Republic Bancorp Inc.
Annual Report 2001

Plain-text annual report

A N N UA L R E PO RT 2 001 Republic Bancorp, Inc. (“Republic” or “the Company”) is a bank holding company headquartered in Louisville, Kentucky. The Company derives substantially all of its revenue and income from the operation FINANCIAL HIGHLIGHTS (dollars in thousands, except per share data) 2001 2000 Years Ended December 31, of its wholly owned subsidiaries, Republic Bank & Trust Company – a Kentucky chartered bank and trust Income Statement Data company and Republic Bank & Trust Company of Indiana – an Indiana chartered bank and trust company (collectively “Bank”). Republic’s Class A Common Stock trades on the NASDAQ Stock Market® under the symbol RBCAA. At the end of 2001, Republic Bank & Trust Company had 21 full-service banking centers, 11 of which were located in the metropolitan Louisville area, including the Company’s principal office. There were four banking centers located in Lexington, Kentucky, two in Frankfort, Kentucky and one each in the Kentucky communities of Bowling Green, Elizabethtown, Owensboro and Shelbyville. Republic Bank & Trust Company of Indiana had one full-service banking center located in Clarksville, Indiana at the end of 2001. At the close of 2001, Republic had assets of $1.6 billion, making the corporation the fourth-largest independent bank holding company in Kentucky. LOCATIONS Louisville, KY 11 Lexington, KY Frankfort, KY Bowling Green, KY Clarksville, IN Elizabethtown, KY Owensboro, KY Shelbyville, KY Indicates principal office 4 2 1 1 1 1 1 Clarksville Shelbyville Frankfort Lexington Louisville Owensboro Elizabethtown Bowling Green Interest income Interest expense Net interest income Provision for loan losses Non-interest income Non-interest expense Income before taxes and extraordinary item Extraordinary item Net income Balance Sheet Data Total assets Total securities Total loans, net Allowance for loan losses Total deposits Repurchase agreements and other short-term borrowings Other borrowed funds Total stockholders’ equity Per Share Data Basic Class A Common earnings per share Basic Class B Common earnings per share Diluted Class A Common earnings per share Diluted Class B Common earnings per share Book value(1) Cash dividends declared per Class A Common Cash dividends declared per Class B Common Performance Ratios Return on average assets Return on average common equity Net interest margin Efficiency ratio (1) Exclusive of accumulated other comprehensive income. $ 117,396 57,917 59,479 3,493 19,741 49,291 26,436 686 16,808 $1,590,831 293,945 1,176,094 8,607 866,358 282,023 296,950 125,115 $ 1.04 1.03 1.01 0.99 7.75 0.18 0.16 1.10% 13.85 4.04 62 $ 118,660 66,851 51,809 1,382 8,859 40,029 19,257 12,921 $ 1,508,072 275,568 1,136,531 7,862 863,761 263,001 246,050 116,942 $ 0.78 0.77 0.76 0.75 7.06 0.15 0.14 0.89% 11.77 3.71 66 $ 1999 97,157 49,552 47,605 1,806 10,084 37,383 18,500 12,252 $ 1,368,983 214,558 1,031,512 7,862 800,909 215,718 231,383 103,770 $ 0.73 0.72 0.71 0.69 6.46 0.12 0.11 0.98% 11.90 3.96 65 1 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 TABLE OF CONTENTS 2 Letter to Shareholders 17 Selected Financial Data 34 Consolidated Financial Statements 39 Notes to Consolidated Financial Statements 18 Management’s Discussion and Analysis 59 Corporate Information 33 Report of Independent Auditors LETTER TO SHAREHOLDERS Our mortgage banking performance was spectacular during 2001. As long-term interest rates declined during the year, consumer demand shifted to fixed-rate mortgage loan products. Republic was at the leading edge in its response to this demand with the introduction of our “$999” product in November 2000. 2 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I It is with great pleasure that I report to you Republic Bancorp’s banner year in 2001. Record earnings, an expanded and diverse product mix, industry-leading advancements in technology and market opportunism were rewarded with a doubling of our stock price. The year 2001 has proven that good strategy combined with great people is a formula for success as we continue to depend on our 500 plus associates to deliver quality products with maximum effort in a timely and caring manner. We enter 2002 with much focus and optimism armed with a workforce whose efforts make what we do work. Net income at Republic grew over 30 percent to $16.8 million in 2001, compared to $12.9 million in 2000. Diluted earnings per Class A Common share increased 33 percent to $1.01. Excluding an extraordinary charge for the early pay-off of advances from the Federal Home Loan Bank, net income increased $4.6 million to $17.5 million and diluted earnings per Class A Common share increased from $0.76 to $1.05.The rise in earnings was primarily a result of increased net interest income, gains on the sale of loans into the secondary market, gains on securities’ sales and deposit fees. Net interest income grew to $59.5 million in 2001, an increase of 15 percent over the previous year. We realized this growth in net interest income through an increase in average loans outstanding, a continued shift into lower cost deposits and borrowings as well as a decline in market interest rates. As part of our asset/liability management strategy during 2001, we extended the maturity of our advances from the Federal Home Loan Bank thereby reducing our exposure to future market interest rate fluctuations. Steven E.Trager President & CEO 3 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 $ 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 $ 60,000 50,000 40,000 30,000 20,000 $ 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 Net Income Excluding extraordinary item (In Thousands) 99 00 01 Net Interest Income (In Thousands) 99 00 01 Book Value Per Share Excluding accumulated other comprehensive income 99 00 01 4 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I (standing L to R) Janice Kingsolver, V.P. - Loan Operations, Mark Collins, V.P. - Mortgage Banking, (seated L to R) Shannon Reid, Sr. V.P. - Loan Administration, Donna Blincoe, V.P. - Loan Operations WE ATTAINED RECORD GAINS OF $6,200,000 BY SELLING OVER $517,000,000 OF FIXED-RATE LOANS INTO THE SECONDARY MARKET The “$999” product caps closing costs on secondary market loans at $999.Through aggressive marketing, we captured a significant share of home finance activity in our markets. Capitalizing on the home finance activities, we attained record gains of $6.2 million by selling over $517 million of fixed-rate loans into the secondary market. Our non-interest income from deposits also increased nicely during 2001. Service charges on deposits this year were $6.3 million an increase of $1.9 million over 2000. The strong showing in non-interest income from deposits was the direct result of growth in our personal checking accounts and the “Overdraft Honor” program. We added over 11,800 personal checking accounts during 2001 through our targeted direct mail free checking/free gift promotion. Secondary Market Loan Originations (dollars in millions) 1999 2000 2001 $177 $110 $547 $ 0 100 200 300 400 500 600 5 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 Chip Hancock Sr.V.P. - Corporate Center Jill Napier V.P. - Fern Creek Mike Elles V.P. - Springhurst David Vest Executive V.P. - Lending Initiative: MORTGAGE BANKING Through the $999 product Republic sold over 4,700 secondary market loans, many of which were new clients to the Company. Republic maximized these new relationships by cross selling many of the Bank’s other products and services.To receive the reduced $999 closing costs, clients were required to open their primary checking account with the Bank. In addition, the Bank was able to open nearly $69 million in new home equity lines of credit with $38 million of these lines in use at year-end. 6 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I (standing L to R) Craig Dunn, Sr. V.P. - Commercial Lending, Jenifer Duncan, Sr. V.P. - Perimeter, Paul Finley, V.P. - Andover, (seated L to R) John Mauldin, Sr. V.P. - Commercial Lending, Bob McQueary, V.P. - Chevy Chase, Mike Marks, Exec. V.P. - Lexington, Billy Blair, V.P. - Harrodsburg Rd. In addition to our success in personal banking, we continued to focus on the development of long-term relationships with the business community. Our commercial lending area experienced a strong increase in commercial real estate loans despite a high level of refinance activity during the year. Overall, commercial real estate loans grew by 40 percent to $360 million at December 31, 2001. Commercial real estate lending was complemented by the continued growth of our corporate cash management area. Cash management accounts increased 24 percent during 2001 to 7,060 while the balances in these accounts increased 17 percent to $370 million.We are proud of our accomplishments in these areas and remain excited about their future growth opportunities. During 2001, we continued our efforts at making banking with Republic easier for our clients through the use of technology. In November, we began offering our clients the ability to receive their monthly checking statements via e-mail. During December, our associates began responding to our internet clients through a very popular “live chat” WE ADDED OVER 11,800 PERSONAL CHECKING ACCOUNTS DURING 2001 Non-Interest Income From Deposits (in thousands) 1999 2000 2001 $3,653 $4,410 $6,267 $ 0 1000 2000 3000 4000 5000 6000 Patty Walls Manager - Overdraft Honor Michael Sadofsky Sr.V.P. - Marketing Greg Williams Sr.V.P. - Chief Investment Officer Initiative: OVERDRAFT HONOR Republic recognizes that sometimes good clients run short on cash.To assist these clients, the Bank introduced the “Overdraft Honor” program. Overdraft Honor allows qualified individuals to overdraw their accounts up to $500 for the Bank’s customary fee, thus avoiding the embarrassment and excess costs of returned checks. At the end of 2001, Republic had nearly 25,000 clients eligible for the Overdraft Honor Program and expects this number to continue to grow in conjunction with the Bank’s aggressive marketing strategy for personal checking accounts. 7 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 COMMERCIAL REAL ESTATE LOANS INCREASED $103,000,000 WHILE THE NUMBER OF CASH MANAGEMENT ACCOUNTS INCREASED 24% TO 7,060 Initiative: BUSINESS BANKING John Mason Sr.V.P. - Preferred Client Services Darryl Witten Sr.V.P. - Commercial Lending Andy Powell Sr.V.P. - Commercial Lending Steve DeWeese Sr.V.P. - Hurstbourne 8 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Republic continues to grow its business banking services and products, as well as its dedicated sales force. The Bank’s commercial lending area offers a full line of fixed and variable rate products including operating lines of credit, equipment loans and leasing, real estate refinance or purchase and SBA loans. The Cash Management area offers a full array of products and services, as well, including small business checking, analysis checking, sweep accounts, business on-line banking and lockbox processing. feature over the web.The response from our client base was tremendous.The number of individuals transacting business via the internet increased 35 percent to over 10,000, while the number of on-line business banking clients tripled to over 1,200. We are pleased with this growth, and will continue with our commitment to enhancing our clients’ banking experience through the use of technology. We continue to look for new and innovative ways to increase Republic’s profitability through non-traditional banking initiatives. Our subsidiary, Refunds Now, processed a record number of tax refunds during 2001 with the help of a 90 percent increase in our tax preparer client base nationwide.We remain optimistic about our potential for growth in the tax refund business through our aggressive marketing strategies. 9 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 (L to R) Genie Stamper, A.V.P. - Cash Management, Cathy Slider, Sr. V.P. - Cash Management 10 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I In July, Republic became a 40 percent owner in the Patriot Group, LLC, a newly formed certified minority business enterprise - independent insurance agency, which specializes in property and casualty lines of insurance.We believe the Patriot Group will provide additional cross sell opportunities with our cash management, commercial real estate lending and personal banking areas.We also continue to expand our personal life insurance products through a joint venture with a Kentucky based insurance agency. Initiative: REFUNDS NOW Kelly Jackson V.P. - Bowling Green Shirley Cecil V.P. - Owensboro Kathy Potts Sr.V.P. - St. Matthews Eric Higdon V.P. - Brownsboro Rd. fi REFUNDS NOW PROCESSED A RECORD NUMBER OF TAX REFUNDS THROUGH A 90% INCREASE IN OUR TAX PREPARER CLIENT BASE Refunds Now allows tax filers the opportunity to receive their refunds from federal and state governments electronically through various bank products. Through Refunds Now, tax preparers are able to offer to their clients Refund Anticipation Loans, Advance Refund Deposits, Electronic Refund Checks and Electronic Refund Deposits. These products are designed to allow the taxpayer to receive his or her refunds more quickly than traditional paper filing methods. Revenue for these products totaled $5.2 million during 2001. In addition to our new insurance products, Republic began offering securities brokerage services. In November, the Company introduced Ultra Cash®, a stored value card designed to help non-resident individuals working in the U.S. protect and access their funds in a secure, inexpensive way. We continue to look for more opportunities in the non-traditional banking arena in order to profitably expand our product line to serve prospective customers’ needs. (L to R) Bill Nelson, Sr. V.P. - Refunds Now, Mike Keene, Sr. V.P. - eCommerce/Refunds Now, Alan Lodge, Sr. V.P. - Refunds Now 11 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 Accompanying our growing product mix, we also continue to expand geographically. While 2001 will always be remembered for the tragic events which occurred on During May, we opened a newly chartered bank in southern Indiana, which allowed us to September 11th in New York City and Washington D.C., it will also be remembered for enhance our banking services to our existing southern Indiana clients while opening the America’s resolve in the face of adversity. I am proud to say that our associates, in door to many potential clients just across the Ohio River from Louisville.The new bank conjunction with a local radio station in Louisville, helped raise $55,000 for the “Attack was so successful during its first eight months of operation, we applied for and received permission to open an additional banking center in New Albany, Indiana during the first quarter of 2002.We also announced plans to open two additional banking centers in Louisville during 2002 as we seek to expand our market presence in the coming years. Our success was recognized by the investing public during 2001 resulting in an increase in our stock price of 118 percent during the year. In addition, our stock was added to the Russell 3000 index, which measures the performance of the 3,000 largest U.S. companies based on total market capitalization.We are very proud of these accomplishments, which represent healthy steps on the road to continued long-term prosperity for us and our shareholders. Initiative: OTHER NON-TRADITIONAL BANKING SERVICES With the passage of the Gramm-Leach- Bliley act, Republic has elected to become a “financial holding company”.This status allows Republic to offer a full array of insurance and brokerage products and services to its client base, including access to equity markets, commercial property and casualty insurance, as well as, personal life and health insurance. Republic also continues to pursue opportunities in programs associated with technology based stored-value cards, such as Ultra Cash and the direct deposit of government payments to card-based accounts. 12 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Andy Parker V.P. - Commercial Lending Carolle Jones Clay V.P. - Community Relations Director Jeff Nelson V.P. - Bank Administration 13 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 REPUBLIC CONTINUES TO SEEK INCOME OPPORTUNITIES OUTSIDE THE REALM OF TRADITIONAL BANKING PRODUCTS (L to R) L. J. Panther, Investment Rep. - Republic Brokerage Services, Sonia Perez, Customer Service Supervisor - Ultra Cash, Lawrence Herring, Pres. and CEO - The Patriot Group 14 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I (L to R) Kari Thom, Banking Center Manager - Clarksville, Todd Lancaster, A.V.P. - Charlestown Rd. REPUBLIC PLANS EXPANSION TO 25 BANKING CENTERS IN 2002 Initiative: EXPANSION Colleen Decker V.P. - Clarksville Greg Siegrist V.P. - Clarksville Jonathan Payne V.P. - Fern Creek As a result of our successes with recent de novo banking centers, including a newly chartered Bank in southern Indiana, Republic has announced plans to open three new banking centers in 2002 in the southern Indiana and Louisville areas. The Company seeks opportunities to open at least two additional banking center locations in its existing markets during the next 12 to 18 months. Republic also continues to search for potential acquisition targets, which will enhance both net income and shareholder value. on America” relief fund. I can think of no better way to describe the dedication of our associates to our community and country. I invite you, along with your family and friends, to come in and meet our dedicated associates face-to-face and experience a commitment to community and service that is unmatched. Thank you for your continued confidence and support. Sincerely, Steven E. Trager President and Chief Executive Officer 15 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 TABLE OF CONTENTS 17 Selected Consolidated Financial Data 18 Management’s Discussion and Analysis 33 Report of Independent Auditors 34 Consolidated Financial Statements 39 Notes to Consolidated Financial Statements 59 Corporate Information 16 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth Republic’s selected historical financial information from 1997 through 2001.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 in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” 2001 2000 1999 1998 1997 Years Ended December 31, (dollars in thousands, except per share data) Income Statement Data: Interest income Interest expense Net interest income Provision for loan losses Non-interest income Gain on sale of deposits Gain on sale of Bankcard Non-interest expense Income before taxes and extraordinary item Extraordinary item Net income Balance Sheet Data: Total assets Total securities Total loans, net Allowance for loan losses Total deposits Repurchase agreements and other short-term borrowings Other borrowed funds Total stockholders’ equity $ $ 117,396 57,917 59,479 3,493 19,741 49,291 26,436 686 16,808 $ 1,590,831 293,945 1,176,094 8,607 866,358 282,023 296,950 125,115 118,660 66,851 51,809 1,382 8,859 40,029 19,257 12,921 $ 97,157 49,552 47,605 1,806 10,084 37,383 18,500 12,252 $ 92,667 50,174 42,493 3,110 11,396 4,116 33,533 21,362 13,756 $ 91,194 50,856 40,338 7,251 7,743 7,527 3,660 32,880 19,137 12,259 $ 1,508,072 275,568 1,136,531 7,862 863,761 263,001 246,050 116,942 $ 1,368,983 214,558 1,031,512 7,862 800,909 215,718 231,383 103,770 $ 1,207,684 216,921 870,031 7,862 747,147 148,659 190,222 103,842 $ 1,054,950 192,372 794,939 8,176 731,598 111,137 124,405 68,386 Per Share Data: Basic Class A Common earnings per share Basic Class B Common earnings per share Diluted Class A Common earnings per share Diluted Class B Common earnings per share Book value(1) Cash dividends declared per Class A Common Cash dividends declared per Class B Common $ Performance ratios: Return on average assets Return on average common equity Net interest margin Efficiency ratio Asset quality ratios: Non-performing assets to total loans Net loan charge-offs to average loans Allowance for loan losses to total loans Allowance for loan losses to non-performing loans Capital ratios: Average stockholders’ equity to average total assets Tier 1 leverage ratio Tier 1 risk-based capital ratio Total risk-based capital ratio Dividend payout ratio Other key data: End-of-period full-time equivalent employees Number of bank offices $ 1.04 1.03 1.01 0.99 7.75 0.18 0.16 1.10% 13.85 4.04 62 0.48% 0.23 0.73 154 7.96% 8.36 12.44 13.26 14 532 22 $ 0.78 0.77 0.76 0.75 7.06 0.15 0.14 0.89% 11.77 3.71 66 0.40% 0.12 0.69 193 7.58% 8.13 12.01 12.78 19 462 22 $ 0.73 0.72 0.71 0.69 6.46 0.12 0.11 0.98% 11.90 3.96 65 0.38% 0.19 0.76 213 8.27% 8.61 13.36 14.28 16 467 21 $ 0.87 0.86 0.83 0.82 6.03 0.11 0.10 1.20% 15.82 3.84 62(2) 0.63% 0.40 0.89 158 7.58% 9.29 14.63 15.68 13 425 19 0.82 0.81 0.79 0.78 4.58 0.11 0.10 1.12% 18.81 3.85 68(3) 0.90% 0.66 1.02 115 5.97% 6.99 10.57 11.73 13 418 18 (1) Exclusive of accumulated other comprehensive income. (2) Excludes pre-tax gain of $4.1 million on sale of deposits. (3) Excludes pre-tax gain of $7.5 million on sale of deposits and pre-tax gain of $3.7 million on sale of Bankcard. 17 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Management's Discussion and Analysis of Financial Condition and Results of Operations of Republic Bancorp, Inc. (“Republic” or “the Company”) analyzes the major elements of Republic's balance sheets and statements of income. Republic, a bank holding company headquartered in Louisville, Kentucky, is the parent of Republic Bank & Trust Company and Republic Bank & Trust Company of Indiana (collectively “Bank”).This section should be read in conjunction with the Company's Consolidated Financial Statements and accompanying Notes and other detailed information. This discussion includes various forward-looking statements with respect to credit quality (including but not limited to delinquency trends and the adequacy of the allowance for loan losses), corporate objectives, the Company’s interest rate sensitivity model and other financial and business matters.When used in this discussion the words "anticipate," "proj- ect," "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 Annual Report, 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; market acceptance of the Bank's products and services; and, the extent and timing of legislative or regulatory actions and reforms. HIGHLIGHTS Republic reported earnings of $16.8 million during 2001 compared with $12.9 million for 2000, an increase of 30%. Diluted earnings per Class A Common share increased 33% to $1.01. Excluding an extraordinary charge for the early extinguishment of long-term debt, net income increased $4.6 million to $17.5 million and diluted earnings per Class A Common share increased from $0.76 to $1.05.The rise in earnings for 2001 was primarily attributable to increased net interest income, gains on the sale of loans into the secondary market, gains on securities sales and non-interest income from deposits. Republic’s book value per common share, exclusive of accumulated other comprehensive income, increased from $7.06 at December 31, 2000 to $7.75 per share at December 31, 2001. The following table summarizes selected financial information regarding Republic’s financial performance: Table 1 - Summary (dollars in thousands) Net income before extraordinary item Net income Diluted Class A earnings per share before extraordinary item Diluted Class A earnings per share ROA ROE 2001 $17,494 16,808 Years Ended December 31, 2000 $ 12,921 12,921 1999 $ 12,252 12,252 1.05 1.01 1.10% 13.85 0.76 0.76 0.89% 11.77 0.71 0.71 0.98% 11.90 Republic experienced modest growth in total assets during 2001 as the majority of the Bank’s loan origination volume was in fixed rate secondary market loan products.The Bank was able to offset a decline of $62 million in the residential real estate portfolio from refinancings into secondary market loan products and portfolio loan amortization by growing the commercial real estate portfolio $103 million during the year. Funding for the growth in the loan portfolio was derived from deposits, repurchase agreements and Federal Home Loan Bank advances. Deposits and repurchase agreements increased $26 million during 2001.A significant portion of this increase was in lower cost deposits such as non-interest bearing and money market certificate of deposit accounts as many customers elected to shift from longer term retail certificates of deposit. Republic’s corporate cash management accounts reflected a 17% increase in balances over year-end 2000. FHLB advances increased from $246 million at December 31, 2000 to $297 million at December 31, 2001. During 2001 Republic continued to expand its banking center locations by chartering a new full service bank in the state of Indiana, with expansion into a second Indiana banking center location planned for the first half of 2002. It is expected that these two new banking centers in the state of Indiana will be well positioned to attract new clients from this market area.The Bank also plans to open two additional full service banking centers by the end of the second quarter in its Kentucky market. Refunds Now® Refunds Now is a tax refund processing service for taxpayers receiving both federal and state tax refunds through a nationwide network of tax preparers. Refund anticipation loans (“RALs”) are made to taxpayers filing income tax returns electronically.The RALs are repaid by the taxpayer when the taxpayers’ refunds are electronically received by the Bank from governmental taxing authorities. Fees from RALs are included in interest income on loans. Refunds Now also provides electronic refund checks (“ERCs”) to taxpayers.After receiving refunds electronically from governmental taxing authorities, checks are issued to taxpayers for the amount of their refund, less fees. Fees on ERCs are included in non- interest income. RAL fees, net of tax preparer rebates, were $3.1 million in 2001 compared to $2.4 million in 2000. ERC fees, net of tax preparer rebates, were $2.1 million in 2001 compared to $1.1 million in 2000.The rise in fee income was the result of an increase in volume. During the 2001 tax season, total tax offices serviced by Refunds Now increased 90% over the 2000 tax season. 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 as well as market interest rates. For 2001, net interest income was $59.5 million, up $7.7 million over the $51.8 million attained during 2000. Republic was able to increase its net interest income through higher loan volume and an improved interest rate margin compared to 2000. (For further analysis see Volume/Rate Variance Analysis of this report.) Republic’s increase in net interest income resulting from changes in volume occurred primarily on the asset side from growth in the loan portfolio during the latter half of 2000 as well as an increase in Refund Anticipation Loans during the 2001 tax season. Republic also experienced an increase of approximately $11 million in the average outstandings of loans available for sale during 2001, which are included as a part of total loans on the average balance sheet and volume/rate analyses. On the liability side, Republic pursued a strategy during 2001 of extending maturities, primarily through advances at the Federal Home Loan Bank, and not pursuing higher cost certificates of deposit.This strategy resulted in many of the Bank’s clients electing to move maturing CD’s into short-term, interest bearing money market CD accounts in anticipation of future interest rate increases.As a result, the change in interest expense due to volume was only a slight increase as the reduction in CD’s was offset by the increase in the money market certificate of deposit accounts, along with other borrowings. The increase in net interest income resulting from changes in rate occurred as the Federal Reserve decreased short-term interest rates throughout 2001.All categories of interest income experienced a reduction due to rate and primarily all categories of interest expense experienced a reduction due to rate as well. Because Republic’s interest bearing liabilities generally have a shorter repricing frequency than its interest earning assets, the overall effect to the Company was an increase in net interest income due to an improved spread during 2001. Management believes short- term rate reductions by the Federal Reserve in the near-term, if any, may not continue to have the positive effect on net interest income that occurred during 2001.This is due to the fact that the already low rates on the Company’s interest bearing transaction accounts may not be subject to further corresponding rate reductions, even should market rates reduce from current levels. (For further discussion see Asset/Liability Management and Market Risk of this report.) 19 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For 2000, net interest income was $51.8 million, up $4.2 million over the $47.6 million attained during 1999.The growth in net interest income during 2000 was primarily attributable to increased volume, particularly in commercial real estate lending.The increase in net interest income due to changes in volume was substantially offset by a decline in net interest income due to changes in rate. Market interest rates generally increased from year-end 1999 through December 31, 2000. Short-term rates generally increased more than long-term rates during that time period.This caused the Company’s interest-bearing liabilities, which are typically tied to shorter-term market indices, to reprice faster at higher rates during 2000 than its interest earning assets, which are generally tied to longer-term indexes. Table 2 provides detailed information as to average balances, interest income/expense, and rates by major balance sheet category for 1999 through 2001.Table 3 provides an analysis of the changes in net interest income attributable to changes in rates and changes in volume of interest-earning assets and interest-bearing liabilities. Table 2 - Average Balance Sheets and Rates for Years Ended December 31, 2001 Average Balance Interest Average Average Balance Rate 2000 Interest Average Average Balance Rate 1999 Interest Average Rate $ 66,247 $ 3,574 5.39% $ 121,296 $ 7,155 5.90% $ 127,492 $ 6,938 5.44% 20 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I (dollars in thousands) ASSETS Earning assets: U.S.Treasury and U.S. Government Agency Securities State and political subdivision securities Mortgage-backed securities Other investments Federal funds sold Total loans and fees(1) 232 159,495 27,153 34,254 1,185,945 11 8,606 1,735 1,146 102,324 Total earning assets 1,473,326 117,396 Less:Allowance for loan losses (8,061) Non-earning assets: Cash and due from banks Bank premises and equipment, net Other assets Total assets 27,756 19,462 12,497 $1,524,980 LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Transaction accounts Money market accounts Individual retirement accounts Certificates of deposits and other time deposits Repurchase agreements and $ 214,528 111,357 33,612 379,057 $ 4,907 3,931 1,972 21,896 4.74 5.40 6.39 3.35 8.63 7.97 1,954 116,764 33,937 11,140 1,111,356 181 7,956 2,257 689 100,422 1,396,447 118,660 9.26 6.81 6.65 6.18 9.04 8.50 (7,862) 25,785 19,580 14,422 $1,448,372 339 4,015 2,104 180 83,581 97,157 8.66 6.42 6.13 5.16 8.64 8.09 3,915 65,493 32,781 3,487 967,751 1,200,919 (7,911) 20,931 17,597 13,552 $1,245,088 2.29% $ 144,034 $ 4,426 5,792 114,675 3.53 1,811 30,884 5.87 3.07% $ 124,435 139,567 5.05 26,359 5.86 $ 3,311 6,285 1,407 2.66% 4.50 5.34 5.78 441,581 25,492 5.77 414,406 21,683 5.23 other short-term borrowings Other borrowings 251,068 282,879 Total interest bearing liabilities 1,272,501 8,529 16,682 57,917 3.40 5.90 4.55 243,582 249,315 1,224,071 13,819 15,511 66,851 5.67 6.22 5.46 129,903 207,687 1,042,357 5,656 11,210 49,552 4.35 5.40 4.75 Non-interest bearing liabilities: Non-interest bearing deposits Other liabilities Stockholders' equity Total liabilities and 116,409 14,748 121,322 101,584 12,983 109,734 87,760 12,002 102,969 stockholders' equity $1,524,980 $1,448,372 $1,245,088 Net interest income Net interest spread Net interest margin $ 59,479 $ 51,809 $ 47,605 3.42% 4.04% 3.04% 3.71% 3.34% 3.96% (1) The amount of fee income included in interest on loans was $5,593; $3,520 and $2,050 for the years ended December 31, 2001, 2000, and 1999, respectively. Table 3 illustrates 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 vol- ume 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 pro- portionately to the changes due to volume and the changes due to rate. Table 3 - Volume/Rate Variance Analysis (in thousands) Interest income: U.S.Treasury and Government Agency Securities State and political subdivision securities Mortgage backed securities Other investments Federal funds sold Total loans and fees Year Ended December 31, 2001 compared to Year Ended December 31, 2000 INCREASE/(DECREASE) Due to Year Ended December 31, 2000 compared to Year Ended December 31, 1999 INCREASE/(DECREASE) Due to Total Net Change $ (3,581) (170) 650 (522) 457 1,902 Volume Rate $(3,014) (109) 2,525 (436) 892 6,558 $ (567) (61) (1,875) (86) (435) (4,656) Total Net Change $ 217 (158) 3,941 153 509 16,841 Volume Rate $ (348) (180) 3,450 76 467 12,840 $ 565 22 491 77 42 4,001 Total increase (decrease) in interest income (1,264) 6,416 (7,680) 21,503 16,305 5,198 Interest expense: Interest bearing transaction accounts Money market accounts Individual retirement accounts Certificates of deposit and other time deposits Repurchase agreements and other short-term borrowings Other borrowings 481 (1,861) 161 (3,596) (5,290) 1,171 1,802 (163) 160 (3,612) 413 2,010 (1,321) (1,698) 1 16 (5,703) (839) 1,115 (493) 404 3,809 8,163 4,301 Total increase (decrease) in interest expense (8,934) 610 (9,544) 17,299 562 (1,202) 257 1,479 6,064 2,442 9,602 553 709 147 2,330 2,099 1,859 7,697 Increase (decrease) in net interest income $ 7,670 $ 5,806 $ 1,864 $ 4,204 $ 6,703 $ (2,499) Non-Interest Income Non-interest income was $19.7 million during 2001, $8.9 million during 2000, and $10.1 million during 1999.The increased level of non-interest income during 2001 occurred in substantially all categories with the most significant increase in net gain on sale of mortgage loans.The decrease from 1999 to 2000 was primarily due to a reduction of the gains generated from sales of loans into the secondary market and sales of investment securities. 21 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Table 4 - Analysis of Non-Interest Income Non-Interest Expense (dollars in thousands) Service charges on deposit accounts Electronic refund check fees Title insurance commissions Net gain on sale of mortgage loans Net gain (loss) on available for sale securities Other Total Years Ended December 31, 2000 1999 2001 $ 6,267 2,087 1,515 6,191 1,864 1,817 $19,741 $ 4,410 1,070 298 1,417 (161) 1,825 $ 8,859 $ 3,653 1,238 2,974 184 2,035 $10,084 Percent Increase/(Decrease) 2001/2000 2000/1999 42% 95 408 337 NM 0 123 21% (14) (10) (52) (188) (10) (12) Total non-interest expense increased by 23% to $49.3 million in 2001 compared to $40.0 million in 2000. Significant factors impacting this increase included an increase in overtime and staffing levels as well as increased marketing efforts for the Bank’s promotional products. Non-interest expense increased from $37.4 million in 1999 to $40.0 million in 2000.The increase in 2000 was primarily attributable to expansion activities. Moderate increases in non-interest expense are likely to continue going forward as Republic anticipates opening a minimum of three additional banking centers in 2002. 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).A lower efficiency ratio is indicative of higher bank performance. Republic's efficiency ratio was 62% in 2001 compared to 66% in 2000 and 65% in 1999. 22 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Service charges on deposit accounts were positively affected by the Bank’s “Overdraft Honor” program and an increase in the number of retail checking accounts during 2001. Overdraft related fees increased $1.8 million during 2001 as the Company added over 11,800 new retail checking accounts during the year.The “Overdraft Honor” program permits selected clients to overdraft their accounts up to $500 for the Bank’s customary fee. At December 31, 2001, the Bank had nearly 25,000 accounts eligible for the “Overdraft Honor” program. The Bank receives substantially all Electronic Refund Check fees during the first quarter of the fiscal year. Electronic Refund Check fees increased $1.0 million during 2001 over 2000, due to a 64% increase in overall ERC volume compared to the prior year resulting from successful marketing efforts during the last half of 2000.The Company plans to continue its aggressive marketing strategies in order to increase its overall market share in this line of business. Title insurance commissions increased $1.2 million for 2001 over 2000. Because the Bank first began offering this product on July 1, 2000, the 2000 amount reflects only six months of activity.As a result, title insurance commissions for 2001 reflect a significant increase over 2000.The large volume of refinance activity in 1-4 family residential real estate loans during 2001 also contributed to the increase for the year as well. Net gain on sale of loans increased 337% during 2001 as declining market interest rates prompted an increase in consumer refinance activity of 1-4 family fixed-rate residential loans, which Republic generally sells into the secondary market. Revenue from mortgage banking activities, principally gains on sale of loans, increased as a result of increased secondary market sales volume.As a percentage of loans sold, net gains on sale decreased to 1.20% in 2001 compared to 1.26% in 2000 and 1.43% in 1999.This reduction was due primarily to a promotional mortgage loan product that reduced the amount of fees charged to the client. Although the reduced fees reduced the net margin on average loan sales, the promotional program has generated significant origination volume. Overall, the Bank originated $548 million in mortgage loans held for sale during 2001 compared to $110 million during 2000. Management anticipates that the level of 1-4 family refinancing volume will continue at or near current levels during the first quarter of 2002. A declining interest-rate environment during 2001 also led to an increase in the market value of the available for sale securities portfolio. Republic received proceeds of $122 million on securities available for sale during 2001 resulting in overall gains of approximately $1.6 million. Republic also had $63 million in securities that were called during 2001 resulting in recognized gains of an additional $257,000. (For further analysis, see discussion on Investment Securities.) The decrease in non-interest income from 1999 to 2000 was primarily in the net gain on sale of mortgage loans category.This decrease occurred as a generally rising long-term interest rate environment during 2000 significantly reduced the origination volume of fixed-rate, 1-4 family residential real estate loans that Republic generally sells into the secondary market. Table 5 - Analysis of Non-Interest Expense (dollars in thousands) Salaries and employee benefits Occupancy and equipment Communication and transportation Marketing and development Bankshares tax Legal fees Supplies Other Total Year Ended December 31, 2000 1999 2001 $ 25,943 9,073 2,319 2,839 1,513 944 1,170 5,490 $ 49,291 $ 20,519 8,825 2,084 1,555 1,339 353 994 4,360 $ 40,029 $ 20,661 7,632 1,716 1,266 811 281 940 4,076 $ 37,383 Percent Increase/(Decrease) 2001/2000 2000/1999 26% 3 11 83 13 167 18 26 23% (1%) 16 21 23 65 26 6 7 7% Salary and employee benefits increased for 2001.The increase was attributable to annual merit increases and associated incentive compensation accruals, additions to commercial lending and cash management professional sales staff, additions to staff and overtime at Refunds Now and additional staff and overtime to support the strong secondary market loan origination volume during the year.Total full-time equivalent employees (FTE’s) increased to 532 at December 31, 2001 from 462 at December 31, 2000. Marketing and development costs increased during 2001.The increase was attributable to the Company’s aggressive direct-mail marketing campaign for the “Absolutely Free Checking” product and enhanced radio marketing for the Bank’s fixed-rate secondary market loan products. Legal expenses increased $591,000 during 2001 over 2000.The increase was primarily attributable to the patent litigation at Refunds Now.All parties have settled the matter, and as a result, legal fees are expected to reduce to historical levels sustained in the normal course of business prior to the initiation of the patent litigation. (For further discussion, see Part II, Item 1, Legal proceedings of the Form 10K.) Non-interest expense increased modestly during 2000 over 1999 primarily in the occupancy and equipment category.This increase occurred due to a full year of operation of the Bank’s Springhurst, Fern Creek and Prospect banking centers, republicbank.com, and the loan production office in southern Indiana. 23 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Loan Portfolio Net loans, primarily consisting of secured real estate loans, increased by $40 million to $1.2 billion at December 31, 2001. Republic’s commercial real estate portfolio increased $103 million from December 31, 2000 as the Company continued its emphasis on commercial real estate lending. Republic was also successful in retaining a significant portion of its commercial real estate loans during 2001 despite the heavy refinance volume that occurred.The Company was successful in retaining many of these loans through the use of early termination penalties, which acted to inhibit routine refinancings. Republic’s commercial real estate loans are primarily concentrated within the Bank’s existing markets, and are principally comprised of loans secured by multi-family investment properties, single-family developments, medical facilities, small business owner-occupied offices, retail properties and, to a lesser extent, golf courses. In conjunction with its commercial real estate lending, emphasis continues to be placed on acquiring the associated deposit relationships from these loan clients. The residential real estate loan portfolio declined by $61 million to $572 million at December 31, 2001.The market interest rate environment negatively influenced portfolio residential real estate originations as the trend toward lower, long-term market interest rates resulted in many adjustable-rate portfolio loans being refinanced into fixed-rate, secondary market loan products. Given the current market interest rate conditions subsequent to December 31, 2001, management does not anticipate that the Bank’s residential loan portfolio will increase in the near term as the majority of residential real estate loan originations are expected to be fixed-rate secondary market loan products. The real estate construction category declined $6 million from December 31, 2000 to $71 million.The decrease was due primarily to the conversion of one large commercial construction loan totaling $8.3 million to a permanent, amortizing loan in the commercial real estate category. Republic’s consumer loans decreased from $33 million at December 31, 2000 to $27 million at December 31, 2001. Consumer lending is not a key bank initiative and, therefore, is not promoted through structured advertising campaigns. The Bank does provide basic consumer loan products to its current customer base but management does not intend to actively grow this line of business due to the smaller loan amounts, higher origination and servicing costs, coupled with generally higher risk factors associated with these loans. Home equity loans increased $10 million during 2001 to $125 million.The increase was primarily the result of cross-sales made by the Company in conjunction with the origination of its fixed-rate secondary market loan products. During 2001 the Company originated 1,800 new home equity lines of credit representing $38 million outstanding at year-end.At year-end, Republic loan clients had $112 million of approved home equity lines of credit available for use. Table 6 - Loans by Type (in thousands) Real estate: Residential Commercial Construction Commercial Consumer Home Equity Total Loans 2001 2000 As of December 31, 1999 1998 1997 $ 571,959 360,056 70,870 30,627 26,905 125,360 $ 1,185,777 $ 633,328 256,834 77,437 30,008 32,662 115,467 $ 1,145,736 $ 636,012 163,064 63,928 31,411 42,408 103,833 $ 1,040,656 $ 520,583 118,293 47,396 26,381 59,874 106,845 $ 879,372 $ 480,874 76,306 37,940 21,552 86,061 102,512 $ 805,245 24 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Mortgage loans held for sale are primarily comprised of fixed-rate, single family residential loans the Company intends to sell into the secondary market. Management elects to sell the majority of its fixed-rate residential loans into the secondary market in order to reduce its exposure to market interest rate risk. Mortgage loans held for sale increased to $35 million at December 31, 2001 as lower long-term market interest rates led to an increase in the number of customers electing to refinance into fixed-rate secondary market loan products. During 2001, Republic sold $517 million in residential mortgage loans into the secondary market compared to $112 million in 2000.At the end of 2001, Republic was servicing $243 million in mortgage loans for other investors compared to $187 million in 2000.The increase in the mortgage-banking servicing portfolio from 2000 to 2001 resulted from management’s decision to retain the servicing rights on a portion of its newly originated secondary market loans due to pricing considerations. Table 7 illustrates Republic's fixed rate maturities and repricing frequency for the loan portfolio: Table 7 - Selected Loan Distribution As of December 31, 2001 (in thousands) Total One Year Or Less Over One Through Five Years Over Five Years Fixed rate maturities: Real estate Residential Commercial Construction Commercial Consumer Home equity Total Fixed Variable rate repricing: Real estate Residential Commercial Construction Commercial Consumer Home equity Total Variable $ 88,794 49,960 23,564 16,892 26,830 3,988 $ 210,028 $ 483,165 310,096 47,306 13,735 75 121,372 $ 975,749 $ 27,056 12,376 21,733 7,528 15,464 2,765 $ 86,922 $ 184,147 160,797 46,825 13,715 28 121,354 $ 526,866 $ 35,129 17,950 1,812 8,895 9,755 802 $ 74,343 $ 250,198 139,024 481 20 47 $ 389,770 $ 26,609 19,634 19 469 1,611 421 $ 48,763 $ 48,820 10,275 18 $ 59,113 Allowance and Provision for Loan Losses The provision for loan losses was $3.5 million during 2001 compared to $1.4 million during 2000.The higher provision for loan losses in 2001 was primarily attributable to an increase in losses associated with the higher volume of Refund Anticipation Loans at Refunds Now as well as an increase in losses in the 1-4 family residential and commercial real estate portfolios. While Refunds Now transaction volume increased, net charge-offs from refund anticipation loans also increased from $271,000 for 2000 to $1.1 million for 2001.This increase was attributable to higher overall volume, and to a lesser extent, losses attributable to limited errors in information received from third parties that Refunds Now utilizes, in part, in connection with its underwriting criteria. It is not known whether or not similar errors may occur in the information utilized by the Bank as a component of its underwriting in the 2002 tax processing year for 2001 tax returns. Excluding the net charge-offs related to Refunds Now, net charge-offs for the Bank’s traditional loan portfolios increased from $1.1 million for 2000 to $1.7 million during 2001. Charge-offs for residential real estate loans includes approximately $250,000 for one commercial loan secured in part by residential real estate as well as charge-offs for business loans to real estate investors secured by 1-4 family residential real estate. 25 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The total allowance for loan losses increased $745,000 to $8.6 million from December 31, 2000 to December 31, 2001. Management elected to increase the allowance for loan losses due to the continued strong growth in commercial real estate lending and the generally recognized slowing in the U.S. economy. Based on information presently available, management believes it has adequately provided for loan losses at December 31, 2001. Management continues to monitor the commercial real estate portfolio closely and believes that it provided an adequate component within the allowance for loans associated with commercial real estate lending, recognizing that these loans generally carry a greater risk of loss than residential real estate loans. Table 8 - Summary of Loan Loss Experience (dollars in thousands) 2001 Years Ended December 31, 1999 2000 1998 1997 Allowance for loan losses at beginning of year $ 7,862 $ 7,862 $ 7,862 $ 8,176 $ 6,241 26 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Charge-offs: Real estate Residential Commercial Construction Commercial Consumer Tax refund loans Total Recoveries: Real estate Residential Commercial Construction Commercial Consumer Tax refund loans Total Net loan charge-offs Provision for loan losses (980) (703) (8) (114) (818) (1,550) (4,173) 105 313 24 502 481 1,425 (2,748) 3,493 (319) (571) (115) (51) (734) (500) (2,290) 43 5 15 616 229 908 (455) (77) (61) (97) (1,508) (200) (2,398) 15 8 557 12 592 (165) (500) (352) (79) (2,828) (358) (43) (5,458) (3,924) (5,859) 7 4 489 500 23 520 543 (5,316) 7,251 (1,382) 1,382 (1,806) 1,806 (3,424) 3,110 Allowance for loan losses at end of year $ 8,607 $ 7,862 $ 7,862 $ 7,862 $ 8,176 Ratios: Allowance for loan losses to total loans Net loan charge-offs to average loans outstanding for the period Allowance for loan losses to non-performing loans 0.73% 0.69% 0.23 154 0.12 193 0.76% 0.19 213 0.89% 0.40 158 1.02% 0.66 115 Table 9 depicts 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 and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance. Table 9 - Management's Allocation of the Allowance for Loan Losses 2001 Percent of Loans to Allowance Total Loans As of December 31, 2000 Percent of Loans to Total Loans Allowance $ 982 5,761 759 458 647 $8,607 48% 30 6 3 13 100% $ 1,685 4,322 953 385 517 $ 7,862 55% 22 7 3 13 100% 1999 Percent of Loans to Total Loans 61% 16 6 3 14 100% Allowance $ 2,070 2,527 1,638 483 1,144 $ 7,862 (dollars in thousands) Real estate: Residential Commercial Construction Commercial Consumer Total Asset Quality 27 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 Loans, including impaired loans under SFAS 114 and excluding consumer loans, are placed on non-accrual status when they become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of collection.When loans are placed on non-accrual status, all unpaid accrued interest is reversed.These loans remain on non-accrual status until the borrower demonstrates the ability to remain current or the loan is deemed uncollectible and is charged off. Consumer loans are not placed on non-accrual status but are reviewed periodically and charged off when they reach 120 days past due or are deemed uncollectible.At December 31, 2001, Republic had $89,000 in consumer loans 90 days or more past due compared to $116,000 at December 31, 2000. The Bank’s level of delinquent loans to total loans increased to 1.73% at December 31, 2001, up from 1.27% at December 31, 2000. Republic experienced an increase in total non-performing loans from $4.1 million at December 31, 2000 to $5.6 million at December 31, 2001. Other real estate owned decreased from $478,000 at December 31, 2000 to $149,000 at December 31, 2001.The increase in non-performing loans was in the residential real estate and construction real estate loan portfolios. Management does not consider the overall increase in non-performing loans during the period to be material or indicative of any adverse change in the overall asset quality of the Bank’s loan portfolios. Table 10 - Non-Performing Assets (dollars in thousands) Loans on non-accrual status(1) Loans past due 90 days or more Total non-performing loans Other real estate owned Total non-performing assets Percentage of non-performing loans to total loans Percentage of non-performing assets to total loans 2001 2000 As of December 31, 1999 1998 1997 $ $ 5,056 521 5,577 149 5,726 0.47% 0.48 $ $ 3,100 984 4,084 478 4,562 0.36% 0.40 $ $ 2,721 968 3,689 218 3,907 0.35% 0.38 $ $ 3,258 1,731 4,989 540 5,529 0.57% 0.63 $ $ 2,676 4,459 7,135 22 7,157 0.90% 0.90 (1) Loans on non-accrual status includes impaired loans. See note 4 to the Consolidated Financial Statements for additional discussion on impaired loans. Republic defines impaired loans to be those commercial loans greater than $499,999 that management has classified as doubtful (collection of total amount 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 that it is probable the full amount will not be collected. Impaired loans, consisting of two commercial real estate loans, decreased from $767,000 at December 31, 2000 to $104,000 at December 31, 2001.The decrease was a result of a charge-off taken on one of the loans. MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investment Securities Table 11 - Securities Portfolio (in thousands) Securities Available for Sale: U.S.Treasury and government agencies Agency mortgage-backed securities Corporate bonds Other securities Total Securities Available for Sale Securities Held to Maturity: U.S.Treasury and government agencies States and political subdivisions Agency mortgage-backed securities Total Securities Held to Maturity 2001 2000 As of December 31, 1999 1998 1997 $ 32,023 179,576 $ 211,599 50,995 200 31,151 82,346 87,309 65,556 18,810 125 171,800 40,375 275 63,118 103,768 $ 97,029 66,340 18,258 $ 123,976 47,806 15,154 $ 44,559 49,267 181,627 186,936 25,353 3,775 3,803 32,931 25,422 4,077 486 29,985 93,826 93,693 4,270 583 98,546 28 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Total $ 293,945 $ 275,568 $ 214,558 $ 216,921 $ 192,372 The investment portfolio primarily consists of U.S.Treasury and U.S. Government Agency obligations, which include agency mortgage-backed securities, and corporate bonds.The agency mortgage-backed securities (MBS) consist of 15- year fixed, 7-year balloons and 5-year balloons as well as other adjustable rate mortgage securities, underwritten and guaranteed by GNMA, FHLMC and FNMA.Agency collateralized mortgage obligations (CMO’s) are also held in the investment portfolio.The coupon on these CMO’s adjusts monthly at a spread to the one-month LIBOR. Securities available for sale increased from $172 million at December 31, 2000 to $212 million at December 31, 2001 with a weighted average maturity of 3.1 years at year-end 2001.The increase in the available for sale portfolio was primarily in the agency mortgage-backed security category, which rose $114 million from year-end 2000. Management elected to invest funds into these securities due to a greater interest rate spread compared to U.S.Treasuries.The increase in agency mortgage-backed securities was partially offset by a decline in U.S.Treasuries and government agencies as well as corporate bonds.A large portion of these securities was sold due to a changing economic environment, which included changing interest rates spreads between alternative investments and potential corporate debt downgrades. Securities in the held to maturity portfolio decreased from $104 million at December 31, 2000 to $82 million at December 31, 2001. During January 2001, $102 million of securities in the held to maturity portfolio were reclassified as available for sale as permitted by the adoption of new accounting guidance.Approximately $49 million of these securities represented CMO’s and were subsequently sold for a gain of approximately $486,000. In December, Republic purchased a $50 million short-term Treasury bill for year-end collateral needs and classified the security in the held to maturity portfolio. Republic also purchased $31 million in CMO’s during the fourth quarter of 2001 which management elected to classify as held to maturity. Table 12 - Investment Securities Available for Sale (dollars in thousands) U.S.Treasury and U.S. Government Agencies: Within one year Over one through five years Total U.S.Treasury and Government Agencies Mortgage-backed securities Over ten years Total available for sale investment securities Amortized Cost $ 8,507 23,035 31,542 179,636 $211,178 As of December 31, 2001 Average Maturity in Years Fair Value $ 8,561 23,462 32,023 179,576 $211,599 0.2 0.8 0.6 3.6 3.1 Weighted Average Yield 6.11% 5.29 5.51 4.76 4.85 Table 13 -Investment Securities Held to Maturity (dollars in thousands) U.S.Treasury and U.S. Government Agencies: Within one year Over one through five years Total U.S.Treasury and Government Agencies Obligations of states and political subdivision: Within one year Over one through five years Total obligations of state and political subdivisions Total mortgage-backed securities Total held to maturity investment securities Amortized Cost $ 49,995 1,000 50,995 100 100 200 31,151 $ 82,346 As of December 31, 2001 Average Maturity in Years Fair Value Weighted Average Yield $ 49,980 978 50,958 101 102 203 31,154 $ 82,315 0.1 1.9 0.1 0.3 0.7 0.5 15.9 6.1 1.60% 2.47 1.62 4.90 4.70 4.80 3.32 2.27 Deposits Total deposits were $866 million at December 31, 2001 compared to $864 million at December 31, 2000. Non- interest bearing deposits increased $22 million since December 31, 2000 to $130 million, as management continues to focus on gathering lower cost funds through the Company’s retail banking centers and Cash Management areas. Because these funds are primarily transaction based, they are likely to have fluctuating balances from period to period. Money market certificates of deposit increased $79 million as declining market interest rates prompted certificate of deposit clients to switch their maturing deposits into more liquid investment vehicles. Certificates of deposit decreased $82 million as management pursued a strategy of lowering its rates on high-cost, retail certificates of deposit while utiliz- ing lower-cost, longer-term Federal Home Loan Bank borrowings to fund the Company’s assets during 2001. Table 14 - Deposits (in thousands) Demand (NOW, SuperNOW and Money Market) Savings Money market certificates of deposit Individual retirement accounts Certificates of deposit, $100,000 and over Other certificates of deposit Brokered deposits 2001 $ 185,447 16,293 155,601 34,299 87,154 258,012 2000 $ 206,511 12,584 76,818 32,933 106,313 321,185 100 As of December 31, 1999 $ 204,071 12,158 43,152 29,380 91,848 319,558 16,486 1998 $ 179,804 12,330 35,139 23,353 77,365 309,938 28,873 1997 $ 118,870 12,165 41,307 30,167 63,045 352,478 47,653 Total interest bearing deposits Total non-interest bearing deposits 736,806 129,552 756,444 107,317 716,653 84,256 666,802 80,345 665,685 65,913 Total $ 866,358 $ 863,761 $ 800,909 $ 747,147 $ 731,598 Securities Sold Under Agreements to Repurchase and Other Short-Term Borrowings Securities sold under agreements to repurchase and other short-term borrowings increased $19 million. Securities sold under agreements to repurchase increased approximately $49 million from a small number of the Company’s larger cash management accounts.These accounts are subject to large periodic changes in balances.This increase was offset by the pay-off of a $30 million repurchase agreement that was utilized to fund a CMO growth initiative during 2000.These securities were sold during the first quarter of 2001 and the funds from this sale were used to pay off the corresponding debt. 29 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Borrowed Funds Asset/Liability Management and Market Risk Other borrowed funds consists primarily of advances from the Federal Home Loan Bank. Management elected to extend maturities in this category during 2001 in order to improve its overall interest rate risk position and lower its current cost of funds. In the process of extending maturities, the Company paid off $25 million in advances with a coupon of 6.69% during the fourth quarter of 2001.These advances were scheduled to mature in October 2002.This early termination of long-term debt resulted in an extraordinary, after-tax expense of $686,000 to the Company.The Company subsequently borrowed $9 million from the Federal Home Loan Bank, in the form of a 3-year advance with a coupon of 3.91%, to replace a portion of this debt. Management estimates, based on interest rates at December 31, 2001, that the Company will realize an increase in net interest income of approximately $1.0 million before taxes for the one year period subsequent to the execution of the transaction. For the year, the Company borrowed $129 million with $40 million fixed for 5 years.The remaining $89 million in borrowings are callable by the Federal Home Loan Bank after their respective fixed-rate periods, ranging from one to five years.These advances have a maturity of five to ten years if not called earlier by the Federal Home Loan Bank. 30 Liquidity 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Republic maintains sufficient liquidity to fund loan demand and routine deposit withdrawal activity. Liquidity is man- aged by retaining sufficient liquid assets in the form of investment securities and core deposits to meet demand. Funding and cash flows can also be realized from the available-for-sale portion of the securities portfolio and paydowns from the loan portfolio. Republic’s banking centers also provide access to retail deposit markets.Approximately $79 million of deposits, repurchase agreements and short-term borrowings collateralized by investment securities, private insurance bonds and Federal Home Loan Bank letters of credit are attributable to three customer relationships at December 31, 2001.These funds are short-term in nature and subject to immediate withdrawal by those entities. Should these funds be withdrawn, Republic has the ability to replenish them through alternative funding sources, including established lines of credit with other financial institutions, the FHLB and brokerage firms.While Republic utilizes numerous funding sources in order to meet liquidity requirements, FHLB borrowings remain a material component of management’s balance sheet strategy. Capital Asset/liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Interest rate risk is the exposure to adverse changes in the net interest income as a result of market fluctuations in interest rates. Management, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be Republic’s most significant market risk. Republic utilizes an earnings simulation model to analyze net interest income sensitivity. Potential changes in market interest rates and their subsequent effects on net interest income are then evaluated.The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points.Assumptions based on the historical behavior of Republic’s deposit rates and balances in relation to changes in interest rates are also incorporated into the model.These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies. Republic’s interest sensitivity profile moderated from December 31, 2000 to December 31, 2001 as management pursued a strategy of extending liabilities to reduce the sensitivity of the Company’s balance sheet to fluctuations in market interest rates. Given a sustained 100 basis point downward shock to the yield curve used in the simulation model, Republic’s base net interest income would decrease by an estimated 1.22% at December 31, 2001 compared to an increase of 2.22% at December 31, 2000. Given a 100 basis point increase in the yield curve Republic’s base net interest income would decrease by an estimated 2.41% at December 31, 2001 compared to a decrease of 3.85% at December 31, 2000. Management elected to shift a portion of Republic’s funding from short-term repricing liabilities to longer-term FHLB borrowings with fixed interest rates from one to five years. (See discussion regarding other borrowed funds.) In addition to moderating the Company’s interest rate risk position, this strategy minimized potential additional income from future rate decreases and reduced the negative impact on potential income resulting from future rate increases. The interest sensitivity profile 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 pricing schedules. It is also influenced by market interest rates, deposit growth, loan growth, and other factors.The following tables are representative only and is not a precise measurement of the effect of changing interest rates on Republic’s net interest income in the future. 31 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 Total capital increased from $117 million at December 31, 2000 to $125 million at December 31, 2001.The increase Tables 15 & 16 illustrate Republic's estimated annualized earnings sensitivity profile based on the asset/liability model in capital was primarily attributable to net income during 2001, increases in accumulated other comprehensive income and stock options exercised by Republic’s employees.These increases were largely offset by a “Dutch Auction” tender offer completed in March 2001. Under this tender offer, Republic purchased 747,319 shares of the Company’s Class A Common Stock at a cost of $10 per share.The overall reduction to capital attributable to the tender offer was $7.6 million.The offer to purchase commenced February 12, 2001 and expired on March 13, 2001. In addition to the shares approved to be purchased under the Dutch Auction tender offer, Republic’s board of directors approved a Class A share repurchase program of 500,000 shares during 1998 and 1999. Under this program, Republic repurchased approximately 456,000 shares through December 31, 2001 with a weighted average cost of $10.09, and a total cost of $4.6 million. Republic purchased approximately 15,000 of these shares during 2001 at a weighted average cost of $12.88. Republic was authorized to buyback an additional 44,000 shares of Class A Common Stock under the program at December 31, 2001. During the second quarter of 2001, the board of directors of Republic Bank & Trust Company approved a $5 mil- lion dividend to Republic Bancorp, Inc.The Parent Company then utilized the $5 million dividend as a capital contribu- tion to its newly formed, wholly owned banking subsidiary, Republic Bank & Trust Company of Indiana. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. 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. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Republic’s average capital to average assets ratio was 7.96% at December 31, 2001 compared to 7.58% at December 31, 2000. as of year-end 2001 and year-end 2000 respectively: Table 15 - Interest Rate Sensitivity for 2001 (dollars in thousands) Projected interest income Short-term investments Investments Loans Total interest income Projected interest expense Deposits Securities sold under agreements to repurchase Other borrowed funds Total interest expense Net interest income Change from base % Change from base Decrease in Rates 100 200 Basis Points Basis Points BASE Increase in Rates 200 100 Basis Points Basis Points $ 165 9,374 82,075 91,614 $ 360 10,540 85,238 96,138 $ 969 11,958 88,517 $ 1,614 13,333 92,130 $ 1,893 15,064 95,945 101,444 107,077 112,902 16,068 2,550 15,871 34,489 17,550 3,355 15,992 36,897 20,071 5,286 16,113 41,470 23,919 8,505 16,124 48,548 27,642 11,730 16,204 55,576 $ 57,125 $ 59,241 $ 59,974 $ 58,529 $ 57,326 $ (2,849) $ (733) $ (1,445) $ (2,648) (4.75)% (1.22)% (2.41)% (4.42)% MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Table 16 - Interest Rate Sensitivity for 2000 (dollars in thousands) Projected interest income Short-term investments Investments Loans Total interest income Projected interest expense Deposits Securities sold under agreements to repurchase Other borrowed funds Total interest expense Net interest income Change from base % Change from base Market and Dividend Information Decrease in Rates 200 Basis Points 100 Basis Points $ 246 14,868 100,645 115,759 35,333 7,877 15,832 59,042 56,717 3,227 $ $ $ 194 16,447 105,004 121,645 40,182 10,157 16,627 66,966 54,679 1,189 $ $ 6.03% 2.22% BASE $ 162 18,160 108,130 126,452 43,051 12,418 17,493 72,962 $ 53,490 Increase in Rates 100 Basis Points 200 Basis Points $ 89 19,738 112,093 131,920 $ 106 21,027 115,729 136,862 47,458 14,897 18,134 80,489 51,431 (2,059) (3.85)% $ $ 51,500 17,181 18,845 87,526 49,336 (4,154) (7.77)% $ $ Republic’s Class A Common Stock is traded on the Nasdaq National Market System (NASDAQ) under the symbol “RBCAA”.The following table sets forth the high and low closing prices of the Class A Common Stock and the dividends paid on the Class A Common Stock and Class B Common Stock during the past two years. Quarter Ended March 31 June 30 September 30 December 31 Quarter Ended March 31 June 30 September 30 December 31 Market Value Dividend 2001 $ $ High 9.19 13.18 14.51 13.99 High 9.81 10.06 8.63 7.00 $ Low 6.19 8.13 10.70 12.10 Class A $ 0.044 0.044 0.044 0.044 2000 Market Value Dividend $ Low 7.88 6.38 6.75 5.63 Class A $ 0.03575 0.03575 0.03575 0.04400 Class B $ 0.040 0.040 0.040 0.040 Class B $ 0.0325 0.0325 0.0325 0.0400 There is no established public trading market for the Class B Common Stock, and there was no established public trading market for the Class A Common Stock prior to July 21, 1998.At February 8, 2002, the Class A Common Stock was held by 724 shareholders of record, and the Class B Common Stock was held by 239 shareholders of record.The Company intends to continue its historical practice of paying quarterly cash dividends although there is no assurance by the board of directors that such dividends will continue to be paid in the future.The payment of dividends in the future is dependent on future income, financial position, capital requirements, the discretion and judgment of the Board of Directors and other considerations. In addition, the payment of dividends is subject to the regulatory restrictions described in Note 13 to the Company’s consolidated financial statements. 32 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I 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, 2001 and 2000, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As disclosed in Note 1, during 2001 the Company adopted new accounting guidance on derivatives. 33 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 Crowe, Chizek and Company LLP Louisville, Kentucky January 11, 2002 CONSOLIDATED BALANCE SHEETS As of December 31, (in thousands, except share data) Assets: Cash and cash equivalents: Cash and due from banks Securities available for sale Securities to be held to maturity Mortgage loans held for sale Loans, less allowance for loan losses of $8,607 and $7,862 (2001 and 2000) Federal Home Loan Bank stock Premises and equipment, net Other assets and accrued interest receivable TOTAL Liabilities: Deposits: Non-interest bearing Interest bearing Securities sold under agreements to repurchase and other short-term borrowings Other borrowed funds Guaranteed preferred beneficial interests in Republic’s subordinated debentures Other liabilities and accrued interest payable Total liabilities Commitments and Contingencies Stockholders’ Equity: Preferred stock, no par value, 100,000 shares authorized Series A 8.5% noncumulative convertible Class A common stock, no par value, 30,000,000 shares authorized, 14,027,284 shares (2001) and 14,511,976 shares (2000) issued and outstanding; Class B common stock, no par value, 5,000,000 shares authorized, 2,078,731 shares (2001) and 2,104,735 shares (2000) issued and outstanding Additional paid-in capital Retained earnings Unearned shares in employee stock ownership plan Accumulated other comprehensive income (loss) Total stockholders’ equity TOTAL See accompanying notes. 34 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I 2001 2000 Years Ended December 31, (in thousands, except per share data) 2001 2000 1999 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME $ $ 35,569 211,599 82,346 35,492 1,176,094 17,375 19,590 12,766 40,215 171,800 103,768 5,229 1,136,531 16,171 19,573 14,785 $ 1,590,831 $ 1,508,072 $ 129,552 736,806 $ 107,317 756,444 282,023 296,950 5,852 14,533 263,001 246,050 6,352 11,966 1,465,716 1,391,130 3,953 33,017 90,873 (3,005) 277 4,079 33,294 83,345 (3,324) (452) 125,115 116,942 $ 1,590,831 $ 1,508,072 Interest Income: Loans, including fees Securities Taxable Non-taxable Other Total interest income Interest Expense: Deposits Securities sold under agreements to repurchase and short-term borrowings Other borrowed funds Total interest expense Net Interest Income Provision For Loan Losses Net Interest Income After Provision For Loan Losses Non-Interest Income: Service charges on deposit accounts Electronic refund check fees Title insurance commissions Net gain on sale of mortgage loans Net gain (loss) on sale of securities Other Total non-interest income Non-Interest Expense: Salaries and employee benefits Occupancy and equipment Communication and transportation Marketing and development Bankshares tax Legal fees Supplies Other Total non-interest expense Income Before Income Taxes and Extraordinary Item Income Taxes Net Income Before Extraordinary Item Extraordinary Item - Early Extinguishment of Long-Term Debt, Net of Tax Net Income Other Comprehensive Income (Loss), Net Of Tax: Change in unrealized gain (loss) on securities Reclassification of realized amount Net unrealized gain (loss) recognized in comprehensive income Comprehensive Income Earnings Per Share Before Extraordinary Item, Basic: Class A Class B Earnings Per Share Assuming Dilution Before Extraordinary Item: Class A Class B Earnings Per Share, Basic: Class A Class B Earnings Per Share Assuming Dilution: Class A Class B See accompanying notes. $ 102,324 $ 100,422 $ 83,581 12,776 11 2,285 117,396 32,706 8,529 16,682 57,917 59,479 3,493 55,986 6,267 2,087 1,515 6,191 1,864 1,817 19,741 25,943 9,073 2,319 2,839 1,513 944 1,170 5,490 49,291 26,436 8,942 17,494 686 16,808 1,948 (1,219) 729 17,537 1.09 1.07 1.05 1.03 1.04 1.03 1.01 0.99 $ $ $ $ 16,309 89 1,840 118,660 37,521 13,819 15,511 66,851 51,809 1,382 50,427 4,410 1,070 298 1,417 (161) 1,825 8,859 20,519 8,825 2,084 1,555 1,339 353 994 4,360 40,029 19,257 6,336 12,921 12,921 3,368 106 3,474 16,395 0.78 0.77 0.76 0.75 0.78 0.77 0.76 0.75 $ $ $ $ $ $ $ $ 12,260 95 1,221 97,157 32,686 5,656 11,210 49,552 47,605 1,806 45,799 3,653 1,238 2,974 184 2,035 10,084 20,661 7,632 1,716 1,266 811 281 940 4,076 37,383 18,500 6,248 12,252 12,252 (4,015) (121) (4,136) 8,116 0.73 0.72 0.71 0.69 0.73 0.72 0.71 0.69 35 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 CONSOLIDATED STATEMENTS OF STOCKHOLDERS(cid:146) EQUITY Common Stock Class B Shares 2,305 4 (167) Amount $ 4,149 6 (57) 1 $ 4,099 14 (34) 2,142 17 (54) 2,105 22 (48) Class A Shares 14,869 22 (247) 167 5 (300) 20 14,536 42 (143) 54 23 14,512 155 (763) 48 50 25 36 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I (in thousands, except per share data) Balance, January 1, 1999 Stock options exercised, net of shares redeemed Repurchase of Class A Common Conversion of Class B Common to Class A Common Conversion of Capital Trust Preferred to Class A Common Purchase of 300,000 shares under the Employee Stock Ownership Plan Commitment of 19,612 shares to be released under the Employee Stock Ownership Plan Dividends declared Common: Class A ($ 0.11825 per share) Class B ($ 0.10750 per share) Net changes in accumulated other comprehensive income (loss) Net income Balance, December 31, 1999 Stock options exercised, net of shares redeemed Repurchase of Class A Common Conversion of Class B Common to Class A Common Commitment of 22,930 shares to be released under the Employee Stock Ownership Plan Dividends declared Common: Class A ($ 0.15125 per share) Class B ($ 0.13750 per share) Net changes in accumulated other comprehensive income (loss) Net income Balance, December 31, 2000 Stock options exercised, net of shares redeemed Repurchase of Class A Common Conversion of Class B Common to Class A Common Conversion of Capital Trust Preferred to Class A Common Commitment of 24,649 shares to be released under the Employee Stock Ownership Plan Dividends declared Common: Class A ($ 0.176 per share) Class B ($ 0.160 per share) Net changes in accumulated other comprehensive income (loss) Net income Balance, December 31, 2001 See accompanying notes. Additional Paid-In Capital Retained Earnings Unearned Shares in Employee Stock Ownership Plan Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity $ 34,014 $ 65,469 $ 210 $ 103,842 91 (489) 49 (48) (2,167) (1,721) (233) 12,252 $ (3,873) 253 (4,136) 97 (2,713) 50 (3,873) 205 (1,721) (233) (4,136) 12,252 $ 33,617 $ 73,600 $ (3,620) $ (3,926) $ 103,770 86 (283) (126) (691) (2,194) (291) 12,921 296 3,474 100 (1,008) 170 (2,194) (291) 3,474 12,921 37 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 $ 4,079 $ 33,294 $ 83,345 $ (3,324) $ (452) $ 116,942 44 (182) 12 808 (1,521) (385) (6,113) 488 (52) 319 (2,449) (333) 16,808 729 467 (7,816) 500 267 (2,449) (333) 729 16,808 14,027 2,079 $ 3,953 $ 33,017 $ 90,873 $ (3,005) $ 277 $ 125,115 CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2001 2000 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Years Ended December 31, (in thousands) Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, net FHLB stock dividends Provision for loan losses Net gain on sale of mortgage loans Net (gain) loss on sale of securities Proceeds from sale of mortgage loans held for sale Origination of mortgage loans held for sale Employee Stock Ownership Plan expense Changes in assets and liabilities: Accrued interest receivable and other assets Accrued interest payable and other liabilities Net cash provided by (used in) operating activities Investing Activities: Purchases of securities available for sale Purchases of securities to be held to maturity Proceeds from maturities of securities to be held to maturity Proceeds from maturities and paydowns of securities available for sale Proceeds from sales of securities available for sale Net increase in loans Purchases of premises and equipment, net Net cash used in investing activities Financing Activities: Net increase in deposits Net increase in securities sold under agreements to repurchase and other short-term borrowings Payments on other borrowed funds Proceeds from other borrowed funds Repurchase of Class A common stock Proceeds from common stock options exercised Purchase of shares for Employee Stock Ownership Plan Cash dividends paid Net cash provided by financing activities 38 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I $ 16,808 $ 12,921 $ 12,252 3,736 (1,204) 3,493 (6,191) (1,864) 523,663 (547,735) 267 2,267 2,622 (4,138) (248,731) (80,845) 139 191,715 122,516 (43,680) (3,955) (62,841) 4,132 (1,117) 1,382 (1,417) 161 113,768 (110,172) 170 (1,196) 998 19,630 (61,159) (88,109) 17,438 48,248 27,569 (107,842) (4,613) (168,468) 3,949 (1,018) 1,806 (2,974) (184) 210,747 (177,014) 205 3,273 (684) 50,358 (89,042) (61,354) 58,544 67,546 20,244 (165,653) (6,724) (176,439) 2,597 62,852 53,762 19,022 (99,837) 150,737 (7,816) 467 (2,837) 62,333 47,283 (305,531) 320,198 (1,008) 100 (2,368) 121,526 67,059 (93,839) 135,000 (2,713) 97 (3,873) (1,831) 153,662 27,581 39,946 Net Increase (Decrease) In Cash And Cash Equivalents (4,646) (27,312) Cash And Cash Equivalents At Beginning of Year 40,215 67,527 Cash And Cash Equivalents At End of Year $ 35,569 Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest Income Taxes $ 59,076 8,701 $ $ 40,215 $ 67,527 66,361 6,284 $ 49,379 5,949 Supplemental Noncash Disclosures: Transfers from loans to other real estate owned Transfers of securities to be held to maturity to securities available for sale See accompanying notes. 624 1,441 2,366 102,153 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 and Republic Bank & Trust Company of Indiana (together referred to as “Bank”), Republic Capital Trust and Republic Mortgage Company (collectively “Republic”).The consolidated financial statements also include the wholly owned subsidiaries of Republic Bank & Trust Company: Republic Financial Services, LLC (d/b/a Refunds Now) and Republic Insurance Agency, LLC. All significant intercompany balances and transactions have been eliminated. Republic operates 22 banking centers, primarily in the retail banking industry and conducts its operations predominately in metropolitan Louisville, central Kentucky, southern Indiana and through an Internet banking software application. 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 real estate mortgage, commercial, 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 transaction deposit accounts and trust services. Republic also generates revenue from its mortgage banking activities, which include the origination and sale of loans in the secondary market and servicing loans for others, and through electronic tax refund services. Republic’s operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, marketing and development, 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. Use of Estimates – Financial statements prepared in conformity with accounting principles generally accepted in the United States of America 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. Estimates that are particularly subject to change include the allowance for loan losses and fair value of financial instruments. Actual results could differ from these estimates. Cash Flows – Cash and cash equivalents includes cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan, deposit and other borrowing transactions. 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, carried at fair value, 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 stockholders’ 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. In conjunction with Republic’s adoption of new guidance regarding accounting for derivative instruments and hedging activities, on January 1, 2001 Republic transferred substantially all of its securities classified as held to maturity at that date to available for sale. 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 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 agreements to sell loans.The aggregate market value of mortgage loans held for sale considers the sales prices of such agreements. Republic also provides for any losses on uncovered commitments to lend or sell. 39 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans by interest rates and then, secondarily, by geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Republic’s loans sold in the secondary market have been primarily sold with servicing released. Accordingly, servicing rights have not had a material impact on Republic’s financial position or results of operations. 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. 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 orig- ination 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 loans are 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 collectibili- ty 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 a valuation allowance for probable credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judg- ment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage and consumer loans, and on an individual loan basis for commercial and commercial real estate loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation and amorti- zation. 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 – Long-lived assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. Securities Sold under Agreements to Repurchase and Other Short-Term Borrowings – Substantially all repurchase agreement liabilities represent amounts advanced by customers. Securities are pledged to cover most of these liabilities not covered by federal deposit insurance. Certain of these liabilities, which are not covered by federal deposit insurance, are secured by private insurance purchased by Republic rather than by a pledge of securities. Stock Option Plans – Employee compensation expense under stock option plans is reported if options are grant- ed below market price at grant date. Pro-forma disclosures of net income and earnings per share are shown using the fair value method of SFAS No. 123 to measure expense, using an option pricing model to estimate fair value. 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. Employee Stock Ownership Plan- The cost of shares held by the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; divi- dends on unearned ESOP shares reduce debt and accrued interest. Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to fund loans and standby letters of credit.The face amount for these items represents the exposure to loss, before con- sidering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Derivatives – Beginning January 1, 2001, a new accounting standard required all derivatives to be recorded at fair value. If designated as hedges of fair values, both the change in fair value of the derivative and hedged item are included in earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclas- sified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur. Republic periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operations.These contracts, considered derivatives, typically last 60 to 90 days and are used to hedge the risk of interest rate changes between the time of the loan commitment to a borrower at a fixed rate and its sale to the secondary market. Republic had $92 million and $2 million in mandatory forward sales contracts at December 31, 2001 and 2000, in conjunction with loans held for sale and loan commitments of which the fair values were not material. Earnings per Share – Earnings per share are based on income (in 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 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 – Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recog- nized as separate components of equity. Segment Information – Segments are parts of a company evaluated by management with separate financial infor- mation. Republic’s internal information is primarily reported and evaluated in three lines of business – banking, mortgage banking and Refunds Now. Reclassifications – Certain amounts presented in prior periods have been restated to conform with the current year presentation. New Accounting Pronouncements – A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. Adoption of this standard on January 1, 2002 will not have a material effect on the Republic’s financial statements. 2. RESTRICTIONS ON CASH AND DUE FROM BANKS Republic is required by the Federal Reserve Bank to maintain average reserve balances. Cash and due from banks in the consolidated balance sheet includes $6.1 million of reserve balances at December 31, 2001. 41 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 42 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I 3. SECURITIES Securities available for sale: December 31, 2001 (in thousands) U.S.Treasury securities and U.S. government agencies Mortgage-backed securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 31,542 179,636 $ 481 798 $ (858) $ 32,023 179,576 Total securities available for sale $211,178 $ 1,279 $ (858) $211,599 December 31, 2000 (in thousands) U.S.Treasury securities and U.S. government agencies Mortgage-backed securities Corporate bonds Other securities Amortized Cost $ 87,251 65,904 19,205 125 Gross Unrealized Gains $ 246 57 Gross Unrealized Losses $ (188) (405) (395) Fair Value $ 87,309 65,556 18,810 125 Total securities available for sale $ 172,485 $ 303 $ (988) $ 171,800 Securities to be held to maturity: December 31, 2001 (in thousands) U.S.Treasury securities and U.S. government agencies Obligations of state and political subdivisions Mortgage-backed securities Amortized Cost $ 50,995 200 31,151 Total securities to be held to maturity $ 82,346 Gross Unrealized Gains Gross Unrealized Losses Fair Value $ $ 3 10 13 $ (37) $ 50,958 (7) 203 31,154 $ (44) $ 82,315 December 31, 2000 (in thousands) U.S.Treasury securities and U.S. government agencies Obligations of state and political subdivisions Mortgage-backed securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 40,375 $ 207 $ (1) $ 40,581 275 63,118 2 345 (139) 277 63,324 Total securities to be held to maturity $ 103,768 $ 554 $ (140) $ 104,182 Securities having an amortized cost of $233.6 million and $255.7 million and fair value of $233.9 million and $255.4 million at December 31, 2001 and 2000 were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law. Gross gains of $1.9 million were recognized in 2001 from proceeds of $123 million on sales of available for sale securities and proceeds of $63 million on calls of available for sale securities. Gross losses of $161,000 were recognized in 2000 from proceeds of $28 million on sales of available for sale securities. The amortized cost and fair value of securities, by contractual maturity, are as follows: December 31, 2001 (in thousands) Due in one year or less Due after one year through five years Due after five through ten years Mortgage-backed securities Securities to be held to maturity Securities available for sale Amortized Cost $ 50,096 1,099 31,151 Fair Value $ 50,081 1,080 31,154 Amortized Cost $ 3,003 23,497 5,042 179,636 Fair Value $ 3,014 23,901 5,108 179,576 Total $ 82,346 $ 82,315 $211,178 $211,599 4. LOANS December 31, (in thousands) Residential real estate Commercial real estate Real estate construction Commercial Consumer Home equity Total loans Less: Unearned interest income and unamortized loan fees Allowance for loan losses Loans, net 2001 $ 571,959 360,056 70,870 30,627 26,905 125,360 1,185,777 2000 $ 633,328 256,834 77,437 30,008 32,662 115,467 1,145,736 1,076 8,607 1,343 7,862 $1,176,094 $ 1,136,531 Activity in the allowance for loan losses is summarized as follows: December 31, (in thousands) Balance, beginning of year Provision for loan losses charged to income Charge-offs Recoveries 2001 $ 7,862 3,493 (4,173) 1,425 $ 2000 7,862 1,382 (2,290) 908 $ 1999 7,862 1,806 (2,398) 592 Balance, end of year $ 8,607 $ 7,862 $ 7,862 Republic utilizes eligible real estate loans to collateralize advances and letters of credit from the Federal Home Loan Bank. At December 31, 2001 and 2000, Republic had $526 million and $597 million in first lien, 1-4 family residential real estate loans pledged to secure advances and letters of credit from the Federal Home Loan Bank, respectively. The Company also had $12 million in multi-family, commercial real estate loans pledged at December 31, 2001. 43 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information about Republic’s investment in impaired loans is as follows: 6. PREMISES AND EQUIPMENT 44 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I As of and for the year ended December 31, (in thousands) 2001 2000 1999 Year-end loans with no allocated allowance for loan losses Year-end loans with allocated allowance for loan losses $ 0 $ 0 $ 0 104 767 1,043 Total $ 104 $ 767 $ 1,043 Amount of the allowance for loan losses allocated Average of impaired loans during the year Interest income recognized during impairment Cash-basis interest income recognized Nonperforming loans were as follows: Loans past due 90 days still on accrual Nonaccrual loans $ 26 $ 385 $ 700 707 0 0 521 5,056 714 0 0 984 3,100 1,043 92 92 968 2,721 Nonperforming loans includes impaired loans and smaller balance homogeneous loans as defined in note 1. Loans made to executive officers and directors of Republic and their related interests in the ordinary course of busi- ness, subject to substantially the same credit policies as other loans and current in their terms, are as follows: Balance, Beginning Of Period Change in Related Party Status New Loans Repayments Balance, End Of Period $ 17,376 $ 859 $ 10,684 $ (7,354) $ 21,565 (in thousands) Year ended December 31, 2001 5. LOAN SERVICING Republic was servicing loans for others (primarily FHLMC) totaling $243 million and $187 million at December 31, 2001 and 2000. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Activity for capitalized mortgage servicing rights was as follows: December 31, (in thousands) Beginning of year Additions Amortized to expense End of year 2001 $ 624 1,548 (287) 2000 $ 519 229 (124) $ 1,885 $ 624 December 31, (in thousands) Land Office buildings and improvements Furniture, fixtures and equipment Leasehold improvements Total premises and equipment Less accumulated depreciation and amortization 2001 $ 2,054 11,577 19,634 2,037 35,302 15,712 $ 2000 2,054 11,356 19,068 2,120 34,598 15,025 Net premises and equipment $ 19,590 $ 19,573 7. DEPOSITS Time deposits of $100,000 or more were approximately $87 million and $106 million at year-end 2001 and 2000. At December 31, 2001, the scheduled maturities of time deposits of $100,000 or more are as follows: (dollars in thousands) Less than 1 year Over 1 year through 3 years Over 3 years through 5 years Total Weighted Average Rate 5.10% 5.24 4.09 Amount $ 67,018 16,213 3,923 $ 87,154 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT TERM BORROWINGS These liabilities consist of short-term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit customers arising from Republic’s cash management program. While effectively deposit equivalents, the overnight liabilities to customers are in the form of repurchase agreements or liabilities secured by Federal Home Loan Bank letters of credit or private insurance policies purchased by Republic. Repurchase agreements collateralized by securities are treated as financings; accordingly, the securities involved with the agreements are record- ed as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabili- ties. All securities underlying the agreements were under Republic’s control. Information concerning securities sold under agreements to repurchase and liabilities secured by insurance policies at year-end 2001 and 2000 are as follows: December 31, (dollars in thousands) Average outstanding balance during the year Average interest rate during the year Maximum month end balance during the year 2001 $251,068 3.40% $283,460 2000 $ 243,582 5.67% $ 264,682 Included in December 31, 2001 balances is $79 million related to three major customer relationships. 45 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. OTHER BORROWED FUNDS Years Ended December 31, (in thousands) Federal Home Loan Bank convertible fixed rate advances with weighted average interest rate of 5.39% (1) Federal Home Loan Bank variable interest rate advances Federal Home Loan Bank fixed interest rate advances, with weighted average interest rate of 5.49% at December 31, 2001, due through 2031 2001 2000 $140,000 $ 10,000 40,000 156,950 196,050 $296,950 $ 246,050 (1) Represents convertible fixed rate advances with the Federal Home Loan Bank (FHLB).These advances have fixed-rate periods ranging from one to five years with maturities of three to ten years if not called earlier by the Federal Home Loan Bank. Federal Home Loan Bank advances are collateralized by a blanket pledge of eligible real estate loans. (For additional information see Note 4 on Loans). Republic also has unsecured lines of credit totaling $40 million available through various financial institutions. The Trust 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. Management anticipates redeeming these trust preferred securities during 2002. Republic has the option to defer interest on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. If interest is deferred, Republic is prohibited from paying dividends to its Class A and Class B Common stockholders. 11. INCOME TAXES Income tax expense is summarized as follows: Years Ended December 31, (in thousands) Current Deferred expense (benefit) Total Income tax benefit allocated to the extraordinary item Tax expense allocated to income from continuing operations 2000 1999 $ 5,904 432 6,336 $ 5,692 556 6,248 2001 $ 8,687 (108) 8,579 363 $ 8,942 $ 6,336 $ 6,248 Aggregate future principal payments on borrowed funds as of December 31, 2001 are as follows: The provision for income taxes differs from the amount computed at the statutory rate as follows: Year (in thousands) 2002 2003 2004 2005 2006 and thereafter $ 97,950 90,000 44,000 65,000 $ 296,950 Years Ended December 31, Federal statutory rate Increase (decrease) resulting from: Tax-exempt interest income Other Effective rate 2001 35.0% 2000 35.0% 1999 35.0% (1.2) 33.8% (0.3) (1.7) 33.0% (0.2) (1.0) 33.8% For purposes of this schedule, the $140 million in convertible fixed-rate advances are assumed to be paid on their The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows: 46 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I 47 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 respective call dates. During 2001, the Company prepaid $25 million on 6.69% Federal Home Loan Bank advances due October 2002. This transaction resulted in an extraordinary penalty of $686,000 (approximately $0.04 per share), net of income tax of $363,000. 10. 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 (Trust Preferred Securities) with a liquidation preference of $100 per security. Each security can be converted into ten shares of Class A Common Stock at the option of the holder.The sole asset of RCT represents the proceeds of the offering loaned to Republic Bancorp, Inc. in exchange for subordinated debentures which have terms that are similar to the Trust Preferred Securities.The subordinated debentures and the related interest expense, payable quarterly at the annual rate of 8.5%, are included in the consolidated financial statements. Years Ended December 31, (in thousands) Deferred tax assets: Depreciation Allowance for loan losses Unrealized securities losses Other Total deferred tax assets Deferred tax liabilities: FHLB dividends Loan fees Mortgage servicing rights Unrealized securities gains Other Total deferred tax liabilities 2001 2000 $ 755 2,097 $ 592 1,832 233 200 3,052 2,172 183 660 143 3,158 2,657 1,667 155 218 455 2,495 Net deferred tax asset (liability), included in other assets $ (106) $ 162 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. EARNINGS PER SHARE Years Ended December 31, (in thousands, except per share data) 48 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I 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 is presented below. Class A and B shares participate equally in undistributed earnings.The difference in earnings per share between the two classes of common stock results solely from the 10% per share dividend premium paid on Class A Common Stock over that paid on Class B Common Stock as discussed in Note 13.The aggregate dividend premium paid on Class A Common Stock for 2001, 2000 and 1999 was $224,000, $199,000 and $156,000, or approximately one and one-half cents on basic earnings per share. Basic Years Ended December 31, (in thousands, except per share data) 2001 2000 1999 Earnings Per Share Net Income available to common shareholders before extraordinary item Extraordinary item – early extinguishment of long-term debt $ 17,494 $ 12,921 $ 12,252 (686) Net Income available to common shareholders $ 16,808 $ 12,921 $ 12,252 Weighted average shares outstanding 16,126 16,621 16,769 Earnings Per Share before extraordinary item, basic Class A Class B Earnings Per Share, basic Class A Class B Diluted Years Ended December 31, (in thousands) Earnings Per Share Assuming Dilution Net Income before extraordinary item Add: Interest expense, net of tax benefit, on assumed conversion of guaranteed preferred beneficial interests in Republic’s subordinated debentures Net Income available to common shareholders assuming conversion before extraordinary item Extraordinary item – early extinguishment of long-term debt Net Income available to common shareholders, assuming conversion $ $ 1.09 1.07 1.04 1.03 $ $ 0.78 0.77 0.78 0.77 $ $ 0.73 0.72 0.73 0.72 2001 2000 1999 $ 17,494 $ 12,921 $ 12,252 332 348 354 $ 17,826 $ 13,269 $ 12,606 (686) $ 17,140 $ 13,269 $ 12,606 Weighted average shares outstanding Add dilutive effects of assumed conversion and exercise: Convertible guaranteed preferred beneficial interest in Republic’s subordinated debentures Stock options Weighted average shares and dilutive potential shares outstanding Diluted Earnings Per Share before extraordinary item Class A Class B Diluted Earnings Per Share Class A Class B 2001 16,126 2000 16,621 1999 16,769 610 356 635 246 635 496 17,092 17,502 17,900 $ $ 1.05 1.03 1.01 0.99 $ $ 0.76 0.75 0.76 0.75 $ $ 0.71 0.69 0.71 0.69 Stock options for 203,000 and 282,500 shares of Class A Common Stock were excluded from the 2001 and 2000 earnings per share assuming dilution because their impact was antidilutive. 13. STOCKHOLDERS’ EQUITY Common Stock - The Class A shares are entitled to cash dividends equal to 110% of the cash 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 Common Stock may be converted, at the option of the holder, to Class A Common Stock on a share-for-share basis.The Class A Common Stock is not convertible into any other class of Republic’s capital stock. On February 12, 2001, Republic initiated an offer to purchase up to 1,000,000 shares of the Company’s Class A Common Stock, approximately 7% of the shares outstanding. A total of 747,319 shares were tendered at a purchase price between $8 and $10 per share with a final price paid of $10 per share. Dividend Limitations - Kentucky banking laws limit the amount of dividends that may be paid to Parent Company by Republic Bank & Trust Company without prior approval of the Kentucky Department of Financial Institutions. Under these laws, the amount of dividends that may be paid in any calendar year is limited to current year's net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. At December 31, 2001, Republic Bank & Trust Company had approximately $15 million of retained earnings that could be utilized for payment of dividends if authorized by its board of directors without prior regulatory approval. Indiana banking laws prohibit the payment of dividends to the Parent Company by Republic Bank & Trust Company of Indiana for a period of three years without prior approval of the Indiana Department of Financial Institutions.These laws also require a minimum Tier I Capital ratio of 8% to be maintained for a period of three years. 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 each bank must meet specific capital guidelines that involve quantitative measures of the banks’ 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. 49 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quantitative measures established by regulation to ensure capital adequacy require the Parent Company and each 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). As of December 31, 2001, the Parent Company, Republic Bank & Trust Company and Republic Bank & Trust Company of Indiana meet all capital adequacy requirements to which they are subject. The most recent notification from the FDIC categorized each bank as well capitalized under the regulatory framework for prompt corrective action.To be categorized as well capitalized each bank must maintain minimum Total Risk-Based,Tier I Risk-Based, and Tier I Leverage ratios as set forth in the table.There are no conditions or events since that notification that management believes have changed the banks’ capital ratings. As of December 31, 2001 (dollars in thousands) Amount Ratio Amount Ratio Minimum Requirement For Capital Adequacy Purposes Actual Minimum Requirement To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount Total Risk Based Capital (to Risk Weighted Assets) Republic Bancorp, Inc. Republic Bank & Trust Co. Republic Bank & Trust Co. of Indiana $139,093 129,530 5,179 13.26% 12.49 43.01 $ 83,943 82,980 963 8% 8 8 $104,929 103,725 1,204 10% 10 10 Tier I Capital (to Risk Weighted Assets) Republic Bancorp, Inc. Republic Bank & Trust Co. Republic Bank & Trust Co. of Indiana Tier I Leverage Capital (to Average Assets) Republic Bancorp, Inc. Republic Bank & Trust Co. Republic Bank & Trust Co. of Indiana 130,486 121,068 5,034 130,486 121,068 5,034 12.44 11.67 41.81 8.36 7.79 37.43 Actual 41,972 41,490 482 62,448 62,142 538 4 4 4 4 4 4 Minimum Requirement For Capital Adequacy Purposes As of December 31, 2000 (dollars in thousands) Amount Ratio Amount Ratio 62,958 62,235 722 78,060 77,678 672 6 6 6 5 5 5 Minimum Requirement To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount 50 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I 14. STOCK OPTION PLAN Under a stock option plan, certain key employees and directors are granted options to purchase shares of Republic’s common stock at fair value at the date of the grant. Options granted become fully exercisable at the end of two to six years of continued employment and must be exercised within one year. A summary of Republic’s stock option activity, and related information for the years ended December 31 follows: 2001 2000 Options Weighted Options Weighted Average Class B Average Class A Exercise Exercise Shares Shares Price Price Options Class A Shares Weighted Average Exercise Price Options Weighted Average Class B Exercise Shares Price 1,045,500 $ 7.20 30,000 $ 4.18 1,126,000 $ 7.08 48,000 $ 3.84 194,750 7.57 137,000 (207,000) 4.72 (26,000) 3.97 (90,000) (50,500) 7.95 (127,500) 6.21 3.28 7.82 (18,000) 3.28 982,750 $ 7.76 4,000 $ 5.53 1,045,500 $ 7.20 30,000 $ 4.18 134,500 $ 5.90 4,000 $ 5.53 30,000 $ 5.53 6,000 $ 5.53 Outstanding beginning of year Granted Exercised Forfeited Outstanding year end Exercisable (vested) end of year 51 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 1999 Options Class A Shares Weighted Options Weighted Average Class B Average Exercise Exercise Shares Price Price Total Risk Based Capital (to Risk Weighted Assets) Republic Bancorp, Inc. Republic Bank & Trust Co. $ 130,968 126,710 12.78% 12.36 $ 82,012 82,006 8% 8 $ 102,516 102,508 10% 10 Outstanding beginning of year 1,217,500 $ 7.03 52,500 $ 3.83 Tier I Capital (to Risk Weighted Assets) Republic Bancorp, Inc. Republic Bank & Trust Co. Tier I Leverage Capital (to Average Assets) Republic Bancorp, Inc. Republic Bank & Trust Co. 123,106 118,848 12.01 11.59 123,106 118,848 8.13 7.84 41,006 41,003 60,599 60,599 4 4 4 4 61,509 61,505 75,748 75,749 6 6 5 5 Granted Exercise Forfeited Outstanding year end Exercisable (vested) end of year 7,000 10.63 (22,500) (76,000) 3.61 7.52 (4,500) 3.61 1,126,000 $ 7.08 48,000 $ 3.84 --- --- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options outstanding at year-end 2001 were as follows: 15. EMPLOYEE BENEFIT PLANS Outstanding Class A Class B Weighted Average Remaining Contractual Life 2.05 3.56 2.91 Weighted Average Remaining Contractual Life 0.50 0.50 Number 4,000 4,000 Number 424,000 558,750 982,750 Range of Exercise Prices $5.53 - $5.97 $6.00 - $13.00 Outstanding 52 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if Republic had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model.The weighted average assumptions for options granted during the year and the resulting estimated weighted average fair values per share used in computing pro forma disclosures are as follows: Years Ended December 31, Assumptions: Risk-free interest rate Expected dividend yield Expected life (years) Expected common stock market price volatility 2001 2000 1999 4.99% 2.37 6.00 34% 5.33% 2.36 6.00 27% 5.08% 1.03 6.00 17% Estimated fair value per share $ 3.71 $ 1.78 $ 2.78 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: Years Ended December 31, (in thousands, except per share data) Pro forma net income Pro forma earnings per share Class A Class B Pro forma earnings per share assuming dilution Class A Class B 2001 $ 16,655 2000 $ 12,568 1999 $ 11,874 1.00 0.99 0.96 0.95 0.76 0.74 0.74 0.73 0.71 0.70 0.69 0.68 Future pro forma net income will be negatively impacted should Republic choose to grant additional options. 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 had the option 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 the Bank achieves certain operating ratios. Republic’s matching contributions were $506,000; $269,000 and $446,000 for the years ended December 31, 2001, 2000 and 1999. On January 29, 1999, Republic formed an Employee Stock Ownership Plan (ESOP) for the benefit of its employees. The ESOP borrowed $3.9 million from the Parent Company and directly and indirectly purchased 300,000 shares of Class A Common Stock from Republic’s largest beneficial owner at a market value of $12.91 per share.The purchase price, determined by an independent pricing committee, was the average closing price for the thirty trading days immedi- ately prior to the transaction. Shares in the ESOP are allocated to eligible employees based on principal payments over the term of the loan, which is ten years. Participants become fully vested in allocated shares after five years of credited service and may receive their distributions in the form of cash or stock. During 2001, 2000, and 1999; 24,649 shares, 22,930 shares and 19,612 shares were allocated to participants in the plan resulting in compensation expense of $267,000; $170,000 and $205,000 respectively. At year-end 2001 the fair value of unallocated shares in the plan was approximately $3.1 million. The cost of shares acquired by the Employee Stock Ownership Plan but not yet committed to be released to par- ticipants is presented in the consolidated balance sheet as a reduction of shareholders equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts.The difference between market price and the cost of shares committed to be released is recorded as an adjustment to paid in capital. 16. LEASES AND TRANSACTIONS WITH AFFILIATES Republic leases office facilities from Republic’s Chairman and from partnerships in which Republic’s Chairman and Chief Executive Officer are partners under operating leases. Rent expense for the years ended December 31, 2001, 2000 and 1999 under these leases was $1,475,000; $1,469,000 and $1,320,000.Total rent expense on all operating leases was $2,092,000; $2,060,000 and $1,747,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The total minimum lease commitments under noncancelable operating leases are as follows: 53 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 Year (in thousands) 2002 2003 2004 2005 Thereafter Affiliate $ 1,491 1,263 976 858 688 December 31, 2001 Other $ 648 702 657 556 2,758 Total $ 2,139 1,965 1,633 1,414 3,446 $ 5,276 $ 5,321 $ 10,597 A director of Republic Bank & Trust Company is a partner in a law firm. Fees paid by Republic to this firm totaled $74,000; $53,000 and $155,000 for the years ended December 31, 2001, 2000 and 1999. Prior to July 1, 2000, Banker’s Insurance Agency (BIA), a corporation beneficially owned by Republic’s Chairman and CEO, sold title insurance to most of the Bank’s mortgage borrowers. Under an agreement between BIA and Republic, Republic personnel performed certain functions for issuance of the policies. BIA recorded title insurance revenues of $540,000 and $1.1 million from Republic loan clients in 2000 and 1999. BIA paid Republic $33,000 and $61,000 for serv- ices performed by Republic employees during the same periods. On July 1, 2000, the Bank began selling title insurance directly to its mortgage borrowers. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. 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 in order 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 potential future obligations of Republic pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with Republic’s credit policies. Collateral from the customer may be required based on management’s credit evaluation of the customer and may include business assets of commercial customers as well as personal property and real estate of individual customers or guarantors. Republic also extends binding commitments to customers and 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 contracts. 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 unfunded, loan commitment represents a potential credit risk once the funds are advanced to the customer.This is also a liquidity risk since the customer may demand immediate cash that would require funding, and interest rate risk as market interest rates may rise above the rate committed. Republic’s liquidity position is managed 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 may not require future funding. As of December 31, 2001, Republic had outstanding loan commitments totaling $188 million which includes unfunded home equity lines of credit totaling $112 million.These commitments generally have variable rates. At December 31, 2001, Republic’s mortgage banking activities included commitments to extend credit, primarily representing fixed rate mortgage loans, totaling $96 million. Of these commitments to originate loans, borrowers with commitments totaling $9 million have elected to wait until closing to lock the rate on their loans.The commitments are generally for a period of 60 to 90 days and are at market rates.To deliver these loans to the secondary market, Republic has entered into $73 million in forward sales contracts at December 31, 2001, of which $59 million were mandatory. The realizable fair values of $14 million of commitments to extend credit were not covered by sales contracts and are therefore exposed to changes underlying interest rates until sales contracts are entered into, the customer withdraws from the commitment, or the loan is sold. Republic provides for any losses on uncovered loans and commitments to lend or sell.At December 31, 2001 no such provisions were required. 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 $21 million at December 31, 2001. At December 31, 2001, Republic had $93 million in letters of credit from the Federal Home Loan Bank issued on behalf of the Bank’s clients. Approximately $13 million of these letters of credit were used as a credit enhancement for a client’s bond offering. The remaining $80 million was used to collateralize a public funds deposit, which the Company classifies in short-term borrowings. These letters of credit reduce Republic’s available borrowing line at the Federal Home Loan Bank by $93 million. Republic uses a blanket pledge of eligible real estate loans to secure the letters of credit. (For additional information see Note 4 on Loans and Note 8 on Short-term borrowings.) 54 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined by Republic using available market information and appropriate valuation methodologies. However, judgment of management is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts Republic could realize in a market exchange.The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. (in thousands) Assets: Cash and cash equivalents Securities available for sale Securities to be held to maturity Mortgage loans held for sale Loans, net Federal Home Loan Bank stock Liabilities: Deposits: Non interest-bearing accounts Transaction accounts Certificate of deposit and individual retirement accounts Securities sold under agreements to repurchase and other short-term borrowings Other borrowed funds Guaranteed preferred beneficial interests in Republic’s subordinated debentures December 31, 2001 December 31, 2000 Carrying Amount $ 35,569 211,599 82,346 35,492 1,176,094 17,375 Fair Value Carrying Amount Fair Value $ 35,569 211,599 82,315 35,999 1,210,558 17,375 $ 40,215 171,800 103,768 5,229 1,136,531 16,171 $ 40,215 171,800 103,904 5,279 1,143,537 16,171 $ 129,552 357,341 $ 129,552 357,341 $ 107,317 295,913 $ 107,317 295,913 379,465 384,323 460,531 462,835 282,023 296,950 282,145 310,420 5,852 5,852 263,001 246,050 6,352 263,033 246,784 6,352 Cash and Cash Equivalents - The carrying amount is a reasonable estimate of fair value. Securities Available for Sale, Securities to be Held to Maturity and Federal Home Loan Bank Stock - Fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted mar- ket prices for similar securities. For Federal Home Loan Bank stock, the carrying amount is an estimate of fair value. Loans - The fair value is estimated by discounting the future cash flows using the interest rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. Mortgage Loans Held for Sale - Estimated fair value is defined as the quoted secondary market price for such loans without regard to Republic’s other commitments to make and sell loans. Deposits - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date.The fair value of fixed-maturity certificates of deposit is estimated using the interest rates offered for deposits of similar remaining maturities. Securities Sold Under Agreements to Repurchase and Other Short-Term Borrowings - The carrying amount is management’s 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 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 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 rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for the estimated vol- ume of loan commitments 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 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, 2001 and 2000. Although management is not aware of any factors that would significantly affect the esti- mated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial state- ments since that date and, therefore, estimates of fair value may differ significantly from the amounts presented. 55 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 56 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I 19. PARENT COMPANY CONDENSED FINANCIAL INFORMATION BALANCE SHEETS December 31, (in thousands) Assets: Cash and cash equivalents Due from subsidiaries Investment in subsidiaries Other Total assets Liabilities and stockholders’ equity: Long-term debt Other liabilities Stockholders’ equity Total STATEMENTS OF INCOME 2001 2000 $ 1,537 4,552 126,875 18 $ 1,780 4,112 119,328 123 $132,982 $ 125,343 $ 6,152 1,715 125,115 $ 6,652 1,749 116,942 $132,982 $ 125,343 Years Ended December 31, (in thousands) 2001 2000 1999 Income and expense: Dividends from subsidiary Interest income Interest expense Other expense Income before income taxes Income tax benefit Income before equity in undistributed net income of subsidiaries Equity in undistributed net income of subsidiaries $ 15,699 253 (548) (401) 15,003 297 15,300 1,508 $ 3,726 292 (566) (209) 3,243 254 3,497 9,424 $ 8,699 281 (567) (165) 8,248 220 8,468 3,784 Net income $ 16,808 $ 12,921 $ 12,252 STATEMENTS OF CASH FLOWS Years Ended December 31, (in thousands) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiaries Change in due from subsidiary Change in other assets Change in other liabilities Net cash provided by operating activities 2001 2000 1999 $ 16,808 $ 12,921 $ 12,252 (1,508) (440) 105 21 14,986 (9,424) 181 (77) (21) 3,580 (3,784) (2,800) (27) (893) 4,748 STATEMENTS OF CASH FLOWS (continued) Investment activities: Dividends on unallocated ESOP shares Purchase of common stock of subsidiary bank Net cash used in investing activities Financing activities: Dividends paid Proceeds from stock options exercised Repurchase of Class A common stock Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year (43) (5,000) (5,043) (2,837) 467 (7,816) (10,186) (243) 1,780 (41) (41) (2,368) 100 (1,008) (3,276) 263 1,517 (22) (22) (1,831) 97 (2,713) (4,447) 279 1,238 Cash and cash equivalents, end of year $ 1,537 $ 1,780 $ 1,517 20. SEGMENT INFORMATION The reportable segments are determined by the type of products and services offered, primarily distinguished between banking, mortgage banking operations and tax refund services. Loans, investments, and deposits provide the substantial amount of revenue from the banking operation; servicing fees and loan sales provide the substantial amount of revenue from mortgage banking; and refund anticipation loan fees and electronic refund check fees provide the substantial amount of revenue from tax refund services. All three operations are domestic. The accounting policies used are the same as those described in the summary of significant accounting policies. Income taxes are allocated and indirect expenses are allocated on revenue.Transactions among segments are made at fair value. Information reported internally for performance assessment follows. (in thousands) Net interest income Provision for loan losses Electronic refund check fees Net gain on sale of loans Other revenue Income tax expense Extraordinary item – early extinguishment of long-term debt, net of tax Segment profit Segment assets (in thousands) Net interest income Provision for loan losses Electronic refund check fees Net gain on sale of loans Other revenue Income tax expense Segment profit Segment assets Banking $ 55,264 2,389 14,031 7,415 686 13,822 1,549,346 Banking $ 48,770 1,170 6,789 5,451 11,202 1,497,843 2001 Mortgage Banking $ 937 Tax Refund Services $ 3,278 1,104 2,087 36 425 831 507 2000 Tax Refund Services $ 2,768 212 1,070 136 714 1,386 338 6,191 (2,604) 1,102 2,155 40,978 Mortgage Banking $ 271 1,417 (553) 171 333 9,891 Consolidated Totals $ 59,479 3,493 2,087 6,191 11,463 8,942 686 16,808 1,590,831 Consolidated Totals $ 51,809 1,382 1,070 1,417 6,372 6,336 12,921 1,508,072 57 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CORPORATE INFORMATION 58 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I (dollars in thousands) Net interest income Provision for loan losses Electronic refund check fees Net gain on sale of loans Other revenue Income tax expense Segment profit Segment assets Banking $ 46,108 1,620 5,535 5,400 10,597 1,358,311 1999 Tax Refund Services $ 1,177 186 1,238 204 461 904 368 Mortgage Banking $ 320 2,974 133 387 751 10,304 Consolidated Totals $ 47,605 1,806 1,238 2,974 5,872 6,248 12,252 1,368,983 21. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2001 and 2000. (in thousands, except per share data) 2001: Interest income Net interest income Provision for loan losses Income before income taxes and extraordinary item Net income before extraordinary item Extraordinary item, net of tax Net income Earnings per share before extraordinary item, basic: Class A Common Class B Common Earnings per share before extraordinary item, assuming dilution: Class A Common Class B Common Earnings per share, basic: Class A Common Class B Common Earnings per share assuming dilution: Class A Common Class B Common (in thousands, except per share data) 2000: Interest income Net interest income Provision for loan losses Income before income taxes Net income Earnings per share: Class A Common Class B Common Earnings per share assuming dilution: Class A Common Class B Common Fourth Quarter $ 26,939 15,023 1,287 6,955 4,537 686 3,851 0.28 0.28 0.27 0.27 0.24 0.24 0.23 0.23 Fourth Quarter $ 30,975 12,558 376 4,732 3,140 0.19 0.19 0.19 0.18 Third Quarter $ 28,288 14,174 569 5,645 3,712 3,712 0.23 0.23 0.22 0.22 0.23 0.23 0.22 0.22 Third Quarter $ 29,886 12,391 39 4,590 3,068 0.19 0.18 0.18 0.18 Second Quarter $ 29,231 14,006 (152) 6,677 4,421 4,421 0.28 0.27 0.27 0.26 0.28 0.27 0.27 0.26 Second Quarter $ 28,717 12,680 432 4,480 3,062 0.18 0.18 0.18 0.18 First Quarter $ 32,938 16,276 1,789 7,160 4,825 4,825 0.29 0.29 0.28 0.28 0.29 0.29 0.28 0.28 First Quarter $ 29,082 14,180 535 5,455 3,651 0.22 0.22 0.21 0.21 ANNUAL MEETING The Annual Meeting of Shareholders of Republic Bancorp, Inc. will be held at 10:00 a.m. (EDT),Wednesday, April 17, 2002 in the community room of Republic Bank - Springhurst, 9600 Brownsboro Road, Louisville, KY 40241. FINANCIAL INFORMATION Shareholders may obtain a free copy of the 2001 Form 10-K including financial statements and schedules required to be filed with the Securities and Exchange Commission by contacting: Kevin Sipes, Executive Vice President and Chief Financial Officer, at the executive office address listed below by calling 502-560-8628; or Mike Ringswald, Senior Vice President and General Counsel, 502-561-7128. STOCK LISTING Republic Bancorp, Inc. Class A Common Stock is listed under the symbol “RBCAA” on NASDAQ. TRANSFER AGENT Inquiries relating to shareholder records, stock transfers, changes of ownership, changes of address and dividend payment should be sent to the transfer agent at the following address: Computershare Investor Services PO Box A3480 Chicago, Illinois 60690-3480 312-360-5350 INDEPENDENT PUBLIC ACCOUNTANTS The independent public accountants of Republic Bancorp, Inc. are Crowe, Chizek & Company LLP, Louisville, KY. EXECUTIVE OFFICES Republic Bancorp, Inc. 601 West Market Street Louisville, Kentucky 40202 502-584-3600 or outside Louisville 888-584-3600 info@republicbank.com WEB SITE www.republicbank.com BANKING CENTERS AND CHIEF OPERATING OFFICERS Kentucky Bowling Green Elizabethtown Frankfort Lexington Louisville Owensboro Shelbyville Indiana Clarksville New Albany East West Andover Chevy Chase Harrodsburg Perimeter Baptist Hospital East Bardstown Road Brownsboro Road Corporate Center Dixie Highway Fern Creek Hurstbourne Parkway Outer Loop Prospect St. Matthews Springhurst 1700 Scottsville Road, Bowling Green, KY 42101 690 Ring Road, Elizabethtown, KY 42701 1001 Versailles Road, Frankfort, KY 40601 100 Highway 676, Frankfort, KY 40601 3098 Helmsdale Place, Lexington, KY 40509 641 East Euclid Avenue, Lexington, KY 40502 2401 Harrodsburg Road, Lexington, KY 40504 651 Perimeter Drive, Lexington, KY 40517 3950 Kresge Way, Suite 108, Louisville, KY 40207 2801 Bardstown Road, Louisville, KY 40205 4921 Brownsboro Road, Louisville, KY 40222 601 West Market Street, Louisville, KY 40202 5320 Dixie Highway, Louisville, KY 40216 7101 Bardstown Road, Louisville, KY 40291 661 S. Hurstbourne Parkway, Louisville, KY 40222 4655 Outer Loop, Louisville, KY 40219 9101 US Hwy 42, Prospect, KY 40059 3726 Lexington Road, KY 40207 9600 Brownsboro Road, KY 40241 3550 Frederica Street, Owensboro, KY 42301 1614 Midland Trail, Louisville. KY 40065 Allen Bell Claudio Monzon Rodney Williams Paul Finley Bob McQueary Billy Blair Jenifer Duncan Barb Cutter Lisa George Eric Higdon Chip Hancock Rob Nicolas Jill Napier Steve DeWeese Mary Matheny Missy Fultz Kathy Potts Mike Elles Shirley Cecil Tucker Ballinger 270-782-9111 270-769-6356 502-695-9000 502-875-4300 859-264-0990 859-255-6267 859-224-1183 859-266-1165 502-897-3800 502-459-2200 502-339-9700 502-584-3600 502-448-7000 502-231-5522 502-425-2300 502-969-8999 502-228-2755 502-893-2533 502-339-2200 270-684-3333 502-633-6660 610 Eastern Boulevard, Clarksville, IN 47129 3001 Charlestown Crossing Way, New Albany, IN 47150 Todd Lancaster Kari Thom 812-288-1111 812-949-2600 59 I R E P U B L C B A N C O R P A N N U A L R E P O R T 2 0 0 1 60 1 0 0 2 T R O P E R L A U N N A P R O C N A B C L B U P E R I DIRECTORS AND OFFICERS Republic Bancorp, Inc. Directors Charles E.“Andy” Anderson President, Anderson Insurance & Financial Services Larry M. Hayes President, Midwest Construction, Inc. Bill Petter Vice Chairman, Republic Bancorp, Inc. Sandra Metts Snowden President, Realty World – Sandy Metts and Associates R.Wayne Stratton, CPA Member, Jones, Nale & Mattingly PLC Samuel G. Swope Chairman, Swope Automotive Group, Inc. Bernard M.Trager Chairman, Republic Bancorp, Inc. Scott Trager Vice Chairman, Republic Bancorp, Inc. Steven E.Trager President and Chief Executive Officer, Republic Bancorp, Inc. Republic Bank & Trust Company Directors Phillip D. Bond Vice President, Metro Untied Way, Inc. J. Michael Brown Partner,Wyatt,Tarrant & Combs, LLP Stan Curtis Senior Vice President, Hilliard Lyons Lawrence C.“Lonnie” Falk Mayor, City of Prospect George F. Fischer Retired - Chairman, SerVend International, Inc. D. Harry Jones Executive Vice President, Jones Plastic & Engineering Inc. Thomas M. Jurich Director of Athletics, University of Louisville Bill Petter Executive Vice President and Chief Operating Officer, Republic Bank & Trust Company Michael T. Rust, FACHE President, Kentucky Hospital Association Robert L. Shircliff Senior Vice President, Jewish Hospital HealthCare Services, Inc. Susan Stout Tamme President, Baptist Hospital East Bernard M.Trager Chairman of the Executive Committee, Republic Bank & Trust Company Scott Trager President, Republic Bank & Trust Company Steven E.Trager Chairman and Chief Executive Officer, Republic Bank & Trust Company Beverly A.Wheatley President,Wheatley Roofing Company, Inc. Doug Wise President, Century Investment Group Republic Bank & Trust Company Advisory Directors David Vest Executive Vice President and Chief Lending Officer Mike Marks Executive Vice President and Regional Sales Manager Ed McDougal Senior Vice President and Regional Sales Manager Kevin Sipes Executive Vice President and Chief Financial Officer Eastern Kentucky Region (Frankfort, Lexington) Tom Burich Gordon Duke Bill Johnson Jas Sekhon Dr. Emery Wilson Western Kentucky (Bowling Green, Elizabethtown, Owensboro) Romanza Johnson* Gary Larimore Bill Osbourne Jody Richards G.Ted Smith Jack Wells Shelbyville Shelbyville Todd Davis John Marshall * Term expired February 19, 2002 Republic Bancorp, Inc. Executive Officers Bernard M.Trager Chairman Steven E.Trager President and Chief Executive Officer A. Scott Trager Vice Chairman Bill Petter Vice Chairman Kevin Sipes Executive Vice President and Chief Financial Officer Republic Bank & Trust Company Senior Management Steven E.Trager Chairman and Chief Executive Officer Scott Trager President Bill Petter Executive Vice President and Chief Operating Officer BANK ADMINISTRATION Jeff Nelson Vice President Barbara Trager Vice President COMPLIANCE Garry Throckmorton Senior Vice President CASH MANAGEMENT Cathy Slider Senior Vice President COMMERCIAL LENDING Darryl Witten Senior Vice President HUMAN RESOURCES Ruth Gillespie Senior Vice President INFORMATION TECHNOLOGY Tom Clausen Senior Vice President LEGAL Mike Ringswald Senior Vice President and General Counsel LOAN ADMINISTRATION Shannon Reid Senior Vice President MARKETING Michael Sadofsky Senior Vice President PREFERRED CLIENT SERVICES John Mason Senior Vice President PURCHASING & FACILITIES MANAGEMENT Rod Gillespie Senior Vice President REFUNDS NOW AND eCOMMERCE Mike Keene Senior Vice President TREASURY Greg Williams Senior Vice President and Chief Investment Officer EXECUTIVE OFFICERS (standing L to R) Scott Trager, Vice Chairman, Bill Petter, Vice Chairman, Bernard M.Trager, Chairman, (seated L to R) Kevin Sipes, Executive Vice President and Chief Financial Officer, Steven E.Trager, President and CEO 

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