase in net interest income
and the corresponding increase in the net interest margin percentage.
Table 16 provides detailed information as to average balance, interest
income/expense, and rates by major balance sheet category for the three months
ended March 31, 1998 and 1997.
43
<PAGE>
TABLE 16--AVERAGE BALANCE SHEET RATES FOR MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ --------- ----------- ------------ --------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
EARNING ASSETS:
U.S. Treasury and U.S. Government
Agency Securities......................... $ 157,199 $ 2,307 5.87% $ 233,754 $ 3,366 5.76%
State and political subdivision securities.. 4,263 92 8.63 4,520 96 8.50
Other investments........................... 10,166 188 7.40 6,431 111 6.90
Mortgage-backed securities.................. 46,773 721 6.17 656 9 5.49
Federal funds sold and securities purchased
under agreements to resell................ 24,783 354 5.71 15,258 213 5.58
Total loans and fees (1).................... 814,254 19,123 9.39 786,882 18,815 9.56
------------ --------- --- ------------ --------- ---
TOTAL EARNING ASSETS........................ 1,057,438 22,785 8.62 1,047,501 22,610 8.63
------------ --------- --- ------------ --------- ---
Less: Allowance for loan losses............. (8,221) (6,256)
NON-EARNING ASSETS:
Cash and due from banks..................... 21,199 24,299
Bank premises and equipment, net............ 12,795 17,731
Other assets................................ 12,410 11,892
------------ ------------
TOTAL ASSETS................................ $ 1,095,621 $ 1,095,167
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Transaction accounts........................ $ 94,303 $ 762 3.23 $ 136,416 $ 1,175 3.45
Money market accounts....................... 79,333 986 4.97 39,935 468 4.69
Individual retirement accounts.............. 22,739 339 5.96 36,430 531 5.83
Certificates of deposit and other time
deposits.................................. 438,325 6,445 5.88 511,188 7,490 5.86
Repurchase agreements and other
borrowings................................ 300,799 3,883 5.16 223,884 2,939 5.25
------------ --------- --- ------------ --------- ---
TOTAL INTEREST BEARING LIABILITIES.......... 935,499 12,415 5.31 947,853 12,603 5.32
------------ --------- --- ------------ --------- ---
NON-INTEREST BEARING LIABILITIES:
Non-interest bearing deposits............... 72,663 72,189
Other liabilities........................... 14,157 15,643
Stockholders' equity........................ 73,302 59,482
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $ 1,095,621 $ 1,095,167
------------ ------------
------------ ------------
Net interest income......................... $ 10,370 $ 10,007
--------- ---------
--------- ---------
Net interest spread......................... 3.31% 3.31%
--- ---
--- ---
Net interest margin......................... 3.92% 3.82%
--- ---
--- ---
</TABLE>
- ------------------------
(1) The amount of fee income included in interest on loans was $473,000 and
$163,000 for the three months ended March 31, 1998 and 1997, respectively.
For the purposes of these calculations, non-accruing loans are included in
the quarterly average loan amounts outstanding.
44
<PAGE>
The following table presents the extent to which changes in interest rates
and changes in the volume of interest earning assets and interest bearing
liabilities have affected Republic's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
TABLE 17--VOLUME/RATE VARIANCE ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------
INCREASE/(DECREASE)
DUE TO
------------------------------------
TOTAL NET
CHANGE VOLUME RATE
----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME(1):
U.S. Treasury and Government Agency Securities.............................. $ (1,059) $ (1,102) $ 43
State and political subdivision securities.................................. (4) (5) 1
Other investments........................................................... 77 64 13
Mortgage-backed securities.................................................. 712 633 79
Federal funds sold and securities purchased under agreements to resell...... 141 133 8
Total loans and fees(2)..................................................... 308 654 (346)
----------- ------------ ---------
TOTAL INCREASE (DECREASE) IN INTEREST INCOME.............................. 175 377 (202)
----------- ------------ ---------
INTEREST EXPENSE:
Interest bearing transaction accounts....................................... (413) (363) (50)
Money market accounts....................................................... 518 462 56
Individual retirement accounts.............................................. (192) (200) 8
Certificates of deposit and other time deposits............................. (1,045) (1,068) 23
Repurchase agreements and other borrowings.................................. 944 1,010 (66)
----------- ------------ ---------
TOTAL INCREASE (DECREASE) IN INTEREST EXPENSE............................. (188) (159) (29)
----------- ------------ ---------
INCREASE (DECREASE) IN NET INTEREST INCOME.................................. $ 363 $ 536 $ (173)
----------- ------------ ---------
----------- ------------ ---------
</TABLE>
- ------------------------
(1) Interest income for loans on non-accrual status has been excluded from
interest income.
(2) The amount of fee income included in interest on loans was $473,000 and
$163,000 for the three months ended March 31, 1998 and 1997, respectively.
NON-INTEREST INCOME. Non-interest income was $6.9 million during first
quarter 1998, up from $2.1 million during the first quarter of 1997. Excluding
the one-time gain on sale of deposits of $4.1 million, non-interest income
increased $700,000 to $2.8 million. This increase was principally due to the
Company's increase in income as a result of more loan originations and fees
generated from subsequent sales in the secondary market. The gains on sale of
investment securities resulted from an increase in the market value of a portion
of the Bank's available for sale securities. Other service charges and fees
increased $87,000 to $397,000 due to increased volume associated with Republic's
participation in a rapid tax refund joint venture. Revenues generated from this
joint venture are primarily realized only during the tax filing season comprised
of the first quarter and to a lesser extent the second quarter of the year.
Table 18 illustrates Republic's primary sources of non-interest income.
45
<PAGE>
TABLE 18--ANALYSIS OF NON-INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
-------------- PERCENT
1998 1997 INCREASE/(DECREASE)
------ ------ -------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts................................... $ 753 $ 777 (3.1)%
Other service charges and fees........................................ 397 310 28.1
Bankcard services..................................................... 409 nm
Net gain on available for sale securities............................. 324 nm
Net gain on sale of loans............................................. 1,009 281 259.1
Net gain on sale of deposits.......................................... 4,116 nm
Loan servicing income................................................. 166 189 (12.2)
Other................................................................. 147 130 13.1
------ ------
Total................................................................. $6,912 $2,096 229.8%
------ ------
------ ------
</TABLE>
Income from mortgage banking, also a component of non-interest income,
includes proceeds from the sale of loans in the secondary market and servicing
income. Gain on sale of loans increased $728,000 in first quarter 1998 from
first quarter 1997. Republic's net gain on sale of loans increased due to
continued strong mortgage loan demand. Loan servicing income declined slightly
during first quarter 1998 compared to the comparable period in 1997. The
decrease was attributable to a decline in the servicing portfolio due to normal
payoff activity and the sale of new loan originations into the secondary market
with servicing released.
NON-INTEREST EXPENSE. Total non-interest expense increased modestly from
$8.0 million in first quarter 1997 to $8.1 million for first quarter 1998. The
increase for the three months ended March 31, 1998 was primarily attributable to
costs associated with Republic's banking center expansion strategies. Excluding
the one-time gain on sale of deposits, Republic's efficiency ratio (non-interest
expense divided by the sum of net interest income and non-interest income) was
61% in the first quarter 1998 compared to 66% for the comparable period in 1997.
TABLE 19--ANALYSIS OF NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------- PERCENT
1998 1997 INCREASE/(DECREASE)
--------- --------- -------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits............................................. $ 4,076 $ 3,688 10.5%
Occupancy and equipment.................................................... 1,862 2,006 (7.2)
Communication and transportation........................................... 426 436 (2.3)
Marketing and development.................................................. 305 363 (16.0)
FDIC deposit insurance..................................................... 84 53 58.5
Supplies................................................................... 260 242 7.4
Other...................................................................... 1,061 1,207 (12.1)
--------- ---------
Total...................................................................... $ 8,074 $ 7,995 1.0%
--------- ---------
--------- ---------
</TABLE>
Republic's staffing level declined to 406 full-time equivalent employees
(FTE's) at March 31, 1998, compared to 439 FTE's at March 31, 1997, primarily
due to the sale of the Western Kentucky banking centers. While total FTE's
decreased, salary and employee benefit expense increased 10.5% for the first
46
<PAGE>
quarter 1998 over first quarter 1997. The increased payroll cost is primarily
attributable to the addition of more highly compensated technical staff, annual
merit increases and compensation paid to the mortgage banking staff.
Occupancy and equipment expense decreased from $2.0 million in first quarter
1997 to $1.9 million for the comparable period in 1998. The decrease was
primarily due to the sale of the Western Kentucky banking centers.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased from $24.5
million at December 31, 1997 to $51.0 million at March 31, 1998. This increase
was primarily comprised of funds generated by core retail deposits and other
borrowed funds.
Cash and due from banks decreased $3.2 million, while federal funds sold and
securities purchased under agreements to resell totaled $29.7 million. This
$29.7 million is primarily comprised of overnight reverse repurchase agreements
totaling $20.0 million with the remaining balance in overnight fed funds sold.
The overnight reverse repurchase agreements provided the Bank with additional
collateral which can be pledged against public deposits and short-term
borrowings.
INVESTMENT SECURITIES. Securities available for sale increased from $93.8
million at December 31, 1997 to $134.4 million at March 31, 1998. Republic
elected to invest funds from core retail deposits and maturing securities
previously held to maturity into securities available for sale in order to
provide for more flexibility in administration of the investment portfolio under
changing market conditions.
TABLE 20--INVESTMENT SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------------------------------
<S> <C> <C> <C> <C>
AVERAGE WEIGHTED
CARRYING MATURITY AVERAGE
VALUE FAIR VALUE IN YEARS YIELD
---------- ---------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury and U.S. Government Agencies:
Within one year................................................... $ 12,004 $ 12,004 0.9 5.85%
Over one year through five years.................................. 80,496 80,496 2.0 5.64
---------- ----------
Total............................................................... 92,500 92,500 1.7 5.67
---------- ----------
Mortgage-backed securities:
Over five years through ten years................................. 14,285 14,285 6.4 6.29
Over ten years.................................................... 27,579 27,579 14.3 6.16
---------- ----------
Total............................................................... 41,864 41,864 11.6 6.20
---------- ----------
Total available for sale investment securities...................... $ 134,364 $ 134,364
---------- ----------
---------- ----------
</TABLE>
47
<PAGE>
Securities to be held to maturity decreased from $98.5 million at December
31, 1997 to $80.1 million at March 31, 1998. The decrease was due to
management's decision to reinvest maturing securities into securities available
for sale. Securities to be held to maturity consist primarily of U.S. Treasury
and U.S. Government Agencies with a range of maturities, none of which exceed
5.5 years.
TABLE 21--INVESTMENT SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------------------------------
<S> <C> <C> <C> <C>
AVERAGE WEIGHTED
CARRYING MATURITY AVERAGE
VALUE FAIR VALUE IN YEARS YIELD
--------- ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasury and U.S. Government Agencies:
Within one year..................................................... $ 58,931 $ 59,052 0.6 6.19%
Over one year through five years.................................... 11,303 11,143 3.2 5.67
Over five years through ten years................................... 5,064 5,026 5.4 6.00
--------- -----------
Total................................................................. 75,298 75,221 1.3 6.10
--------- -----------
Obligations of state and political subdivisions:
Within one year..................................................... 86 87 0.8 7.76
Over one year through five years.................................... 669 728 2.8 9.35
Over five years through ten years................................... 800 923 7.3 11.03
Over ten years...................................................... 2,689 2,700 17.9 10.01
--------- -----------
Total................................................................. 4,244 4,438 15.1 10.19
--------- -----------
Mortgage-backed securities:
Over ten years...................................................... 561 532 25.3 7.75
--------- -----------
TOTAL HELD TO MATURITY INVESTMENT SECURITIES.......................... $ 80,103 $ 80,191
--------- -----------
--------- -----------
</TABLE>
LOANS. Loans decreased from $795 million at December 31, 1997 to $784
million at March 31, 1998. The decrease in loans is primarily due to paydowns in
the Bank's unsecured consumer loan portfolio. Consumer loans decreased from $82
million at December 31, 1997 to $74 million at March 31, 1998. Approximately
44.6% of loans in the consumer portfolio are unsecured. The unsecured consumer
portfolio includes the "All Purpose" and "Pre-Approved" loan programs.
Republic's "All Purpose" loans, with total outstandings of $11.9 million at
March 31, 1998 and $13.4 million at December 31, 1997, are originated through
Republic's banking centers. "Pre-Approved Loans," with total outstandings of
$21.2 million at March 31, 1998 and $24.9 million at December 31, 1997, were
originated through direct mail, targeting clients both in and outside of
Republic's traditional markets. Management plans to continue to allow the
outstanding "All Purpose" and "Pre-Approved" portfolios to reduce in the near
term.
While the residential real estate segment of the portfolio remained flat
from December 31, 1997, overall loan origination volume remains strong. The
majority of Republic's new fixed rate residential real estate originations are
being sold into the secondary market.
48
<PAGE>
TABLE 22--LOANS BY TYPE
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Real estate:
Residential............................................. $ 480,820 $ 480,874
Construction............................................ 39,539 37,940
Commercial.............................................. 74,462 76,306
Commercial................................................ 22,042 21,552
Consumer.................................................. 176,827 188,573
-------------- --------
Total loans............................................... $ 793,690 $ 805,245
-------------- --------
-------------- --------
</TABLE>
The table below illustrates Republic's fixed rate maturities and repricing
frequency for the loan portfolio:
TABLE 23--SELECTED LOAN DISTRIBUTION
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR OVER ONE YEAR OVER FIVE YEARS
TOTAL OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS
---------- ---------- ------------------ -----------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate maturities............................. $ 183,039 $ 50,149 $ 79,493 $ 53,397
Variable rate repricing frequency................. 610,651 440,308 165,246 5,097
---------- ---------- -------- -------
Total............................................. $ 793,690 $ 490,457 $ 244,739 $ 58,494
---------- ---------- -------- -------
---------- ---------- -------- -------
</TABLE>
ALLOWANCE AND PROVISION FOR LOAN LOSSES. The allowance for loan losses
remained constant at $8.2 million from December 31, 1997 to March 31, 1998.
Republic's allowance to total loan ratio was 1.04% at March 31, 1998 compared to
1.02% at December 31, 1997.
The provision for loan losses was $643,000 for the three months ended March
31, 1998, compared to $1.3 million for the three months ended March 31, 1997.
Net charge-offs decreased significantly from first quarter 1997 to first quarter
1998. Republic's unsecured consumer loan portfolio accounted for 85% of total
charge-offs during the first quarter of 1998 and 96% for the first quarter of
1997. Management anticipates that charge-offs in the unsecured loan portfolio
may continue at recent levels in the near future and believes, based on
information presently available, that it has adequately provided for those
losses at March 31, 1998.
Table 24 below depicts the allowance activity by loan type for the three
months ended March 31, 1998 and 1997.
49
<PAGE>
TABLE 24--SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Allowance for loan losses at beginning of period........................... $ 8,176 $ 6,241
Charge-offs:
Real estate.............................................................. (19) (22)
Commercial............................................................... (38)
Consumer................................................................. (683) (1,375)
--------- ---------
Total.................................................................. (702) (1,435)
--------- ---------
Recoveries:
Real estate.............................................................. 3 18
Commercial............................................................... 4 0
Consumer................................................................. 110 159
--------- ---------
Total.................................................................. 117 177
--------- ---------
Net loan charge-offs....................................................... (585) (1,258)
Provision for loan losses.................................................. 643 1,298
--------- ---------
Allowance for loan losses at end of period................................. $ 8,234 $ 6,281
--------- ---------
--------- ---------
Ratios:
Allowance for loan losses to total loans................................. 1.04% .82%
Net loan charge-offs to average loans.................................... .29 .64
Allowance for loan losses to non-performing loans........................ 108 88
</TABLE>
TABLE 25--MANAGEMENT ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
ALLOCATED % OF LOANS ALLOCATED % OF LOANS
ALLOWANCE TO TOTAL LOANS ALLOWANCE TO TOTAL LOANS
----------- --------------- ----------- ---------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate................................................... $ 3,590 74.9% $ 3,590 73.9%
Commercial.................................................... 46 2.8 46 2.7
Consumer...................................................... 4,598 22.3 4,540 23.4
----------- ----- ----------- -----
Total......................................................... $ 8,234 100.0% $ 8,176 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale increased from
$10.0 million at December 31, 1997 to $26.1 million at March 31, 1998.
Republic's origination of mortgage loans for sale increased from $41 million
during the quarter ended December 31, 1997 to $73 million for the quarter ended
March 31, 1998. The increase in origination loan volume was the result of
favorable long-term interest rates and an increase in mortgage loan origination
staff. Republic anticipates that the volume of secondary market originations
will continue in the near term if long-term interest rates remain at current
levels. Also during the first quarter of 1998, Republic securitized
approximately $6 million in 15 year fixed rate mortgage loan originations. These
securities were subsequently sold for a modest gain during April of 1998.
DEPOSITS. Total deposits decreased marginally to $728 million at March 31,
1998 compared to $732 million at December 31, 1997. The decrease in deposits was
primarily the result of the sale of deposits
50
<PAGE>
totaling $65.7 million at the Mayfield banking center. This decrease was offset
by solid growth in retail deposits. Republic's growth in retail deposits was the
result of management's emphasis on retail deposit gathering and its cash
management program. Republic hired a cash management specialist and has
designated a senior officer to focus on deposit growth initiatives.
TABLE 26--DEPOSITS
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Demand (NOW, Super NOW and Money Market).................. $ 136,710 $ 118,870
Savings................................................... 11,178 12,165
Money market certificates of deposit...................... 36,897 41,307
Individual retirement accounts............................ 22,555 30,167
Certificates of deposit, $100,000 and over................ 65,116 63,045
Other certificates of deposit............................. 332,016 352,478
Brokered deposits......................................... 47,697 47,653
-------------- --------
Total interest bearing deposits........................... 652,169 665,685
Total non-interest bearing deposits....................... 75,900 65,913
-------------- --------
Total..................................................... $ 782,069 $ 731,598
-------------- --------
-------------- --------
</TABLE>
TABLE 27--MATURITY DISTRIBUTION ON CD'S OVER $100,000
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
--------------
(IN THOUSANDS)
<S> <C>
Three months or less.......................................................... $ 14,254
Over three months through six months.......................................... 21,268
Over six months through twelve months......................................... 12,551
Over twelve months............................................................ 17,043
-------
Total......................................................................... $ 65,116
-------
-------
</TABLE>
OTHER BORROWED FUNDS. Other borrowed funds which consist of FHLB advances
increased from $124 million at December 31, 1997 to $179 million at March 31,
1998. During the first quarter of 1998 Republic borrowed $60 million from the
FHLB to fund the sale of deposits in Mayfield. As of March 31, 1998, Republic
had the capacity to increase its borrowings from the FHLB up to approximately
$310 million.
51
<PAGE>
ASSET QUALITY
At March 31, 1998, Republic had $587,000 in consumer loans 90 days or more
past due compared to $497,000 at December 31, 1997.
Table 28 provides information related to non-performing assets and loans 90
days or more past due.
TABLE 28--NON-PERFORMING LOANS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998(1) 1997(1)
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans on non-accrual status(2)...................................... $ 2,537 $ 2,676
Loans past due 90 days or more...................................... 5,084 4,459
----------- ------
Total non-performing loans.......................................... 7,621 7,135
Other real estate owned............................................. 504 22
----------- ------
Total non-performing assets......................................... $ 8,125 $ 7,157
----------- ------
----------- ------
Percentage of non-performing loans to total loans................... .96% .90%
Percentage of non-performing assets to total loans.................. 1.02 .90
</TABLE>
- ------------------------
(1) The table is exclusive of impaired loans which remained on accrual status.
(2) Interest income that would have been earned and received on non-accrual
loans was not material.
Non-performing assets increased from $7.2 million at December 31, 1997 to
$8.1 million at March 31, 1998. This increase is largely comprised of loans 90
days or more past due and real estate owned, both of which are primarily secured
by 1-4 family residential loans. Non-performing loans increased from $7.1
million at December 31, 1997 to $7.6 million at March 31, 1998. Management does
not consider the increase in non-performing assets to be material.
CAPITAL
Consolidated stockholders' equity increased from $68.4 million at December
31, 1997 to $73.4 million at March 31, 1998, a 7.4% increase. The increase was
primarily attributable to the gain on sale of the deposits and related fixed
assets at the Mayfield banking center, supported by core earnings. At March 31,
1998, Republic exceeded the Federal Reserve Board's regulatory definition of a
"well capitalized" institution. See Note 14 to the Consolidated Financial
Statements.
Kentucky banking regulations limit the amount of dividends that may be paid
to Republic by the Bank without prior approval of the Bank's regulatory agency.
Under these regulations, the amount of dividends that may be paid in any
calendar year is limited to the Bank's current year's net income, as defined in
the regulations, combined with the retained net income of the preceding two
years, less any dividends declared during those periods. At March 31, 1998, the
Bank had $13 million of retained earnings available for payment of dividends.
52
<PAGE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The following table illustrates Republic's estimated annualized earnings
sensitivity profile as of March 31, 1998:
TABLE 29--INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DECREASE IN RATES INCREASE IN RATES
------------------------ ------------------------
200 100 100 200
BASIS BASIS BASIS BASIS
POINTS POINTS BASE POINTS POINTS
----------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PROJECTED INTEREST INCOME
Loans........................................... $ 64,714 $ 70,051 $ 75,240 $ 80,089 $ 84,702
Investments..................................... 12,774 13,300 13,876 14,298 14,717
Short-term investments.......................... 1,280 1,670 2,070 2,471 2,866
----------- ----------- --------- ----------- -----------
TOTAL INTEREST INCOME........................... $ 78,769 $ 85,021 $ 91,186 $ 96,858 $ 102,285
PROJECTED INTEREST EXPENSE
Deposits........................................ $ 30,378 $ 32,536 $ 34,670 $ 36,842 $ 39,412
Other borrowings................................ 10,764 12,691 14,618 16,545 18,472
----------- ----------- --------- ----------- -----------
TOTAL INTEREST EXPENSE.......................... 41,142 45,227 49,288 53,387 57,884
----------- ----------- --------- ----------- -----------
NET INTEREST INCOME............................. $ 37,627 $ 39,794 $ 41,898 $ 43,471 $ 44,401
Change from base................................ $ (4,271) $ (2,104) $ 1,573 $ 2,503
% Change from base.............................. (10.19)% (5.02)% 3.75% 5.97%
</TABLE>
The interest rate sensitivity profile of Republic at any point in time will
be effected by a number of factors. These factors include the mix of interest
sensitive assets and liabilities as well as their relative pricing schedules.
The table above may not be a precise measurement of the effect of changing
interest rates on Republic in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements for a discussion of
recent accounting pronouncements.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Republic's Class A Common Stock and Class B Common Stock held by
each person who is known by Republic to own beneficially more than five percent
(5%) of each such class as of July 17, 1998, and as adjusted to reflect the sale
of 2,140,000 shares of Class A Common Stock by the Company and the Selling
Shareholder in the Offering. Except as otherwise indicated, no person named in
the table shares voting or investment power with respect to his or her
beneficially owned shares. The Class B Common Stock is convertible into Class A
Common Stock on a share-for-share basis. Beneficial ownership presented does not
reflect the shares of Class A Common Stock issuable upon conversion of the Class
B Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------------
AS ADJUSTED, TO
AS OF MAY 31, 1998 REFLECT THE OFFERING
----------------------------------- ----------------------
CLASS OF VOTING
5% SHAREHOLDERS COMMON STOCK NUMBER PERCENT POWER NUMBER PERCENT
- ---------------------------------------- ------------------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mr. Bernard M. Trager .................. A 7,696,986(1) 61.4% 63.1% 7,296,986(1) 51.1%
601 West Market Street B 1,545,858(2) 63.9 1,545,858(2) 63.9
Louisville, Kentucky 40202
Steven E. Trager ....................... A 6,576,896(3) 52.4% 42.3% 6,576,896(3) 46.0%
601 West Market Street B 894,178(4) 36.9 894,178(4) 36.9
Louisville, Kentucky 40202
Scott Trager ........................... A 6,625,606(5) 52.8% 42.7% 6,625,606(5) 46.4%
601 West Market Street B 903,920(6) 37.4 903,920(6) 37.4
Louisville, Kentucky 40202
Sheldon Gilman, Trustee ................ A 6,524,396(7) 52.0% 41.8% 6,524,396(7) 45.7%
for the grandchildren of B 884,678(8) 36.5 884,678(8) 36.5
Bernard M. Trager
500 Meidinger Tower
462 S. Fourth St.
Louisville, Kentucky 40202
Teebank Family ......................... A 5,903,612(9) 47.1% 36.9% 5,903,612(9) 41.3%
Limited Partnership B 763,984(9) 31.6 763,984(9) 31.6
7413 Cedar Bluff Court
Prospect, Kentucky 40059
<CAPTION>
VOTING
5% SHAREHOLDERS POWER
- ---------------------------------------- -----------
<S> <C>
Mr. Bernard M. Trager .................. 59.2%
601 West Market Street
Louisville, Kentucky 40202
Steven E. Trager ....................... 40.4%
601 West Market Street
Louisville, Kentucky 40202
Scott Trager ........................... 40.7%
601 West Market Street
Louisville, Kentucky 40202
Sheldon Gilman, Trustee ................ 39.9%
for the grandchildren of
Bernard M. Trager
500 Meidinger Tower
462 S. Fourth St.
Louisville, Kentucky 40202
Teebank Family ......................... 35.2%
Limited Partnership
7413 Cedar Bluff Court
Prospect, Kentucky 40059
</TABLE>
- ------------------------------
(1) Includes 5,903,612 shares held of record by Teebank Family Limited
Partnership ("Teebank") and 620,784 shares held of record by Jaytee
Properties Limited Partnership, 7413 Cedar Bluff Court, Prospect, Kentucky
40059 ("Jaytee"). Mr. Bernard M. Trager is a general and limited partner
and Mrs. Jean S. Trager, his wife, is a limited partner of both Teebank and
Jaytee. Mr. Bernard M. Trager shares voting and investment power over the
shares held of record by Teebank and Jaytee with Mr. Steven E. Trager, Mr.
Scott Trager and Mr. Sheldon Gilman, as trustee.
(2) Includes 763,984 shares held of record by Teebank and 119,694 shares held
of record by Jaytee. Mr. Bernard M. Trager is a general and limited partner
and Mrs. Jean S. Trager, his wife, is a limited partner of both Teebank and
Jaytee. Mr. Bernard M. Trager shares voting and investment power over the
shares held of record by Teebank and Jaytee with Mr. Steven E. Trager, Mr.
Scott Trager and Mr. Sheldon Gilman, as trustee. Also includes 117,454
shares owned by Mrs. Jean S. Trager.
(3) Includes 5,903,612 shares held of record by Teebank and 620,784 shares held
of record by Jaytee. Mr. Steven E. Trager is a general and limited partner
and trusts for the benefit of Mr. Trager's two minor children are limited
partners of both Teebank and Jaytee. Mr. Steven E. Trager shares voting and
investment power over the shares held of record by Teebank and Jaytee with
Mr. Bernard M. Trager, Mr. Scott Trager and Mr. Sheldon Gilman, as trustee.
Also includes 22,500 shares of Class A Common Stock that can be acquired
under currently exercisable options.
(4) Includes 763,984 shares held of record by Teebank and 119,694 shares held
of record by Jaytee. Mr. Steven E. Trager is a general and limited partner
and trusts for the benefit of Mr. Trager's two minor children are limited
partners of both Teebank and Jaytee. Mr. Steven E. Trager shares voting and
investment power over the shares held of record by Teebank and Jaytee with
Mr. Bernard M. Trager, Mr. Scott Trager and Mr. Sheldon Gilman, as trustee.
Also includes 4,500 shares of Class B Common Stock that can be acquired
under currently exercisable options.
54
<PAGE>
(5) Includes 5,903,612 shares held of record by Teebank and 620,784 shares held
of record by Jaytee. Mr. Scott Trager is a limited partner of both Teebank
and Jaytee. Mr. Scott Trager shares voting and investment power over the
shares held of record by Teebank and Jaytee with Mr. Bernard M. Trager, Mr.
Steven E. Trager and Mr. Sheldon Gilman, as trustee.
(6) Includes 763,984 shares held of record by Teebank and 119,694 shares held
of record by Jaytee. Mr. Scott Trager is a limited partner of both Teebank
and Jaytee. Mr. Scott Trager shares voting and investment power over the
shares held of record by Teebank and Jaytee with Mr. Bernard M. Trager, Mr.
Steven E. Trager and Mr. Sheldon Gilman, as trustee.
(7) Includes 5,903,612 shares held of record by Teebank and 620,784 shares held
of record by Jaytee. Mr. Sheldon Gilman is a limited partner of both
Teebank and Jaytee, as trustee for the grandchildren of Mr. Bernard M.
Trager. Mr. Sheldon Gilman shares voting and investment power over the
shares held of record by Teebank and Jaytee with Mr. Bernard M. Trager, Mr.
Steven E. Trager and Mr. Scott Trager.
(8) Includes 763,984 shares held of record by Teebank and 119,694 shares held
of record by Jaytee. Mr. Sheldon Gilman is a limited partner of both
Teebank and Jaytee, as trustee for the grandchildren of Mr. Bernard M.
Trager. Mr. Sheldon Gilman shares voting and investment power over the
shares held of record by Teebank and Jaytee with Mr. Bernard M. Trager, Mr.
Steven E. Trager and Mr. Scott Trager.
(9) Teebank is a limited partnership of which Mr. Bernard M. Trager and Mr.
Steven E. Trager are general and limited partners. The shares of Common
Stock beneficially owned by Teebank are also shown in the above table as
being beneficially owned by Mr. Bernard M. Trager, Mr. Steven E. Trager,
Mr. Scott Trager and Mr. Sheldon Gilman, trustee, who share voting and
investment power over the shares held by the partnership. The following
table provides information about the units of Teebank owned by directors
and officers of Republic:
<TABLE>
<CAPTION>
PERCENT OF
NAME NO. OF UNITS OUTSTANDING
- ----------------------------------------------------------- -------------- ---------------------
<S> <C> <C>
Bernard M. Trager.......................................... 1,187,351(a) 59.4%
Steven E. Trager........................................... 410,564(b) 20.5
Scott Trager............................................... 2,020 0.1
</TABLE>
a) Includes 576,621.33 units held by Mr. Bernard M. Trager's wife.
b) Includes 271,080 units held in a revocable trust and 139,484 units
held for the benefit of Mr. Steven E. Trager's minor children.
SELLING SHAREHOLDER
A total of 400,000 shares of Class A Common Stock are being sold in the
Offering by Mr. Bernard M. Trager, Republic's Chairman and, prior to 1998, CEO.
The Company and the Selling Shareholder have entered into an Underwriting
Agreement pursuant to which the Selling Shareholder will bear the underwriting
discount applicable to the shares sold by him, and the Company and the Selling
Shareholder will indemnify the Underwriters from certain liabilities, including
liabilities under the Securities Act. Information concerning the number of
shares of Class A Common Stock currently beneficially owned by the Selling
Shareholder and the number of shares of Class A Common Stock that will be
beneficially owned by the Selling Shareholder upon completion of the Offering is
set forth in the table under "PRINCIPAL SHAREHOLDERS." For information
concerning the Selling Shareholder's positions, offices and material
relationships with Republic and the Bank, see "MANAGEMENT" and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF REPUBLIC
Republic's board of directors currently consists of nine persons. The
following table sets forth the names of the members of the board of directors of
Republic, their ages and principal occupations during the past five years, the
year in which each became a director and the amount and percent of Common Stock
beneficially owned by each director on July 17, 1998. The table also includes,
as designated, Republic's executive officers. Beneficial ownership does not
reflect the shares of Class A Common Stock issuable upon conversion of the Class
B Common Stock.
<TABLE>
<CAPTION>
CLASS
OF
DIRECTOR COMMON
NAME, AGE AND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS SINCE STOCK NUMBER PERCENT
- ---------------------------------------------------------------- -------- ------- --------- -------
<S> <C> <C> <C> <C>
BERNARD M. TRAGER, 69, serves as Chairman of Republic. Prior to 1974 A 7,696,986(1) 61.4%
1998, he also served as CEO of Republic and as Chairman of the B 1,545,858(2) 63.9
Bank.
STEVEN E. TRAGER, 37, began serving as President and CEO of 1988 A 6,576,896(1) 52.4%
Republic and Chairman and CEO of the Bank in 1998. From 1994 to B 894,178(2) 36.9
1997 he served as Vice Chairman and from 1994 to 1998 Secretary
of Republic. From 1993 to 1994 he served as General Counsel of
the Bank. In 1990, he was promoted from Vice President, General
Counsel and Secretary to Senior Vice President, General Counsel
and Secretary of the Bank.
SCOTT TRAGER, 45, has served as Vice Chairman of Republic since 1990 A 6,625,606(1) 52.8%
1994 and has served as President of the Bank since 1984. B 903,920(2) 37.4
E. WILLIAM PETTER, JR., 48, began serving as Vice Chairman and 1995 A 73,000 .6%
Chief Operating Officer of Republic during 1997. From 1995 to B 14,600 .6
1997 he served as Vice Chairman and Chief Financial Officer. He
has served as Executive Vice President of the Bank since 1993
and served as Chief Financial Officer of the Bank from 1993 to
1997. From 1990 to 1993 he served as Senior Vice President and
Chief Financial Officer of the Bank.
R. WAYNE STRATTON, 50, is a partner in the CPA firm of Jones, 1995 A 8,500(3) .1%
Nale & Mattingly PLC. B 1,700(4) .1
LARRY M. HAYES, 50, is president of Midwest Construction 1995 A 33,470(5) .3%
Company, Inc., Lexington, Kentucky. B 4,694 .2
A. WALLACE GRAFTON, JR., 60, is a partner at Wyatt, Tarrant & 1998 A 51,940(6) .4%
Combs law firm. B 10,388(7) .4
SAMUEL G. SWOPE, 71, is the Chairman of Sam Swope Auto Group, 1998 A 33,470(8) .3%
Inc. B 5,694 .2
D. HARRY JONES, 67, is an Executive Vice President of Jones 1995 A 38,470(9) .3%
Plastic and Engineering Corporation. B 5,694(10) .2
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
CLASS
OF
DIRECTOR COMMON
NAME, AGE AND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS SINCE STOCK NUMBER PERCENT
- ---------------------------------------------------------------- -------- ------- --------- -------
<S> <C> <C> <C> <C>
NON-DIRECTOR EXECUTIVE OFFICER:
MARK A. VOGT, 29, has served as Chief Financial Officer of A 2,600 --
Republic since May 1998, and has served as Chief Financial and B 200 --
Accounting Officer of the Bank since October 1997. He joined the
Bank in 1995 as Vice President of Finance and has served as
Senior Vice President of the Bank since 1996. Prior to joining
the Bank, he served as a certified public accountant with
Deloitte & Touche LLP.
All directors and executive officers as a group (10 persons) A 8,092,146 64.3%
B 1,619,570 66.9%
</TABLE>
- ------------------------
(1) Includes 5,903,612 shares held of record by Teebank and 620,784 shares held
of record by Jaytee. Messrs. Bernard M. Trager, Steven E. Trager, Scott
Trager and Sheldon Gilman, Trustee for Mr. Bernard M. Trager's
grandchildren, share voting and investment power over these shares. Also
includes, for Mr. Steven E. Trager, 22,500 shares of Class A Common Stock
that can be acquired under currently exercisable options. See the table and
accompanying notes under the heading "PRINCIPAL SHAREHOLDERS" for
additional information concerning the manner of beneficial ownership.
(2) Includes 763,984 shares held of record by Teebank and 119,694 shares held
of record by Jaytee. Messrs. Bernard M. Trager, Steven E. Trager, Scott
Trager and Sheldon Gilman, Trustee for Mr. Bernard M. Trager's
grandchildren, share voting and investment power over these shares. Also
includes, for Mr. Steven E. Trager, 4,500 shares of Class B Common Stock
that can be acquired under currently exercisable options, and includes, for
Mr. Bernard M. Trager, 117,454 shares of Class B Common Stock owned by Mrs.
Jean S. Trager. See the table and the accompanying notes under the heading
"PRINCIPAL SHAREHOLDERS" for additional information concerning the manner
of beneficial ownership.
(3) Includes 3,500 shares held jointly with his wife and 5,000 shares held by
his wife.
(4) Includes 700 shares held jointly with his wife and 1,000 shares held by his
wife.
(5) Includes 3,000 shares that can be acquired by Mr. Hayes and 7,000 shares
that can be acquired by his wife upon conversion of Trust Preferred
securities.
(6) Includes 51,590 shares held by his wife.
(7) Includes 10,318 shares held by his wife.
(8) Includes 5,000 shares that can be acquired upon conversion of Trust
Preferred securities.
(9) Includes 15,000 shares held by his wife and 10,000 shares that can be
acquired upon conversion of Trust Preferred securities.
(10) Includes 3,000 shares held by his wife.
None of the Republic directors holds 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.
57
<PAGE>
The directors of Republic were elected at the most recent annual meeting of
shareholders held on January 12, 1998, to a one year term. The executive
officers of Republic are selected by the board of directors and hold office at
the discretion of the board of directors. The following table shows the family
relationships between certain directors and executive officers:
<TABLE>
<CAPTION>
RELATIONSHIP WITH OTHER
NAME OF DIRECTOR/EXECUTIVE OFFICER DIRECTORS/EXECUTIVE OFFICERS
- ---------------------------------------------- ----------------------------------------------
<S> <C>
Bernard M. Trager Father of Steven E. Trager
Uncle of Scott Trager
Steven E. Trager Son of Bernard M. Trager
Cousin of Scott Trager
Scott Trager Nephew of Bernard M. Trager
Cousin of Steven E. Trager
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation of the named executive
officers of Republic for services rendered in all capacities during the years
ended December 31, 1997, 1996, and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------ ---------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS COMPENSATION
- ---------------------------------------- --------- --------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bernard M. Trager ...................... 1997 $ 220,000 $ 170,000 $ 12,646(2) -- $ 55,155(5)
Chairman and Director 1996 220,000 90,000 12,703(3) -- 61,216(6)
1995 220,000 100,000 10,885(4) -- 60,856(7)
Steven E. Trager ....................... 1997 $ 160,000 $ 80,000 $ 9,088(2) -- $ 9,160(5)
President, CEO and Director 1996 160,000 -- 7,062(3) -- 7,281(6)
1995 160,000 100,000 8,260(4) 60,000(8) 6,921(7)
L. Lee Kinsolving, Jr. ................. 1997 $ 160,000 $ 80,000 $ 7,371(2) -- $ 7,160(5)
Vice Chairman and Director(10) 1996 160,000 -- 6,676(3) -- 7,185(6)
1995 160,000 100,000 6,334(4) 60,000(8) 6,825(7)
Scott Trager ........................... 1997 $ 160,000 $ 80,000 $ 6,901(2) -- $ 9,160(5)
Vice Chairman and Director 1996 160,000 -- 5,171(3) -- 7,185(6)
1995 160,000 100,000 6,046(4) 60,000(8) 6,825(7)
E. William Petter, Jr. ................. 1997 $ 160,000 $ 80,000 $ 9,600(2) -- $ 9,160(5)
Vice Chairman and Director 1996 160,000 -- 9,600(3) -- 7,494(6)
1995 160,000 100,000 9,600(4) 60,000(8) 7,134(7)
Mark A. Vogt ........................... 1997 $ 100,000 $ 18,000 -- -- $ 5,379(5)
Senior Vice President, CFO and CAO 1996 83,000 9,000 -- -- 4,058(6)
1995 65,000 12,300 -- 20,000(9) 563(7)
</TABLE>
- ------------------------
(1) Represents incentive bonuses awarded after year-end for achievement of
corporate, individual and organizational objectives in fiscal years 1997,
1996 and 1995.
(2) Includes amounts paid for membership dues ($6,986 for Bernard M. Trager,
$5,488 for Steven E. Trager, $6,883 for L. Lee Kinsolving, Jr., and $5,988
for Scott Trager), car allowance ($9,600 for Mr. Petter) and allocated
personal use of Company car ($5,660 for Bernard M. Trager, $3,600 for
Steven E. Trager, $488 for L. Lee Kinsolving, Jr., and $913 for Scott
Trager).
58
<PAGE>
(3) Includes amounts paid for membership dues ($7,065 for Bernard M. Trager,
$3,474 for Steven E. Trager, $5,359 for L. Lee Kinsolving, Jr., $4,296 for
Scott Trager), car allowance ($9,600 for Mr. Petter) and allocated personal
use of Company car ($5,638 for Bernard M. Trager, $3,588 for Steven E.
Trager, $1,317 for L. Lee Kinsolving, Jr., and $875 for Scott Trager).
(4) Includes amounts paid for membership dues ($5,247 for Bernard M. Trager,
$4,086 for Steven E. Trager, $5,359 for L. Lee Kinsolving, Jr., $4,296 for
Scott Trager), car allowance ($9,600 for Mr. Petter) and allocated personal
use of Company car ($5,638 for Bernard M. Trager, $4,174 for Steven E.
Trager, $975 for L. Lee Kinsolving, Jr., and $1,750 for Scott Trager).
(5) Includes matching contributions to 401(k) Retirement Plan, ($6,000 for
Bernard M. Trager, $6,000 for Steven E. Trager, $4,000 for L. Lee
Kinsolving, Jr., $6,000 for Scott Trager, $6,000 for E. William Petter,
Jr., and $3,587 for Mark A. Vogt), amount paid on split dollar life
insurance policy ($45,665 for Bernard M. Trager), and on life and
disability insurance policies ($3,490 for Bernard M. Trager and $3,160 each
for Steven E. Trager, L. Lee Kinsolving, Jr., Scott Trager and E. William
Petter, Jr., and $1,792 for Mark A. Vogt).
(6) Includes matching contributions to 401(k) Retirement Plan, ($5,625 for
Bernard M. Trager, $5,625 for Steven E. Trager, $5,721 for L. Lee
Kinsolving, Jr., $5,625 for Scott Trager, $5,625 for E. William Petter, Jr.
and $2,689 for Mark A. Vogt), amount paid on split dollar life insurance
policy ($54,031 for Bernard M. Trager) and on life and disability insurance
policies ($1,560 for each of Bernard M. Trager, Steven E. Trager, L. Lee
Kinsolving, Jr., Scott Trager, and E. William Petter, Jr. and $1,369 for
Mark A. Vogt).
(7) 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 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 and disability insurance policies ($1,200
for each of Bernard M. Trager, Steven E. Trager, L. Lee Kinsolving, Jr.,
Scott Trager, and E. William Petter, Jr. and $563 for Mark A. Vogt).
(8) Includes options for 50,000 shares of Class A Common Stock and 10,000
shares of Class B Common Stock.
(9) Includes options for 20,000 shares of Class A Common Stock.
(10) L. Lee Kinsolving retired as an executive officer of Republic in November
1997.
STOCK OPTIONS
During 1997, no stock options were granted to executive officers.
The following table provides information about stock options outstanding at
December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
SHARES OPTIONS AT DECEMBER 31, 1997
CLASS OF ACQUIRED ON VALUE ----------------------------------------
NAME COMMON STOCK EXERCISE REALIZED(1) EXERCISABLE (#) UNEXERCISABLE (#)
- ------------------------- ------------- ------------- ----------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Bernard M. Trager........ A 0 --
B 0 --
Steven E. Trager......... A 5,000 $ 4,980 0 45,000
B 1,000 $ 1,150 0 9,000
Scott Trager............. A 0 50,000
B 0 10,000
E. William Petter, Jr.... A 0 50,000
B 0 10,000
Mark A. Vogt............. A 0 20,000
B 0 --
<CAPTION>
VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 1997
------------------------------------------
UNEXERCISABLE
NAME EXERCISABLE (#) (#)(1)
- ------------------------- --------------------- -------------------
<S> <C> <C>
Bernard M. Trager........ 0 0
0 0
Steven E. Trager......... 0 $ 43,650
0 $ 8,730
Scott Trager............. 0 $ 65,000
0 $ 13,000
E. William Petter, Jr.... 0 $ 65,000
0 $ 13,000
Mark A. Vogt............. 0 0
0 --
</TABLE>
- ------------------------
(1) Republic's Common Stock has no established public trading market. For
purposes of this table, value is based on closing book value per share on
December 31, 1997 of $4.58 minus the exercise price.
59
<PAGE>
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 clients of and had
transactions with Republic during 1997. During 1997, the members of the
committee were Karen Bearden, Harry Jones, Gordon Duke and Charles Weisberg, and
this committee set 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 Mr. Bernard M. Trager
which became effective September 10, 1996. This agreement provides for the
payment of three years compensation to the estate of Mr. 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, Scott Trager, L. Lee Kinsolving, Jr., and E. William
Petter, Jr., which became effective January 1995, and Mark A. Vogt, which became
effective October 1997. 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 if, following a change
in control, the executive officer terminates his employment for "Good Reason" or
his employment is terminated other than pursuant to death or for "Cause," as
defined in the agreements. 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 the acquisition by a person of beneficial ownership of securities
representing greater voting power than held by the Trager Family Members
(Bernard M. Trager, Jean S. Trager and their descendants) as a group or a
reduction to less than 25% of the combined voting power of the stock held by the
Trager Family Group. These agreements expire on December 31, 1998; however, as
of December 31, 1998, and on each anniversary of that date the agreements are
extended for two additional years unless the Company gives notice that it elects
not to extend. L. Lee Kinsolving's agreement terminated upon his retirement,
effective December 31, 1997.
COMPENSATION OF DIRECTORS
As of December 31, 1997, no directors were paid for their services rendered
to Republic. During 1997, certain directors of Republic received fees from the
Bank for services rendered as Bank directors as follows:
<TABLE>
<S> <C>
R. Wayne Stratton.................................................. $ 10,900
Larry M. Hayes(1).................................................. 9,525
A. Wallace Grafton, Jr.(1)......................................... 9,150
Samuel G. Swope.................................................... 8,150
D. Harry Jones..................................................... 8,400
</TABLE>
- ------------------------
(1) See also the following discussion under the heading "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS".
60
<PAGE>
Directors of Republic who do not also serve as directors of the Bank
currently receive director's fees of $1,350 for each board meeting attended and
fees within the range from $250 to $475 for each committee meeting attended.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASING ARRANGEMENTS. The Bank leases space in three buildings, as well as
land owned by Mr. Bernard M. Trager, Chairman of Republic, and Jean Trager, his
wife, and partnerships in which they own controlling interests, including
Jaytee, a shareholder of Republic. Relatives of Mr. Bernard M. Trager, including
Steven E. Trager and Scott Trager, directors and executive officers of Republic,
are also partners in Jaytee. See notes to the table under "PRINCIPAL
SHAREHOLDERS." The buildings include Republic Corporate Center, which serves as
both a downtown banking center and administrative headquarters and is owned and
leased by TEECO Properties, a partnership in which Mr. and Mrs. Bernard M.
Trager are the general partners, as well as the Hurstbourne Parkway and
Bardstown Road banking centers, which are owned and leased by Jaytee. The leased
land is located on U.S. Highway 22 where Republic currently has a temporary
banking center and is owned and leased by Jaytee. Altogether, these affiliate
leases approximate 70,500 square feet and the Bank pays approximately $99,600
per month with lease terms expiring through June 30, 2008. See Note 18 to the
Consolidated Financial Statements for information concerning the total minimum
lease commitments under these leases as of December 31, 1997.
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 and Republic, is a partner in Wyatt, Tarrant & Combs. Fees paid by Republic
to Wyatt, Tarrant & Combs totaled $30,801 in 1997.
During 1997, the Bank paid $245,424 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.
OTHER TRANSACTIONS. Steven E. Trager, a director and executive officer, and
Shelley Trager Kusman, the daughter of Mr. Bernard M. Trager, and Jean Trager,
Mr. Bernard M. Trager's wife, are directors of Bankers Insurance Agency, Inc., a
title insurance agency which provides title insurance coverage to clients of
Republic. These services resulted in commissions to Bankers Insurance Agency of
$496,000 in 1997. The majority owner of Bankers Insurance Agency is Shelley
Trager Kusman. Minority shareholders in Bankers Insurance Agency include Steven
E. Trager, Jean Trager, and the grandchildren of Mr. Bernard M. Trager: Michael
Kusman, Andrew Kusman, Brett Kusman, Kevin Trager and Emily Trager. Steven E.
Trager and Shelley Trager Kusman are children of Mr. Bernard M. Trager.
Bankers Insurance Agency had a similar relationship with Republic Savings
Bank, FSB, before the Savings Bank and Republic Bank of Shelby County combined
with Republic in 1994. At the time the Office of Thrift Supervision ("OTS")
maintained that the Savings Bank had federal statutory authority to conduct the
title insurance business then being conducted by Bankers Insurance Agency and
that the Savings Bank and all of its shareholders should benefit from the income
generated. The management of the Savings Bank did not consider the relationship
with Bankers Insurance Agency to be inappropriate. However, to facilitate the
combination and to resolve the matter promptly, Mr. Bernard M. Trager and Steven
E. Trager voluntarily entered into a Stipulation and Consent to a Cease and
Desist Order for Restitution with the OTS relating to Bankers Insurance Agency.
They paid the Savings Bank $488,127 in restitution and paid the OTS $15,000 for
expenses incurred in resolving the matter. In addition, Mr. Bernard M. Trager
and Steven E. Trager voluntarily paid $17,272 in civil penalties.
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Since the 1994 combination, the Bank has continued its relationship with
Bankers Insurance Agency, Inc., given the limitations imposed under the Kentucky
banking statutes prohibiting a majority shareholder of a state bank (including a
bank holding company and, by extension, the subsidiary bank itself) to act as
agent for title insurance. These statutory limitations have been removed
effective July 15, 1998. Accordingly, Republic's board of directors will examine
the appropriateness of the Bank acting as a title insurance agent after that
time.
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, which loans do not involve more than
the normal risk of collectibility or present other unfavorable features. As of
December 31, 1997, directors and executive officers of Republic had loans
outstanding of $4.7 million.
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC and the banking system as a whole, and not for the
protection of the bank holding company shareholders or creditors. The banking
agencies have broad enforcement power over bank holding companies and banks
including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
THE COMPANY
The Company is a bank holding company registered under the BHCA, and it is
subject to supervision, regulation and examination by the Federal Reserve Board.
The BHCA and other federal laws subject bank holding companies to particular
restrictions on the types of activities in which they may engage, and to a range
of supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and regulations.
REGULATORY RESTRICTIONS ON DIVIDENDS; SOURCE OF STRENGTH. It is the policy
of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and to
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
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In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of an
insured depository institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.
ACTIVITIES "CLOSELY RELATED" TO BANKING. The BHCA prohibits a bank holding
company, with certain limited exceptions, from acquiring direct or indirect
ownership or control of any voting shares of any company which is not a bank or
from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve Board, by order or regulation, to be so closely
related to banking or managing or controlling banks, as to be a proper incident
to banking. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve Board
include consumer financial counseling, tax planning and tax preparation, futures
and options advisory services, check guaranty services, collection agency and
credit bureau services, and personal property appraisals. In approving
acquisitions by bank holding companies of companies engaged in banking-related
activities, the Federal Reserve Board considers a number of factors, and weighs
the expected benefits to the public (such as greater convenience and increased
competition or gains in efficiency) against the risks of possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition or conflicts of interest). The Federal Reserve Board is also
empowered to differentiate between activities commenced de novo and activities
commenced through acquisition of a going concern. Despite prior approval, the
Federal Reserve may order a holding company or its subsidiaries to terminate any
activity, or terminate its ownership or control of any subsidiary, when it has
reasonable cause to believe that continuation of such activity constitutes a
serious risk to the financial safety, soundness or stability of any bank
subsidiary of the bank holding company.
SECURITIES ACTIVITIES. The Federal Reserve Board has approved applications
by bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four family
mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.
SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation.
The Federal Reserve Board has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations,
and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1,000,000 for each day
the activity continues.
ANTI-TYING RESTRICTIONS. With certain limited exceptions, bank holding
companies and their affiliates are prohibited from tying the provision of
certain services, such as extensions of credit, to other services offered by a
holding company or its affiliates.
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CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of March 31, 1998, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 11.49% and its ratio of total capital to total
risk-weighted assets was 12.67%. See Note 14 to the Consolidated Financial
Statements.
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital divided
by its average total consolidated assets (less goodwill and certain other
intangible assets). Certain highly-rated bank holding companies may maintain a
minimum leverage ratio of 3.0%, but other bank holding companies may be required
to maintain a leverage ratio of up to 200 basis points above the regulatory
minimum. As of March 31, 1998, the Company's leverage ratio was 7.31%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve Board guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
Board approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.
CONTROL ACQUISITIONS. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve
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Board, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act, such as the Company, would, under the circumstances set forth in
the presumption, constitute acquisition of control of the Company.
In addition, any company is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror
that is a bank holding company) or more of the outstanding Common Stock of the
Company, or otherwise obtaining control or a "controlling influence" over the
Company.
THE BANK
The Bank is a Kentucky chartered banking corporation, the deposits of which
are insured by the Bank Insurance Fund ("BIF") and the SAIF of the FDIC. The
Bank is not a member of the Federal Reserve System; the Bank is subject to
supervision and regulation by the FDIC and the Kentucky Department of Financial
Institutions. Such supervision and regulation subjects the Bank to special
restrictions, requirements, potential enforcement actions and periodic
examination by the FDIC and the Kentucky Department of Financial Institutions.
Because the Federal Reserve Board regulates the bank holding company parent of
the Bank, the Federal Reserve Board also has supervisory authority which
directly affects the Bank.
EQUIVALENCE TO NATIONAL BANK POWERS. To the extent that the Kentucky laws
and regulations may have allowed state-chartered banks to engage in a broader
range of activities than national banks, the Federal Deposit Insurance Act has
been amended to limit this authority. Under that Act, no state bank or
subsidiary thereof may engage as principal in any activity not permitted for
national banks, unless the institution complies with applicable capital
requirements and the FDIC determines that the activity poses no significant risk
to the insurance fund. In general, statutory restrictions on the activities of
banks are aimed at protecting the safety and soundness of depository
institutions.
BRANCHING. Kentucky law permits a Kentucky chartered bank, with prior
regulatory approval, to establish a branch office in any county in which the
bank's principal office or an existing branch is located. In addition, a
Kentucky chartered bank is permitted to combine with a commonly controlled bank
or thrift regardless of its location in Kentucky, provided both of the
institutions have been in operation for at least five years. The Kentucky
banking statutes also permit a Kentucky bank, with prior regulatory approval, to
engage in an interstate merger transaction, and thereby establish a branch
office outside of Kentucky. In any case, the transaction must also be approved
by the FDIC, which considers a number of factors, including financial history,
capital adequacy, earnings prospects, character of management, needs of the
community and consistency with corporate powers.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. Transactions
between the Bank and its nonbanking affiliates, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser
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amount is appropriate. Insiders are subject to enforcement actions for knowingly
accepting loans in violation of applicable restrictions.
RESTRICTIONS ON DISTRIBUTION OF SUBSIDIARY BANK DIVIDENDS AND
ASSETS. Dividends paid by the Bank have provided a substantial part of the
Company's operating funds and for the foreseeable future it is anticipated that
dividends paid by the Bank to the Company will continue to be the Company's
principal source of operating funds. Capital adequacy requirements serve to
limit the amount of dividends that may be paid by the Bank. Under federal law,
the Bank cannot pay a dividend if, after paying the dividend, the Bank will be
"undercapitalized." The FDIC may declare a dividend payment to be unsafe and
unsound even though the Bank would continue to meet its capital requirements
after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.
EXAMINATIONS. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The Kentucky Department of Financial Institutions also conducts
examinations of state banks but may accept the results of a federal examination
in lieu of conducting an independent examination.
AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. The Federal Deposit Insurance Act requires that independent audit
committees be formed, consisting of outside directors only. The committees of
such institutions must include members with experience in banking or financial
management, must have access to outside counsel, and must not include
representatives of large clients.
CAPITAL ADEQUACY REQUIREMENTS. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.
The FDIC's risk-based capital guidelines generally require state banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4% and a
ratio of total capital to total risk-weighted assets of 8%. The capital
categories have the same definitions for the Bank as for the Company. As of
March 31, 1998, the Bank's ratio of Tier 1 capital to total risk-weighted assets
was 11.46% and its ratio of total capital to total risk-weighted assets was
12.65%. See Note 14 to the Consolidated Financial Statements.
The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3% of average total
assets. As of March 31, 1998, the Bank's ratio of Tier 1 capital to average
total assets (leverage ratio) was 7.29%. See Note 14 to the Consolidated
Financial Statements.
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CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." A "well capitalized" bank has a total risk-based
capital ratio of 10% or higher; a Tier 1 risk-based capital ratio of 6% or
higher; a leverage ratio of 5% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk-based
capital ratio of 8% or higher; a Tier 1 risk-based capital ratio of 4% or
higher; a leverage ratio of 4% or higher (3% or higher if the bank was rated a
CAMEL 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "undercapitalized" if it fails to meet any one of the ratios required
to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. The FDIC has
only very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
DEPOSIT INSURANCE ASSESSMENTS. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by amendments made to the Federal Deposit
Insurance Act. Under this system, FDIC-insured depository institutions pay
insurance premiums at rates based on their risk classification. Institutions
assigned to higher-risk classifications (that is, institutions that pose a
greater risk of loss to their respective deposit insurance funds) pay
assessments at higher rates than institutions that pose a lower risk. An
institution's risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators. In
addition, the FDIC can impose special assessments in certain instances.
After the one-time SAIF assessment in 1996, the assessment rate disparity
between BIF and SAIF members was eliminated. The current range of BIF and SAIF
assessments is between 0% and .27% of deposits. Institutions which qualify for
the 0% assessment category such as the Bank do, however, still have to pay the
$1,000 minimum semi-annual assessment required by federal statute.
The FDIC established a process for raising or lowering all rates for insured
institutions semi-annually if conditions warrant a change. Under this new
system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the SAIF and to assure the
payment of the Financing Corporation's ("FICO") bond obligations. Under this new
act, banks insured under the BIF are required to pay a portion of the interest
due on bonds that were issued by FICO to help shore up the ailing Federal
Savings and Loan
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Insurance Corporation in 1987. The BIF rate must equal one-fifth of the SAIF
rate through year-end 1999, or until the insurance funds are merged, whichever
occurs first. Thereafter BIF and SAIF payers will be assessed pro rata for the
FICO bond obligations. With regard to the assessment for the FICO obligation,
the current BIF rate is .0126% of deposits and the SAIF rate is .0630% of
deposits.
ENFORCEMENT POWERS. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. The appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
BROKERED DEPOSIT RESTRICTIONS. Well capitalized institutions may solicit
and accept, renew or roll over brokered deposits without restriction.
Institutions which are adequately capitalized, but not well capitalized, cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew, or roll over
brokered deposits.
CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of 1977 ("CRA")
and the regulations issued thereunder are intended to encourage banks to help
meet the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in meeting
the needs of its service area when considering applications to establish banking
centers, merger applications and applications to acquire the assets and assume
the liabilities of another bank. FIRREA requires federal banking agencies to
make public a rating of a bank's performance under the CRA. In the case of a
bank holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with any
other bank holding company. An unsatisfactory record can substantially delay or
block the transaction.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act, and the Fair Housing Act, among
others. These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must deal with clients when
taking deposits or making loans to such clients. The Bank must comply with the
applicable provisions of these consumer protection laws and regulations as part
of its ongoing customer relations.
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INSTABILITY OF REGULATORY STRUCTURE
Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies and
limit the investments that a depository institution may make with insured funds,
is from time to time introduced in Congress. Such legislation may change banking
statutes and the operating environment of the Company and its banking
subsidiaries in substantial and unpredictable ways. The Company cannot determine
the ultimate effect that potential legislation, if enacted, or implementing
regulations with respect thereto, would have upon the financial condition or
results of operations of the Company or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by
amendments to the Federal Deposit Insurance Act is the increased ability of
banking regulators to monitor the activities of banks and their holding
companies. In addition, the Federal Reserve Board and FDIC are possessed of
extensive authority to police unsafe or unsound practices and violations of
applicable laws and regulations by depository institutions and their holding
companies. For example, the FDIC may terminate the deposit insurance of any
institution which it determines has engaged in an unsafe or unsound practice.
The agencies can also assess civil money penalties, issue cease and desist or
removal orders, seek injunctions, and publicly disclose such actions. The
Federal Deposit Insurance Corporation Improvements Act of 1991 (FDICIA), FIRREA
and other laws have expanded the agencies' authority in recent years, and the
agencies have not yet fully tested the limits of their powers.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of the
Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Company and its subsidiaries
cannot be predicted.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of Republic consists of 30,000,000 shares of
Class A Common Stock having no par value (the Class A Common Stock), 5,000,000
shares of Class B Common Stock having no par value ("Class B Common Stock"), and
100,000 shares of Preferred Stock having no par value (the "Preferred Stock").
Shares of Class A Common Stock, Class B Common Stock and Preferred Stock may be
issued at such time or times and for such consideration as the board of
directors may deem advisable, subject to such limitations as may be set forth in
the laws of Kentucky, the Company's Articles of Incorporation or Bylaws or,
after the Offering, the rules of the Nasdaq National Market. As of March 31,
1998, there were 12,541,062 shares of Class A Common Stock and 2,418,074 shares
of Class B Common Stock outstanding. No shares of Preferred Stock were
outstanding on that date, and management is not aware of the existence of
circumstances from which it may be inferred that such issuance is imminent. THE
CAPITAL STOCK OF REPUBLIC DOES NOT REPRESENT OR CONSTITUTE A DEPOSIT ACCOUNT AND
IS NOT INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
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Except as discussed below, the shares of the Class A Common Stock and the
Class B Common Stock are identical in all respects and have equal rights and
privileges with each other as Common Stock. If there is a recapitalization or
similar change in the number of shares of one class of Common Stock, a similar
change must be made to the other class of Common Stock.
As discussed below, the board of directors of the Company is authorized
under the Articles of Incorporation to establish series of Preferred Stock and
to fix the relative rights and preferences of shares of the series established.
To the extent the board of directors of the Company exercises this authority
granted it in the Articles of Incorporation, the fixing of the relative rights,
preferences and limitations of shares of Preferred Stock, vis-a-vis the Common
Stock, could have the effect of modifying the rights of holders of Common Stock.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by
shareholders and may adversely affect the voting and other rights of the holders
of Common Stock.
CLASS A COMMON STOCK
VOTING RIGHTS. The holders of the Class A Common Stock are entitled to one
(1) vote for each share of Class A Common Stock standing in their names on the
books of the Company.
DIVIDENDS. Subject to any preferential rights of any shares of Preferred
Stock then outstanding, and applicable requirements, the Class A Common Stock is
entitled to dividends from funds legally available therefor if, as and when
declared by the board of directors of the Company. If any dividend is paid with
respect to the Class B Common Stock a dividend of like kind must be declared and
paid contemporaneously with respect to the Class A Common Stock. If a cash
dividend is paid on the Class B Common Stock, a cash dividend must be paid on
the Class A Common Stock in an amount equal to 110% of the dividend paid per
share on the Class B Common Stock (rounded to the nearest $.0001). Any dividend
per share on the Class A Common Stock paid other than in cash must be equal to
the dividend paid on the Class B Common Stock.
Although quarterly cash dividends have been paid on the Common Stock since
1995, and the board of directors of Republic has indicated its intention to
continue to pay cash dividends on the Class A Common Stock, no assurance can be
given that any dividends will be declared or, if declared, what the amount of
the dividends will be or whether such dividends, once declared, will continue.
See "DIVIDEND POLICY."
CONVERSION. The Class A Common Stock is not convertible into any other
class of the Company's capital stock.
PREEMPTIVE RIGHTS. Holders of the Class A Common Stock are not entitled to
preemptive rights with respect to any shares which may be issued. The Class A
Common Stock is not subject to redemption.
DISSOLUTION. If the Company is dissolved, the holders of the Class A Common
Stock, together with the holders of the Class B Common Stock, will be entitled
to receive, pro rata based on the number of shares held, the remaining assets of
the Company after the satisfaction of the Company's liabilities and any
preferential liquidation rights of any then outstanding shares of Preferred
Stock of the Company.
Because the Company is a holding company, its rights and the rights of its
creditors and shareholders, including the holders of Class A Common Stock and
Class B Common Stock, to participate in the distribution of assets of a
subsidiary in its liquidation or recapitalization may be subject to prior claims
of such subsidiary's creditors except to the extent that the Company itself may
be a creditor having recognized claims against such subsidiary.
OTHER ASPECTS. Republic has applied for listing of the Class A Common Stock
on the Nasdaq National Market. Harris Trust and Savings Bank will serve as
registrar and transfer agent of the Class A Common Stock following the Offering.
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CLASS B COMMON STOCK
VOTING RIGHTS. The holders of the Class B Common Stock are entitled to ten
(10) votes for each share of Class B Common Stock standing in their names on the
books of the Company.
DIVIDENDS. Subject to any preferential rights of any shares of Preferred
Stock then outstanding and the dividend differential in favor of the Class A
Common Stock, the Class B Common Stock is entitled to dividends from funds
legally available therefor if, as and when declared by the board of directors of
the Company.
CONVERSION. The Class B Common Stock is convertible into Class A Common
Stock on a one share for one share basis. The Company is required to reserve and
keep available out of its authorized but unissued shares of Class A Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Class B Common Stock, such number of its shares of Class A Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Class B Common Stock. If at any time the number of authorized but
unissued shares of Class A Common Stock shall not be sufficient to effect the
conversion of all of the then outstanding shares of the Class B Common Stock,
the Company is required to take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Class A Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to the Company's
Articles of Incorporation.
PREEMPTIVE RIGHTS. Holders of the Class B Common Stock are not entitled to
preemptive rights with respect to any shares which may be issued. The Class B
Common Stock is not subject to redemption.
DISSOLUTION. If the Company is dissolved, the holders of the Class B Common
Stock, together with the holders of the Class A Common Stock, will be entitled
to receive, pro rata based on the number of shares held, the remaining assets of
the Company after the satisfaction of the Company's liabilities and any
preferential liquidation rights of any then outstanding shares of Preferred
Stock of the Company.
PREFERRED STOCK
Preferred Stock is preferred as to the payment of dividends over any other
class of stock of the Company, and shall be preferred over any other class of
stock of the Company upon liquidation, dissolution or winding up of the affairs
of the Company.
Except as otherwise expressly provided by law or as otherwise provided by
the board of directors in establishing a particular series of Preferred Stock,
the holders of shares of Preferred Stock are not entitled to notice of meetings
of shareholders and are not entitled to vote at the election of directors or on
any question arising at any meeting of the shareholders of the Company.
The Articles of Incorporation vest in the board of directors the authority
to divide the authorized shares of the Preferred Stock of the Company into
series and, within the limitations imposed by law and the Articles of
Incorporation, to fix and determine as to each such series:
[1] The voting rights and powers, if any, of the holders of shares of
such series;
[2] The number of shares and designation of such series;
[3] The annual dividend rate and whether cumulative, noncumulative, or
partially cumulative;
[4] The prices at which, and the terms and conditions on which, shares
of such series may be redeemed;
[5] The amounts payable on shares of such series in the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the
affairs of the Company;
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[6] Whether the shares of such series shall have a preference, as to the
payment of dividends or otherwise, over the shares of any other series;
[7] The terms, if any, upon which shares of such series may be
convertible into, or exchangeable for, shares of any other class or classes
or of any other series of the same or any other class or classes, including
the price or prices and the rate of conversion or exchange, any adjustments
thereof, and all other terms and conditions;
[8] The sinking fund provisions, if any, for the redemption or purchase
of shares of such series; and
[9] Such other provisions as may be fixed by the board of directors of
the Company pursuant to Kentucky law.
The board of directors does not intend to seek shareholder approval prior to
any issuance of shares of Preferred Stock or any series of Preferred Stock,
unless otherwise required by law. Under the Kentucky Business Corporation Act,
shareholder approval prior to the issuance of shares of Common Stock or
Preferred Stock is required in connection with certain mergers. Frequently,
opportunities arise that require prompt action, such as the possible acquisition
of a property or business or the private sale of securities, and it is the
belief of the board of directors that the delay necessary for shareholder
approval of a specific issuance could be to the detriment of the Company and its
shareholders. The board of directors does not intend to issue any shares of
Common Stock or Preferred Stock except on terms which the board of directors
deems to be in the best interests of the Company and its then existing
shareholders.
Although the Preferred Stock and, because of its voting rights, the Class B
Common Stock could be deemed to have an anti-takeover effect, the board of
directors is not aware of any takeover efforts. If a hostile takeover situation
should arise, shares of Class B Common Stock and/or Preferred Stock could be
issued to purchasers sympathetic with the Company's management or others in such
a way as to render more difficult or to discourage a merger, tender offer, proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management.
The effects of the issuance of the Preferred Stock on the holders of Common
Stock could include, among other things, (i) reduction of the amount otherwise
available for payments of dividends on Common Stock if dividends are payable on
the series of Preferred Stock; (ii) restrictions on dividends on Common Stock if
dividends on the series of Preferred Stock are in arrears; (iii) dilution of the
voting power of Common Stock if the series of Preferred Stock has voting rights,
including a possible "veto" power if the series of Preferred Stock has class
voting rights; (iv) dilution of the equity interest of holders of Common Stock
if the series of Preferred Stock is convertible, and is converted, into Common
Stock; and (v) restrictions on the rights of holders of Common Stock to share in
the Company's assets upon liquidation until satisfaction of any liquidation
preference granted to the holders of the series of Preferred Stock. Holders of
Class A Common Stock have no preemptive rights to purchase or otherwise acquire
any Preferred Stock that may be issued.
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CERTAIN PROVISIONS OF KENTUCKY LAW AND THE ARTICLES OF INCORPORATION AND BYLAWS
OF REPUBLIC AFFECTING THE RIGHTS OF SHAREHOLDERS
The rights of Class A Common shareholders of Republic are governed by the
Kentucky Business Corporation Act and the Articles of Incorporation and Bylaws
of Republic. The following discussion is a summary of certain material
provisions of the Kentucky Business Corporation Act and Republic's Articles of
Incorporation and Bylaws affecting shareholders rights. Copies of the Articles
of Incorporation and Bylaws are filed as exhibits to the Registration Statement
of which this Prospectus is a part.
SPECIAL MEETINGS OF SHAREHOLDERS. The Articles of Incorporation limit the
right of shareholders holding shares representing less than a majority of the
voting power of the outstanding stock of the Company to call a special meeting
of the shareholders. Under Article XIII, special meetings of shareholders may
only be called by the board of directors or shareholders owning shares
representing more than 50% of the votes entitled to be cast by the holders of
all stock of the Company then outstanding. The affirmative vote of the holders
of more than 50% of the voting power is required to amend this provision of the
Articles of Incorporation.
ELIMINATION OF CERTAIN LIABILITIES AND INDEMNIFICATION RIGHTS. The Articles
of Incorporation of the Company limit the liability of directors to the Company
and its shareholders to the maximum extent permitted by applicable law. Under
Section 271B.2-020 of the Kentucky Business Corporation Act, the personal
liability of a director may not be limited for the following actions: (i) for
any transaction in which the director's personal financial interest is in
conflict with the financial interest of the corporation or its shareholders;
(ii) for acts of omissions not in good faith or which involve intentional
misconduct or are known by the director to violate law; (iii) actions involving
an improper distribution in violation of KRS 271B.8-330; and (iv) for any
transaction from which the director derived an improper personal benefit. If the
Kentucky General Assembly expands the types of director liabilities that can be
eliminated or limited, the personal liability of directors of Republic under the
Articles of Incorporation will likewise be eliminated or limited without any
further action by shareholders.
Under Kentucky law, a corporation has broad powers of indemnification. A
person may be indemnified for judgments, penalties, fines, settlements, and
reasonable expenses incurred by that person in proceedings in connection with
the person's official capacity in the corporation. Indemnification against
reasonable legal expenses incurred by a person in such a proceeding is mandatory
when the person is wholly successful in the defense of the proceeding. The
Bylaws of the Company also require the Company to indemnify, and permit the
Company to advance expenses to, all directors, officers, employees or agents of
the Company who were or are threatened to be made a defendant or respondent to
any threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that he or she
is or was a director, officer, employee or agent of the Company, to the fullest
extent that is expressly permitted or required by the Kentucky statutes and all
other applicable law.
ELECTION OF DIRECTORS. Kentucky law requires cumulative voting in the
election of directors. Under cumulative voting, each shareholder is entitled to
vote the number of votes of the shares owned by him on the record date
multiplied by the number of directors to be elected. Each shareholder may cast
all of his votes for a single nominee or may distribute his votes in any manner
among as many candidates as the shareholder sees fit.
The Company's Articles of Incorporation fix the minimum number of directors
at five, with the exact number of directors to be fixed in accordance with the
Bylaws. The number of directors is currently set at nine.
CONFLICT OF INTEREST TRANSACTIONS. The Articles of Incorporation provide
that the Company may enter into conflict of interest transactions with officers,
directors and/or shareholders. According to the Articles of Incorporation, a
conflict of interest transaction that is approved by shareholders holding a
majority of the voting power is valid and binding as though ratified by every
shareholder of the Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, the Company's directors, executive
officers and all other current shareholders will own 12,141,062 shares of Class
A Common Stock, representing approximately 85% of the total outstanding shares.
The Company and its directors, officers and certain shareholders (who
collectively will own approximately 59% of the outstanding shares of Class A
Common Stock after the consummation of the Offering) have agreed with the
Underwriters not to offer, sell, contract to sell or otherwise dispose of any of
their shares of Class A Common Stock for a period of 180 days after the date of
this Prospectus without the permission of the Underwriters. Currently 4,154,044
outstanding shares of Class A Common Stock are not subject to such agreement and
are freely tradable in accordance with Rule 144(k) under the Securities Act.
After such 180 day period, all of such shares held by existing shareholders will
be eligible for sale by the holders thereof in accordance with Rule 144 under
the Securities Act. In addition, the outstanding Class B Common Stock and Trust
Preferred securities held by nonaffiliates can be converted into approximately
1,329,388 shares of Class A Common Stock, which, upon conversion, will be
tradable in accordance with Rule 144.
In general, Rule 144 provides that, subject to its provisions and other
applicable federal and state securities law requirements, any person (or persons
whose shares are aggregated), including any person who may be deemed an
"affiliate" as defined under the Securities Act, who has acquired securities
directly or indirectly from the issuer or an affiliate in a transaction not
involving a public offering ("restricted securities"), and who has beneficially
owned such restricted securities for at least one year is entitled to sell
within any three-month period, a number of such shares that does not exceed the
greater of (i) the average weekly trading volume of the same class of securities
during the four calendar weeks preceding the filing of the notice of the sale
with the Securities and Exchange Commission ("Commission" or "SEC"); or (ii) 1%
of the same class of securities then outstanding, subject to certain
manner-of-sale provisions, notice requirements, and the availability of current
information concerning the Company. A person who is not deemed an "affiliate" of
the Company and who has beneficially owned shares for at least two years is
entitled to sell such shares under Rule 144 without regard to the volume
limitations and current public information, manner of sale and notice
requirements described above. Affiliates, including officers, directors and
principal shareholders of the Company, are subject to the volume limitations and
certain other requirements as to all shares owned by them, regardless of the
length of time such shares have been beneficially owned and irrespective of
whether such shares were acquired from the issuer or otherwise and whether
acquired in transaction involving a public offering.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among
Morgan Keegan & Company, Inc. and J.J.B. Hilliard, W.L. Lyons, Inc. (the
"Underwriters"), the Selling Shareholder and the Company, the Underwriters have
severally agreed to purchase from the Selling Shareholder and the Company the
following respective numbers of shares of Class A Common Stock at the initial
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Morgan Keegan & Company, Inc............................................... 602,500
J.J.B. Hilliard, W.L. Lyons, Inc........................................... 602,500
Advest, Inc................................................................ 45,000
Robert W. Baird & Co. Incorporated......................................... 45,000
J.C. Bradford & Co......................................................... 45,000
Crowell, Weedon & Co....................................................... 45,000
Suntrust Equitable Securities Corporation.................................. 45,000
Friedman, Billings, Ramsey & Co., Inc...................................... 45,000
Interstate/Johnson Lane Corporation........................................ 45,000
Josephthal & Co. Inc....................................................... 45,000
Keefe, Bruyette & Woods, Inc............................................... 45,000
McDonald & Company Securities, Inc......................................... 45,000
Natcity Investments, Inc................................................... 45,000
Fifth Third/The Ohio Company............................................... 45,000
Piper Jaffray Inc.......................................................... 45,000
Raymond James & Associates, Inc............................................ 45,000
The Robinson-Humphrey Company, LLC......................................... 45,000
Stephens Inc............................................................... 45,000
Stifel, Nicolaus & Company, Incorporated................................... 45,000
Tucker Anthony Incorporated................................................ 45,000
Wheat First Securities, Inc................................................ 45,000
Howe Barnes Investments Inc................................................ 20,000
Brean Murray & Co., Inc.................................................... 20,000
Hoefer & Arnett, Inc....................................................... 20,000
Sterne, Agee & Leach, Inc.................................................. 20,000
-----------------
TOTAL.............................................................. 2,140,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all such shares of the Class A Common Stock if any of such shares are
purchased. The Underwriters are obligated to take and pay for all of the shares
of Class A Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any are taken.
Republic has been advised by the Underwriters that the Underwriters propose
to offer such shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $.91 per share. The Underwriters may
allow, and such dealers may re-allow, a concession not in excess of $.10 per
share to certain other dealers. After the initial public offering, the offering
price and other selling terms may be changed by the Underwriters.
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Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 260,000 additional shares of Class A Common
Stock at the public offering price, less the underwriting discounts and
commissions set forth on the cover page of this Prospectus, solely to cover
over-allotments. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to the total
number of shares in such table, and the Company will be obligated, pursuant to
the option, to sell such shares to the Underwriters.
The Company, each of its directors and executive officers, and certain other
shareholders of the Company have agreed not to sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of the Underwriters, except that
the Company may issue shares of Class A Common Stock upon the exercise of
currently outstanding options or upon conversion of currently outstanding Trust
Preferred securities. See "RISK FACTORS-- SHARES ELIGIBLE FOR FUTURE SALE."
The representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority. The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Until the distribution of the Class A Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
or members of the selling group to bid for and purchase the Class A Common
Stock. As an exception to these rules, the Underwriters are permitted to engage
in certain transactions that stabilize the price of the Class A Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Class A Common Stock.
If the Underwriters create a short position in the Class A Common Stock in
connection with the Offering, i.e., if they sell a greater aggregate number of
shares of Class A Common Stock than is set forth on the cover page of this
Prospectus, the Underwriters may reduce the short position by purchasing shares
of Class A Common Stock in the open market. The Underwriters may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Class A Common Stock in
the open market to reduce the selling group members' short position or to
stabilize the price of the Class A Common Stock, they may reclaim the amount of
the selling concession from the selling group members who sold those shares of
Class A Common Stock as part of the Offering. In general, purchases of a
security for the purpose of stabilization or to reduce a short position could
cause the price of the security to be higher than it might be in the absence of
such purchases. The imposition of a penalty bid might also have an effect on the
price of a security to the extent that it were to discourage resales of the
security.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A Common Stock. In addition,
neither the Company nor the Underwriters make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to the Offering, there has been no public market for the Class A
Common Stock. Consequently, the initial public offering price for the Class A
Common Stock has been determined by negotiations between the Company and the
representatives of the Underwriters. Among the factors considered in such
negotiations were prevailing market and general economic conditions, the market
capitalizations, trading histories and stages of development of other traded
companies that the Company and the Underwriters
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believed to be comparable to the Company, the results of operations of the
Company in recent periods, the current financial position of the Company,
estimates of the business potential of the Company and the present state of the
Company's development and the availability for sale in the market of a
significant number of shares of Class A Common Stock. Additionally,
consideration has been given to the general status of the securities market, the
market conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.
Application has been made for quotation of the Class A Common Stock on the
Nasdaq National Market.
LEGAL MATTERS
The legality of the shares of the Class A Common Stock offered hereby will
be passed upon by Wyatt, Tarrant & Combs, Louisville, Kentucky, counsel to
Republic. A. Wallace Grafton, Jr., a partner of Wyatt, Tarrant & Combs, is a
director of Republic and the Bank and, as of May 31, 1998, beneficially owns
51,940 shares of Class A Common Stock and 10,388 shares of Class B Common Stock.
Certain legal matters in connection with the Offering will be passed on for the
Underwriters by Baker, Donelson, Bearman & Caldwell, Memphis, Tennessee.
EXPERTS
The consolidated financial statements of Republic and its subsidiaries at
December 31, 1997 and 1996 and for the years then ended, included in this
Prospectus and Registration Statement, have been audited by Crowe, Chizek and
Company LLP, independent auditors, as set forth in their reports appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The consolidated statements of income, stockholders' equity, and cash flows
of Republic and its subsidiaries for the year ended December 31, 1995, included
in this Prospectus and Registration Statement, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report thereon appearing
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
Deloitte & Touche LLP were the principal accountants for Republic Bancorp,
Inc. from 1983 through 1995. 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 decision to change accountants was approved by the
Company's board of directors.
The audit reports of Deloitte & Touche LLP on the consolidated financial
statements of Republic Bancorp, Inc. as of and for the year ended December 31,
1995 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 any of the independent accountants
relating to accounting principles or practices or financial statement
disclosure.
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AVAILABLE INFORMATION
Republic is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission" or "SEC"). Copies of such
reports and other information can be obtained, at prescribed rates, from the SEC
by addressing written requests for such copies to the Public Reference Section
at the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
In addition, such reports and other information can be inspected and copied at
the public reference facilities referred to above and at the regional offices of
the SEC at 7 World Trade Center, 13th Floor, New York, New York 10048 and
northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The SEC also maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding registrants.
Following the Offering, the shares of Class A Common Stock will be traded on
the Nasdaq National Market under the symbol RBCAA, and reports, proxy and
information statements, and other information filed by Republic following the
Offering may also be inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and supplements, the "Registration Statement")
under the Securities Act, with respect to the Class A Common Stock. This
Prospectus omits certain information contained in the Registration Statement,
certain items of which are contained in exhibits to the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Class A Common Stock, reference
is made to the Registration Statement, including the exhibits filed as a part
thereof, which may be inspected at the principal office of the Commission
without charge at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at
its principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of prescribed fees. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete, and, where the contract or the document has been filed as an exhibit
to the Registration Statement, each such statement is qualified in all respects
by reference to the applicable document filed with the Commission.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT AUDITORS............................................................................. F-2
REPORT OF INDEPENDENT AUDITORS............................................................................. F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997 and 1996............................................................................... F-4
Consolidated Statements of Income for the three months ended March 31, 1998 and 1997 (unaudited) and for
the years ended December 31, 1997, 1996 and 1995......................................................... F-5
Consolidated Statements of Stockholders' Equity for the three months ended March 31, 1998 (unaudited) and
for the years ended December 31, 1997, 1996 and 1995..................................................... F-7
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) and
for the years ended December 31, 1997, 1996 and 1995..................................................... F-8
Notes to Consolidated Financial Statements................................................................. F-10
</TABLE>
F-1
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Republic
Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
January 30, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
of Republic Bancorp, Inc.
We have audited the consolidated statements of income, stockholders' equity
and cash flows of Republic Bancorp, Inc. and subsidiaries (the Company) for the
year ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
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, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Republic
Bancorp, Inc. and subsidiaries for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 1, 1996
Louisville, Kentucky
F-3
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
MARCH 31, ------------ ------------
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks............................................. $ 21,354 $ 24,546 $ 40,021
Federal funds sold.................................................. 29,675 16,650
------------ ------------ ------------
Total cash and cash equivalents................................... 51,029 24,546 56,671
Securities available for sale......................................... 134,364 93,826 107,937
Securities to be held to maturity..................................... 80,103 98,546 173,918
Mortgage loans held for sale.......................................... 26,100 9,970 7,624
Loans, less allowance for loan losses of $8,234 (1998), $8,176 (1997)
and $6,241 (1996)................................................... 783,505 794,939 759,424
Federal Home Loan Bank stock.......................................... 10,716 8,124 5,548
Accrued interest receivable........................................... 9,033 8,803 9,685
Premises and equipment, net........................................... 13,059 12,774 17,509
Other assets.......................................................... 4,667 3,422 2,566
------------ ------------ ------------
TOTAL............................................................... $ 1,112,576 $ 1,054,950 $ 1,140,882
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES
Deposits:
Non-interest bearing................................................ $ 75,900 $ 65,913 $ 66,969
Interest bearing.................................................... 652,169 665,685 716,172
Securities sold under agreements to repurchase and other short-term
borrowings.......................................................... 110,477 111,137 181,634
Other borrowed funds.................................................. 179,164 124,405 106,974
Accrued interest payable.............................................. 10,349 6,233 5,643
Guaranteed preferred beneficial interests in Republic's subordinated
debentures.......................................................... 6,452 6,452
Other liabilities..................................................... 4,631 6,739 4,471
------------ ------------ ------------
Total liabilities................................................... 1,039,142 986,564 1,081,863
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
Class A common stock, no par value, 30,000,000 shares authorized,
12,541,062 shares (1998) 12,531,062 shares (1997) and 12,103,222
shares (1996) issued and outstanding; Class B common stock, no par
value, 5,000,000 shares authorized, 2,418,074 shares (1998 and 1997)
and 2,339,714 shares (1996) issued and outstanding.................. 3,615 3,613 3,491
Additional paid-in capital............................................ 10,890 10,833 6,817
Retained earnings..................................................... 59,113 53,994 43,930
Net unrealized depreciation on securities available for sale, net of
tax................................................................. (184) (54) (219)
------------ ------------ ------------
Total stockholders' equity.......................................... 73,434 68,386 59,019
------------ ------------ ------------
TOTAL............................................................... $ 1,112,576 $ 1,054,950 $ 1,140,882
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees...................................... $ 19,123 $ 18,815 $ 76,889 $ 70,831 $ 61,338
Securities available for sale.............................. 1,725 1,463 5,748 569
Securities to be held to maturity:
Taxable.................................................. 1,367 1,978 7,249 8,806 7,781
Non-taxable.............................................. 28 31 123 127 139
FHLB dividends............................................. 188 110 494 378 338
Other...................................................... 354 213 691 1,275 1,537
--------- --------- --------- --------- ---------
Total interest income.................................... 22,785 22,610 91,194 81,986 71,133
--------- --------- --------- --------- ---------
INTEREST EXPENSE:
Deposits................................................... 8,532 9,664 38,940 36,084 32,512
Securities sold under agreements to repurchase and
short-term borrowings.................................... 1,216 1,242 4,533 3,481 975
Other borrowed funds....................................... 2,667 1,697 7,383 4,290 4,233
--------- --------- --------- --------- ---------
Total interest expense................................... 12,415 12,603 50,856 43,855 37,720
--------- --------- --------- --------- ---------
NET INTEREST INCOME.......................................... 10,370 10,007 40,338 38,131 33,413
PROVISION FOR LOAN LOSSES.................................... 643 1,298 7,251 9,149 4,268
--------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.......... 9,727 8,709 33,087 28,982 29,145
--------- --------- --------- --------- ---------
NON-INTEREST INCOME:
Service charges on deposit accounts........................ 753 777 3,284 2,642 1,974
Other service charges and fees............................. 397 310 661 445 1,434
Bankcard services.......................................... 409 457 1,010 1,263
Net gain on sale of deposits............................... 4,116 7,527
Net gain on sale of Bankcard............................... 3,660
Net gain on sale of mortgage loans......................... 1,009 281 1,852 1,212 1,083
Net gain on available for sale securities.................. 324 81
Loan servicing income...................................... 166 189 734 829 895
Other...................................................... 147 130 674 959 871
--------- --------- --------- --------- ---------
Total non-interest income................................ 6,912 2,096 18,930 7,097 7,520
--------- --------- --------- --------- ---------
</TABLE>
F-5
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NON-INTEREST EXPENSE:
Salaries and employee benefits............................. 4,076 3,688 15,444 13,236 11,334
Occupancy and equipment.................................... 1,862 2,006 8,562 6,623 5,346
Communication and transportation........................... 426 436 1,796 1,548 1,407
Marketing and development.................................. 305 363 1,299 1,620 1,308
FDIC deposit insurance..................................... 84 53 107 3,277 1,245
Supplies................................................... 260 242 1,013 973 883
Litigation recovery........................................ (738)
Other...................................................... 1,061 1,207 4,659 4,132 3,720
--------- --------- --------- --------- ---------
Total non-interest expense............................... 8,074 7,995 32,880 31,409 24,505
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES................................... 8,565 2,810 19,137 4,670 12,160
INCOME TAXES................................................. 3,041 930 6,878 1,943 4,372
--------- --------- --------- --------- ---------
NET INCOME................................................... $ 5,524 $ 1,880 $ 12,259 $ 2,727 $ 7,788
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Change in unrealized gain (loss) on securities............. $ 194 $ (664) $ 246 $ (219)
Reclassification of realized amount........................ (324) (81)
--------- --------- --------- --------- ---------
Net unrealized gain (loss) recognized in comprehensive
income................................................... (130) (664) 165 (219)
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME......................................... $ 5,394 $ 1,216 $ 12,424 $ 2,508 $ 7,788
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS PER SHARE
Class A.................................................... $ .37 $ .12 $ .82 $ .16
Class B.................................................... $ .37 $ .12 $ .81 $ .15
Common Stock............................................... $ .52
EARNINGS PER SHARE ASSUMING DILUTION
Class A.................................................... $ .35 $ .12 $ .79 $ .16
Class B.................................................... $ .35 $ .12 $ .78 $ .15
Common Stock............................................... $ .52
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1997,
1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK NET UNREALIZED
PREFERRED STOCK ---------------------------------- ADDITIONAL DEPRECIATION ON TOTAL
---------------- CLASS A CLASS B PAID-IN RETAINED AVAILABLE FOR SALE STOCKHOLDERS'
SHARES AMOUNT SHARES SHARES SHARES AMOUNT CAPITAL EARNINGS SECURITIES EQUITY
------ ------- ------- ------- ------ ------ ---------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January
1, 1995........ 14,348 $3,467 $ 6,609 $36,969 $47,045
Sale of
preferred
stock.......... 50 $ 5,000 5,000
Exercise of
common stock
options........ 108 27 279 306
Purchases and
retirements of
common stock... (12) (3 ) (71) (74)
Dividends
declared:
Preferred
($7.28 per
share)...... (364) (364)
Common ($.085
per
share)...... (1,199) (1,199)
Net income...... 7,788 7,788
------ ------- ------ ------ ---------- -------- -------------
BALANCE,
December 31,
1995........... 50 5,000 14,444 3,491 6,817 43,194 58,502
Stock split..... 12,036 2,408 (14,444)
Conversions of
Class B common
to Class A
common......... 68 (68)
Dividends
declared:
Preferred
($8.50 per
share)...... (425) (425)
Common: Class
A ($.11 per
share)...... (1,330) (1,330)
Class
B ($.10 per
share)...... (236) (236)
Net changes in
unrealized
depreciation on
securities
available for
sale, net of
tax............ $(219) (219)
Net income...... 2,727 2,727
------ ------- ------- ------- ------ ------ ---------- -------- ----- -------------
BALANCE,
December 31,
1996........... 50 5,000 12,104 2,340 3,491 6,817 43,930 (219) 59,019
Exercise of
common stock
options........ 28 7 146 153
Redemption of
preferred
stock.......... (10) (1,015) (203) (1,218)
Conversion of
preferred stock
into common
stock.......... (40) (3,985) 398 80 115 3,870
Conversions of
Class B common
to Class A
common......... 2 (2)
Dividends
declared:
Preferred
($8.50 per
share)...... (425) (425)
Common: Class
A ($.11 per
share)...... (1,335) (1,335)
Class
B ($.10 per
share)...... (232) (232)
Net changes in
unrealized
depreciation on
securities
available for
sale, net of
tax............ 165 165
Net income...... 12,259 12,259
------ ------- ------- ------- ------ ------ ---------- -------- ----- -------------
BALANCE,
December 31,
1997........... 12,532 2,418 3,613 10,833 53,994 (54) 68,386
Exercise of
common stock
options(1)..... 10 2 57 59
Dividends
declared(1)
Common: Class
A ($.0275
per
share)...... (345) (345)
Class
B ($.025 per
share)...... (60) (60)
Net changes in
unrealized
depreciation on
securities
available for
sale, net of
tax(1)......... (130) (130)
Net income(1)... 5,524 5,524
------ ------- ------- ------- ------ ------ ---------- -------- ----- -------------
BALANCE, March
31, 1998(1).... 12,542 2,418 $3,615 $10,890 $59,113 $(184) $73,434
------ ------- ------- ------- ------ ------ ---------- -------- ----- -------------
------ ------- ------- ------- ------ ------ ---------- -------- ----- -------------
</TABLE>
- ------------------------
(1) Unaudited
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
REPUBLIC BANCORP. INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- -------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................... $ 5,524 $ 1,880 $ 12,259 $ 2,727 $ 7,788
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and
equipment........................................ 838 1,047 4,683 3,179 2,353
Amortization and accretion of securities........... 57 135 606 (124) (370)
FHLB stock dividends............................... (188) (97) (456) (372) (331)
Provision for loan losses.......................... 643 1,298 7,251 9,149 4,268
Net gain on sale of deposits....................... (4,116) (7,527)
Net gain on sale of Bankcard....................... (3,660)
Net gain on sale of mortgage loans................. (1,009) (281) (1,852) (1,212) (1,083)
Net gain on sale of securities..................... (324) (81)
Proceeds from sale of loans held for sale.......... 58,043 24,235 123,909 104,115 86,808
Origination of mortgage loans held for sale........ (73,164) (22,415) (124,403) (104,539) (91,407)
Changes in assets and liabilities:
Accrued interest receivable...................... (230) 532 882 (2,441) (1,968)
Other assets..................................... (595) (150) 17 415 960
Accrued interest payable......................... 4,116 1,779 590 1,329 755
Other liabilities................................ (2,108) 894 2,268 83 (1,281)
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities................................... (12,513) 8,857 14,486 12,309 6,492
INVESTING ACTIVITIES:
Purchases of securities available for sale........... (81,269) (69,355) (108,350)
Purchases of securities to be held to maturity....... (11,089) (11,189) (215,655) (100,039)
Purchases of FHLB stock.............................. (2,404) (1,000) (2,120)
Proceeds from maturities of securities to be held to
maturity........................................... 18,522 53,305 86,746 156,596 86,460
Proceeds from sales of securities available for
sale............................................... 40,722 9,124 83,006
Proceeds from sale of Bankcard....................... 26,590
Net (increase) decrease in loans..................... 10,208 (26,470) (66,654) (100,484) (101,313)
Purchases of premises and equipment.................. (2,001) (1,028) (3,364) (8,673) (2,922)
Proceeds from sales of premises and equipment........ 878 3,416
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities....................................... (15,344) 22,842 47,076 (276,566) (117,814)
</TABLE>
F-8
<PAGE>
REPUBLIC BANCORP. INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- -------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits............................. 62,151 29,301 63,593 48,698 144,407
Sale of deposits..................................... (61,564) (107,609)
Net increase (decrease) in securities sold under
agreements to repurchase and other short-term
borrowings......................................... (660) (94,183) (70,497) 159,905 8,997
Payments on other borrowed funds..................... (35,241) (42,228) (296,819) (77,089) (19,997)
Proceeds from other borrowed funds................... 90,000 47,000 314,250 116,000 11,000
Purchases and retirements of common stock............ (74)
Sale of preferred stock.............................. 5,000
Proceeds from issuance of guaranteed preferred
beneficial interests in Republic's subordinated
debentures......................................... 6,452 6,452
Proceeds from common stock options exercised......... 59 153 306
Redemption of preferred stock........................ (1,218)
Cash dividends paid.................................. (405) (497) (1,992) (1,899) (1,563)
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities....................................... 54,340 (54,155) (93,687) 245,615 148,076
---------- ---------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 26,483 (22,456) (32,125) (18,642) 36,754
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......... 24,546 56,671 56,671 75,313 38,559
---------- ---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............... $ 51,029 $ 34,215 $ 24,546 $ 56,671 $ 75,313
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................... $ 8,299 $ 13,135 $ 50,266 $ 42,526 $ 36,965
Income taxes....................................... $ 2,581 $ $6,095 $ 2,902 $ 3,920
Transfers from loans to real estate acquired in
settlement of loans................................ $ 583 $ 61 $ 958 $ 104 $ 802
Conversion of preferred stock to common stock........ $ 3,985 $
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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
Capital Trust, Republic Mortgage Company and Republic Insurance Agency, Inc.
(collectively Republic). All significant intercompany balances and transactions
have been eliminated.
Republic operates 18 banking centers primarily in the retail banking
industry and conducts its operations predominately in metropolitan Louisville
and in Central Kentucky. Republic's consolidated results of operations are
dependent upon net interest income, which is the difference between the interest
income on interest-earning assets and the interest expense on interest-bearing
liabilities. Principal interest-earning assets are securities and 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 as 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.
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.
F-10
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
LOANS--Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Interest on loans is computed on the principal balance outstanding. Loan
origination fees and certain direct loan origination costs relating to
successful loan origination efforts are deferred and recognized over the lives
of the related loans as an adjustment to yield.
Generally, the accrual of interest on loans, including impaired loans, is
discontinued when it is determined that the collection of interest or principal
is doubtful, or when a default of interest or principal has existed for 90 days
or more, unless such loan is well secured and in the process of collection.
Interest received on non-accrual loans generally is either applied against
principal or reported as interest income, according to management's judgment as
to the collectibility of principal. When loans are placed on non-accrual status,
all unpaid accrued interest is reversed. Such loans remain on non-accrual status
until the borrower demonstrates the ability to remain current or the loan is
deemed uncollectible and is charged off. Consumer loans generally are not placed
on non-accrual status but are reviewed periodically and charged off when deemed
uncollectible.
Republic recognizes interest income on an impaired loan when earned, unless
the loan is on non-accrual status, in which case interest income is recognized
when received.
ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is an amount that
management believes will be adequate to absorb 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.
F-11
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A loan is defined as "impaired" when it is probable that a creditor will be
unable to collect all principal and interest due according to the contractual
terms of the loan agreement. Republic has defined its population of impaired
loans to be those commercial real estate and commercial loans $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
amount will not be collected.
Impairment of smaller balance, homogeneous loans (commercial real estate and
commercial loans less than $500,000, residential real estate, consumer, home
equity, and credit card loans) is measured on an aggregate basis giving
consideration to historical charge-off experience of the related portfolios.
PREMISES AND EQUIPMENT--Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed over the
estimated useful lives of the related assets on the straight-line method.
Estimated lives are 25 to 31 1/2 years for buildings and improvements, 3 to 5
years for furniture, fixtures and equipment and 3 to 9 years for leasehold
improvements.
LONG LIVED ASSETS--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 prior accounting methods. Under the intrinsic value
method, 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 do not elect to use the fair value method
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 the intrinsic value method and has provided the 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 share and earnings per share assuming
dilution are computed under a new accounting standard effective in the quarter
ended December 31, 1997. All prior amounts have been restated to be comparable.
Earnings per share is based on income less preferred stock dividends (and, in
F-12
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the case of Class B common stock, less the dividend preference on Class A common
stock) divided by the weighted average number of shares outstanding during the
period. Earnings per share assuming dilution shows the effect of additional
common shares issuable under stock options, convertible preferred stock and
guaranteed preferred beneficial interests in Republic's subordinated debentures.
All per share amounts have been restated to reflect the stock splits occurring
during the periods presented.
COMPREHENSIVE INCOME--Republic adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income", effective for the interim
period ended March 31, 1998. This Standard requires reporting of comprehensive
income, defined as changes in equity other than those resulting from investments
by or distributions to stockholders. Net income, plus or minus "other
comprehensive income" results in comprehensive income. The only item of other
comprehensive income applicable to Republic is the change in unrealized gain or
loss on securities available for sale. Comprehensive income is reported on the
statement of income. The periods prior to March 31, 1998 were restated to meet
the current reporting format.
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.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1997, the FASB issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". This
standard changes the way public companies report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Operating segments are parts of a company
for which separate information is available which is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
evaluating performance. Required disclosures for operating segments include
total segment revenues, total segment profit or loss, and total segment assets.
The standard also requires disclosures regarding revenues derived from products
and service (or similar groups of products or services), countries in which the
company derives revenue or holds assets, and about major customers, regardless
of whether this information is used in operating decision making. Republic is
required to adopt the disclosure requirements in its 1998 annual report, and in
interim periods in 1999. The 1999 interim period disclosures are required to
include comparable 1998 information.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This new standard requires companies to
record derivatives on the balance sheet as assets or liabilities at fair value.
Depending on the use of the derivative and whether it qualifies for hedge
accounting, gains or losses resulting from changes in the values of those
derivatives would either be recorded as a component of net income or as a change
in stockholders' equity. Republic is required to adopt this new standard January
1, 2000. Management has not yet determined the impact of this standard.
UNAUDITED FINANCIAL INFORMATION--Financial information at March 31, 1998 and
for the three months ended March 31, 1998 and 1997 as well as other information
presented subsequent to January 30, 1998 is
F-13
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
unaudited. In the opinion of management of Republic, all adjustments necessary
for a fair presentation of such financial information have been included. All
such adjustments are of a normal recurring nature. The statements of income,
cash flows and changes in stockholders' equity for the three months ended March
31, 1998 are not necessarily indicative of the statements of income, cash flows
and changes in stockholders' equity which may be expected for the year ending
December 31, 1998.
2. CASH AND CASH EQUIVALENTS
During 1998, the Bank entered into agreements to purchase securities under
agreements to resell ("reverse repurchase agreements"). At March 31, 1998 these
reverse repurchase agreements totaled $20.0 million (unaudited). The securities
purchased under these reverse repurchase agreements are government agency
securities and pledged against the Bank's customer repurchase accounts. The fair
value of the pledged securities as of March 31, 1998 was approximately $20.0
million (unaudited). The securities purchased under these agreements are
overnight in term and maintained by a third party safekeeping agent for the
benefit of the Bank. The average balance of securities purchased under reverse
repurchase agreements during the first quarter of 1998 was $7.6 million
(unaudited) with a maximum balance outstanding at any month end of $20.0 million
(unaudited).
Republic is required by the Federal Reserve Bank to maintain average reserve
balances. Cash and due from banks in the consolidated balance sheet includes
$1.7 million of reserve balances at December 31, 1997.
F-14
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. SECURITIES
Securities available for sale:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C>
U.S. Treasury Securities and U.S. government
agencies................................... $ 92,628 $ (128) $ 92,500
Mortgage-Backed Securities................... 42,015 (151) 41,864
---------- --- ----- ----------
Total securities available for sale.......... $ 134,643 $ (279) $ 134,364
---------- --- ----- ----------
---------- --- ----- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government
agencies................................... $ 44,586 $ 6 $ (33) $ 44,559
Mortgage-backed securities................... 49,322 28 (83) 49,267
---------- --- ----- ----------
Total securities available for sale.......... $ 93,908 $ 34 $ (116) $ 93,826
---------- --- ----- ----------
---------- --- ----- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government
agencies................................... $ 108,269 $ (332) $ 107,937
---------- --- ----- ----------
---------- --- ----- ----------
</TABLE>
F-15
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. SECURITIES (CONTINUED)
Securities to be held to maturity:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C>
U.S. Treasury Securities and U.S. government
agencies................................... $ 75,298 $ 170 $ (247) $ 75,221
Obligations of state and political
subdivisions............................... 4,244 194 4,438
Mortgage-backed securities................... 561 (29) 532
---------- ----- ----- ----------
Total securities to be held to maturity...... $ 80,103 $ 364 $ (276) $ 80,191
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government
agencies................................... $ 93,693 $ 229 $ (378) $ 93,544
Obligations of state and political
subdivisions............................... 4,270 177 4,447
Mortgage-backed securities................... 583 (34) 549
---------- ----- ----- ----------
Total securities to be held to maturity...... $ 98,546 $ 406 $ (412) $ 98,540
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
Securities having an amortized cost of $210.0 million (unaudited) and a fair
value of $209.7 million (unaudited) at March 31, 1998, were pledged to secure
public deposits, securities sold under agreements to repurchase and for other
purposes, as required or permitted by law. Gross gains on available for sale
securities were $324,000 (unaudited) for quarter ended March 31, 1998.
Securities having an amortized cost of $168.6 million and $263.5 million and
fair value of $168.1 million and $262.9 million at December 31, 1997 and 1996,
respectively, were pledged to secure public
F-16
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. SECURITIES (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
SECURITIES TO BE SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
------------------------ ------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less........................ $ 52,787 $ 52,776
Due after one year through five years.......... 31,049 31,028 $ 44,586 $ 44,559
Due after five through ten years............... 11,438 11,486 34,220 34,159
Due after ten years............................ 3,272 3,250 15,102 15,108
----------- ----------- ----------- -----------
Total.......................................... $ 98,546 $ 98,540 $ 93,908 $ 93,826
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
4. LOANS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 ----------------------
(UNAUDITED) 1997 1996
--------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Residential real estate............................. $ 480,820 $ 480,874 $ 457,204
Commercial real estate.............................. 74,462 76,306 59,086
Real estate construction............................ 39,539 37,940 32,130
Commercial.......................................... 22,042 21,552 25,115
Consumer............................................ 74,016 81,967 96,138
Home equity......................................... 100,154 102,512 69,572
Bankcard............................................ 24,527
Other............................................... 2,657 4,094 4,309
--------------- ---------- ----------
Total loans....................................... 793,690 805,245 768,081
Less:
Unearned interest income and unamortized loan
fees............................................ 1,951 2,130 2,416
Allowance for loan losses......................... 8,234 8,176 6,241
--------------- ---------- ----------
Loans, net.......................................... $ 783,505 $ 794,939 $ 759,424
--------------- ---------- ----------
--------------- ---------- ----------
</TABLE>
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 Bankcard loans and approximately $38.4 million and $55.0 million of
consumer loans at December 31, 1997 and 1996, respectively, are on an unsecured
basis.
F-17
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
4. LOANS (CONTINUED)
During 1997, Republic sold the Bankcard loans. A gain of $3.7 million was
recognized on these sales and includes $500,000 of gain recognized on the sale
of the associated merchant processing.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------
1998 (UNAUDITED) 1997 1996 1995
----------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year.................. $ 8,176 $ 6,241 $ 3,695 $ 1,827
Provision for loan losses charged to
income..................................... 643 7,251 9,149 4,268
Charge-offs................................. (702) (5,859) (7,129) (2,489)
Recoveries.................................. 117 543 526 89
------ --------- --------- ---------
Balance, end of year........................ $ 8,234 $ 8,176 $ 6,241 $ 3,695
------ --------- --------- ---------
------ --------- --------- ---------
</TABLE>
The level of charge offs in 1997 and 1996 exceeded losses incurred in prior
periods and were directly related to two unsecured credit programs initiated in
1995. The net charge offs related to loans arising under these programs were
$4.2 million and $4.8 million in 1997 and 1996, and accounted for 71% and 73% of
net charge-offs in each of those years. Originations of loans under these
programs were significantly reduced in 1997 and 1996, and such originations were
underwritten to more restrictive standards than in 1995.
Information about Republic's investment in impaired loans is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR THE YEARS ENDED
THE THREE
MONTHS ENDED DECEMBER 31,
MARCH 31, -------------------------------
1998 (UNAUDITED) 1997 1996 1995
----------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross impaired loans which have allowances..... $ 1,640 $ 1,640 $ 1,638 $ 4,064
Less: related allowances for loan losses....... 240 240 240 589
------ --------- --------- ---------
Net impaired loans with related allowances..... 1,400 1,400 1,398 3,475
Impaired loans with no related allowances...... 0 0 0 87
------ --------- --------- ---------
Total........................................ $ 1,400 $ 1,400 $ 1,398 $ 3,562
------ --------- --------- ---------
------ --------- --------- ---------
Average impaired loans outstanding............. $ 1,640 $ 1,639 $ 1,638 $ 3,432
------ --------- --------- ---------
------ --------- --------- ---------
Interest income recognized..................... $ 0 $ 93 $ 110 $ 358
------ --------- --------- ---------
------ --------- --------- ---------
Interest income received....................... $ 0 $ 93 $ 110 $ 337
------ --------- --------- ---------
------ --------- --------- ---------
</TABLE>
F-18
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
4. LOANS (CONTINUED)
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:
<TABLE>
<CAPTION>
BALANCE, BALANCE,
BEGINNING NEW END
PERIOD OF PERIOD LOANS REPAYMENTS OF PERIOD
- ------------------------------------------------ ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1997.................... $ 5,688 $ 7,301 $ 8,327 $ 4,662
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
5. LOAN SERVICING
Republic was servicing loans for others (primarily FHLMC) totaling $263
million and $297 million at December 31, 1997 and 1996, 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 $.5 million and $.6 million at December 31, 1997 and 1996,
respectively.
6. ACCRUED INTEREST RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Investment securities................................................... $ 2,845 $ 4,331
Loans................................................................... 5,958 5,354
--------- ---------
$ 8,803 $ 9,685
--------- ---------
--------- ---------
</TABLE>
7. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................................... $ 1,007 $ 1,699
Office buildings and improvements....................................... 6,991 8,718
Furniture, fixtures and equipment....................................... 17,735 18,608
Leasehold improvements.................................................. 869 869
--------- ---------
Total premises and equipment............................................ 26,602 29,894
Less accumulated depreciation and amortization.......................... 13,828 12,385
--------- ---------
Net premises and equipment.............................................. $ 12,774 $ 17,509
--------- ---------
--------- ---------
</TABLE>
F-19
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
8. INTEREST BEARING DEPOSITS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 ----------------------
(UNAUDITED) 1997 1996
--------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Demand (NOW, SuperNOW and
Money Market)...................................... $ 136,710 $ 118,870 $ 116,180
Savings............................................. 11,178 12,165 14,840
Money market certificates of deposit................ 36,897 41,307 63,423
Individual retirement accounts...................... 22,555 30,167 35,845
Certificates of deposit, $100,000 and over.......... 65,116 63,045 60,890
Other certificates of deposit....................... 332,016 352,478 374,864
Brokered deposits................................... 47,697 47,653 50,130
--------------- ---------- ----------
Total interest bearing deposits..................... $ 652,169 $ 665,685 $ 716,172
--------------- ---------- ----------
--------------- ---------- ----------
</TABLE>
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE
-------------
<S> <C> <C>
Less than 1 year............................................ $ 301,532 5.95%
Over 1 year through 3 years................................. 187,580 5.56%
Over 3 years through 5 years................................ 4,231 5.67%
----------
$ 493,343
----------
----------
</TABLE>
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT TERM
BORROWINGS
These borrowings consist of short term excess funds from correspondent
banks, repurchase agreements and overnight liabilities to deposit customers
arising from a cash management program offered by Republic. While effectively
deposit equivalents, such arrangements are in the form of repurchase
agreements. The repurchase agreements are treated as financings; accordingly,
the securities involved with the agreements are recorded as assets and are
held by a safekeeping agent and the obligations to repurchase the securities
are reflected as liabilities. All securities underlying the agreements were
under Republic's control.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 ----------------------
(UNAUDITED) 1997 1996
--------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Average outstanding balance during the year......... $ 112,625 $ 100,291 $ 74,531
Average interest rate during the year............... 4.32% 4.57% 4.74%
Maximum month end balance during the year........... $ 130,754 $ 111,137 $ 182,485
</TABLE>
Approximately $92 million of the December 31, 1996 balance represents funds
received from a local governmental organization. Substantially all of these
amounts were returned during the first quarter of 1997.
F-20
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
10. OTHER BORROWED FUNDS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 ----------------------
(UNAUDITED) 1997 1996
--------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal Home Loan Bank convertible fixed rate advance (see
comment below)............................................... $ 30,000
Subordinated debentures bearing interest from 9.75% to
10.0%........................................................ $ 188
Note payable to a financial institution bearing interest at
7.75%........................................................ 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 5.90% at December 31, 1997,
due through 1999............................................. 81,000 $ 116,000 65,000
Federal Home Loan Bank fixed interest rate advances, with
weighted average interest rate of 5.55% at December 31, 1997,
due through 2001............................................. 68,164 8,405 19,336
--------------- ---------- ----------
$ 179,164 $ 124,405 $ 106,974
--------------- ---------- ----------
--------------- ---------- ----------
</TABLE>
During the first quarter of 1998, Republic entered into a 5 year convertible
fixed rate advance with the Federal Home Loan Bank (FHLB) for $30 million. The
advance is fixed for 1 year at 5.11%. At the end of the first year, the FHLB has
the right to convert the fixed rate advance on a quarterly basis to a variable
rate advance tied to the 3 month LIBOR index. The advance can be prepaid at any
quarterly date without penalty, but may not be prepaid at any time during the
fixed rate term.
The Parent Company has available through a financial institution a line of
credit in the amount of $6.5 million and has pledged 51% of the Bank's
outstanding common stock as collateral for this line of credit.
The FHLB advances are collateralized by a blanket pledge of eligible real
estate loans with an unpaid principal balance of greater than 150% of the
outstanding advances. Republic has available collateral to borrow an additional
$171 million from the FHLB. Republic also has unsecured lines of credit totaling
$16.7 million and secured lines of credit of $104.7 million available through
various financial institutions.
Aggregate future principal payments on borrowed funds as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
(IN
YEAR THOUSANDS)
- --------------------------------------------------------------------- -------------
<S> <C>
1998................................................................. $ 3,068
1999................................................................. 120,044
2000................................................................. 1,103
2001................................................................. 190
-------------
$ 124,405
-------------
-------------
</TABLE>
F-21
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
11. GUARANTEED PREFERRED BENEFICIAL INTERESTS
In February 1997, Republic Capital Trust (RCT), a trust subsidiary of
Republic Bancorp, Inc., completed the private placement of 64,520 shares of
cumulative trust preferred securities (Preferred Securities) with a liquidation
preference of $100 per security. Each security can be converted into 10 shares
of Class A Common Stock at the option of the holder. The proceeds of the
offering were loaned to Republic Bancorp, Inc. in exchange for subordinated
debentures with terms that are similar to the Preferred Securities.
Distributions on the securities are payable quarterly at the annual rate of 8.5%
of the liquidation preference and are included in interest expense in the
consolidated financial statements. Republic undertook the issuance of these
securities to enhance its regulatory capital position. The Bank intends to
utilize the capital for general business purposes and to support the Bank's
future opportunities for growth. These securities are considered as Tier I
capital under current regulatory guidelines.
The Preferred Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the subordinated debentures at maturity or their earlier
redemption at the liquidation preference. The subordinated debentures are
redeemable prior to the maturity date of April 1, 2027 at the option of Republic
on or after April 1, 2002, or upon the occurrence of specific events, defined
within the trust indenture. Republic has the option to defer distributions on
the subordinated debentures from time to time for a period not to exceed 20
consecutive quarters.
12. INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense consisted of:
Current........................................................ $ 7,587 $ 2,560 $ 4,443
Deferred benefit............................................... (709) (617) (71)
--------- --------- ---------
Total........................................................ $ 6,878 $ 1,943 $ 4,372
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from the amount computed at the
statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate................................................. 35.0% 34.0% 34.0%
--- --- ---
--- --- ---
Increase (decrease) resulting from:
Tax-exempt interest income........................................... (0.3) (1.4) (0.7)
Net operating loss carryforward...................................... (1.8)
Acquisition intangibles.............................................. 6.5
Other................................................................ 1.2 2.5 4.4
--- --- ---
Effective rate......................................................... 35.9% 41.6% 35.9%
--- --- ---
--- --- ---
</TABLE>
F-22
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
12. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Depreciation............................................................. $ 448 $ 232
Loan fees................................................................ 168 186
Allowance for loan losses................................................ 1,860 1,040
FAS 115 valuation reserve................................................ 28 113
--------- ---------
Total deferred tax assets.............................................. 2,504 1,571
--------- ---------
Deferred tax liabilities:
FHLB dividends........................................................... 662 488
Other.................................................................... 209 74
--------- ---------
Total deferred tax liabilities......................................... 871 562
--------- ---------
Net deferred tax asset, included in other assets........................... $ 1,633 $ 1,009
--------- ---------
--------- ---------
</TABLE>
13. EARNINGS PER SHARE
A reconciliation of the combined Class A and B Common Stock numerators and
denominators of the earnings per share and earnings per share assuming dilution
computations in thousands is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED
(UNAUDITED) DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Earnings Per Share
Net income.................................................... $ 5,524 $ 1,880 $ 12,259 $ 2,727 $ 7,788
Less: Dividends declared on preferred stock................... (106) (425) (425) (364)
--------- --------- --------- --------- ---------
Net income available to common shareholders................... $ 5,524 $ 1,774 $ 11,834 $ 2,302 $ 7,424
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding........................... 14,958 14,444 14,450 14,444 14,404
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings Per Share Assuming Dilution
Net income.................................................... $ 5,524 $ 1,880 $ 12,259 $ 2,727 $ 7,788
Less: Dividends declared on preferred stock................... (106) (425) (364)
Add: Interest expense, net of tax benefit, on assumed
conversion of guaranteed preferred beneficial interests in
Republic's subordinated debentures.......................... 90 320
--------- --------- --------- --------- ---------
Net income available to common shareholders assuming
conversion.................................................. $ 5,614 $ 1,774 $ 12,579 $ 2,302 $ 7,424
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-23
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
13. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED
(UNAUDITED) DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Weighted average shares outstanding............................. 14,958 14,444 14,450 14,444 14,404
Add dilutive effects of assumed conversion and exercise:
Convertible preferred stock................................... 600
Convertible guaranteed preferred beneficial interest in
Republic's subordinated debentures.......................... 646 564
Stock options................................................. 294 180 320 198 126
--------- --------- --------- --------- ---------
Weighted average shares and dilutive potential shares
outstanding.................................................... 15,898 14,624 15,934 14,642 14,530
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The difference in earnings per share between the two classes of Common Stock
result solely from the dividend premium paid to Class A over Class B Common
Stock.
The 50,000 shares of Preferred Stock were not considered converted to
600,000 shares of Common Stock for the three months ending March 31, 1997 and
the years ending December 31, 1996 and 1995 in computing earnings per share
assuming dilution because the impact of their conversion was antidilutive.
Incentive stock options for 62,000 shares of Common Stock granted during 1995
were not considered in computing earnings per share assuming dilution for 1995
because they were antidilutive.
14. 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 shareholders
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. All outstanding shares of common stock were
reclassified as Class B Common Stock by virtue of the amendment.
On February 16, 1996, the Board of Directors declared a stock dividend of
five shares of Class A Common Stock for each share of Class B Common Stock owned
by shareholders 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.
On June 30, 1998, the shareholders approved an amendment to Republic's
Articles of Incorporation to increase the authorized Class A Common Stock to
30,000,000 shares and the authorized Class B Common Stock to 5,000,000 shares.
Concurrently, the shareholders approved a 2-for-1 stock split effecting
F-24
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
14. STOCKHOLDERS' EQUITY (CONTINUED)
both classes of common stock. All shares and per share amounts have been
retroactively restated to reflect the split.
PREFERRED STOCK--On December 31, 1997, Republic redeemed the $5 million
outstanding Series A Convertible Preferred stock. At the option of each
shareholder, each security was either converted to 5 shares of Class A Common
Stock and 1 share of Class B Common Stock, or redeemed in cash for the initial
offering price of $100 per share plus a 20% premium.
DIVIDEND LIMITATIONS--Banking regulations limit the amount of dividends that
may be paid to the Parent Company without prior approval of the Bank's
regulatory agency. Under these regulations, the amount of dividends that may be
paid in any calendar year is limited to the current year's net profits, as
defined, combined with the retained net profits of the preceding two years, less
any dividends declared during those periods. At December 31, 1997, the Bank had
$14 million of retained earnings available for such purposes.
REGULATORY CAPITAL REQUIREMENTS--The Parent Company and the Bank are subject
to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on Republic's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Parent Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Parent Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).
F-25
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
14. STOCKHOLDERS' EQUITY (CONTINUED)
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.
<TABLE>
<CAPTION>
MINIMUM REQUIREMENT TO
MINIMUM REQUIREMENT BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT
CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
-------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 1998 (UNAUDITED)
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated........................................ $ 88,304 12.67% $ 52,647 8% $ 65,808 10%
Bank only........................................... 88,128 12.65 52,716 8 65,895 10
Tier I Capital (to Risk Weighted Assets)
Consolidated........................................ 80,070 11.49 26,323 4 39,485 6
Bank only........................................... 79,894 11.46 23,558 4 39,537 6
Tier I Leverage Capital (to Average Assets)
Consolidated........................................ 80,070 7.31 44,725 4 55,906 5
Bank only........................................... 79,894 7.29 43,885 4 54,856 5
AS OF DECEMBER 31, 1997
Total Risk Based Capital (to Risk Weighted Assets)
Consolidated........................................ $ 83,069 11.73% $ 56,672 8% $ 70,841 10%
Bank only........................................... 83,149 11.74 56,670 8 70,837 10
Tier I Capital (to Risk Weighted Assets)
Consolidated........................................ 74,893 10.57 28,336 4 42,504 6
Bank only........................................... 74,973 10.58 28,335 4 42,502 6
Tier I Leverage Capital (to Average Assets)
Consolidated........................................ 74,893 6.99 42,866 4 53,583 5
Bank only........................................... 74,973 7.00 42,865 4 53,581 5
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
</TABLE>
F-26
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
15. 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 after
vesting. A summary of Republic's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------- -----------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
CLASS A EXERCISE CLASS B EXERCISE CLASS A EXERCISE CLASS B EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- --------- ----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding beginning of
year.................... 937,000 $ 5.16 68,000 $ 3.76 456,000 $ 3.86
Stock Split.............. 380,000 $ 3.86 (380,000) 3.86
Granted.................. 227,000 6.00 623,000 5.97
Exercised................ (27,000) 5.54 (1,000) 3.61
Forfeited................ (144,000) 5.04 (10,000) 3.28 (66,000) 5.38 (8,000) 5.00
---------- --------- --------- ----------
Outstanding year end..... 993,000 5.36 57,000 3.81 937,000 5.16 68,000 3.73
---------- --------- --------- ----------
---------- --------- --------- ----------
Exercisable (vested) end
of year................. -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------
WEIGHTED
OPTIONS AVERAGE
COMMON EXERCISE
STOCK PRICE
--------- -----------
<S> <C> <C>
Outstanding beginning of
year..................... 84,000 $ 1.88
Granted................... 456,000 3.86
Exercised................. (84,000) 1.88
---------
Outstanding year end...... 456,000 3.86
---------
---------
Exercisable (vested) end
of year.................. --
</TABLE>
As discussed in Note 14, on February 29, 1996, common stock was reclassified
and 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 shareholders of record on
February 20, 1996.
Exercise prices for options outstanding as of December 31, 1997 ranged from
$3.28 to $6.00. The weighted average remaining contractual life of those options
is 4.43 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
F-27
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
15. STOCK OPTION PLAN (CONTINUED)
year and the resulting estimated weighted average fair values per share used in
computing pro forma disclosures are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Assumptions:
Risk-free interest rate............................................ 6.25% 6.29% 7.37%
Expected dividend yield............................................ 1.84% 1.84% 2.95%
Expected life (years).............................................. 5.78 6.00 5.66
Expected common stock market price volatility...................... .13 .13 .13
Estimated fair value per share..................................... $ 1.38 $ 1.40 $ .81
</TABLE>
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);
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net income............................................ $ 12,058 $ 2,574 $ 7,727
Pro forma earnings per share
Class A....................................................... $ .81 $ .15
Class B....................................................... $ .80 $ .14
Common Stock.................................................. $ .51
Pro forma earnings per share assuming dilution
Class A....................................................... $ .79 $ .15
Class B....................................................... $ .78 $ .14
Common Stock.................................................. $ .51
</TABLE>
The Board of Directors intends to grant 250,000 options during July 1998 to
certain members of management at the initial offering price of $12.00 to $14.00
per share. The options will become exercisable at the end of five to six years
of continued employment and must be exercised within one year after vesting.
Using a Black-Scholes option pricing model with assumptions similar to those
presented above, the weighted average estimated fair value of these shares,
depending on the initial offering price, would be approximately $3.40 to $4.00
per share.
Future pro forma net income will be negatively impacted should Republic
choose to grant additional options.
16. 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
F-28
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. EMPLOYEE BENEFIT PLAN (CONTINUED)
achieved. Republic's matching contributions were $313,000, $284,000, and
$240,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
17. 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. As a result, $738,000 was recorded as litigation
cost recovery in non-interest expense during 1995.
18. LEASES AND TRANSACTIONS WITH AFFILIATES
Republic leases office facilities from affiliated companies owned by certain
directors and executive officers of Republic under operating leases. Rent
expense for the years ended December 31, 1997, 1996 and 1995 under these leases
was $1,064,000, $1,054,000, and $951,000. Total rent expense on all operating
leases was $1,533,000, $1,343,000, and $1,200,000 for the years ended December
31, 1997, 1996 and 1995, respectively. The total minimum lease commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
YEAR AFFILIATE OTHER TOTAL
- ---------------------------------------------------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
1998................................................ $ 1,181,500 $ 316,000 $ 1,497,500
1999................................................ 1,146,400 310,100 1,456,500
2000................................................ 1,131,400 235,700 1,367,100
2001................................................ 853,700 120,300 974,000
Thereafter.......................................... 447,600 696,700 1,144,300
------------ ------------ ------------
$ 4,760,600 $ 1,678,800 $ 6,439,400
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Republic made payments to companies owned by directors of the Bank for the
construction of branches totaling $245,000, $711,000, and $11,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
19. SALE OF DEPOSITS AND BANKING CENTERS
During 1997, Republic entered into agreements to sell deposits totaling $180
million and fixed assets of $3.7 million associated with its Western Kentucky
banking centers. Loans originated by these banking centers, substantially all of
which have been retained.
Sales of four of the five banking centers were finalized during 1997,
resulting in a pretax gain of $7.5 million. The sale of the remaining banking
center was finalized during January 1998 for a pretax gain of $4.1 million. FHLB
advances of $36 million and $60 million were used, in part, to fund the 1997 and
1998 sales.
20. 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 continues to be insured
F-29
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
20. SAIF ASSESSMENT (CONTINUED)
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.
21. 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, 1997,
Republic had outstanding loan commitments totaling $106.9 million which includes
unused home equity lines of credit totaling $84.0 million. These commitments are
substantially all at variable rates.
At December 31, 1997, Republic's mortgage banking activities included
commitments to extend credit, primarily representing fixed rate mortgage loans,
totaling $31 million. Of commitments to originate loans, borrowers with
commitments totaling $7.5 million have elected to wait until closing to lock the
rate on the loan. Republic has also entered into forward commitments to deliver
loans into the secondary market of $16.7 million at December 31, 1997.
Standby letters of credit are conditional commitments issued by Republic to
guarantee the performance of a customer to a third party. The terms and risk of
loss involved in issuing standby letters of credit are similar to those involved
in issuing loan commitments and extending credit. Commitments outstanding under
standby letters of credit totaled $1.9 million for both December 31, 1997 and
1996.
22. 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
F-30
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
22. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.................. $ 24,546 $ 24,546 $ 56,671 $ 56,671
Securities available for sale.............. 93,826 93,826 107,937 107,937
Securities to be held to maturity.......... 98,546 98,540 173,918 173,695
Mortgage loans held for sale............... 9,970 10,070 7,624 7,700
Loans...................................... 794,939 796,577 759,424 761,915
FHLB stock................................. 8,124 8,124 5,548 5,548
Liabilities:
Deposits:
Certificates of deposit and individual
retirement accounts.................... $ 493,343 $ 495,776 $ 521,729 $ 521,333
Non interest-bearing accounts............ 65,913 65,913 66,969 66,969
Transaction accounts..................... 172,342 172,608 194,443 196,578
Securities sold under agreements to
repurchase and other short-term
borrowings............................... 111,137 111,134 181,634 181,428
Other borrowed funds..................... 124,405 124,403 106,974 107,134
Guaranteed preferred beneficial interests
in Republic's subordinated debentures.... 6,452 6,452
</TABLE>
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 FHLB
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 FHLB 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.
F-31
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
22. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEPOSITS--The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM
BORROWINGS--The carrying amount is a reasonable estimate of fair value.
GUARANTEED PREFERRED BENEFICIAL INTERESTS--The fair value is estimated based
on the estimated present value of future cash flows using the current rates at
which similar financings with the same remaining maturities could be obtained.
OTHER BORROWED FUNDS--The fair value is estimated based on the estimated
present value of future cash outflows using the current rates at which similar
loans with the same remaining maturities could be obtained.
COMMITMENTS TO EXTEND CREDIT--The fair value of commitments to extend credit
is based upon the difference between the interest rate at which Republic is
committed to make the loans and the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining
maturities, adjusted for the estimated volume of loan commitments actually
expected to close. The fair value of such commitments is not material.
COMMITMENTS TO SELL LOANS--The fair value of commitments to sell loans is
based upon the difference between the interest rates at which Republic is
committed to sell the loans and the current quoted secondary market price for
similar loans. The fair value of such commitments is not material.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. 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 such dates and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
F-32
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
23. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents............................................. $ 596 $ 551
Due from subsidiaries................................................. 2,220 542
Investment in subsidiaries............................................ 75,271 60,181
Repurchase agreements................................................. 851
Other................................................................. 20 21
--------- ---------
Total assets........................................................ $ 78,107 $ 62,146
--------- ---------
--------- ---------
Liabilities:
Long-term debt........................................................ $ 6,752 $ 1,638
Other................................................................. 2,969 1,489
--------- ---------
Total liabilities................................................... 9,721 3,127
--------- ---------
Stockholders' equity:
Preferred stock....................................................... 5,000
Common stock.......................................................... 3,613 3,491
Additional paid-in capital............................................ 10,833 6,817
Retained earnings..................................................... 53,994 43,930
Net unrealized depreciation on securities available for sale, net of
tax................................................................. (54) (219)
--------- ---------
Total stockholders' equity............................................ 68,386 59,019
--------- ---------
Total liabilities and stockholders' equity.............................. $ 78,107 $ 62,146
--------- ---------
--------- ---------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries................................... $ 4,446 $ 2,400 $ 2,000
Interest...................................................... 38 115 160
--------- --------- ---------
Total income................................................ 4,484 2,515 2,160
--------- --------- ---------
Expenses:
Interest expense.............................................. 590 166 218
Other expense................................................. 67 42 16
--------- --------- ---------
Total expenses.............................................. 657 208 234
--------- --------- ---------
Income before income taxes...................................... 3,827 2,307 1,926
Income tax benefit.............................................. 283 33 26
--------- --------- ---------
Income before equity in undistributed net income of
subsidiaries.................................................. 4,110 2,340 1,952
Equity in undistributed net income of subsidiaries.............. 8,149 387 5,836
--------- --------- ---------
Net income...................................................... $ 12,259 $ 2,727 $ 7,788
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-33
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
23. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income.................................................. $ 12,259 $ 2,727 $ 7,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed net income of subsidiaries.................. (8,149) (387) (5,836)
Change in due from subsidiaries........................... (1,678) (35) (220)
Change in other assets.................................... (38) (63) 1
Change in other liabilities............................... 1,480 (15) 850
--------- --------- ---------
Net cash provided by operating activities............... 3,874 2,227 2,583
--------- --------- ---------
Investment activities:
Purchases of repurchase agreements.......................... (55,292)
Purchase of common stock of subsidiary bank................. (6,775) (3,999)
Proceeds from maturities of repurchase agreements........... 889 3,999 50,507
--------- --------- ---------
Net cash used in investing activities..................... (5,886) (4,785)
--------- --------- ---------
Financing activities:
Sale of preferred stock..................................... 5,000
Dividends paid.............................................. (1,992) (1,899) (1,563)
Sale of common stock and stock options exercised............ 153 306
Purchase and retirement of common stock..................... (74)
Proceeds from issuance of guaranteed preferred beneficial
interests in Republic's subordinated debentures........... 6,752
Payments on long-term debt.................................. (1,638) (350) (987)
Retirement of preferred stock............................... (1,218)
--------- --------- ---------
Net cash provided by (used in) financing activities....... 2,057 (2,249) 2,682
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......... 45 (22) 480
Cash and cash equivalents, beginning of year.................. 551 573 93
--------- --------- ---------
Cash and cash equivalents, end of year........................ $ 596 $ 551 $ 573
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-34
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
24. SEGMENT INFORMATION
Republic's operations include two 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------------
MORTGAGE PARENT
BANKING BANKING COMPANY ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------ ------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Unaffiliated customers......................... $ 22,508 $ 277 $ 22,785
Intersegment................................... 198 $ 145 $ (343)
------------ ----------- ----------- ------------ ------------
Total interest income............................ 22,706 277 145 (343) 22,785
------------ ----------- ----------- ------------ ------------
Interest expense:
Unaffiliated customers......................... 12,278 137 12,415
Intersegment................................... 2 198 143 (343)
------------ ----------- ----------- ------------ ------------
Total interest expense........................... 12,280 198 280 (343) 12,415
------------ ----------- ----------- ------------ ------------
Net interest income.............................. 10,426 79 (135) 10,370
Provision for loan losses........................ 643 643
Non-interest income.............................. 5,999 913 6,912
Non-interest expense............................. 7,619 451 4 8,074
------------ ----------- ----------- ------------ ------------
Income (loss) before income taxes................ $ 8,163 $ 541 $ (139) $ 8,565
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
Identifiable assets.............................. $ 1,085,800 $ 26,756 $ 91,717 $ (91,697) $1,112,576
Depreciation and amortization of premises and
equipment...................................... $ 796 $ 42 $ 838
Capital expenditures............................. $ 1,771 $ 230 $ 2,001
</TABLE>
F-35
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
24. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------------------------------------
MORTGAGE PARENT
BANKING BANKING COMPANY ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------ ------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Unaffiliated customers......................... $ 22,485 $ 125 $ 22,610
Intersegment................................... 87 $ 89 $ (176)
------------ ----------- ----------- ------------ ------------
Total interest income............................ 22,572 125 89 (176) 22,610
------------ ----------- ----------- ------------ ------------
Interest expense:
Unaffiliated customers......................... 12,485 118 12,603
Intersegment................................... 8 87 81 (176)
------------ ----------- ----------- ------------ ------------
Total interest expense........................... 12,493 87 199 (176) 12,603
------------ ----------- ----------- ------------ ------------
Net interest income.............................. 10,079 38 (110) 10,007
Provision for loan losses........................ 1,298 1,298
Non-interest income.............................. 1,641 455 2,096
Non-interest expense............................. 7,632 305 58 7,995
------------ ----------- ----------- ------------ ------------
Income (loss) before income taxes................ $ 2,790 $ 188 $ (168) $ 2,810
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
Identifiable assets.............................. $ 1,083,761 $ 6,834 $ 77,642 $ (77,621) $1,090,616
Depreciation and amortization of premises and
equipment...................................... $ 1,032 $ 15 $ 1,047
Capital expenditures............................. $ 1,008 $ 20 $ 1,028
</TABLE>
F-36
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
24. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------
MORTGAGE PARENT
BANKING BANKING COMPANY ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Unaffiliated customers............... $ 90,458 $ 736 $ 91,194
Intersegment......................... 512 $ 551 $ (1,063)
------------ ----------- ----------- ------------ ------------
Total interest income.................. 90,970 736 551 (1,063) 91,194
------------ ----------- ----------- ------------ ------------
Interest expense:
Unaffiliated customers............... 50,287 569 50,856
Intersegment......................... 38 512 513 (1,063)
------------ ----------- ----------- ------------ ------------
Total interest expense................. 50,325 512 1,082 (1,063) 50,856
------------ ----------- ----------- ------------ ------------
Net interest income.................... 40,645 224 (531) 40,338
Provision for loan losses.............. 7,251 7,251
Non-interest income.................... 16,631 2,299 18,930
Non-interest expense................... 31,491 1,322 67 32,880
------------ ----------- ----------- ------------ ------------
Income (loss) before income taxes...... $ 18,534 $ 1,201 $ (598) $ 19,137
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
Identifiable assets.................... $ 1,044,376 $ 10,554 $ 84,996 $ (84,976) $1,054,950
Depreciation and amortization of
premises and equipment............... $ 4,566 $ 117 $ 4,683
Capital expenditures................... $ 3,218 $ 446 $ 3,664
</TABLE>
F-37
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
24. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------
MORTGAGE PARENT
BANKING BANKING COMPANY ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
F-38
<PAGE>
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
24. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------
MORTGAGE PARENT
BANKING BANKING COMPANY ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
F-39
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 12
Use of Proceeds........................................................... 19
Capitalization............................................................ 19
Dilution.................................................................. 20
Dividend Policy........................................................... 21
Limited Trading Market.................................................... 22
Selected Consolidated Financial Data...................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Principal Shareholders.................................................... 54
Selling Shareholder....................................................... 55
Management................................................................ 56
Certain Relationships and Related Transactions............................ 61
Supervision and Regulation................................................ 62
Description of Capital Stock.............................................. 69
Shares Eligible for Future Sale........................................... 74
Underwriting.............................................................. 75
Legal Matters............................................................. 77
Experts................................................................... 77
Available Information..................................................... 78
Index to Consolidated Financial Statements................................ F-1
</TABLE>
2,140,000 SHARES
[LOGO]
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
MORGAN KEEGAN &
COMPANY, INC.
J.J.B. HILLIARD, W.L. LYONS, INC.
JULY 21, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
