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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [No Fee Required]
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the Transition Period From __________ to ___________
Commission File Number: 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2604669
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 725-7337
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Registrant's common stock held by
non-affiliates, based on the closing price on March 6, 1998 of $19.00, was
$313.8 million.
Number of shares of Registrant's common stock outstanding as of March 6,
1998: 18,678,846
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Registrant's definitive proxy statement dated March 18, 1998
("1998 Proxy Statement") filed with the Commission (Part III).
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FORM 10-K TABLE OF CONTENTS
Part I Page
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Item 1 - Business................................................. 2
General Description.................................... 2
Business Segments...................................... 3
Competition............................................ 4
Employees.............................................. 5
Principal Sources of Revenue........................... 5
Monetary Policy and Economic Controls.................. 5
Supervision and Regulation............................. 5
Forward-Looking Statements............................. 9
Executive Officers of the Registrant................... 9
Item 2 - Properties............................................... 10
Item 3 - Legal Proceedings........................................ 10
Item 4 - Submission of Matters to a Vote of Security Holders...... 10
Part II
Item 5 - Market for Registrant's Common Stock and Related
Stockholder Matters.................................... 10
Item 6 - Selected Financial Data.................................. 11
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
Item 7A- Quantitative and Qualitative Disclosures
about Market Risk...................................... 31
Item 8 - Financial Statements and Supplementary Data.............. 32
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 62
Part III
Item 10 - Directors and Executive Officers of the Registrant....... 62
Item 11 - Executive Compensation................................... 62
Item 12 - Security Ownership of Certain Beneficial Owners
and Management......................................... 62
Item 13 - Certain Relationships and Related Transactions........... 62
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 63
Signatures.......................................................... 65
1
PART I
ITEM 1. BUSINESS
General Description
Republic Bancorp Inc. (the "Company") is a bank holding company incorporated
under the laws of the State of Michigan in 1986. The Company's principal
office is located in Ann Arbor, Michigan. Currently, the Company has 112
banking and mortgage banking offices in 21 states.
Through its two wholly-owned banking subsidiaries--Republic Bank and
Republic Savings Bank--the Company provides commercial and retail banking
products and services. Together, the subsidiary banks operate 35 commercial
and retail banking offices and 9 mortgage loan production offices in
Michigan, Ohio and Indiana. Republic Bank, a state-chartered bank
headquartered in Ann Arbor, Michigan, exercises the powers of a full-service
commercial bank and operates 26 offices in seven market areas in Michigan. At
December 31, 1997, Republic Bank had $1.3 billion in assets and $894 million
in deposits. Republic Savings Bank, a state-chartered savings bank
headquartered in Pepper Pike, Ohio, exercises the powers of a full-service
savings bank and operates 18 offices primarily in the greater Cleveland area
as well as Columbus, Dayton and Cincinnati, Ohio and Indianapolis, Indiana.
At December 31, 1997, Republic Savings Bank had $492 million in assets and
$320 million in deposits.
To complement its commercial and retail banking activities, the Company
has grown a nationwide mortgage lending network through various nonbank
companies engaged in the mortgage banking business. Market Street Mortgage
Corporation ("Market Street Mortgage") is an 80% majority-owned mortgage
banking subsidiary of Republic Bank with headquarters in Clearwater, Florida,
and 44 offices in 13 states. Republic Bancorp Mortgage Inc. ("Republic
Bancorp Mortgage") is a wholly-owned mortgage banking subsidiary of Republic
Bank with headquarters in Farmington Hills, Michigan, and 17 offices in 5
states. CUB Funding Corporation ("CUB Funding") is a wholly-owned mortgage
banking subsidiary of Republic Bank with headquarters in Clearwater, Florida,
and 7 offices in 3 states.
The Company, on an ongoing basis, evaluates its existing business
operations and organizational structures and routinely explores opportunities
to acquire financial institutions and other financial services-related
businesses, particularly mortgage origination networks and related assets. In
September 1997, the Company acquired certain assets and the mortgage
origination network of Exchange Mortgage Corporation of Southfield, Michigan,
including its sub-prime mortgage lending division, Union Mortgage Services,
Inc. In July 1997, the parent company transferred its 80% ownership interest
in Market Street Mortgage to Republic Bank, effectively reducing funding
costs. In May 1997, the Company completed the sale of four southern Michigan
branches of Republic Bank to concentrate the expansion of its
deposit-gathering capabilities in more growth-oriented areas of the state.
Also, in 1997, Market Street Mortgage assumed responsibility for the
management of CUB Funding Corporation to allow for the sharing of best
practices between the two organizations, marketing synergies, enhanced sales
efforts, and improved operating results.
At December 31, 1997, the Company had consolidated total assets of $1.9
billion, total deposits of $1.2 billion and shareholders' equity of $131.1
million. For the year ended December 31, 1997, the Company reported net
income of $18.8 million, compared to $14.7 million for 1996. Residential
mortgage loan closings totaled $3.9 billion in 1997, compared to $3.6 billion
in 1996. Commercial loan closings totaled $178 million in 1997 versus $122
million in 1996. Small Business Administration (SBA) loan closings totaled
$28 million in 1997, compared to $24 million in 1996. At December 31, 1997,
the Company's mortgage loan servicing portfolio was $3.1 billion, compared to
$2.7 billion at year-end 1996.
2
Business Segments
The Company engages in two lines of business--Commercial and Retail Banking
and Mortgage Banking.
Commercial and Retail Banking
- -----------------------------
Commercial and retail banking is conducted at 35 branches of Republic
Bank and Republic Savings Bank by providing traditional commercial and retail
banking products and services to consumers and small- to medium-size
businesses. Products and services offered include commercial loans; small
business loans; mortgage portfolio loans; home equity loans and lines of
credit; other types of installment loans; and demand, savings and time
deposit accounts. Lending activity at the banking subsidiaries is primarily
focused on real estate-secured lending to minimize credit risk (e.g., fixed
rate and variable rate residential mortgage loans; residential construction
loans; commercial real estate mortgage loans; and commercial real estate
construction loans). In addition, emphasis is placed on loans that are
government guaranteed or insured, such as Small Business Administration (SBA)
loans, United States Department of Agriculture (USDA) loans, and FHA/VA
loans. Commercial and industrial loans are made to a lesser extent and are
typically secured by the customer's assets at a 75% or less loan-to-value
ratio and by personal guarantees.
The Company's banking subsidiaries target their marketing efforts toward
a particular segment of the consumer population that is interested in
receiving personalized banking service and attention when handling
transactions related to their deposit accounts. The Company's deposit base
consists primarily of retail deposits gathered from within local markets
served. At December 31, 1997, retail deposits comprised 83% of total
deposits.
Mortgage Banking
- ----------------
Mortgage banking activities encompass two areas: mortgage loan production
and mortgage loan servicing. Mortgage loan production involves the
origination and sale of single-family residential mortgage loans. Mortgage
lending is conducted by all of the Company's affiliates. All mortgage loan
originations are funded by the Company's banking subsidiaries.
Retail residential mortgage loans are originated by the Company's own
sales staff through 76 retail mortgage loan production offices and 35 retail
banking offices located in Michigan, Alabama, Arizona, California, Colorado,
Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts,
Missouri, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Texas, Utah
and Virginia. Each retail loan production office is responsible for
processing loan applications received and preparing loan documentation. Loan
applications are then evaluated by the underwriting departments of either the
Company's banking or mortgage banking affiliates for compliance with the
Company's underwriting criteria, including loan-to-value ratios, borrower
qualifications and required insurance. The Company also maintains a wholesale
production office in California that engages in the purchase of residential
loans from brokers. Residential loans purchased through the wholesale
operation are processed and prepared by the brokers. The Company's quality
control personnel subsequently review these loans using certain verification
procedures.
The Company originates primarily conventional mortgage loans secured by
residential properties which conform to the underwriting guidelines for sale
to the Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC). Loans guaranteed by the Department of Veterans
Affairs (VA) and insured through the Federal Housing Administration (FHA) are
originated in compliance with their underwriting guidelines permitting
conversion of such loans into mortgage-backed securities issued by the
Government National Mortgage Association (GNMA).
Growth in the Company's residential mortgage origination business during
1997 was funded primarily with the subsidiary banks' retail deposits and
short-term borrowings, including federal funds purchased and Federal Home
Loan Bank (FHLB) advances. The majority of all mortgage loans originated are
held for a short period of time (generally less than 60 days) with the intent
of selling them to investors in the secondary market. These loans are
classified as mortgage loans held for sale in the Company's consolidated
balance sheet. Mortgage loans held for sale consist of loans that will be
sold directly to secondary market investors or loans that are being prepared
for securitization into mortgage-backed securities; however, the
mortgage-backed security has not yet been formed and issued. These mortgage
loans held for sale are typically sold without recourse to the Company in the
event of default by the borrowers. To minimize interest rate risk, the
Company obtains mandatory purchase commitments from investors prior to
funding the loans.
3
Consistent with the Company's strategy of managing interest rate risk,
substantially all long-term fixed rate mortgages originated are typically
securitized and sold or sold directly to secondary market investors. The
majority of short-term fixed rate mortgages and variable rate mortgages are
typically securitized and sold or sold directly to secondary market
investors, although a portion of the variable rate mortgages may be retained
in the loan portfolios of Republic Bank and Republic Savings Bank for
investment purposes. Portfolio loans may be securitized and reclassified as
securities available for sale.
When the Company sells originated or purchased residential mortgage loans
to investors, it makes a determination to either retain or sell the rights to
service those loans. Servicing rights may also be acquired through bulk
purchases of loans. While there is an active market for selling servicing
rights (which are generally valued in relation to the present value of the
anticipated cash flow generated by the servicing rights), the aggregation of
a servicing portfolio creates a substantial continuing source of income and
enables the Company to reduce the sensitivity of its earnings to changes in
interest rates.
Mortgage loan servicing is conducted primarily by Market Street Mortgage,
which receives servicing fees ranging from 25 to 45 basis points per annum on
its servicing portfolio. The mortgage loan servicing function involves the
administration of loans; collection and remittance of loan payments; receipt
of escrow funds for payment of taxes and insurance; counseling of delinquent
mortgagors and supervision of foreclosures and property dispositions in the
event of unremedied defaults.
The Company's current operating strategy for the mortgage banking segment
is to continue growing mortgage banking revenue and related interest income
while managing interest rate and liquidity risks. To help accomplish this
objective, the Company expanded its target market for mortgage customers
during 1997 by opening 13 new mortgage loan production offices and by
entering the sub-prime mortgage lending market in the Midwest. (All sub-prime
mortgage loans originated are sold to the secondary market.) Selling mortgage
loans to investors in the secondary market provides additional revenue,
although the level of this activity is dependent upon market conditions at
the time of sale. The Company also earns fees for originating and servicing
loans. In addition, the mortgage banking segment effectively earns long-term
interest rates on mortgage loans held for sale which helps the Company to
minimize interest rate risk.
Competition
Commercial and Retail Banking and Mortgage Banking are highly competitive
businesses in which the Company faces numerous banking and non-banking
institutions as competitors. By reason of changes in Federal law (which
became effective on September 29, 1995) and Michigan law (which became
effective on November 29, 1995) the number and types of potential depository
institution competitors have substantially increased.
In addition to competition from other banks, the Company continues to
face increased competition from other types of financial services
organizations. Competition from finance companies and credit unions has
increased in the areas of consumer lending and deposit gathering. The
Company's mortgage banking affiliates also face significant competition from
numerous bank and non-bank companies in the area of mortgage lending.
Generally, other financial institutions have greater resources to use in
making acquisitions and higher lending limits than those of the Company's
banking subsidiaries or any banking institution that the Company could
acquire. Such institutions may also provide certain non-traditional financial
products and services to their customers which the Company's banking
subsidiaries currently do not offer (e.g., trust services, brokerage services
and insurance products).
The principal factors of competition in the markets for deposits and
loans are price (interest rates paid and/or fees charged) and customer
service. The Company's banking subsidiaries compete for deposits by offering
depositors a variety of checking and savings accounts, time deposits,
convenient office locations and personalized customer services. The Company
competes for loans through the efficiency and quality of the services it
provides to borrowers, real estate brokers and home builders. The Company
seeks to compete for loans primarily on the basis of customer service,
including prompt underwriting decisions and funding of loans, and by offering
a variety of loan programs as well as competitive interest rates.
4
Employees
As of December 31, 1997, the Company and its subsidiaries had 1,426 full-time
equivalent employees.
Principal Sources of Revenue
The principal sources of revenue for the Company are interest income from
interest and fees on loans and mortgage banking revenue. Interest and fees on
loans totaled $105.8 million in 1997, an increase of 32% from $80.4 million
in 1996 and up 48% from $71.5 million in 1995. In 1997, interest and fees on
loans accounted for 48% of total revenues, compared to 42% of total revenues
in both 1996 and 1995. Mortgage banking revenue, the largest component of
noninterest income, totaled $93.7 million in 1997, an increase of 8% from
$86.4 million in 1996 and up 32% from $71.0 million in 1995. Mortgage banking
revenue represented 42% of total revenues in 1997, compared to 45% in 1996
and 42% in 1995.
Monetary Policy and Economic Controls
The earnings of the banking subsidiaries, and, therefore, the earnings of the
Company, are affected by the policies of regulatory authorities, including
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). An important function of the Federal Reserve Board is to promote
orderly economic growth by influencing interest rates and the supply of money
and credit. Among the methods that have been used to achieve this objective
are open market operations in U.S. government securities, changes in the
discount rate on member bank borrowings, and changes in reserve requirements
against bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, interest rates on loans and securities, and rates paid for
deposits.
The Federal Reserve Board's monetary policies strongly influence the
behavior of interest rates and can have a significant effect on the operating
results of commercial banks and mortgage banking companies. Continued
moderate price inflation in 1997 contributed to the decision of the Federal
Reserve Board to hold short-term interest rates stable. The effects of the
various Federal Reserve Board policies on the future business and earnings of
the Company cannot be predicted. Other economic controls also have affected
the Company's operations in the past. The Company cannot predict the nature
or extent of any effects that possible future governmental controls or
legislation may have on its business and earnings.
Supervision and Regulation
General
- -------
Bank holding companies, banks and savings banks are highly regulated at both
the state and federal level. As a bank holding company, the Company is
subject to supervision and regulation by the Federal Reserve Board under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). Under the BHC
Act, the Company is prohibited from engaging in activities other than those
of banking or of managing or controlling banks and from acquiring or
retaining direct or indirect ownership or control of voting shares of any
company which is not a bank or bank holding company, unless the activities
engaged in by the Company or the company whose voting shares are acquired by
the Company are activities which the Federal Reserve Board determines to be
so closely related to the business of banking as to be a proper incident
thereto.
Republic Bank is chartered by the State of Michigan and is supervised and
regulated by the Financial Institutions Bureau of the State of Michigan (the
"FIB"). Republic Savings Bank is chartered by the State of Ohio and is
supervised and regulated by the Ohio Superintendent of the Division of
Financial Institutions. As insured state banks, Republic Bank and Republic
Savings Bank are also regulated by the Federal Deposit Insurance Company
("FDIC").
The Company is a legal entity separate and distinct from its banking
subsidiaries. Most of the Company's revenues result from dividends paid to it
by its bank subsidiaries. There are statutory and regulatory requirements
applicable to the payment of dividends by subsidiary banks to the Company as
well as by the Company to its shareholders.
5
Under Federal Reserve Board policy, the Company is expected to act as a
source of financial and managerial strength to Republic Bank and to Republic
Savings Bank and to commit resources to support them. This support may be
required at times when, in the absence of such Federal Reserve Board policy,
the Company would not otherwise be required to provide it.
Interstate Banking and Branching
- --------------------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act"), among other things: (i) permits bank holding companies to
acquire control of banks in any state, subject to (a) specified maximum
national state deposit concentration limits; (b) any applicable state law
provisions requiring the acquired bank to be in existence for a specified
period of up to five years; (c) any applicable nondiscriminatory state
provisions that make an acquisition of a bank contingent upon a requirement
to hold a portion of such bank's assets available for call by a state
sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorizes
interstate mergers by banks in different states (and retention of interstate
branches resulting from such mergers) beginning June 1, 1997, subject to the
provisions noted in (i) and to any state laws that "opt-out" of the provision
entirely; and (iii) authorizes states to enact legislation permitting
interstate de novo branching.
The Michigan Banking Code permits, in appropriate circumstances and with
notice to, or the approval of the Commissioner of the FIB, (i) acquisition of
Michigan-chartered banks (such as Republic Bank) by FDIC-insured banks,
savings banks or savings and loan associations located in other states, (ii)
the sale by a Michigan-chartered bank of one or more of its branches (not
comprising all or substantially all of its assets) to an FDIC-insured bank,
savings bank or savings and loan association located in a state in which a
Michigan-chartered bank could purchase one or more branches of the purchasing
entity, (iii) the acquisition by a Michigan-chartered bank of an FDIC-insured
bank, savings bank or savings and loan association located in another state,
(iv) the acquisition by a Michigan-chartered bank of one or more branches
(not comprising all or substantially all of the assets) of an FDIC-insured
bank, savings bank or savings and loan association located in another state,
(v) the consolidation of one or more Michigan-chartered banks and
FDIC-insured banks, savings banks or savings and loan associations located in
other states with the resulting organization chartered either by Michigan or
one of such other states, (vi) the establishment by Michigan-chartered banks
of branches located in other states, the District of Columbia, or U.S.
territories or protectorates, (vii) the establishment of branches in Michigan
by FDIC-insured banks located in other states, the District of Columbia, or
U.S. territories or protectorates having laws permitting a Michigan-chartered
bank to establish a branch in such jurisdiction, and (viii) the establishment
by foreign banks of branches located in Michigan.
Dividends
- ---------
Michigan and Ohio law, respectively, place specific limits on the source and
amount of dividends which may be paid by Republic Bank and Republic Savings
Bank, respectively. The payment of dividends by the Company and its bank
subsidiaries is also affected by various regulatory requirements and
policies, such as the requirement to maintain adequate capital above
regulatory guidelines. The "prompt corrective action" provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
impose further restrictions on the payment of dividends by insured banks
which fail to meet specified capital levels and, in some cases, their parent
bank holding companies. FDICIA generally prohibits a depository institution
from making any capital distribution (including payment of a dividend) or
paying any management fee to its holding company if the depository
institution would thereafter be undercapitalized.
The FDIC may prevent an insured bank from paying dividends if the bank is
in default of payment of any assessment due to the FDIC. In addition, payment
of dividends by a bank may be prevented by the applicable federal regulatory
authority if such payment is determined, by reason of the financial condition
of such bank, to be an unsafe and unsound banking practice. The Federal
Reserve Board has issued a policy statement providing that bank holding
companies and insured banks should generally only pay dividends out of
current operating earnings.
These regulations and restrictions may limit the Company's ability to
obtain funds from its subsidiaries for its cash needs, including funds for
acquisitions, payment of dividends and interest and the payment of operating
expenses.
6
FIRREA
- ------
Banking legislation, including the Financial Institutions Reform and Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA, has broadened the
regulatory powers of the federal bank regulatory agencies. Under FIRREA, a
depository institution insured by the FDIC shall be liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution, or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default."
"Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance.
FDICIA
- ------
In December 1991, FDICIA was enacted, substantially revising the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and
making revisions to several other federal banking statutes. Among other
things, FDICIA requires the federal banking agencies to take "prompt
corrective action" in respect of depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital tiers:
"well-capitalized," "adequately capitalized," "undercapitalized,"
"significantly under capitalized" and "critically undercapitalized." A
depository institution's capital tier will depend upon where its capital
levels are in relation to various relevant capital measures, which will
include a risk-based capital measure and a leverage ratio capital measure,
and certain other factors.
Regulations establishing the specific capital tiers provide that, for an
institution to be well capitalized it must have a total risk-based capital
ratio of at least 10 percent, a Tier 1 risk-based capital ratio of at least 6
percent, a Tier 1 leverage ratio of at least 5 percent, and not be subject to
any specific capital order or directive. For an institution to be adequately
capitalized it must have a total risk-based capital ratio of at least 8
percent, a Tier 1 risk-based capital ratio of at least 4 percent, and a Tier
1 leverage ratio of at least 4 percent (and in some cases 3 percent). Under
these regulations, the banking subsidiaries of the Company would be
considered to be well capitalized as of December 31, 1997.
FDICIA directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating
to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, asset quality, earnings, stock valuation and other standards as
they deem appropriate. Such standards were issued jointly by the agencies on
August 9, 1995, in guideline form.
FDICIA also contains a variety of other provisions that may affect the
operations of depository institutions including new reporting requirements,
regulatory standards for real estate lending, "truth in savings" provisions,
the requirement that a depository institution give 90 days prior notice to
customers and regulatory authorities before closing any branch and a
prohibition on the acceptance or renewal of brokered deposits by depository
institutions that are not well capitalized or are adequately capitalized and
have not received a waiver from the FDIC. Under regulations relating to the
brokered deposit prohibition, the Company's subsidiary banks are all
well-capitalized and may accept brokered deposits without restriction.
FDIC Insurance Assessments
- --------------------------
Republic Bank is generally subject to FDIC deposit insurance assessments paid
to the Bank Insurance Fund ("BIF"). Republic Savings is subject to FDIC
deposit insurance assessments paid to the Savings Association Insurance Fund
("SAIF"). Pursuant to FDICIA, the FDIC has implemented a risk-based
assessment scheme. Under this arrangement, each depository institution is
assigned to one of nine categories (based upon three categories of capital
adequacy and three categories of perceived risk to the applicable insurance
fund). Pursuant to the Omnibus Consolidated Appropriations Act, 1997
("OCAA"), a special one-time assessment was made by the FDIC in October 1996,
on SAIF-insured deposits to bring the SAIF to its mandated reserve ratio of
1.25% of aggregate SAIF-insured deposits by January 1, 1997. OCAA
contemplates the merger of the BIF and SAIF into a single Deposit Insurance
Fund ("DIF") on January 1, 1999, under certain conditions.
7
Mortgage Banking Affiliates
- ---------------------------
The Company's non-depository mortgage banking affiliates, Market Street
Mortgage, Republic Bancorp Mortgage and CUB Funding (collectively referred to
as the "mortgage companies") are engaged in the business of originating,
selling and servicing mortgage loans secured by residential real estate. In
the origination of mortgage loans, the mortgage companies are subject to
State usury and licensing laws and to various federal statutes, such as the
Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending
Act, Real Estate Settlement Procedures Act, and Home Mortgage Disclosure Act,
and the regulations promulgated thereunder, which prohibit discrimination,
specify disclosures to be made to borrowers regarding credit and settlement
costs, and regulate the mortgage loan servicing activities of such entities,
including the maintenance and operation of escrow accounts and the transfer
of mortgage loan servicing.
CUB Funding purchases mortgage loans from approved brokers after they
perform their own underwriting review of the mortgage loans. Brokers qualify
to participate in CUB Funding's wholesale program only after a review of
their financial condition, including a review of references and financial
statements. In such activities, CUB Funding is also subject to applicable
usury and other state and federal laws, including various states' licensing
statutes.
As sellers and servicers of mortgage loans, the mortgage companies are
participants in the secondary mortgage market with some or all of the
following: private institutional investors, FNMA, GNMA, FHLMC, VA and FHA. In
their dealings with these agencies, the mortgage companies are subject to
various eligibility requirements prescribed by the agencies, including but
not limited to net worth, quality control, bonding, financial reporting and
compliance reporting requirements. The mortgage loans which they originate
and purchase are subject to agency-prescribed procedures, including, without
limitation, inspection and appraisal of properties, maximum loan-to-value
ratios, and obtaining credit reports on prospective borrowers. On some types
of loans, the agencies prescribe maximum loan amounts, interest rates and
fees. When selling mortgage loans to FNMA, FHLMC, GNMA, VA and FHA, each of
the mortgage companies represents and warrants that all such mortgage loans
sold by it conform to their requirements. If the mortgage loans sold are
found to be non-conforming mortgage loans, such agency may require the seller
(i.e., Republic Bancorp Mortgage, Market Street Mortgage or CUB Funding) to
repurchase the non-conforming mortgage loans. Additionally, FNMA, FHLMC,
GNMA, VA and FHA may require the mortgage companies to indemnify them against
all losses arising from their failure to perform their contractual
obligations under the applicable selling or servicing contract. Certain
provisions of the Housing and Community Development Act of 1992, and
regulations adopted thereunder may affect the operations and programs of FNMA
and FHLMC.
Regulation of Proposed Acquisitions
- -----------------------------------
In general, any direct or indirect acquisition by the Company of any voting
shares of any bank which would result in the Company's direct or indirect
ownership or control of more than 5% of any class of voting shares of such
bank, and any merger or consolidation of the Company with another bank
holding company, will require the prior written approval of the Federal
Reserve Board under the BHC Act. In acting on such applications, the Federal
Reserve Board must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition,
managerial resources, and record of performance under the Community
Reinvestment Act.
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of assets of
another bank, or the assumption of liability by such a subsidiary to pay any
deposits in another bank, will require the prior written approval of the
responsible Federal depository institution regulatory agency under the Bank
Merger Act, based upon a consideration of statutory factors similar to those
outlined above with respect to the BHC Act. In addition, an application to,
and the prior approval of, the Federal Reserve Board may be required under
the BHC Act, in certain such cases.
Each of the foregoing types of applications is subject to public notice
and comment procedures, and, in many cases, to prior notice and/or approval
of Federal and State bank regulatory authorities. Adverse public comments
received, or adverse considerations raised by the regulatory agencies, may
delay or prevent consummation of the proposed transaction.
8
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K which are not
statements of historical fact constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act (the "Act"),
including, without limitation, the statements specifically identified as
forward-looking statements within this document. In addition, certain
statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, or in oral and written statements made by or
with the approval of the Company which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples
of forward-looking statements include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per share, the
payment or non-payment of dividends, capital structure and other financial
items, (ii) statements of plans and objectives of the Company or its
management or Board of Directors, including those relating to products or
services, (iii) statements of future economic performance and (iv) statements
of assumptions underlying such statements. Words such as "believes",
"anticipates", "expects", "intends", "plans", "targets" and similar
expressions are intended to identify forward-looking statements but are not
the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such statements.
Factors that could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to: (i) the strength
of the U.S. economy in general and the strength of the local economies in
which operations are conducted; (ii) the effects of and changes in trade,
monetary and fiscal policies and laws, including interest rate policies of
the Federal Reserve Board; (iii) inflation, interest rate, market and
monetary fluctuations; (iv) the timely development of and acceptance of new
products and services and perceived overall value of these products and
services by users; (v) changes in consumer spending, borrowing and saving
habits; (vi) technological changes; (vii) acquisitions; (viii) the ability to
increase market share and control expenses; (ix) the effect of changes in
laws and regulations (including laws and regulations concerning taxes,
banking, and securities) with which the Company and its subsidiaries must
comply; (x) the effect of changes in accounting policies and practices, as
may be adopted by the regulatory agencies as well as the Financial Accounting
Standards Board, (xi) changes in the Company's organization, compensation and
benefit plans; (xii) the costs and effects of litigation and of unexpected or
adverse outcomes in such litigation; and (xiii) the success of the Company at
managing risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which such statement is made to reflect the occurrence of unanticipated
events.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all the executive officers (5) of the Company
as of December 31, 1997. All of these officers are elected annually by the
Board of Directors. Excluding Mr. Parker, each of the executive officers has
served as an officer of the Company for more than five years. Prior to
joining the Company in 1997, Mr. Parker was a principal in the law firm of
Miller, Canfield, Paddock & Stone, PLC, Detroit, Michigan, for more than
twenty-five years. There are no family relationships among any of the
executive officers.
Name Age Position
- ---- --- --------
Jerry D. Campbell.................. 57 Chairman of the Board and Chief
Executive Officer (Since 1985)
Dana M. Cluckey, CPA............... 38 President and Chief Operating
Officer (Since 1986)
Barry J. Eckhold................... 51 Vice President and Chief Credit
Officer (Since 1990)
Thomas F. Menacher, CPA............ 41 Senior Vice President, Treasurer
and Chief Financial Officer
(Since 1992)
George E. Parker III............... 63 General Counsel and Corporate
Secretary (Since 1997)
9
ITEM 2. PROPERTIES
The Company's executive offices are located at 1070 East Main Street,
Owosso, Michigan 48867. At December 31, 1997, the Company had 35 banking
locations, of which eight were owned and 27 were leased, and 77 mortgage loan
production offices, all of which were leased. All of these offices are
considered by management to be well maintained and adequate for the purpose
intended. See Note 7 of the Notes to Consolidated Financial Statements
included under Item 8 of this document for further information on properties.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is set forth in Note 17 of the
Notes to Consolidated Financial Statements included under Item 8 of this
document and is expressly incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Quarterly Dividends and Market Price Summary
Common Stock
Dividends Price Range (1)
Declared ----------------
Per Share (1) High Low
------------- ---- ---
1997
Fourth quarter .......... $ 0.100 $21.375 $15.250
Third quarter ........... 0.091 15.000 13.000
Second quarter .......... 0.091 13.250 11.500
First quarter ........... 0.091 12.375 10.750
-------
Year ................ $ 0.373 $21.375 $10.750
=======
1996
Fourth quarter .......... $ 0.091 $11.250 $ 9.875
Third quarter ........... 0.083 10.000 9.000
Second quarter .......... 0.083 9.750 9.125
First quarter ........... 0.083 9.875 8.750
-------
Year ................ $ 0.340 $11.250 $ 8.750
=======
<FN>
- ---------
(1) Dividends and market price data have been restated to reflect the
issuance of stock dividends.
The principal market for the quotations of stock prices of the Company's
common stock is The Nasdaq Stock Market. The Company's common stock trades
under the symbol RBNC. There were approximately 13,800 shareholders of record
of the Company's common stock as of March 6, 1998.
10
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Earnings Summary (in thousands)
Interest income $118,852 $ 99,147 $ 95,597 $ 78,219 $ 78,831
Interest expense 71,912 62,427 65,192 44,999 42,268
Net interest income 46,940 36,720 30,405 33,220 36,563
Provision for loan losses 3,031 290 24 94 603
Mortgage banking revenue 93,700 86,377 70,960 69,899 85,128
Other noninterest income 8,815 4,469 4,241 5,762 6,992
Noninterest expense 117,742 104,492(1) 83,152 85,021 93,539
Income before cumulative effect
of a change in accounting principle
and extraordinary item 18,789 15,066 14,264 15,719 22,233
Net income 18,789 14,678 14,264 15,719 23,183
-------- -------- -------- -------- --------
Per Common Share(2)
Basic earnings $ 1.01 $ .76 $ .71 $ .77 $ 1.19
Diluted earnings .99 .74 .69 .75 1.13
Cash dividends declared .37 .34 .28 .22 .15
Book value (year-end) 7.02 6.47 6.34 5.78 5.54
Closing price of common stock (year-end) 21.38 10.57 8.88 7.42 9.39
Dividend payout ratio 37% 46% 40% 30% 13%
-------- -------- -------- -------- --------
Operating Data (in millions)
Loan closings:
Residential mortgage loans $ 3,892 $ 3,581 $ 2,847 $ 2,837 $ 4,911
Commercial loans 175 122 50 27 20
SBA loans 28 24 17 12 7
Mortgage loan servicing portfolio (year-end) 3,113 2,706 3,967 4,669 3,023
-------- -------- -------- -------- --------
Year-End Balances (in millions)
Total assets $ 1,873 $ 1,490 $ 1,473 $ 1,364 $ 1,171
Total earning assets 1,731 1,349 1,323 1,224 1,078
Mortgage loans held for sale 514 329 423 152 508
Total portfolio loans 1,096 785 578 605 407
Total deposits 1,177 1,014 905 819 834
Total short-term borrowings and
FHLB advances 425 255 344 327 160
Long-term debt 48 49 52 56 20
Shareholders' equity 131 122 126 118 111
-------- -------- -------- -------- --------
Ratios
Return on average assets 1.16% 1.02% 1.00% 1.23% 1.94%
Return on average equity 15.09 11.95 11.71 13.43 23.72
Net interest margin (3) 3.16 2.88 2.38 2.88 3.29
Net loan charge-offs to average
total loans (4) .03 .06 .06 .20 .06
Allowance for loan losses as a percentage
of year-end portfolio loans .67 .60 .87 .92 1.77
Non-performing assets as a percentage
of year-end total assets .68 .44 .20 .30 .45
Average shareholders' equity to
average assets 7.69 8.52 8.56 9.14 8.16
Tier 1 risk-based capital 9.75 13.30 15.72 17.57 16.35
Total risk-based capital 10.35 13.84 18.63 21.05 20.19
Tier 1 leverage 6.58 8.16 8.31 8.43 8.43
-------- -------- -------- -------- --------
<FN>
- ---------
(1) Includes a one-time assessment of $1.5 million ($975,000 after tax, or
$.05 per share) for the recapitalization of the SAIF.
(2) The basic earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, Earnings Per Share. For further discussion of earnings per share and
the impact of Statement No. 128, see the Notes to the Consolidated
Financial Statements beginning on page 37. All per share amounts
presented have been adjusted to reflect the issuance of stock dividends.
(3) Net interest income (FTE) expressed as a percentage of average
interest-earning assets.
(4) Includes mortgage loans held for sale.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Net income for 1997 was $18.8 million, an increase of 28% from net income of
$14.7 million in 1996. Diluted earnings per share rose 34% during the year to
$.99 from $.74 in 1996. In 1995, net income was $14.3 million, or $.69 per
common share. Return on average assets was 1.16% in 1997, compared with 1.02%
in 1996 and 1.00% in 1995. Return on average equity for 1997 was 15.09%,
compared with 11.95% in 1996 and 11.71% in 1995.
Net income for 1996 included an extraordinary loss from the early
redemption of Subordinated Notes of $388,000, after tax, and the after-tax
charge of $975,000 for a one-time special FDIC assessment. Excluding these
items, operating earnings for 1996 were $16.0 million, or $.79 per share.
Return on average assets and return on average equity, excluding these
charges, would have been 1.11% and 13.06%, respectively.
The Company's 1997 results of operations reflected the following trends
in earnings:
o Net interest income increased 28% during 1997 following an increase
of 21% in 1996. Increasing average earning asset balances during
these periods contributed to the growth in net interest income.
o The net interest margin expanded further to 3.16% in 1997, compared
to 2.88% in 1996 and 2.38% in 1995. A shift in average earning assets
away from investment securities and toward higher-yielding loans over
the past two years helped widen the net interest margin.
o Mortgage banking revenue grew 8% during 1997 after climbing 22% in
1996, as a result of record retail lending production volumes.
Shareholders' equity totaled $131.1 million at December 31, 1997. Market
capitalization, which is computed by multiplying the number of shares
outstanding by the closing price of the Company's common stock at year-end,
was $399.2 million at December 31, 1997, a 100% increase from a year earlier.
Capital ratios, by all measures, remain in excess of regulatory requirements.
Acquisitions and Divestitures
In May 1997, the Company completed the sale of four southern Michigan
branches of Republic Bank. The sale included the fixed assets of the
Hillsdale, Litchfield, Somerset Center and Spring Arbor branch offices and
deposits totaling $52 million. The Company recognized a gain of $4.4 million
on the sale.
In September 1997, the Company acquired certain assets and the mortgage
origination network of Exchange Mortgage Corporation of Southfield, Michigan.
The mortgage operation has three offices in Michigan, including a sub-prime
mortgage lending division, Union Mortgage Services. Exchange Mortgage
operates as a division of Republic Bancorp Mortgage Inc. The purchase price
for the assets of Exchange Mortgage was not significant.
Business Segments
The Company's operations are managed as two major business segments: (1)
commercial and retail banking and (2) mortgage banking. Table 1 presents the
financial results of each business segment for the last three years. Business
segment performance is determined based on the Company's management
accounting process, which assigns revenue, expenses and assets to a business
segment using specific identification and an allocation methodology. This
process is somewhat subjective; therefore, the information presented is not
necessarily comparable with similar information for any other financial
institution. Changes in the allocation methodology may result in changes in
allocations and assignments. In that case, however, results for prior periods
would be restated to allow comparability between periods.
The Company's internal management reporting system allocates interest
income and interest expense items by matching the earning asset with the
related funding source. Noninterest income and expenses directly attributable
to a business segment's operations are assigned to that business segment.
Expenses supporting more than one business segment are allocated to each
segment based on the number of employees dedicated to the segment's
operations.
12
Table 1
Business Segment Results
Commercial and
Retail Banking Mortgage Banking Consolidated
------------------------------ ------------------------------ -----------------------------
(In thousands) 1997 1996 1995 1997 1996 1995 1997 1996 1995
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
Interest income $ 93,730 $ 72,706 $ 74,496 $ 25,122 $ 26,441 $ 21,101 $118,852 $ 99,147 $ 95,597
Interest expense 49,052 40,812 43,831 22,860 21,615 21,361 71,912 62,427 65,192
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income(1) 44,678 31,894 30,665 2,262 4,826 (260) 46,940 36,720 30,405
Provision for loan
losses 3,031 290 24 -- -- -- 3,031 290 24
Noninterest
income (3) 8,102 4,469 4,241 94,413 86,377 70,960 102,515 90,846 75,201
Noninterest
expense(2) 28,585 21,221 16,410 89,157 83,271 66,742 117,742 104,492 83,152
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before taxes $ 21,164 $ 14,852 $ 18,472 $ 7,518 $ 7,932 $ 3,958 $ 28,682 $ 22,784 $ 22,430
======== ======== ======== ======== ======== ======== ======== ======== ========
Depreciation and
amortization $ 2,422 $ 2,265 $ 2,484 $ 9,595 $ 10,609 $ 10,036 $ 12,017 $ 12,874 $ 12,520
Capital expenditures $ 1,640 $ 2,298 $ 2,294 $ 2,360 $ 1,544 $ 1,265 $ 4,000 $ 3,842 $ 3,559
(In millions)
Identifiable assets $ 1,261 $ 1,072 $ 951 $ 612 $ 418 $ 522 $ 1,873 $ 1,490 $ 1,473
<FN>
- ---------
(1) Net interest income for the mortgage banking segment is generated from
the interest earned on mortgage loans held for sale, less the interest
expense incurred on short-term borrowings used to fund loan production
and servicing acquisitions.
(2) Noninterest expense for the commercial and retail banking segment in 1996
includes the $1.5 million, pre-tax, SAIF assessment.
(3) Noninterest income for the commercial and retail banking segment in 1997
includes a gain of $4.4 million on the sale of bank branches and
deposits.
Mortgage Banking
The Mortgage Banking segment is comprised of mortgage loan production and
mortgage loan servicing.
Table 2
Residential Mortgage Loan Closings
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------- ---------- --------- ----------
Total closings $3,891,894 $3,580,700 $2,847,490
Retail loans percentage 88% 76% 68%
Wholesale loans percentage 12 24 32
The Company's total closings of single-family residential mortgage loans
increased $311.2 million, or 9%, to $3.9 billion in 1997. The retail portion
of this volume reached a record $3.4 billion in 1997, up 25% from 1996.
Successful sales efforts by our mortgage loan originators and a declining
interest rate environment were major contributors to the growth in retail
loan closings. In addition, total closings for 1997 reflected a full year of
operations for Unlimited Mortgage Services, which was acquired in July 1996.
In 1996, total mortgage loan closings rose $733.2 million, or 26%, to $3.6
billion, reflecting the dual impact on production of a relatively low
interest rate environment and strong retail lending efforts. Retail mortgage
loan closings totaled $2.7 billion in 1996, a 42% increase from 1995.
Wholesale mortgage loan volume declined 43% since 1996 as the Company placed
more emphasis on its more profitable retail mortgage lending. Refinances
totaled $950.3 million, or 24% of total closings in 1997, compared to $937.3
million, or 26% of total closings, a year earlier. The Company's pipeline of
mortgage loan applications in process was $895.1 million at December 31,
1997, compared to $930.4 million at December 31, 1996.
13
Table 3
Mortgage Banking Revenue
Year Ended December 31
(In thousands) 1997 1996 1995
- -------------- ---- ---- ----
Mortgage loan production revenue (1) $85,655 $70,499 $49,656
Net mortgage loan servicing revenue (2) 6,428 8,220 9,596
Gain on bulk sales of mortgage servicing rights 1,617 7,658 11,708
------- ------- -------
Total mortgage banking revenue $93,700 $86,377 $70,960
======= ======= =======
<FN>
- ---------
(1) Includes fee revenue derived from the loan origination process (i.e.,
points collected), gains on the sale of mortgage loans and the related
mortgage servicing rights released concurrently with the underlying loans
sold.
(2) Includes servicing fees, late fees and other ancillary charges, net of
amortization and charges for impairment of mortgage servicing rights, if
any.
Mortgage banking revenue, the largest component of total noninterest
income, rose $7.3 million, or 8%, to $93.7 million in 1997, after increasing
22% in 1996. This increase resulted as growth in mortgage loan production
revenue more than offset declines in net mortgage loan servicing revenue and
gains on bulk sales of mortgage servicing rights.
Mortgage loan production revenue increased $15.2 million, or 21%, in
1997. This increase resulted primarily as volume and profitability levels
improved in retail mortgage production activities, but was partially offset
by a decline in wholesale mortgage production volume. The Company sold $3.55
billion of single-family residential mortgages in both 1997 and 1996,
compared to $2.65 billion in 1995. The ratio of mortgage production revenue
to mortgage loans sold rose 43 basis points to 2.42% in 1997, compared to
1.99% in 1996 and 1.87% in 1995.
Net mortgage loan servicing revenue decreased 22% to $6.4 million in
1997, after declining 14% in 1996. These declines correspond to a decrease in
the average size of the mortgage servicing portfolio over the past two years.
Loans serviced for others averaged $2.9 billion in 1997, down 17% from a year
earlier. In 1996, average loans serviced for others totaled $3.5 billion,
which was 11% lower than the 1995 average. This reduction in the mortgage
servicing portfolio resulted primarily from the sale of servicing rights at
Republic Bancorp Mortgage and CUB Funding as the Company focused all
servicing activity at Market Street Mortgage.
Amortization of mortgage servicing rights totaled $6.9 million in 1997,
compared to $7.6 million in 1996 and $7.0 million in 1995. The Company
evaluates its mortgage servicing rights for impairment on a quarterly basis.
No impairment reserves were required in 1997 and 1996 in accordance with
Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
The Company may elect to sell mortgage servicing rights concurrently with
the sale of the underlying loans or retain the servicing rights. Any
servicing rights retained may subsequently be sold in bulk form. The level of
bulk servicing sales is dependent upon the Company's strategy to either build
or reduce the servicing portfolio and is further based upon current market
conditions. In 1997, bulk sales of mortgage servicing rights for loans with
principal balances of $345.2 million resulted in gains of $1.6 million. In
1996 and 1995, bulk sales of mortgage servicing rights for loans with
principal balances of $2.3 billion and $2.5 billion, respectively, resulted
in gains of $7.7 million and $11.7 million, respectively.
14
Commercial and Retail Banking
The Commercial and Retail Banking segment consists of commercial lending to
small- and medium-sized companies, primarily in the form of commercial real
estate and Small Business Administration (SBA) loans; mortgage portfolio
lending; home equity lending; and the deposit-gathering function. Deposits
and loan products are offered through the 35 retail branch offices of
Republic Bank and Republic Savings Bank, which are staffed by personal
bankers and loan originators. The remaining disclosures and analyses within
this Management's Discussion and Analysis of the Company's results of
operations and financial condition relate principally to the commercial and
retail banking segment.
Results of Operations
Net Interest Income
Net interest income is defined as the difference between total interest
income generated by earning assets and the cost of funding those assets. To
permit the comparable analysis of tax-exempt and fully taxable income, net
interest income is stated on a fully taxable equivalent (FTE) basis,
reflecting adjustments made to the yields of tax-exempt investment securities
included in earning assets. The net interest margin is net interest income
(FTE) expressed as a percentage of average earning assets and measures how
effectively the Company utilizes its earning assets in relationship to the
interest cost of funding them.
Net interest income (FTE) rose 26% to $47.3 million in 1997, compared to
$37.5 million in 1996, primarily due to growth in average earning assets.
Average earning assets rose $196.0 million, or 15%, to $1.5 billion in 1997,
as a $324.9 million increase in average portfolio loans more than offset a
reduction in average investment securities and a slight decrease in average
mortgage loans held for sale. Net interest income growth also benefited as
the mix of earning assets continued to favor higher-yielding commercial,
residential and installment loan balances rather than lower-yielding
investment securities. Partially offsetting the increase in net interest
income was the incremental interest expense associated with a $197.1 million,
or 17%, increase in interest-bearing liabilities.
The net interest margin widened by 28 basis points to 3.16% in 1997,
compared to 2.88% in 1996. The improved margin was largely attributable to
the continued shift in the mix of earning assets to higher-yielding
commercial, residential and installment loan balances during 1997. This
strategy led to a 28 basis point rise in the yield on average earning assets.
The net interest margin also benefited from a decline in short-term interest
rates during much of 1997, which contributed to a 10 basis point decrease in
the average cost of funds.
In 1996, net interest income (FTE) increased 23% to $37.5 million from
$30.4 million in 1995, primarily due to growth in average earning assets with
higher yields and a decline in average short-term borrowings. Average earning
assets rose $24.7 million, or 2%, to $1.3 billion. Average short-term
borrowings decreased $99.7 million, or 36%, to $174.7 million, reflecting the
replacement of third-party warehousing lines of credit with less expensive
interest-bearing deposits and short-term borrowings as funded by the
Company's banking subsidiaries. This switch from external to internal
funding, along with a shift in the mix of earning assets toward
higher-yielding portfolio loan balances, led to a 50 basis point increase in
the net interest margin to 2.88% in 1996 from 2.38% in 1995.
15
Table 4
Analysis of Net Interest Income (FTE)
Year Ended December 31
(Dollar amounts in thousands) 1997 1996 1995
- ----------------------------- ------------------------------ ---------------------------- -----------------------------
Average Avg. Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Average Assets:
Short-term investments $ 5,917 $ 264 4.46% $ 9,155 $ 438 4.78% $ 16,801 $ 954 5.68%
Mortgage loans held for sale 317,114 24,235 7.64 340,375 26,392 7.75 268,788 21,100 7.85
Investment securities 198,946 13,102 6.59 301,338 19,054 6.32 382,242 23,155 6.06
Portfolio loans: (1)
Commercial loans 251,299 24,139 9.61 162,463 15,183 9.35 109,063 10,843 9.94
Real estate mortgage loans 631,638 48,065 7.61 415,981 31,521 7.58 443,928 33,633 7.58
Installment loans 92,963 9,380 10.09 72,565 7,340 10.12 56,370 5,912 10.49
---------- -------- ---- ---------- ------- ----- ---------- ------- ----
Total loans, net of
unearned income 975,900 81,584 8.36 651,009 54,044 8.30 609,361 50,388 8.27
---------- -------- ---- ---------- ------- ----- ---------- ------- ----
Total interest-earning assets 1,497,877 119,185 7.96 1,301,877 99,928 7.68 1,277,192 95,597 7.48
Allowance for loan losses (6,281) (4,819) (5,264)
Cash and due from banks 22,270 26,213 24,460
Other assets 106,038 118,782 126,339
---------- --------- ----------
Total assets $1,619,904 $1,442,053 $1,422,727
========== ========== ==========
Average Liabilities and
Shareholders' Equity:
Interest-bearing demand
deposits $ 44,933 993 2.21 $ 57,754 1,358 2.35 $ 63,516 1,554 2.45
Savings deposits 298,104 12,331 4.14 215,357 8,882 4.12 177,978 6,677 3.75
Time deposits 619,371 35,662 5.76 545,151 32,028 5.88 517,663 30,567 5.90
---------- -------- ---- ---------- ------- ----- ----------- ------- ----
Total interest-bearing
deposits 962,408 48,986 5.09 818,262 42,268 5.17 759,157 38,798 5.11
Short-term borrowings 107,271 6,181 5.76 174,734 10,322 5.91 274,454 18,396 6.70
FHLB advances 226,634 13,275 5.86 103,244 6,094 5.90 40,004 2,431 6.08
Long-term debt 47,948 3,470 7.23 50,873 3,743 7.36 63,256 5,567 8.80
---------- -------- ---- ---------- ------- ----- ----------- ------- ----
Total interest-bearing
liabilities 1,344,261 71,912 5.34 1,147,113 62,427 5.44 1,136,871 65,192 5.73
Noninterest-bearing deposits 108,667 124,976 128,640
Other liabilities 42,452 47,172 35,435
---------- ---------- ---------
Total liabilities 1,495,380 1,319,261 1,300,946
Shareholders' equity 124,524 122,792 121,781
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,619,904 $1,442,053 $1,422,727
========== ========== ==========
Net interest income/
Rate spread (FTE) $ 47,273 2.60% $37,501 2.24% $30,405 1.75%
-------- ======= =======
FTE adjustment(2) $ 333 $ 781 $ --
======== ======= =======
Impact of net noninterest-
bearing sources of funds .56 .64 .63
---- ----- ----
Net interest margin (FTE) 3.16% 2.88% 2.38%
==== ===== =====
<FN>
- ---------
(1) Non-accrual loans and overdrafts are included in average balances.
(2) The amount of tax-exempt income earned in 1995 was not material.
16
Table 5
Rate/Volume Analysis (FTE)
1997/1996 1996/1995
--------------------------------- ---------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Change in: Due to Change in:
--------------------------------- ---------------------------------
Average Average Net Average Average Net
(In thousands) Balance(1) Rate(1) Change Balance(1) Rate(1) Change
- -------------- --------- ------- ------ ---------- ------- ------
Interest Income:
Short-term investments $ (147) $ (27) $ (174) $ (383) $ (133) $ (516)
Mortgage loans held for sale (1,786) (371) (2,157) 5,563 (271) 5,292
Investment securities (6,733) 781 (5,952) (5,062) 961 (4,101)
Loans, net of unearned income (2) 27,003 537 27,540 3,472 184 3,656
-------- -------- -------- -------- -------- ---------
Total interest income 18,337 920 19,257 3,590 741 4,331
Interest Expense:
Interest-bearing demand deposits (288) (77) (365) (135) (61) (196)
Savings deposits 3,406 43 3,449 1,500 705 2,205
Time deposits 4,298 (664) 3,634 1,568 (107) 1,461
-------- -------- -------- -------- -------- ---------
Total interest-bearing deposits 7,416 (698) 6,718 2,933 537 3,470
Short-term borrowings (3,886) (255) (4,141) (6,096) (1,978) (8,074)
FHLB advances 7,222 (41) 7,181 3,737 (74) 3,663
Long-term debt (209) (64) (273) (994) (830) (1,824)
-------- -------- -------- -------- -------- ---------
Total interest expense 10,543 (1,058) 9,485 (420) (2,345) (2,765)
-------- -------- -------- -------- -------- ---------
Net interest income (FTE) $ 7,794 $ 1,978 $ 9,772 $ 4,010 $ 3,086 $ 7,096
======== ======== ======== ======== ======== ========
<FN>
- ---------
(1) Variances attributable jointly to volume and rate changes are allocated
to volume and rate in proportion to the relationship of the absolute
dollar amount of the change in each.
(2) Non-accrual loans are included in average balances.
Noninterest Income
Noninterest income is a significant source of revenue for the Company,
contributing 46% of total revenues in 1997, compared to 48% in 1996 and 44%
in 1995. Details of the largest component of noninterest income are presented
in the "Mortgage Banking" section, beginning on page 13. Exclusive of
mortgage banking revenue, noninterest income increased to $8.8 million in
1997 from $4.5 million in 1996, primarily due to the $4.4 million pre-tax
gain on the sale of four Republic Bank branches and the related deposits in
the second quarter of 1997.
Table 6
Noninterest Income
Year Ended December 31
(In thousands) 1997 1996 1995
- -------------- ---- ---- ----
Mortgage banking revenue $ 93,700 $86,377 $70,960
Service charges 1,446 1,218 1,297
Investment securities gains (losses) (497) 766 1,061
Gain on sale of bank branches and deposits 4,442 -- --
Gain on sale of SBA loans 1,065 1,242 873
Other noninterest income 2,359 1,243 1,010
-------- ------- -------
Total noninterest income $102,515 $90,846 $75,201
======== ======= =======
17
As part of management's strategy to support further loan growth, efforts
have been made to reduce the investment securities portfolio through sales
and maturities. In 1997, the Company sold $189.7 million of investment
securities for a net loss of $497,000. This activity included $47.1 million
of lower-yielding securities that were sold during the second quarter of 1997
at a loss of $850,000. In 1996, the Company sold $144.7 million of investment
securities, compared to $232.0 million in 1995.
The guaranteed portions of Small Business Administration (SBA) loans are
regularly sold to investors. In 1997, the Company sold $13.8 million of the
guaranteed portion of SBA loans, compared to $17.9 million in 1996 and $10.8
million in 1995.
Noninterest Expense
Noninterest expense increased 13% in 1997 to $117.7 million, after rising 26%
in 1996. Salaries and employee benefits expense increased $5.8 million, or
14%, in 1997, following an increase of $10.5 million, or 33%, in 1996. This
year's increase resulted primarily from the net addition of 69 employees to
the Company's payroll. Mortgage loan commissions paid to mortgage loan
originators and processors rose $5.2 million, or 21%, after increasing $6.9
million, or 39%, in 1996. The increase in mortgage loan commissions
corresponds to the 25% growth rate in the volume of retail mortgage loans
originated during 1997, compared to a 42% growth rate in 1996. The commission
rate paid on retail loan closings, which make up a substantial majority of
total closings, is significantly higher than the commission rate paid on
wholesale closings.
Table 7
Noninterest Expense
Year Ended December 31
(In thousands) 1997 1996 1995
- -------------- ---- ---- ----
Salaries and employee benefits $ 48,358 $ 42,589 $32,081
Mortgage loan commissions 29,767 24,590 17,710
Net occupancy expense of premises 7,022 6,145 5,274
Equipment expense 4,538 4,626 4,395
SAIF assessment fee -- 1,500 --
Other noninterest expense 28,057 25,042 23,692
-------- -------- -------
Total noninterest expense $117,742 $104,492 $83,152
======== ======== =======
Net occupancy expense increased 14% in 1997, following a 17% increase in
1996, due to the net addition of 19 retail bank and mortgage loan production
offices during 1997, most of which are leased. Equipment expense has remained
relatively stable over the past several years, reflecting consistent levels
of purchasing activity.
Included in noninterest expense for 1996 was a one-time pre-tax
assessment of $1.5 million levied on the Company's banking subsidiaries by
the Federal Deposit Insurance Corporation (FDIC) as a result of legislation
passed by Congress to recapitalize the Savings Association Insurance Fund
(SAIF). This one-time charge related to $212 million in SAIF-insured deposits
at Republic Savings Bank and $17 million in SAIF-insured deposits at Republic
Bank.
Income Taxes
The provision for income taxes was $9.9 million in 1997, compared to $7.5
million in 1996 (inclusive of the tax benefit arising from the extraordinary
item) and $8.2 million in 1995. The effective tax rate, computed by dividing
the provision for income taxes by pre-tax income, was 34.5% for 1997,
compared to 33.8% for 1996 and 36.4% for 1995. Pre-tax income in 1997
contained a lower amount of tax-exempt interest income on bank-qualified
municipal securities than in 1996. Pre-tax income in 1995 contained a higher
amount of non-deductible expenses than in 1997 and 1996.
18
Financial Condition
Total assets were $1.9 billion at December 31, 1997, an increase of 26% from
$1.5 billion at December 31, 1996. Average total assets rose $177.9 million,
or 12%, to $1.6 billion during the year. This increase primarily reflects
strong growth in the portfolio loan balance, which was funded by a reduction
in investment securities as well as increases in deposits and FHLB advances.
Assets
- ------
Portfolio Loans
The Company's loan portfolio is comprised of domestic loans to businesses and
consumers. At December 31, 1997 and 1996, there were no loans to foreign
debtors outstanding and the amount of agribusiness loans outstanding were
insignificant. Loans to businesses are classified as commercial loans and are
further segregated as commercial and industrial loans and commercial real
estate loans. Commercial and industrial loans are made to local small- and
medium-sized corporations primarily to finance working capital and equipment
purchases.
Commercial real estate loans represent loans secured by real estate and
consist of real estate construction loans and commercial real estate mortgage
loans. Real estate construction loans are made to builders or developers of
real estate properties and are typically refinanced at completion, becoming
either income-producing or owner-occupied properties. Commercial real estate
mortgage loans are secured by owner-occupied or income-producing properties.
For owner-occupied property loans, the primary source of repayment is the
cash flow of the owner with the real estate serving as a secondary repayment
source. Income-producing property loans are made to entities or individuals
engaged in real estate investment, and the primary source of repayment is
derived from the rental or sale of the property.
Loans to consumers include residential real estate mortgage loans and
installment loans. Installment loans, predominantly home equity loans, are
made for various purposes, including home improvement, automobile purchases
and college tuition. The Company emphasizes home equity lending above all
other installment lending. Other types of installment loans are generally
made to accommodate customers who have an existing banking relationship with
the Company.
Table 8
Loan Portfolio Analysis
December 31
(Dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------- ----------------- --------------- ------------- --------------- ----------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
Commercial loans:
Commercial and
industrial $ 41,095 3.7% $ 29,483 3.8% $ 22,523 3.9% $ 20,556 3.4% $ 27,025 6.6%
Real estate
construction 48,346 4.4 32,946 4.2 11,625 2.0 11,259 1.9 28,509 7.0
Commercial real
estate mortgages 233,078 21.3 132,763 16.9 98,285 17.0 66,096 10.8 71,008 17.5
---------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Total commercial
loans 322,519 29.4 195,192 24.9 132,433 22.9 97,911 16.1 126,542 31.1
Residential real
estate mortgages 669,203 61.1 506,944 64.6 381,803 66.0 457,755 75.7 229,203 56.3
Installment loans 104,022 9.5 82,492 10.5 63,876 11.1 49,423 8.2 51,372 12.6
---------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Total portfolio
loans $1,095,744 100.0% $784,628 100.0% $578,112 100.0% $605,089 100.0% $407,117 100.0%
========== ===== ======== ===== ======== ===== ======== ===== ======== =====
The total portfolio loans balance grew $311.1 million, or 40%, to $1.1
billion at December 31, 1997, after increasing 36% in 1996. Lending remained
strong across all major categories in 1997 as more residential mortgage loans
were originated and retained in the loan portfolio. Also, commercial lending
programs were successful in local markets served by the Company and marketing
efforts directed at existing customers yielded additional home equity loans.
The overall growth of the loan portfolio stems from the Company's efforts to
enhance long-term profitability by improving the mix of earning assets on the
balance sheet.
19
Commercial loans increased $127.3 million, or 65%, to $322.5 million at
December 31, 1997, after climbing 47% in 1996. This growth, which was
concentrated primarily in commercial real estate loans, reflects the
Company's efforts to complement traditional residential mortgage lending with
commercial lending. Residential real estate mortgage loans rose $162.3
million, or 32%, to $669.2 million at December 31, 1997, after growing 33% a
year earlier, as the Company retained a higher percentage of variable rate
residential real estate loans compared to prior years. Installment loans
increased $21.5 million, or 26%, to $104.0 million at December 31, 1997,
after rising 29% a year ago, reflecting the continued success of specifically
targeted sales and marketing efforts in home equity lending.
Table 9
Maturity Distribution and Interest Rate Sensitivity of Commercial Loans
After One
December 31, 1997 Within But Within After
(In thousands) One Year Five Years Five Years Total
- ----------------- -------- ---------- ---------- -----
Commercial loans:
Commercial and industrial $ 9,260 $ 15,035 $ 16,800 $ 41,095
Real estate construction 17,190 27,815 3,341 48,346
Commercial real estate mortgages 37,008 117,195 78,875 233,078
-------- --------- --------- ---------
Total commercial loans $ 63,458 $ 160,045 $ 99,016 $ 322,519
======== ========= ========= =========
Commercial Loans Maturing After
One Year With:
Predetermined rates $ 111,694 $ 15,052
Floating or adjustable rates 48,351 83,964
--------- ---------
Total $ 160,045 $ 99,016
========= =========
The commercial loan portfolio contained no aggregate loans to any one
industry that exceeded 10% of total portfolio loans outstanding at December
31, 1997. The Company's total loan portfolio is geographically concentrated
primarily in Michigan and Ohio as shown in the following table.
Table 10
Geographic Distribution of Loan Portfolio
December 31, 1997 Percent
(Dollars in thousands) Amount of Total
- ---------------------- ------ --------
Michigan $ 635,000 58%
Ohio 375,825 34
Indiana 27,563 3
Other states 57,356 5
---------- ---
Total $1,095,744 100%
========== ===
Mortgage Loans Held for Sale
Mortgage loans held for sale increased $184.4 million, or 56%, to $513.5
million at December 31, 1997, after decreasing 22% to $329.2 million at
December 31, 1996, primarily due to strong fourth quarter 1997 mortgage loan
production volumes. Decreasing just 7% from the average balance a year
earlier, average mortgage loans held for sale remained relatively consistent
as the Company retained a higher percentage of residential mortgage loans in
the loan portfolio.
20
Credit Risk Management
Extending credit to businesses and consumers exposes the Company to credit
risk. Credit risk is the risk that the principal balance of a loan and/or the
related interest will not be collected due to the inability of the borrower
to repay the loan. The Company manages credit risk in the loan portfolio
through adherence to consistent standards, guidelines and limitations
established by senior management. Written loan policies establish
underwriting standards, lending limits and other standards or limits as
deemed necessary and prudent. Various approval levels, based on the amount of
the loan and whether the loan is secured or unsecured, have also been
established. Loan approval authority ranges from the individual loan officer
to the Board of Directors' Loan Committee.
The Loan Review group within the Company's Internal Audit Department
conducts ongoing, independent reviews of the lending process to ensure
adherence to established policies and procedures, monitor compliance with
applicable laws and regulations, provide objective measurement of the risk
inherent in the loan portfolio, and ensure proper documentation exists. The
results of these periodic reviews are reported to the Audit Committee of the
Company's Board of Directors.
The following discussion summarizes the underwriting policies and
procedures for the major categories within the loan portfolio and addresses
the Company's strategies for managing the related credit risk.
Commercial Loans
Credit risk associated with commercial loans is primarily influenced by
prevailing and expected economic conditions and the level of underwriting
risk the Company is willing to assume. To manage credit risk when extending
commercial credit, the Company focuses on adequately assessing the borrower's
ability to repay and on obtaining sufficient collateral. To minimize credit
risk, the Company concentrates its commercial lending efforts on commercial
real estate loans. At December 31, 1997 and 1996, commercial real estate
loans accounted for 87% and 85%, respectively, of total commercial loans.
Emphasis is also placed on loans that are government guaranteed, such as SBA
loans. Commercial and industrial loans are generally secured by company
assets at a 75% or less loan-to-value ratio and by personal guarantees.
Management closely monitors the composition and quality of the total
commercial loan portfolio to ensure that significant credit concentrations by
borrower or industry do not exist.
Residential Real Estate Mortgage Loans
The Company originates fixed rate and variable rate residential mortgage
loans which are secured by the underlying 1-4 family residential property. At
December 31, 1997 and 1996, these loans accounted for 61% and 65%,
respectively, of total portfolio loans. Credit risk exposure in this area of
lending is minimized by the assessment of the creditworthiness of the
borrower and adherence to underwriting policies that emphasize conservative
loan-to-value ratios of generally no more than 80%. Residential mortgage
loans granted in excess of the 80% loan-to-value ratio criterion are
generally insured by private mortgage insurance, unless otherwise guaranteed
or insured by the Federal, state or local government. Credit risk is further
reduced since the majority of the Company's fixed rate, long- and short-term
mortgage loan production and all of its sub-prime mortgage loan production
are sold to investors in the secondary market.
Installment Loans
Credit risk in the installment loan portfolio is controlled through
consistent adherence to conservative underwriting standards that consider
debt to income levels and the creditworthiness of the borrower. In the home
equity lending category, loan-to-value ratios generally are limited to 80% of
collateral value. However, the Company may lend in excess of 80% of
collateral value and often utilizes an unaffiliated insurance company to
minimize the risk.
21
Asset Quality
Non-Performing Assets
Non-performing assets consist of non-accrual loans, restructured loans
and other real estate owned (OREO). OREO represents real estate properties
acquired by the Company through foreclosure or by deed in lieu of
foreclosure. Commercial loans, residential real estate mortgage loans and
installment loans are generally placed on non-accrual status when principal
or interest is 90 days or more past due, unless the loans are well-secured
and in the process of collection. In all cases, loans may be placed on
non-accrual status earlier when, in the opinion of management, reasonable
doubt exists as to the full, timely collection of interest or principal. When
a loan is placed on non-accrual status, interest accruals cease and any
uncollected interest is charged against current income. Interest subsequently
received on non-accrual loans is applied against the principal balance.
Table 11
Non-Performing Assets
December 31
(Dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------- ---- ---- ---- ---- ----
Non-accrual loans:
Commercial $ 1,457 $ 1,321 $ 848 $ 982 $ 1,812
Residential real estate
mortgages 9,217 3,968 313 1,304 803
Installment 307 50 131 79 108
------- ------- ------- ------- -------
Total non-accrual loans 10,981 5,339 1,292 2,365 2,723
Restructured loans -- -- 688 1,130 2,140
------- ------- ------- ------- -------
Total non-performing loans 10,981 5,339 1,980 3,495 4,863
Other real estate owned 1,671 1,250 980 586 405
------- ------- ------- ------- -------
Total non-performing assets $12,652 $ 6,589 $ 2,960 $ 4,081 $ 5,268
======= ======= ======= ======= =======
Non-performing assets as a
percentage of:
Portfolio loans and OREO 1.15% .84% .51% .67% 1.29%
Portfolio loans, mortgage
loans held for sale
and OREO .79 .59 .30 .54 .58
Total assets .68 .44 .20 .30 .45
Loans past due 90 days or more
and still accruing interest:
Commercial $ -- $ -- $ 209 $ 104 $ 217
Residential real estate
mortgages 228 548 42 -- --
Installment 6 22 94 35 93
------- ------- ------- ------- -------
Total loans past due 90 days
or more $ 234 $ 570 $ 345 $ 139 $ 310
======= ======= ======= ======= =======
Non-performing assets totaled $12.7 million at December 31, 1997, up $6.1
million from $6.6 million at December 31, 1996. The increase in non-accrual
residential real estate mortgage loans accounted for 87% of the overall
increase in total non-performing assets. The primary cause for the rise in
non-accrual residential mortgages was growth in portfolio residential
mortgage loans. Historically, credit losses on loans secured by residential
property have been minimal as demonstrated by the Company's low level of net
loan charge-offs. The Company's actual losses have, generally, been limited
to forgone interest and costs related to the foreclosure process, which may
take several months to complete.
Approximately $8.2 million, or .75%, of the loans in the loan portfolio
at December 31, 1997, were 30 to 89 days delinquent, compared to $4.8
million, or .61% of portfolio loans, at December 31, 1996. The Company also
maintains a watch list for loans identified as requiring a higher level of
monitoring by management because of one or more characteristics, such as
economic conditions, industry trends, nature of collateral, collateral
margin, payment history or other factors. As of December 31, 1997, total
loans on the watch list, excluding those categorized as non-performing loans
and loans past due 90 days and still accruing interest, were $3.7 million, or
.3% of total portfolio loans, compared to $2.2 million, or .3% of total
portfolio loans, at December 31, 1996.
22
The following table presents the amount of interest income that would
have been earned on non-performing loans outstanding at December 31, 1997,
1996 and 1995 had those loans been accruing interest in accordance with the
original terms of the loan agreement, as well as the amount of interest
income earned and included in net interest income for each of those years.
Table 12
Forgone Interest on Non-Performing Loans
For the Year Ended
December 31
(In thousands) 1997 1996 1995
- ------------------ ------------------------- ------------------------- ------------------------
Non-Accrual Restructured Non-Accrual Restructured Non-Accrual Restructured
----------- ------------ ----------- ------------ ----------- ------------
Pro forma interest income $ 856 $ -- $ 259 $ -- $ 135 $ 67
Interest income earned 478 -- 34 -- 44 38
------ ----- ----- ------ ----- -----
Forgone interest income $ 378 $ -- $ 225 $ -- $ 91 $ 29
====== ===== ===== ====== ===== =====
Impaired Loans
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of
Loans (SFAS No. 114), impaired loans are those loans for which it is probable
that payment of principal and interest will not be collected in accordance
with the contractual terms of the original loan agreement. Consistent with
this definition, all non-accrual and restructured loans (with the exception
of residential mortgage and consumer installment loans) are impaired. At
December 31, 1997 and 1996, the gross recorded investment in impaired loans
totaled $1.5 million and $1.4 million, respectively. Similar to non-accrual
loans, interest payments subsequently received on impaired loans are applied
against the principal balance. See Note 5 of the Notes to Consolidated
Financial Statements for further discussion of impaired loans.
Provision and Allowance for Loan Losses
The allowance for loan losses represents management's assessment of the
potential losses inherent in the Company's loan portfolio. An appropriate
level of the allowance is determined based on the application of projected
loss percentages to risk-rated loans, both individually and by category. The
projected loss percentages were developed giving consideration to actual loan
loss experience, adjusted for current and prospective economic conditions.
Management also considers other factors when assessing the adequacy of the
allowance for loan losses, including loan quality, changes in the size and
character of the loan portfolio, and consultation with regulatory
authorities. In addition, specific reserves are established for individual
loans when deemed necessary by management.
Management believes that the allowance for loan losses is adequate to
meet potential losses in the loan portfolio. It must be understood, however,
that inherent risks and uncertainties related to the operation of a financial
institution require management to depend on estimates, appraisals and
evaluations of loans to prepare the Company's financial statements. Changes
in economic conditions and the financial prospects of borrowers may result in
abrupt changes to the estimates, appraisals or evaluations used. In addition,
if actual circumstances and losses differ substantially from management's
assumptions and estimates, the allowance for loan losses may not be
sufficient to absorb all future losses, and net income could be significantly
impacted.
Gross loan charge-offs declined $150,000 to $608,000 in 1997, compared to
$758,000 in 1996 and $845,000 in 1995. The ratio of net loan charge-offs to
average loans, including loans held for sale, was .03% for 1997, compared to
.06% for both 1996 and 1995. Commercial loan net charge-offs as a percentage
of average commercial loans was .14% for 1997, compared to .24% for 1996 and
.43% for 1995. Residential real estate mortgage loan net charge-offs as a
percentage of average residential mortgage loans, including loans held for
sale, was zero for 1997 and .001% for 1996, versus a net recovery of (.002)%
for 1995. Installment loan net charge-offs as a percentage of average
installment loans was .06% for 1997, compared to .26% for 1996 and .19% for
1995.
23
Table 13
Analysis of the Allowance for Loan Losses
Year Ended December 31
(Dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------- ---- ---- ---- ---- ----
Balance at beginning of year $ 4,709 $ 5,002 $ 5,544 $ 7,214 $ 7,684
Loan charge-offs:
Commercial loans 468 494 661 1,521 612
Residential real estate mortgage loans 13 11 34 70 49
Installment loans 127 253 150 114 101
------- -------- ------- ----- -------
Total loan charge-offs 608 758 845 1,705 762
Recoveries:
Commercial loans 115 112 189 219 170
Residential real estate mortgage loans 20 2 47 -- 36
Installment loans 67 61 43 72 73
------- -------- ------- ----- -------
Total recoveries 202 175 279 291 279
------- -------- ------- ----- -------
Net loan charge-offs 406 583 566 1,414 483
Provision charged to expense 3,031 290 24 94 603
Allowance for commercial loans sold -- -- -- (350) (590)
------- -------- ------- ----- -----
Balance at end of year $ 7,334 $ 4,709 $ 5,002 $ 5,544 $ 7,214
======= ======== ======= ======= =======
Allowance for loan losses as a
percentage of year-end portfolio loans .67% .60% .87% .92% 1.77%
Allowance for loan losses as a
percentage of year-end non-performing
loans 66.79 88.18 252.64 158.61 148.34
Net charge-offs as a percentage of
average total loans (including loans
held for sale) .03 .06 .06 .20 .06
The Company's policy for charging off loans varies with respect to the
category of and specific circumstances surrounding each loan under
consideration. Installment loans are generally charged off when deemed to be
uncollectible or 180 days past due, whichever comes first. Charge-offs of
commercial loans and residential real estate mortgage loans are made on the
basis of management's ongoing evaluation of non-performing loans.
The following table summarizes the Company's allocation of the allowance
for loan losses by loan type and the percentage of each loan type to total
portfolio loans. The entire allowance, however, is available for use against
any type of loan charge-off deemed necessary.
Table 14
Allocation of the Allowance for Loan Losses
December 31
(Dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------- --------------- --------------- --------------- -------------- ---------------
% of % of % of % of % of
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial loans $2,173 29% $1,973 25% $1,522 23% $2,221 16% $3,382 31%
Residential real
estate mortgage
loans 3,795 61 1,543 65 971 66 598 76 1,298 56
Installment loans 432 10 307 10 212 11 501 8 559 13
Unallocated 934 n/a 886 n/a 2,297 n/a 2,224 n/a 1,975 n/a
------ --- ------ --- ------ --- ------ --- ------ ---
Total allowance
for loan losses $7,334 100% $4,709 100% $5,002 100% $5,544 100% $7,214 100%
====== === ====== === ====== === ====== === ====== ===
<FN>
- ---------
n/a -- Not applicable.
24
Securities Available for Sale
The Company's investment securities portfolio, while serving as a secondary
source of earnings, carries relatively minimal principal risk and contributes
to the management of interest rate risk and liquidity risk. The portfolio is
comprised principally of U.S. Government agency obligations, obligations
collateralized by U.S. Government-sponsored agencies, mainly in the form of
collateralized mortgage obligations and mortgage-backed securities. The
maturity structure of the portfolio is generally short-term in nature or
indexed to variable rates. At December 31, 1997, the estimated average
maturity of fixed rate investment securities within the portfolio, excluding
municipal securities, ranged from 1.5 years to 2.3 years.
Investment securities totaled $119.9 million at December 31, 1997, a
$108.7 million, or 48%, decrease from $228.6 million at December 31, 1996.
This decrease reflects sales and maturities of securities primarily to fund
growth in higher-yielding portfolio loans. The investment securities
portfolio constituted 6.4% of the Company's assets at year-end 1997, compared
to 15.3% a year earlier.
The following table summarizes the composition of the Company's
investment securities portfolio at December 31, 1997 and 1996.
Table 15
Securities Available For Sale Portfolio
December 31
(In thousands) 1997 1996
- -------------- ---- ----
U.S. Treasury and Government agency securities $ 40,806 $ 35,806
Collateralized mortgage obligations 24,249 81,539
Mortgage-backed securities 23,568 60,233
Municipal and other securities 3,185 31,823
Equity securities 28,073 19,220
-------- --------
Total securities available for sale $119,881 $228,621
======== ========
The maturity distribution of and average yield information for investment
securities held as of December 31, 1997 is provided in the following table.
Table 16
Maturity Distribution of Securities Available for Sale Portfolio
December 31, 1997 Due Within One to Five to After
(Dollars in thousands) One Year Five Years Ten Years Ten Years Total
- ---------------------- ---------------- ---------------- ---------------- ----------------- -----------------
Estimated Estimated Estimated Estimated Estimated
Market Avg. Market Avg. Market Avg. Market Avg. Market Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
U.S. Treasury and
Government agency
securities $ 21 8.95% $ -- --% $ -- --% $40,785 6.47% $ 40,806 6.47%
Collateralized mortgage
obligations (2) (3) -- -- -- -- -- -- 24,249 6.80 24,249 6.80
Mortgage-backed
securities (2) (3) -- -- 129 8.35 -- -- 23,439 5.95 23,568 5.96
Municipal and other
securities (1) 30 9.95 148 9.95 417 7.25 2,590 7.63 3,185 7.71
Equity securities 28,073 6.91 -- -- -- -- -- -- 28,073 6.91
------- ---- ----- ---- ----- ---- ------- ---- -------- ----
Total securities
available for sale $28,124 6.91% $ 277 9.20% $ 417 7.25% $91,063 6.46% $119,881 6.57%
======= ==== ===== ==== ===== ==== ======= ==== ======== ====
<FN>
- ---------
(1) Average yields on tax-exempt obligations have been computed on a tax
equivalent basis, based on a 35% federal tax rate.
(2) Collateral guaranteed by U.S. Government agencies.
(3) All maturities beyond ten years are at variable rates or have estimated
average lives of less than 2.3 years. The average yield presented
represents the current yield on these securities.
25
Liabilities
- -----------
Deposits
Total deposits, the Company's primary source of funding, grew 16% to nearly
$1.18 billion at December 31, 1997, after increasing 12% a year earlier. The
Company's core deposits represent the largest and most stable component of
total deposits and consist of demand deposits, NOW accounts, regular savings
accounts, money market accounts, Individual Retirement Accounts (IRAs) and
retail certificates of deposit. At year-end 1997, core deposits totaled
$976.8 million, a 6% increase when compared to $922.5 million at year-end
1996.
The Company also funds mortgage loans with brokered certificates of
deposit and municipal certificates of deposit. At December 31, 1997, these
deposits totaled $83.5 million and $117.0 million, respectively, and
represented 17% of total deposits on a combined basis. At December 31, 1996,
brokered certificates of deposit totaled $56.9 million and municipal
certificates of deposit totaled $34.3 million, representing 9% of total
deposits on a combined basis.
Table 17
Maturity Distribution of Certificates of Deposit of $100,000 or More
December 31
(In thousands) 1997
- -------------- ----
Three months or less $154,919
Over three months through six months 93,407
Over six months through twelve months 34,669
Over twelve months 47,449
--------
Total $330,444
========
Short-Term Borrowings
Short-term borrowings decreased $62.9 million, or 52%, to $58.3 million at
December 31, 1997, following a 54% decline to $121.1 million a year earlier.
Included in short-term borrowings at year-end 1997 were federal funds
purchased, securities sold under agreements to repurchase, and treasury, tax
and loan demand notes. The amount provided by these funding sources has
declined over the past two years due to increases in total deposits and
short- and long-term FHLB advances. See Note 8 to the Consolidated Financial
Statements for further information regarding short-term borrowings.
FHLB Advances
The Company's banking subsidiaries routinely utilize FHLB advances, both on a
short-term and long-term basis, to provide funding for mortgage loan
production and to minimize the interest rate risk associated with certain
fixed rate commercial and residential mortgage portfolio loans. These
advances are generally secured under a blanket security agreement by first
mortgage loans or investment securities with an aggregate book value equal to
at least 150% of the total advances. Total FHLB advances were $366.6 million
at December 31, 1997 compared to $134.2 million at December 31, 1996,
representing a 173% increase. This increase was primarily attributable to the
utilization of short-term FHLB advances to fund mortgage loan originations.
See Note 9 to the Consolidated Financial Statements for further information
regarding FHLB advances.
Long-Term Debt
Long-term debt totaled $47.5 million at December 31, 1997, compared to $49.2
million at December 31, 1996. In the first quarter of 1997, the Company paid
off a $1.8 million 6.99% Mortgage Loan maturing in the year 2000 as a result
of the sale of an office building that housed the corporate offices and
operations of Republic Bancorp Mortgage. A portion of the space in this
building was subsequently leased from the new owners. See Note 10 to the
Consolidated Financial Statements for further information regarding long-term
debt.
26
Capital
Shareholders' equity increased $9.3 million, or 8%, to $131.1 million at
December 31, 1997, after declining 4% to $121.8 million a year earlier. The
increase in shareholders' equity during 1997 resulted primarily from the
retention of $11.8 million in net income after dividends and a $1.7 million
decrease in net unrealized losses on securities available for sale. In
addition, fewer common shares were repurchased during the year under the
Company's stock repurchase plan--486,100 shares in 1997 versus 1,128,400
shares in 1996. The Company declared $7.0 million in cash dividends to
shareholders in 1997, an 6% increase over the amount declared in 1996.
The Company is subject to risk-based capital adequacy guidelines that
measure capital relative to risk-weighted assets and off-balance sheet
financial instruments. Capital adequacy guidelines issued by the Federal
Reserve Board require bank holding companies to have a minimum Total
risk-based capital ratio of 8.00%, with at least half of total capital in the
form of Tier 1, or core capital. The Company's Total risk-based capital ratio
was 10.35% at December 31, 1997, compared to 13.84% a year ago. The decline
in this ratio resulted primarily from an increase in risk-weighted assets due
to growth in the loan portfolio. For further information regarding regulatory
capital requirements, see Note 22 of the Notes to Consolidated Financial
Statements.
Liquidity Management
The objective of liquidity management is to provide funds at an acceptable
cost to meet mortgage and commercial loan demand and deposit withdrawals and
to service other liabilities as they become due. Managing liquidity also
enables the Company to take advantage of opportunities for business
expansion. Funds are available from a number of sources, including, but not
limited to, cash and money market investments, the investment securities
portfolio, mortgage loans held for sale and portfolio loan repayments and
maturities.
In addition, short-term liquidity is available from federal funds
purchased, securities sold under agreement to repurchase, core deposit
growth, brokered certificates of deposit and FHLB advances. Long-term
liquidity is generated from securities sold under agreement to repurchase,
deposit growth, the maturity structure of time deposits, brokered
certificates of deposit and FHLB advances.
The parent company has two major funding sources to meet its liquidity
requirements: dividends from its subsidiaries and access to the capital
markets. On December 31, 1997, $35.5 million was available within the bank
subsidiaries for payment of dividends to the parent company without prior
regulatory approval, compared to $30.9 million at December 31, 1996. Also, at
December 31, 1997, the parent company had interest-earning deposits of $35.2
million at Republic Bank to meet any liquidity requirements.
As discussed in Item 1 of the Company's Form 10-K on page 6, Republic
Bank and Republic Savings Bank are subject to statutory and regulatory
requirements and, among other things, may be limited in their ability to pay
dividends to the parent company. These statutory and regulatory restrictions
have not had, and are not expected to have, a material effect on the
Company's ability to meet its cash obligations.
At December 31, 1997, the parent company and its subsidiaries had
available the following lines of credit or borrowing opportunities:
-- Republic Bank had $62.9 million available in unused lines of credit
with third parties for federal funds purchased; $123.1 million
available in unused borrowings with the FHLB; and $3.0 million in
borrowings available through securities sold under agreement to
repurchase.
-- Republic Savings Bank had $47.0 million available in unused lines of
credit with third parties for federal funds purchased and $6.8 million
available in unused borrowings with the FHLB. In addition, effective
January 1, 1998, Republic Savings Bank had an additional $10.0 million
federal funds purchased line of credit available with a third party.
27
Forward-Looking Statements
The sections that follow entitled "Market Risk Management" and "Impact of
Year 2000" contain certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve certain risks, uncertainties, estimates and assumptions by
management, which may cause actual results to differ materially from those
contemplated by such statements. For a discussion of certain factors that may
cause such forward-looking statements to differ materially from actual
results, see Item 1 of the Company's 1997 Annual Report on Form 10-K.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, foreign
exchange rates and equity prices. The Company's market risk exposure is
composed entirely of interest rate risk. Interest rate risk arises in the
normal course of business to the extent that there is a difference between
the amount of the Company's interest-earning assets and the amount of
interest-bearing liabilities that are prepaid/withdrawn, reprice or mature in
specified periods.
The Company's Asset and Liability Management Committee (ALCO), which
meets weekly, is responsible for reviewing the interest rate sensitivity
position of the Company and establishing policies to monitor and limit
exposure to interest rate risk. Senior management at each of the Company's
subsidiaries is responsible for ensuring that the subsidiary asset and
liability management procedures adhere to corporate policies and risk limits
established by its respective board of directors.
Asset and Liability Management
The primary objective of asset and liability management is to maintain
stability in the level of net interest income by producing the optimal yield
and maturity mix of assets and liabilities within the interest rate risk
limits set by ALCO and consistent with projected liquidity needs and capital
adequacy requirements.
Interest Rate Risk Measurement
- ------------------------------
The Company utilizes two complementary quantitative tools to measure and
monitor interest rate risk: static gap analysis and earnings simulation
modeling. Each of these interest rate risk measurements has limitations, but
when evaluated together, they provide a reasonably comprehensive view of the
exposure the Company has to interest rate risk.
Static Gap Analysis: Gap analysis is utilized at the end of each month to
measure the amount of interest rate risk embedded in the balance sheet as of
a point in time. It does this by comparing the differences in the repricing
characteristics of interest-earning assets and interest-bearing liabilities.
A gap is defined as the difference between the principal amount of
interest-earning assets and interest-bearing liabilities that reprice within
a specified time period. This gap provides a general indication of the
sensitivity of the Company's net interest income to interest rate changes.
Consequently, if more assets than liabilities reprice or mature in a given
period, resulting in an asset sensitive position or positive gap, increases
in market interest rates will generally benefit net interest income because
earning asset rates will reflect the changes more quickly. Alternatively,
where interest-bearing liabilities reprice more quickly than interest-earning
assets, resulting in a liability sensitive position or negative gap,
increases in market interest rates will generally have an adverse impact on
net interest income. At December 31, 1997, the cumulative one-year gap was a
positive 4.25% of total earning assets.
The Company's current policy is to maintain a mix of asset and
liabilities with repricing and maturity characteristics that permit a
moderate amount of short-term interest rate risk based on current interest
rate projections, customer credit demands and deposit preferences. The
Company generally operates in a range of plus or minus 10% of total earning
assets for the cumulative one-year gap. Management believes that this range
reduces the vulnerability of net interest income to large shifts in market
interest rates while allowing the Company to take advantage of fluctuations
in current short-term rates.
28
Static Gap Analysis
December 31, 1997 Within 4 Months 1 to 5 Years
(Dollars in thousands) 3 Months to 1 Year 5 Years or Over Total
- ---------------------- -------- --------- ------- ------- -----
Interest-Earning Assets:
Federal funds sold and other
money market investments $ 2,210 $ -- $ -- $ -- $ 2,210
Mortgage loans held for sale 513,533 -- -- -- 513,533
Securities available for sale 101,150 4,213 1,877 12,641 119,881
Loans, net of unearned income 268,562 261,426 378,422 187,334 1,095,744
-------- --------- --------- -------- ----------
Total interest-earning assets $885,455 $ 265,639 $ 380,299 $199,975 $1,731,368
======== ========= ========= ======== ==========
Interest-Bearing Liabilities:
Deposits:
Savings and NOW accounts $ -- $ 155,148 $ 135,914 $ -- $ 291,062
Money market accounts -- 55,635 42,026 -- 97,661
Certificates of deposit:
Under $100,000 62,172 185,255 113,718 337 361,482
$100,000 or more 154,919 128,076 47,449 -- 330,444
-------- --------- --------- -------- ----------
Total certificates of deposit 217,091 313,331 161,167 337 691,926
-------- --------- --------- -------- ----------
Total interest-bearing deposits 217,091 524,114 339,107 337 1,080,649
Short-term borrowings (1) 57,315 959 -- -- 58,274
FHLB advances 216,000 62,000 88,632 -- 366,632
Long-term debt -- -- 34,000 13,500 47,500
-------- --------- --------- -------- ----------
Total interest-bearing liabilities $490,406 $ 587,073 $ 461,739 $ 13,837 $1,553,055
======== ========= ========= ======== ==========
Interest rate sensitivity gap $395,049 $(321,434) $(81,440) $186,138 $ 178,313
As a percentage of total
interest-earning assets 22.82% (18.57)% (4.70)% 10.75% 10.30%
Cumulative interest rate
sensitivity gap $395,049 $ 73,615 $ (7,825) $178,313
As a percentage of total
interest-earning assets 22.82% 4.25% (0.45)% 10.30%
<FN>
- ---------
(1) Includes federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings.
Actual maturity or repricing dates are used for investment securities,
certificates of deposit and short-term borrowings. Assumptions and estimates
have been made for NOW accounts, savings, and money market accounts to more
accurately reflect repricing and retention.
Earnings Simulation: On a quarterly basis, the earnings simulation model
is used to quantify the effects of various hypothetical changes in interest
rates on the Company's projected net interest income over the ensuing
twelve-month period. The model permits management to evaluate the effects of
various parallel shifts of the U.S. Treasury yield curve, upward and
downward, on net interest income expected in a stable interest rate
environment (i.e., base net interest income).
As of December 31, 1997, the earnings simulation model projects net
interest income would increase by 12.3% of base net interest income for 1998,
assuming an immediate parallel shift upward in market interest rates by 200
basis points. If market interest rates fall by 200 basis points, the model
projects net interest income would decrease by 6.4%. These projected levels
are well within the Company's policy limits. These results portray the
Company's interest rate risk position as asset-sensitive for the one-year
horizon. The earnings simulation model assumes that current balance sheet
totals remain constant and all maturities and prepayments of interest-earning
assets and interest-bearing liabilities are reinvested at current market
rates.
Impact of Interest Rate Fluctuations and Inflation on Earnings
Unlike most industrial companies, substantially all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rate fluctuations generally have a more significant and direct
impact on a financial institution's performance than do the effects of
inflation. To the extent inflation affects interest rates, real estate values
and other costs, the Company's lending activities may be adversely impacted.
Significant increases in interest rates beyond those reflected in the
earnings simulation model typically make it more difficult for potential
borrowers to purchase residential property and to qualify for mortgage loans.
As a result, the Company's volume of loans originated may be reduced and the
potential reduction in the related interest income may be much larger than
would implied by a simple linear extrapolation of the results generated by
the earnings simulation model. Significant decreases in interest rates
typically result in higher loan prepayment activity, which reduces interest
29
income and causes the Company's mortgage servicing rights to decrease in
value. However, a lower interest rate environment would enable more potential
borrowers to reduce their mortgage interest rate and qualify for relatively
higher mortgage loan balances, therefore resulting in higher mortgage loan
production activity as well as interest income.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company initiated the process of preparing its computer systems and
applications for the year 2000 in June 1997. A Year 2000 Compliance Plan has
been developed by management and reviewed by the Company's Board of
Directors. This Plan contains requirements for assessing the impact of the
Year 2000 on critical computer systems and applications and for modifying,
replacing and testing certain hardware and software maintained by the Company
so that its computer systems will function properly with respect to dates in
the year 2000 and thereafter.
Management believes that with modifications to existing software and
conversions to new software, the Year 2000 will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made or are not completed on a timely basis, the Year
2000 could have a material impact on the operations of the Company. The
Company has also initiated formal communications with its significant
suppliers and large customers as well as other financial institutions to
determine the extent to which the Company's interface systems are vulnerable
to those third parties' failure to remediate their own Year 2000 issues.
There is no guarantee that the systems of other companies on which the
Company's systems rely will be converted on a timely basis and would not have
an adverse effect on the Company's systems.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
total Year 2000 project cost for the Company is estimated at approximately
$1.5 million and is not expected to have a material effect on the Company's
results of operations, financial position, liquidity or capital resources.
The project is expected to be completed not later than June 30, 1999, which
is prior to any anticipated impact on the Company's operating systems. The
cost of the project and the expected completion date are based on
management's best estimates.
Accounting and Financial Reporting Developments
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The Statement provides standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
It also extends the treatment of mortgage servicing rights to all servicing
assets. On January 1, 1997, the Company prospectively adopted the provisions
of SFAS No. 125 related to the following types of transactions:
securitizations, recognition of servicing assets and liabilities, transfers
of receivables with recourse, loan participations, and extinguishments of
liabilities. Certain provisions of SFAS No. 125, relating to repurchase
agreements, securities lending and other similar transactions, and pledged
collateral, were deferred for one year by SFAS No. 127, and were adopted
prospectively as of January 1, 1998. The adoption of these Statements did not
have a material impact on the Company's financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This Statement establishes standards for reporting the components of
comprehensive income and requires that all items recognized as components of
comprehensive income be included in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income
includes net income as well as certain items that are reported as a separate
component of shareholders' equity and bypass net income. The provisions of
this Statement are effective beginning with 1998 interim reporting. The
disclosure requirements will not have an impact on the Company's financial
position or results of operations.
30
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement's new "management
approach" to segment reporting requires disclosure of financial and
descriptive information about an enterprise's operating segments in both
annual and interim financial reports issued to shareholders. An operating
segment is defined as a revenue-producing component of an enterprise for
which separate financial information is produced internally and is subject to
evaluation by the chief operating decision maker for purposes of determining
resource allocation and performance. The Statement is effective beginning
January 1, 1998, however, it is not required to be applied to interim
reporting in the initial year of application. The Company is currently
evaluating the impact of the Statement's provisions relating to financial and
descriptive information on current disclosures in the Company's annual and
interim financial reports. The composition of the Company's segments is not
expected to change as a result of adopting the Statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section
entitled "Market Risk Management" included under Item 7 of this document and
is incorporated herein by reference.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Republic Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
(Dollars in thousands) 1997 1996
- ---------------------- ---------- ----------
Assets
Cash and due from banks $ 27,458 $ 33,590
Interest-earning deposits with banks 2,210 6,524
---------- ----------
Cash and cash equivalents 29,668 40,114
Mortgage loans held for sale 513,533 329,157
Securities available for sale 119,881 228,621
Loans, net of unearned income 1,095,744 784,628
Less allowance for loan losses (7,334) (4,709)
---------- ----------
Net loans 1,088,410 779,919
Premises and equipment 12,505 15,008
Mortgage servicing rights 58,413 44,398
Other assets 50,483 53,148
---------- ----------
Total assets $1,872,893 $1,490,365
========== ==========
Liabilities
Noninterest-bearing deposits $ 96,644 $ 126,940
Interest-bearing deposits:
NOW accounts 29,561 48,472
Savings and money market accounts 359,162 258,276
Certificates of deposit 691,926 580,019
---------- ----------
Total interest-bearing deposits 1,080,649 886,767
---------- ----------
Total deposits 1,177,293 1,013,707
Federal funds purchased, securities sold
under agreements to repurchase and
other short-term borrowings 58,274 121,142
FHLB advances 366,632 134,200
Accrued expenses and other liabilities 91,142 49,243
Long-term debt 47,500 49,189
---------- ----------
Total liabilities 1,740,841 1,367,481
Minority interest 964 1,069
Shareholders' Equity
Preferred stock, $25 stated value;
$2.25 cumulativeand convertible;
5,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $5 par value;
30,000,000 shares authorized;
18,678,242 and 18,842,056 shares
issued and outstanding in 1997 and
1996, respectively 93,391 85,646
Capital surplus 37,221 37,538
Retained earnings 1,274 1,079
Net unrealized losses on securities
available for sale, net of tax (798) (2,448)
---------- ----------
Total shareholders' equity 131,088 121,815
---------- ----------
Total liabilities and shareholders' equity $1,872,893 $1,490,365
========== ==========
See accompanying notes.
32
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31
(Dollars in thousands, except per share data) 1997 1996 1995
- --------------------------------------------- -------- ------- -------
Interest Income
Interest and fees on loans $105,819 $ 80,436 $71,488
Interest on investment securities 12,769 18,273 23,155
Interest on federal funds sold 141 282 573
Interest on interest-earning deposits with banks 123 156 381
-------- -------- -------
Total interest income 118,852 99,147 95,597
-------- -------- -------
Interest Expense
Interest on deposits:
NOW accounts 993 1,358 1,554
Savings and money market accounts 12,331 8,882 6,677
Certificates of deposits 35,662 32,028 30,567
-------- -------- -------
Total interest expense on deposits 48,986 42,268 38,798
Federal funds purchased and securities sold
under agreements to repurchase 5,715 8,378 10,436
Other short-term borrowings 466 1,944 7,960
Interest on FHLB advances 13,275 6,094 2,431
Interest on long-term debt 3,470 3,743 5,567
-------- -------- -------
Total interest expense 71,912 62,427 65,192
-------- -------- -------
Net interest income 46,940 36,720 30,405
Provision for loan losses 3,031 290 24
-------- -------- -------
Net interest income after provision
for loan losses 43,909 36,430 30,381
-------- -------- -------
Noninterest Income
Mortgage banking revenue 93,700 86,377 70,960
Service charges 1,446 1,218 1,297
Investment securities gains (losses) (497) 766 1,061
Gain on sale of SBA loans 1,065 1,242 873
Gain on sale of bank branches and deposits 4,442 -- --
Other noninterest income 2,359 1,243 1,010
-------- -------- -------
Total noninterest income 102,515 90,846 75,201
-------- -------- -------
Noninterest Expense
Salaries and employee benefits 48,358 42,589 32,081
Mortgage loan commissions 29,767 24,590 17,710
Occupancy expense of premises 7,022 6,145 5,274
Equipment expense 4,538 4,626 4,395
SAIF assessment fee -- 1,500 --
Other noninterest expenses 28,057 25,042 23,692
-------- -------- -------
Total noninterest expense 117,742 104,492 83,152
-------- --------- -------
Income before income taxes and extraordinary item 28,682 22,784 22,430
Provision for income taxes 9,893 7,718 8,166
-------- -------- -------
Income before extraordinary item 18,789 15,066 14,264
Extraordinary item - loss on early redemption of
debt, net of tax -- (388) --
-------- -------- -------
Net Income $ 18,789 $ 14,678 $14,264
======== ======== =======
Basic Earnings Per Share:
Income before extraordinary item $ 1.01 $ .78 $ .71
Extraordinary item -- (.02) --
-------- -------- -------
Net income per share--basic $ 1.01 $ .76 $ .71
======== ======== =======
Diluted Earnings Per Share:
Income before extraordinary item $ .99 $ .76 $ .69
Extraordinary item -- (.02) --
-------- --------- -------
Net income per share--assuming dilution $ .99 $ .74 $ .69
======== ======== =======
See accompanying notes.
33
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Number of Net Unrealized Total
Common Common Capital Retained Gains/(Losses) Shareholders'
(In thousands, except per share data) Shares Stock Surplus Earnings on Securities Equity
- ------------------------------------- --------- ------ ------- -------- --------------- ------------
Balances at January 1, 1995 15,246 $76,231 $ 35,636 $ 11,320 $(5,273) $ 117,914
Net Income 14,264 14,264
Cash dividends declared
($.28 per share) (5,536) (5,536)
Awards of common share under
Restricted Stock Plan (1,318) (1,318)
Amortization of restricted stock 672 672
10% common share dividend 1,504 7,521 10,342 (17,876) (13)
Issuance of common shares:
Through exercise of stock options 177 885 241 1,126
Through exercise of stock warrants 12 58 11 69
Tax benefit relating to exercise of
stock options 405 405
Change in unrealized gains/(losses)
on securities available for sale,
net of income taxes of $2,105 3,910 3,910
Repurchase of common shares (461) (2,305) (2,812) (5,117)
------ ------- -------- -------- ------- ---------
Balances at December 31, 1995 16,478 82,390 43,177 2,172 (1,363) 126,376
Net Income 14,678 14,678
Cash dividends declared
($.34 per share) (6,531) (6,531)
Awards of common shares under
Restricted Stock Plan (790) (790)
Amortization of restricted stock 648 648
10% common share dividend 1,565 7,827 1,398 (9,240) (15)
Issuance of common shares:
Through exercise of stock options 212 1,062 (28) 1,034
Through exercise of stock warrants 2 9 (3) 6
Tax benefit relating to exercise of
stock options 514 514
Change in unrealized gains/(losses) on
securities available for sale,
net of income tax benefit of $584 (1,085) (1,085)
Repurchase of common shares (1,128) 5,642) (7,378) (13,020)
------ ------- -------- -------- ------- ---------
Balances at December 31, 1996 17,129 85,646 37,538 1,079 (2,448) 121,815
Net Income 18,789 18,789
Cash dividends declared
($.37 per share) (6,950) (6,950)
Awards of common shares under
Restricted Stock Plan (1,575) (1,575)
Amortization of restricted stock 824 824
10% common share dividend 1,693 8,466 3,155 (11,644) (23)
Issuance of common shares:
Through exercise of stock options 289 1,446 115 1,561
Through exercise of stock warrants 53 264 (70) 194
Tax benefit relating to stock-based
awards 1,123 1,123
Change in unrealized gains/(losses) on
securities available for sale,
net of income tax of $888 1,650 1,650
Repurchase of common shares (486) (2,431) (3,889) (6,320)
------ ------- -------- -------- ------- ---------
Balances at December 31, 1997 18,678 $93,391 $ 37,221 $ 1,274 $ (798) $ 131,088
====== ======= ======== ======== ======= =========
See accompanying notes.
34
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31
(In thousands) 1997 1996 1995
- ---------------------- ---------- --------- -----------
Cash Flows From Operating Activities:
Net income $ 18,789 $ 14,678 $ 14,264
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,099 5,258 5,521
Amortization of mortgage servicing rights 6,918 7,616 6,999
Net gains on sale of mortgage servicing rights (29,398) (33,041) (25,279)
Net (gains) losses on sale of securities
available for sale 497 (766) (1,061)
Net gains on sale of loans (4,568) (5,488) (3,037)
Proceeds from sale of mortgage loans
held for sale 3,340,995 3,244,436 2,408,751
Origination of mortgage loans held for sale (3,525,371) (3,150,229) (2,695,917)
(Increase) decrease in other assets 8,855 (5,205) 3,137
Increase in other liabilities 41,899 5,928 1,729
Other, net (1,842) (3,292) (5,254)
---------- --------- -----------
Total adjustments (156,916) 65,217 (304,411)
---------- --------- -----------
Net cash provided by (used in)
operating activities (138,127) 79,895 (290,147)
Cash Flows From Investing Activities:
Proceeds from sale of mortgage servicing rights 26,483 53,182 48,918
Additions to mortgage servicing rights (29,161) (19,638) (31,720)
Proceeds from sale of securities available for sale 189,161 145,422 233,082
Proceeds from maturities/principal payments of
securities available for sale 31,873 57,139 67,192
Purchase of securities available for sale (111,109) (115,115) (157,537)
Proceeds from maturities/principal payments of
securities held to maturity -- -- 11,881
Proceeds from sale of loans 207,817 215,636 253,310
Net increase in loans made to customers (511,641) (415,126) (208,034)
Proceeds from sale of fixed assets 4,194 -- --
---------- --------- -----------
Net cash (used in) provided by investing
activities (192,383) (78,500) 217,092
See accompanying notes.
35
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Year Ended December 31
(In thousands) 1997 1996 1995
- ---------------------- ---------- --------- -----------
Cash Flows From Financing Activities:
Net increase in total deposits $ 215,722 $ 81,973 $ 65,490
Purchase of bank branch deposits -- 27,005 20,497
Sale of bank branch deposits (52,136) -- --
Net increase (decrease) in short-term borrowings (62,765) (141,899) 6,505
Net increase (decrease) in short-term FHLB advances 242,000 4,500 (34,950)
Increase in long-term FHLB advances 31,432 49,200 70,500
Payments on long-term FHLB advances (41,000) -- (25,000)
Increase in long-term debt -- -- 13,464
Payments on long-term debt (1,792) (25,649) (17,915)
Proceeds from issuance of senior debentures and
subordinated notes, net of issuance costs (30) 22,233 --
Net proceeds from issuance of common shares 1,755 1,040 1,195
Repurchase of common shares (6,320) (13,020) (5,117)
Dividends paid (6,802) (6,305) (5,270)
---------- --------- ---------
Net cash provided (used in) by financing
activities 320,064 (922) 89,399
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents (10,446) 473 16,344
Cash and cash equivalents at beginning of year 40,114 39,641 23,297
---------- --------- ---------
Cash and cash equivalents at end of year $ 29,668 $ 40,114 $ 39,641
========== ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 72,004 $ 63,233 $ 62,562
Income taxes $ 6,153 $ 8,576 $ 5,782
Supplemental Schedule of Non-Cash
Investing Activities:
Portfolio loan charge-offs $ 608 $ 758 $ 845
Reclassification of investment securities held
to maturity to the investment securities
available for sale category $ -- $ -- $ 257,200
See accompanying notes.
36
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Republic Bancorp Inc. and Subsidiaries (the "Company") is a bank holding
company headquartered in Ann Arbor, Michigan. The Company has two primary
lines of business: (1) commercial and retail banking and (2) mortgage
banking. Financial products are offered to consumers and businesses through
the Company's two banking subsidiaries' 35 retail bank branches located in
Michigan and Ohio. The Company also maintains a nationwide mortgage banking
network of 112 offices located in 21 states. In addition, the Company
performs residential mortgage loan servicing for the benefit of others with
responsibilities ranging from collecting and remitting loan payments to
supervising foreclosure proceedings.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts of
Republic Bancorp Inc.; its two wholly-owned banking subsidiaries: Republic
Bank (including its wholly-owned mortgage company subsidiaries, Republic
Bancorp Mortgage Inc. and CUB Funding Corporation, and its 80% majority-owned
mortgage company subsidiary, Market Street Mortgage Corporation) and Republic
Savings Bank. In July 1997, the parent company transferred its ownership
interest in Market Street Mortgage to Republic Bank. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to current year
presentations.
Use of Estimates
Management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and accompanying
notes, as well as the amounts of revenues and expenses reported during the
periods covered by those financial statements and notes. Actual results could
differ from these estimates.
Securities Available for Sale
The Company's investment securities are classified as available for sale
and stated at fair value with unrealized gains and losses, net of income
taxes, reported as a component of shareholders' equity. Gains and losses on
sales of securities are computed based on specific identification of the
adjusted cost of each security and included in investment securities gains
(losses).
For mortgage portfolio loans securitized and retained as investment
securities, the remaining net deferred fees or costs are treated as a
discount or premium and recognized as an adjustment to the yield over the
life of the security using the effective interest method. If the security is
subsequently sold, any remaining net deferred fees or costs are treated as
part of the cost basis in determining the gain or loss on sale of the
security.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are treated as
collateralized borrowing transactions and are recorded at the amount at which
the securities were sold plus accrued interest. The securities sold represent
the underlying collateral in these transactions and are recorded on the
balance sheet at fair value.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost
or market. The cost of mortgage loans held for sale is adjusted by gains and
losses generated from corresponding forward commitments to sell the loans to
investors in the secondary market. Such commitments are generally entered
into prior to closing to protect the value of the mortgage loans from
increases in interest rates during the period held. Mortgage loans originated
are generally sold within a period of 30 to 60 days after closing, therefore,
the related fees and costs are not amortized during that period.
37
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. Interest income earned on all loans is accrued daily. Loans for which
the accrual of interest has been discontinued are designated as non-accrual
loans. Commercial loans, residential real estate mortgage loans and
installment loans are placed on non-accrual status at the time the loan is 90
days past due, unless the loan is well-secured and in the process of
collection. In all cases, loans may be placed on non-accrual status when, in
the opinion of management, reasonable doubt exists as to the full, timely
collection of interest or principal. All interest accrued but not collected
for loans that are placed on non-accrual status is reversed and charged
against current income. Any interest payments subsequently received on
non-accrual loans are applied against the principal balance. Loans are
considered restructured when the Company makes certain concessions to a
financially troubled debtor that would not normally be considered. Loan
origination and commitment fees and certain direct loan origination costs are
deferred and recognized over the life of the related loan as an adjustment to
the yield on the loan.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level adequate to
provide for potential loan losses through additions to the provision for loan
losses. An appropriate level of the allowance for loan losses is determined
based on a continuing review of the loan portfolio giving consideration to
loan quality, actual loan loss experience, changes in the size and character
of the loan portfolio, an analysis of current economic conditions and
consultation with regulatory authorities. With respect to loans which are
deemed impaired, the calculation of an allowance for loan losses typically is
based upon collateral values.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed on a straight-line basis over the shorter of the
estimated useful lives of the related assets or the remaining lease terms.
Mortgage Servicing Rights
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan and the mortgage servicing rights ("MSRs") based
on their relative fair values at the date of origination. The capitalized
cost of MSRs is amortized in proportion to and over the period of the
estimated future net servicing income. Mortgage servicing rights are
periodically evaluated for impairment, which represents the excess of cost of
an individual MSR stratum over its fair value. Impairment is recognized
through a valuation allowance. For purposes of measuring impairment, MSRs are
stratified on the basis of loan type (e.g., fixed, balloon or adjustable) and
interest rate.
Fair values for individual stratum are based on the present value of
estimated future cash flows using a discount rate commensurate with the risks
involved. Estimates of fair value include assumptions about prepayment,
default and interest rates, and other factors which are subject to change
over time. Changes in these underlying assumptions could cause the fair value
of MSRs, and the related valuation allowance, to change significantly in the
future.
Goodwill
The excess of cost over the fair value of net assets acquired is included
in other assets and is amortized using the straight-line method over a period
of 15 years. Core deposit intangible assets are amortized on a straight-line
basis over a period of 10 years.
38
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to temporary differences between the tax and financial statement
basis of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is established to the extent current available
evidence about future events raise doubt about the future realization of a
deferred tax asset. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enacted date.
Earnings Per Share
In February 1997, the FASB issued Statement No. 128, Earnings Per Share,
which became effective for the Company for reporting periods ending after
December 15, 1997. The provisions of the Statement replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share in an effort to simplify the computation of these measures
and align them more closely with the methodology used internationally. Basic
earnings per share is calculated by dividing income available to common
shareholders by the weighted-average number of common shares outstanding.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share equates to what would have been reported as fully diluted
earnings per share. For purposes of comparability, all basic earnings per
share amounts for prior periods have been restated to conform to the
requirements of SFAS No. 128.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation. As permitted by the Statement, the Company
continues to use the intrinsic value method prescribed by Accounting
Principles Board (APB) Opinion No. 25 when accounting for its employee stock
compensation plans. Therefore, no compensation costs are charged against
income for stock option grants. Accordingly, the Company is required to
disclose pro forma net income and earnings per share information as if
compensation expense had been recognized for stock options granted based on
the fair value method prescribed by SFAS No.
123.
The Company continues to recognize compensation expense for restricted
stock over the vesting period in accordance with APB Opinion No. 25. Such
expense is included in salaries and employee benefits expense on the
consolidated statements of income. The unamortized portion of restricted
stock is included as a component of shareholders' equity.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest-earning deposits with banks,
federal funds sold and other short-term investments with maturities less than
90 days.
Note 2. Acquisitions and Divestitures
The Company completed the following acquisitions and divestitures in the
years indicated. The purchase price for each acquisition was immaterial,
unless otherwise noted, and all acquisitions were accounted for under the
purchase method of accounting. With the exception of the sale of bank
branches, these transactions did not have a significant impact on the
Company's results of operations.
During 1997:
In May 1997, the Company completed the sale of four southern Michigan
branches of Republic Bank. The sale included the fixed assets of the
Hillsdale, Litchfield, Somerset Center and Spring Arbor offices and deposits
totaling $52 million. The Company recognized a $4.4 million gain on the sale.
39
Notes to Consolidated Financial Statements
Note 2. Acquisitions and Divestitures (Continued)
In September 1997, the Company acquired certain assets and the mortgage
origination network of Exchange Mortgage Corporation of Southfield, Michigan.
The mortgage operation has three offices in Michigan, including a sub-prime
mortgage lending division, Union Mortgage Services. Exchange Mortgage
operates as a division of Republic Bancorp Mortgage Inc.
During 1996:
In April 1996, the Company completed the purchase of certain assets and
the mortgage origination network of First of America in St. Louis, Missouri
and southern Illinois. The mortgage operation has seven offices in the
greater St. Louis, Missouri area operating under the name Leader Financial
and is a division of CUB Funding Corporation.
In July 1996, the Company completed the purchase of certain assets and
the mortgage origination network of Unlimited Mortgage Services, Inc., of
Columbus, Ohio. The mortgage operation has an office in Columbus, Ohio and
operates as a division of Republic Bancorp Mortgage Inc.
In December 1996, the Company acquired certain fixed assets and deposits
of three branch offices located in the greater Cleveland, Ohio area. The
three branch offices are located in Middleburg Heights, Shaker Heights and
Hudson and had combined deposits of approximately $27 million. The purchase
price for these offices totaled $2.9 million.
Note 3. Securities Available for Sale
Information regarding the Company's securities available for sale portfolio
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -------------- --------- ---------- ---------- ---------
December 31, 1997:
U.S. Treasury and Government agency securities $ 40,900 $ 119 $ 213 $ 40,806
Collateralized mortgage obligations 24,283 34 68 24,249
Mortgage-backed securities 24,020 3 455 23,568
Municipal and other securities 3,051 134 -- 3,185
-------- -------- -------- --------
Total debt securities 92,254 290 736 91,808
Equity securities 28,855 -- 782 28,073
-------- -------- -------- --------
Total securities available for sale $121,109 $ 290 $ 1,518 $119,881
======== ======== ======== ========
December 31, 1996:
U.S. Treasury and Government agency securities $ 36,030 $ 36 $ 260 $ 35,806
Collateralized mortgage obligations 82,804 4 1,269 81,539
Mortgage-backed securities 61,602 6 1,375 60,233
Municipal and other securities 31,970 110 257 31,823
-------- -------- -------- --------
Total debt securities 212,406 156 3,161 209,401
Equity securities 19,982 -- 762 19,220
-------- -------- -------- --------
Total securities available for sale $232,388 $ 156 $ 3,923 $228,621
======== ======== ======== ========
The amortized cost and estimated market value of securities available for
sale at December 31, 1997, by contractual maturity, are shown on the
following page. Variable rate mortgage-backed securities are indexed to the
11th District Cost of Funds. Expected maturities for mortgage-backed
securities and collateralized mortgage obligations will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations. Based upon prepayment assumptions, estimated lives of fixed rate
mortgage-backed securities and fixed rate collateralized mortgage obligations
range from 1.5 to 2.3 years. Collateral for all mortgage-backed securities
and collateralized mortgage obligations is guaranteed by U.S. Government
agencies.
40
Notes to Consolidated Financial Statements
Note 3. Securities Available for Sale (Continued)
December 31, 1997 Due Within One to Five to After
(Dollars in thousands) One Year Five Years Ten Years Ten Years Total
- ------------------------------------------ -------------------- -------------------- -------------------- ---------------------
Estimated Estimated Estimated Estimated Estimated
Amortized Marke Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- -------- -------- --------- --------- ---------
U.S. Treasury and
Government agency
securities $ 20 $ 21 $ -- $ -- $ -- $ -- $ 40,880 $ 40,785 $ 40,900 $ 40,806
Collateralized
mortgage
obligations -- -- -- -- -- -- 24,283 24,249 24,283 24,249
Mortgage-backed
securities -- -- 126 129 -- -- 23,894 23,439 24,020 23,568
Municipal and other
securities 30 30 145 148 405 417 2,471 2,590 3,051 3,185
Equity securities 28,855 28,073 -- -- -- -- -- -- 28,855 28,073
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities
available
for sale $ 28,905 $ 28,124 $ 271 $ 277 $ 405 $ 417 $ 91,528 $ 91,063 $121,109 $119,881
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Sales of investment securities resulted in the following realized gains and
losses:
Year Ended December 31
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Proceeds from sales $ 189,161 $145,422 $233,082
Realized gains (losses):
Securities gains $ 742 $ 824 $ 1,524
Securities losses (1,239) (58) (463)
--------- -------- --------
Net securities gains (losses) $ (497) $ 766 $ 1,061
========= ======== ========
Securities with a carrying value of approximately $30.9 million and $65.0
million at December 31, 1997 and 1996, respectively, were pledged to secure
certain securities sold under agreements to repurchase and public deposits as
required by law.
Note 4. Loans
Information regarding the Company's loan portfolio follows:
December 31
(In thousands) 1997 1996
- ------------------------------------------------------------------------
Commercial:
Commercial and industrial $ 41,095 $ 29,483
Real estate construction 48,346 32,946
Commercial real estate mortgages 233,078 132,763
---------- --------
Total commercial loans 322,519 195,192
Residential real estate mortgages 669,203 506,944
Installment loans 104,022 82,492
---------- --------
Total loans, net of unearned income $1,095,744 $784,628
========== ========
41
Notes to Consolidated Financial Statements
Note 4. Loans (Continued)
A geographic concentration exists within the Company's loan portfolio since
most portfolio lending activity is conducted in Michigan and Ohio. At
December 31, 1997, approximately 58% of outstanding portfolio loans was
concentrated in Michigan and 34% in Ohio. At December 31, 1997, there were no
aggregate loan concentrations of 10% or more of total portfolio loans to any
particular industry.
Note 5. Allowance for Loan Losses and Impaired Loans
An analysis of changes in the allowance for loan losses follows:
Year Ended December 31
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
Balance at beginning of year $ 4,709 $ 5,002 $ 5,544
Loans charged off (608) (758) (845)
Recoveries on loans previously charged off 202 175 279
------- ------- -------
Net loans charged off (406) (583) (566)
Provision for loan losses 3,031 290 24
------- ------- -------
Balance at end of year $ 7,334 $ 4,709 $ 5,002
======= ======= =======
Amount of balance at end of year:
Related to impaired loans $ -- $ 96 $ 368
Related to all other loans $ 7,334 $ 4,613 $ 4,634
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by
SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the
contractual terms of the original loan agreement. Consistent with this
definition, all non-accrual and restructured loans (with the exception of
residential mortgage and consumer installment loans) are impaired.
The following impaired loans were included in non-performing loans, which
totaled $11.0 million and $5.3 million at December 31, 1997 and 1996,
respectively:
December 31
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------
Average recorded investment in impaired loans for the year $1,483 $1,545
Gross recorded investment in impaired loans (year-end) $1,457 $1,356
Impaired loans requiring a specific allowance -- 336
Impairment allowance -- 96
Interest income recognized on impaired loans $ 22 $ 16
An impaired loan for which it is deemed necessary to record a specific
allowance is, typically, written down to the fair value of the underlying
collateral at the time it is placed on non-accrual status via a direct
charge-off against the allowance for loan losses. Consequently, those
impaired loans not requiring a specific allowance represent loans for which
the fair value of the underlying collateral equaled or exceeded the recorded
investment in the loan. All impaired loans were evaluated using the fair
value of the underlying collateral as the measurement method.
42
Notes to Consolidated Financial Statements
Note 6. Mortgage Servicing Rights
Activity related to the Company's mortgage servicing rights is as follows:
Year Ended December 31
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------
Balance at beginning of year $44,398 $58,265 $57,183
Additions 29,161 19,638 31,720
Sales (8,228) (25,889) (23,639)
Amortization (6,918) (7,616) (6,999)
------- ------- -------
Balance at end of year $58,413 $44,398 $58,265
======= ======= =======
Estimated fair value at end of year $59,574 $50,869 $63,000
======= ======= =======
In 1995, the Company adopted SFAS No. 122, Accounting for Mortgage
Servicing Rights, which was superseded by SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, in 1997. Income before taxes in 1995 increased approximately
$3.4 million as a result of adopting this Statement.
Mortgage Servicing Activity
Mortgage loans secured principally by single-family residential properties
are originated and sold to investors without recourse. The Company retains
the servicing rights to certain loans sold. As a loan servicer, the Company
is responsible for collecting and remitting monthly principal and interest
payments, performing certain escrow services and conducting other duties
related to the administration of the loans within the servicing portfolio.
The Company's mortgage servicing portfolio totaled $3.1 billion at December
31, 1997 and consisted of approximately 39,000 loans. At December 31, 1996,
the mortgage servicing portfolio was $2.7 billion and consisted of
approximately 36,000 loans.
At December 31, 1997 and 1996, the Company was responsible for $59.9
million and $47.0 million, respectively, of escrow funds on behalf of
mortgagors. Escrow funds are generally held in custody at Republic Bank and
are included in noninterest-bearing deposits on the consolidated balance
sheets.
Note 7. Premises and Equipment
Premises and equipment consisted of the following:
December 31
(In thousands) 1997 1996
- -----------------------------------------------------------------------------
Land $ 1,289 $ 1,605
Furniture, fixtures and equipment 22,899 20,621
Buildings and improvements 8,685 11,111
-------- -------
32,873 33,337
Less accumulated amortization and depreciation (20,368) (18,329)
-------- -------
Premises and equipment $ 12,505 $15,008
======== =======
The Company leases certain office facilities under lease agreements that
expire at various dates. In some cases, these leases offer renewal options
and require that the Company pay for insurance, maintenance and taxes. Rental
expense under all operating leases charged to operations in 1997, 1996 and
1995 totaled $5.4 million, $4.6 million, and $3.6 million, respectively.
43
Notes to Consolidated Financial Statements
Note 7. Premises and Equipment (Continued)
As of December 31, 1997, the future aggregate minimum lease payments
required under noncancellable operating leases are as follows:
Operating
Year Ending Lease Payments
- ----------------------------------------------------------
1998 $ 4,202
1999 2,699
2000 1,823
2001 964
2002 553
2003 and thereafter 941
--------
Total minimum lease payments required $ 11,182
========
Note 8. Short-Term Borrowings
Short-term borrowings were as follows:
Average Average Maximum
Ending Rate Average Rate Month-End
(Dollars in thousands) Balance At Year-End Balance During Year Balance
- ----------------------------------------------------------------------------------------------
December 31, 1997
Federal funds purchased $ 32,000 6.61% $ 38,091 5.75% $ 70,900
Securities sold under agreements
to repurchase 20,770 5.89 62,163 5.67 106,596
Other short-term borrowings 5,504 5.27 7,017 6.64 7,205
-------- ---- -------- ---- --------
Total short-term borrowings $ 58,274 6.23% $107,271 5.76% $184,701
======== ==== ======== ==== ========
- ----------------------------------------------------------------------------------------------
December 31, 1996
Federal funds purchased $ 67,900 6.76% $ 25,312 5.71% $ 76,900
Securities sold under agreements
to repurchase 47,256 5.66 122,298 5.67 188,187
Other short-term borrowings 5,986 6.16 27,124 7.17 96,919
-------- ---- -------- ---- --------
Total short-term borrowings $121,142 6.19% $174,734 5.91% $362,006
======== ==== ======== ==== ========
Federal funds purchased mature within one day following the transaction
date and securities sold under agreements to repurchase generally mature
within ninety days from the transaction date. At December 31, 1997, Republic
Bank and Republic Savings Bank had $62.9 million and $47.0 million,
respectively, of unused lines of credit available with third parties for
federal funds purchased. Effective January 1, 1998, Republic Savings Bank had
an additional $10.0 million federal funds line of credit available under an
agreement with a third party. With respect to securities sold under
agreements to repurchase, Republic Bank had $3.0 million in borrowings
available at December 31, 1997.
Other short-term borrowings at December 31, 1997 were comprised of
treasury, tax and loan demand notes. At December 31, 1996, other short-term
borrowings consisted of treasury, tax and loan demand notes, amounts owed by
the parent company under a revolving credit agreement, and the current
portion of long-term debt.
44
Notes to Consolidated Financial Statements
Note 8. Short-Term Borrowings (Continued)
The parent company had an $18.0 million revolving credit agreement with
Firstar Bank Milwaukee, N.A. The proceeds received under this agreement were
used for general working capital purposes. This credit facility was secured
by the common and preferred stock of Republic Bank. Interest on borrowings
was computed at the prime rate (8.50% at December 31, 1997) minus .50%. The
agreement contained certain restrictive covenants which required Republic
Bank and the Company to maintain certain minimum capital, loan quality and
financial performance ratios as well as a minimum net worth. This agreement
expired in January 1998 and has not been renewed.
Note 9. FHLB Advances
FHLB advances outstanding as of December 31, 1997 and 1996 are presented
below. Classifications are based on original maturities.
December 31
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------
Average Average
Ending Rate at Ending Rate at
Balance Year-End Balance Year-End
- ----------------------------------------------------------------------------------------------
Short-term FHLB advances $281,000 5.74% $ 39,000 5.59%
Long-term FHLB advances 85,632 6.09 95,200 6.02
-------- ---- --------- ----
Total FHLB advances $366,632 5.83% $ 134,200 5.89%
======== ==== ========= ====
Republic Bank and Republic Savings Bank routinely borrow short-term and
long-term advances from the Federal Home Loan Bank (FHLB) to fund mortgage
loan originations and to minimize the interest rate risk associated with
certain fixed rate commercial and residential mortgage portfolio loans. These
advances are generally secured under a blanket security agreement by first
mortgage loans or investment securities with an aggregate book value equal to
at least 150% of the advances. Republic Bank and Republic Savings Bank had
$123.1 million and $6.8 million, respectively, available in unused borrowings
with the Federal Home Loan Bank at December 31, 1997.
The principal maturities of long-term FHLB advances outstanding at
December 31, 1997 are as follows:
(In thousands) Amount
- --------------------------------
1998 $ 27,000
1999 36,200
2000 12,000
2001 10,432
--------
Total $ 85,632
========
45
Notes to Consolidated Financial Statements
Note 10. Long-Term Debt
Obligations with original maturities of more than one year consisted of the
following:
December 31
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------
7.17% Senior Debentures due 2001 $ 25,000 $ 25,000
6.75% Senior Debentures due 2001 9,000 9,000
6.95% Senior Debentures due 2003 13,500 13,500
6.99% Mortgage Note due 2000 -- 1,792
-------- --------
$ 47,500 $ 49,292
Less current maturities included in other
short-term borrowings -- (103)
-------- --------
Total long-term debt $ 47,500 $ 49,189
======== ========
7.17% Senior Debentures Due 2001
These senior debentures were issued through a private offering in March
1994 and mature April 1, 2001. Interest is payable at a stated rate
semi-annually on April 1 and October 1 of each year.
6.75% and 6.95% Senior Debentures Due 2001 and 2003
In January 1996, the Company completed a private offering of $22.5
million of Senior Debentures with $9.0 million maturing on January 15, 2001
and $13.5 million maturing on January 15, 2003. Interest is payable at the
stated rate semi-annually on April 1 and October 1 of each year. Proceeds of
the offering were used to redeem $17.25 million of 9.0% Subordinated Notes
and for general corporate purposes. The early redemption of the 9.0%
Subordinated Notes resulted in the recognition of an extraordinary loss of
$388,000 after the related income tax effect of $209,000.
6.99% Mortgage Note Due 2000
In September 1993, Republic Bancorp Mortgage Inc. financed the
acquisition of its corporate office with a mortgage note in the amount of
$2.1 million with Firstar Bank Milwaukee, N.A. Principal and interest at a
fixed rate of 6.99% were payable quarterly. At December 31, 1996, $103,000 of
the amount outstanding was classified as short-term borrowings. The note,
which was originally due on October 1, 2000, was paid in full in March 1997
due to the sale of the office building.
The principal maturities of long-term debt outstanding at December 31, 1997
are as follows:
(In thousands) Amount
- -----------------------------------
1999 $ --
2000 --
2001 34,000
2002 13,500
2003 and thereafter --
-------
Total $47,500
=======
46
Notes to Consolidated Financial Statements
Note 11. Shareholders' Equity
On September 21, 1997, the Board of Directors declared a 10% stock dividend
distributed on December 5, 1997 to shareholders of record on November 7,
1997. Similar stock dividends were distributed on December 2, 1996 to
shareholders of record November 4, 1996 and December 1, 1995 to shareholders
of record November 3, 1995.
The Company repurchased 486,100 shares of common stock in 1997. None of
these shares were reissued in conjunction with the 1997 10% stock dividend.
In 1996, repurchases totaled 1,128,000 shares, of which 1,049,000 shares were
reissued in conjunction with the 1996 10% stock dividend. In 1995, the
Company repurchased 461,000 shares, of which 429,000 shares were reissued in
conjunction with the 1995 10% stock dividend.
Note 12. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Year Ended December 31
(Dollars in thousands, except per share data) 1997(1) 1996(1) 1995(1)
- -------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Income before extraordinary item $ 18,789 $ 15,066 $ 14,264
Extraordinary item -- (388) --
------------ ------------ ------------
Net income $ 18,789 $ 14,678 $ 14,264
============ ============ ============
Denominator:
Denominator for basic earnings per share --
weighted-average shares 18,679,777 19,347,146 19,970,129
Effect of dilutive securities:
Employee stock options 222,298 348,930 445,823
Warrants 167,263 139,130 135,191
------------ ------------ ------------
Dilutive potential common shares 389,561 488,060 581,014
Denominator for diluted earnings per share --
adjusted weighted-average shares for
assumed conversions 19,069,338 19,835,206 20,551,143
============ ============ ============
Basic earnings per share $ 1.01 $ .76 $ .71
============ ============ ============
Diluted earnings per share $ .99 $ .74 $ .69
============ ============ ============
<FN>
(1) Share amounts for all periods presented have been adjusted to reflect the
issuance of stock dividends.
Note 13. Stock-Based Compensation
The Company maintains various stock-based compensation plans that provide for
its ability to grant stock options, stock warrants and restricted shares to
selected employees and directors. See Note 1 on page 39 for the Company's
accounting policies relating to stock-based compensation.
Stock Options
The Company awards stock options to officers and key employees under the
1997 Stock Option Plan, which was adopted effective January 16, 1997. This
Plan authorizes the issuance of up to 825,000 options to purchase common
shares at exercise prices equal to the market value of the Company's common
stock on the date of grant. Options are exercisable immediately upon grant
and have a maximum contractual life of 10 years from the date of grant. At
December 31, 1997, options available for future grant under the 1997 Stock
Option Plan totaled 598,730. There were no options available for grant at
December 31, 1996 and 920 options were available at December 31, 1995 under
the previous Non-Qualified Stock Option Plan, which concluded in accordance
with its terms in 1996.
47
Notes to Consolidated Financial Statements
Note 13. Stock-Based Compensation (Continued)
The following table presents stock option activity for the years
indicated:
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
- ----------------------------------------------------------------------------------------
Outstanding at
beginning of year 587,371 $ 4.84 858,560 $ 4.20 1,068,456 $ 3.71
Granted 226,270 11.84 -- -- 32,222 7.96
Exercised (316,726) 4.92 (249,697) 3.84 (234,286) 4.01
Canceled -- -- (21,492) 8.46 (7,832) 8.31
-------- -------- -------- -------- --------- --------
Outstanding at
end of year 496,915 $ 8.54 587,371 $ 4.84 858,560 $ 4.20
======== ======== ======== ======== ========= ========
Additional information regarding stock options outstanding and
exercisable at December 31, 1997 is provided in the following table:
- --------------------------------------------------------------------------
Options Outstanding and Exercisable
---------------------------------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Range of Exercise Prices Shares Life (Years) Price
- --------------------------------------------------------------------------
$ 3.00 - $ 6.00 125,891 2.5 $ 3.30
$ 6.00 - $ 9.00 101,179 6.5 7.66
$ 9.00 - $12.00 255,765 8.8 11.18
$12.00 - $18.00 14,080 9.4 13.82
- -------------------------------------------------------------------------
$ 3.00 - $18.00 496,915 6.8 $ 8.54
==========================================================================
Stock Warrants
The Company has a Director Compensation Plan that provides for its ability to
issue 1,500 warrants annually to each of the Company's outside directors.
Stock warrants granted are immediately exercisable and have maximum
contractual lives of ten years. In 1997, 19,800 warrants were issued,
compared to 21,780 warrants in 1996 and 15,972 warrants in 1995. At December
31, 1997, 234,268 warrants were outstanding with exercise prices ranging from
$3.15 to $11.70.
Restricted Stock Plan
The Company's Restricted Stock Plan authorizes the grant of 331,301
common shares to key officers and employees. Restriction periods for these
shares exist for a period of three or four years, depending on whether the
shares were issued before or after January 16, 1997. Restricted shares are
forfeited if employment is terminated before the restriction period expires.
As of December 31, 1997 and 1996, 242,035 and 266,632 shares have been
awarded and are still subject to restrictions under the Restricted Stock
Plan. Compensation expense is recognized over the restriction period and
included in salaries and employee benefits expense in the consolidated
statements of income. Compensation expense for restricted stock totaled
$632,000 in 1997, $513,000 in 1996, and $313,000 in 1995. The unamortized
portion of restricted stock is included as a component of shareholders'
equity in the consolidated balance sheets. In 1997, 126,889 restricted shares
were issued, compared to 87,780 in 1996 and 98,857 in 1995. The weighted
average grant-date fair value of restricted shares issued in 1997 was $12.41.
48
Notes to Consolidated Financial Statements
Note 13. Stock-Based Compensation (Continued)
Pro Forma Disclosures
For purposes of providing the pro forma disclosures of net income and
earnings per share required by SFAS No. 123, the fair value of stock options
and stock warrants was estimated as of the grant date using the Black-Scholes
option pricing model. The following weighted average assumptions were used in
the option pricing model: an expected volatility factor of 23.3%; an expected
dividend yield of 2.61%; a risk-free interest rate of 6.69%; and an expected
life of the option of 5.2 years. The weighted average grant-date fair value
of stock options and stock warrants granted during each of the years 1997,
1996 and 1995 was $2.76.
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with SFAS No. 123, net income and earnings per share
would have been as summarized below:
Year Ended December 31
(In thousands, except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------
Net income (as reported) $18,789 $ 14,678 $14,264
Net income (pro forma) 18,347 14,639 14,194
Basic earnings per share (as reported) $ 1.01 $ .76 $ .71
Basic earnings per share (pro forma) .98 .76 .71
Diluted earnings per share (as reported) $ .99 $ .74 $ .69
Diluted earnings per share (pro forma) .96 .74 .69
Note 14. Employee Benefit Plans
The Company maintains a 401(k) plan for its employees. The employer
contributions to the plan are determined annually by the Board of Directors.
Contribution expenses for the 401(k) plan for the years ended December 31,
1997, 1996 and 1995 totaled $1.2 million, $693,000, and $644,000,
respectively.
Note 15. Other Noninterest Expense
The three largest components of other noninterest expense were as follows:
Year Ended December 31
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------
Telephone $ 3,379 $ 3,120 $ 2,708
Computer service fees 1,859 1,737 1,556
Advertising 1,833 1,679 1,487
49
Notes to Consolidated Financial Statements
Note 16. Income Taxes
The current and deferred components of the provision for Federal income tax
expense for the years ended December 31, 1997, 1996, and 1995 are as follows.
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Current income tax expense $ 6,906 $ 7,315 $ 5,127
Deferred income tax expense 2,987 194 3,039
------- ------- ---------
Total income tax expense $ 9,893 $ 7,509 $ 8,166
======= ======= =======
A deferred tax asset or liability is recognized to reflect the net tax
effects of temporary differences between the carrying amounts of existing
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, as well as operating loss and tax credit
carryforwards. Significant temporary differences that gave rise to the
deferred tax assets and liabilities as of December 31, 1997 were as follows:
(In thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
Deferred Deferred
Asset Liability Asset Liability
- -------------------------------------------------------------------------------------------------
Allowance for loan losses $ 1,869 $ -- $ 392 $ --
Mortgage servicing rights amortization 997 -- 788 --
Originated mortgage servicing rights -- 6,159 -- 2,506
Deferred loan origination fees and costs, net -- 2,811 -- 2,106
Non-deductible accruals -- -- 177 --
Depreciation/amortization 717 -- 373 --
Cash dividends on FHLB stock -- 777 -- 649
Purchase accounting adjustment amortization 719 -- 675 --
Unrealized loss on securities available for sale 430 -- 1,318 --
Loan mark-to-market adjustment 752 -- 994 --
Other temporary differences 1,240 683 1,114 158
------- ------- ------- -------
Total deferred taxes $ 6,724 $10,430 $ 5,831 $ 5,419
======= ======= ======= =======
Items causing differences between the statutory tax rate and the
effective tax rate are summarized as follows:
Year ended December 31
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------
Statutory tax rate $10,039 35.0% $ 7,765 35.0% $ 7,851 35.0%
Amortization of goodwill 87 .3 88 .4 88 .4
Net tax exempt interest income (240) (.8) (521) (2.4) (36) (.2)
Other, net 7 -- 177 .8 263 1.2
-------- --- ------- ---- ------- -----
Provision for income taxes $ 9,893 34.5% $ 7,509 33.8% $ 8,166 36.4%
======= ==== ======= ==== ======= ====
50
Notes to Consolidated Financial Statements
Note 17. Contingencies
The Company and its subsidiaries are subject to certain legal actions and
proceedings in the normal course of business. Management believes that the
aggregate liability, if any, resulting from such actions would not have a
material adverse affect on the Company's financial condition, results of
operations or liquidity.
Note 18. Transactions With Related Parties
Republic Bank and Republic Savings Bank have, in the normal course of
business, made loans to certain directors and officers and to organizations
in which certain directors and officers have an interest. Other transactions
with related parties include noninterest-bearing and interest-bearing
deposits. In the opinion of management, such loans and other transactions
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated parties and did not involve more than normal risk of
collectibility.
A summary of related party loan activity follows:
Year Ended December 31
(In thousands) 1997 1996
- ------------------------------------------------------------------------
Balance at beginning of year $ 1,685 $ 2,596
Loans and advances to employees 1,211 --
Loans to current directors and officers 937 379
Repayments (824) (1,290)
-------- --------
Balance at end of year $ 3,009 $ 1,685
======== ========
Note 19. Segment Information
The Company operates in two industry segments, as defined by SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. Those segments are
commercial and retail banking and mortgage banking. Table 1 of Management's
Discussion and Analysis of Financial Condition and Results of Operations on
page 13, incorporated herein by reference, presents the financial results of
these segments for the years ending December 31, 1997, 1996, and 1995.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement's provisions require
enterprises to disclose in their annual and interim reports to shareholders
financial and descriptive information about their operating segments using a
new "management approach." The Statement is effective for the Company
beginning January 1, 1998, however, it is not required to be applied to
interim reporting in the initial year of application.
Note 20. Off-Balance Sheet Transactions
In the normal course of business, the Company becomes a party to transactions
involving financial instruments with off-balance sheet risk to meet the
financing needs of its customers and to manage its own exposure to interest
rate risk. These financial instruments include commitments to extend credit,
standby letters of credit and forward commitments to sell mortgage loans that
are not reflected in the consolidated financial statements. The contractual
amounts of these instruments express the extent of the Company's involvement
in these transactions as of the balance sheet date. These instruments
involve, to varying degrees, elements of credit risk, market risk and
liquidity risk in excess of the amount recognized in the consolidated balance
sheets. However, they do not represent unusual risks for the Company and
management does not anticipate any significant losses to arise from these
transactions.
51
Notes to Consolidated Financial Statements
Note 20. Off-Balance Sheet Transactions (Continued)
Commitments to extend credit are legally binding agreements to lend cash
to a customer as long as there is no breach of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. Commitments to fund
loan applications with agreed-upon rates subject the Company to market risk
due to fluctuations in interest rates. Standby letters of credit guarantee
the performance of a customer to a third party. The Company issues these
guarantees primarily to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions.
The credit risk associated with commitments to extend credit and standby
letters of credit is essentially the same as that involved with direct
lending. Therefore, these instruments are subject to the Company's loan
review and approval procedures and credit policies. Based upon management's
credit evaluation of the counterparty, the Company may require the
counterparty to provide collateral as security for the agreement, including
real estate, accounts receivable, inventories, and investment securities. The
maximum credit risk associated with these instruments equals their
contractual amounts and assumes that the counterparty defaults and the
collateral proves to be worthless. The total contractual amounts of
commitments to extend credit and standby letters of credit do not necessarily
represent future cash requirements, since many of these agreements may expire
without being drawn upon.
At December 31, 1997, the Company had outstanding $220.9 million of
commitments to fund residential real estate loan applications with
agreed-upon rates, including $50.3 million of portfolio residential mortgage
loans. Committing to fund residential real estate loan applications at
specified rates and holding residential mortgage loans for sale to the
secondary market exposes the Company to interest rate risk during the period
after the loans close but before they are sold to investors. To minimize this
exposure to interest rate risk, the Company enters into firm commitments to
sell such mortgage loans at specified future dates to various third parties.
At December 31, 1997, the Company had outstanding mandatory forward
commitments to sell $536.1 million of residential mortgage loans, of which
$389.8 million covered the mortgage loans held for sale balance and $146.3
million covered commitments to fund residential real estate loan applications
with agreed-upon rates. These outstanding forward commitments to sell
mortgage loans are expected to settle in the first quarter of 1998 without
producing any material gains or losses. At December 31, 1997, the mortgage
loans held for sale balance included $123.7 million of loan products for
which the Company did not enter into mandatory forward commitments. The
Company's exposure to market risk was not significantly increased, however,
since $78.9 million, or 64%, of these loans were loans that had been
committed for bulk sale to third parties prior to year-end or were floating
rate residential construction loans.
At December 31, 1996, outstanding forward commitments to sell mortgage
loans totaled $438.1 million, of which $329.2 million covered the mortgage
loans held for sale balance and $108.9 million related to commitments to fund
residential real estate loan applications with agreed-upon rates.
The following table presents the contractual amounts of the Company's
off-balance sheet financial instruments outstanding at December 31, 1997 and
1996:
December 31
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to fund residential real estate loans $575,005 $229,755
Commitments to fund commercial real estate loans 101,531 94,188
Other unused commitments to extend credit 41,116 33,224
Standby letters of credit 3,254 228
Financial instruments subject to interest rate risk:
Residential real estate loan applications with agreed-upon rates $220,919 $145,945
Forward commitments to sell residential real estate mortgage loans 536,120 438,112
52
Notes to Consolidated Financial Statements
Note 21. Estimated Fair Value of Financial Instruments
Fair value estimates of financial instruments are made at a specific point in
time based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale the Company's entire holdings of a particular
financial instrument. Since no ready market exists for a significant portion
of the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are determined for existing on- and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and value of assets and liabilities that are not
considered financial instruments. Tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect
on the fair value of financial instruments and have not been considered in
these estimates.
The methods and assumptions used to estimate the fair value of each class
of financial instruments for which determination of such an estimate was
practicable are as follows:
Cash and Cash Equivalents:
The carrying amount is a reasonable estimate of fair value for these
instruments.
Mortgage Loans Held for Sale:
The fair value of mortgage loans held for sale, including the fair value
of associated mortgage servicing rights, is estimated based on the present
value of estimated future cash flows of the loan and related servicing
rights.
Securities Available for Sale:
The fair value of securities available for sale is estimated based on
quoted market prices or dealer quotes.
Loans:
Fair values are estimated for portfolio loans based on the present value
of future estimated cash flows using discount rates which incorporate a
premium commensurate with normal credit and interest rate risks involved.
Loans are segregated by type such as commercial and industrial, commercial
real estate, residential mortgage and installment.
Fair value for non-performing loans is based on the premise that
management has allocated adequate reserves for loan losses. As a result, the
fair value of non-performing loans approximate their carrying value.
Deposits:
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, money market and NOW accounts,
is equal to the amount payable on demand. The estimated fair value of
certificates of deposit is based on the present value of future estimated
cash flows using the rates currently offered for deposits of similar
remaining maturities.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase:
Fair value approximates the carrying value since the majority of these
instruments were entered into at or near December 31, 1997 and 1996.
53
Notes to Consolidated Financial Statements
Note 21. Estimated Fair Value of Financial Instruments (Continued)
Other Short-Term Borrowings:
The carrying amount is a reasonable estimate of fair value of other
short-term borrowings as these financial instruments are tied to floating
rate indices such as prime and LIBOR, and reprice frequently.
FHLB Advances and Long-Term Debt:
Fair value is estimated based on the present value of future estimated
cash flows using current rates offered to the Company for debt with similar
terms.
Off-Balance Sheet Financial Instruments:
The Company's off-balance sheet financial instruments are detailed in
Note 20 in the Notes to Consolidated Financial Statements. The Company's
commitments to fund residential real estate loan applications with
agreed-upon interest rates may result in a gain or loss upon the sale of the
funded residential real estate loans. Additionally, the Company's forward
commitments to sell residential real estate loans may result in a gain or
loss. The aggregated fair value of these off-balance sheet financial
instruments at December 31, 1997 and 1996 were not material.
The following table presents the estimated fair values of the Company's
financial instruments:
1997 1996
December 31 Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
- -----------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 29,668 $ 29,668 $ 40,114 $ 40,114
Mortgage loans held for sale 513,533 515,683 329,157 333,271
Securities available for sale 119,881 119,881 228,621 228,621
Loans, net of the allowance for loan losses 1,088,409 1,111,414 779,919 784,346
Liabilities:
Noninterest-bearing deposits 96,644 96,644 126,940 126,940
NOW, savings and money market accounts 388,724 388,724 306,748 306,748
Certificates of deposit maturing in:
Six months or less 327,517 328,312 260,455 260,893
Over six months to one year 70,039 70,235 220,096 221,250
Over one year to three years 175,627 176,600 78,394 78,903
Over three years 118,742 119,617 21,074 21,202
---------- ---------- ---------- ----------
Total deposits 1,177,293 1,180,132 1,013,707 1,015,936
Federal funds purchased and securities sold
under agreements to repurchase 52,770 52,770 115,156 115,156
Other short-term borrowings 5,504 5,504 5,986 5,986
FHLB advances 366,632 365,431 134,200 134,720
Long-term debt 47,500 48,890 49,189 50,206
54
Notes to Consolidated Financial Statements
Note 22. Regulatory Matters
The Company's banking subsidiaries are required by law to maintain average
cash reserve balances with the Federal Reserve Bank based on a percentage of
deposits. At December 31, 1997 and 1996, these reserves totaled $3.5 million
and $10.6 million, respectively.
The principal source of cash flows for the parent company is dividends
from Republic Bank and Republic Savings Bank. The banking regulatory agencies
limit the amount of dividends these state chartered financial institutions
may declare to the parent company in any calendar year. On December 31, 1997,
$35.5 million was available for payment of dividends.
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by regulators that, if undertaken, could have an effect on
the Company's financial statements. Capital adequacy guidelines require
minimum capital ratios of 8.00% for Total risk-based capital, 4.00% for Tier
1 risk-based capital and 4.00% (and in some cases 3.00%) for Tier 1 leverage.
Under the framework for prompt corrective action, all financial institutions
must meet capital guidelines that involve quantitative measures of the
Company's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. To be considered well
capitalized under the regulatory framework for prompt corrective action,
minimum capital ratios of 10.00% for Total risk-based capital, 6.00% for Tier
1 risk-based capital and 5.00% for Tier 1 leverage must be maintained. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators with respect to components, risk weightings and
other factors.
Management believes, as of December 31, 1997, that the Company met all
capital adequacy requirements to which it is subject. In addition, each bank
subsidiary had regulatory capital ratios in excess of the levels established
for well capitalized institutions.
As of December 31, 1997, the Federal Reserve Bank of Chicago considers
the Company to be "well capitalized" under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Company's category.
55
Notes to Consolidated Financial Statements
Note 22. Regulatory Matters (Continued)
Presented in the table below are the capital amounts and ratios for the
Company and each of its banking subsidiaries, Republic Bank and Republic
Savings Bank, along with a comparison to the year-end capital amounts and
ratios established by the regulators.
(Dollars in thousands) Actual Adequately Capitalized Well Capitalized
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
As of December 31, 1997
Total capital
(to risk weighted assets)(1):
Consolidated $126,519 10.35% $ 97,541 8.00% $121,926 10.00%
Republic Bank 104,182 11.52 72,353 8.00 90,441 10.00
Republic Savings Bank 38,086 12.49 24,400 8.00 30,501 10.00
Tier 1 capital
(to risk weighted assets)(1):
Consolidated $118,825 9.75% $ 48,771 4.00% $ 73,156 6.00%
Republic Bank 99,294 10.98 36,176 4.00 54,265 6.00
Republic Savings Bank 33,139 10.87 12,200 4.00 18,300 6.00
Tier 1 capital
(to average assets)(1):
Consolidated $118,825 6.58% $ 54,208 3.00% $ 90,346 5.00%
Republic Bank 99,294 8.12 36,689 3.00 61,149 5.00
Republic Savings Bank 33,139 6.59 15,096 3.00 25,159 5.00
- ---------------------------------------------------------------------------------------------------
As of December 31, 1996
Total capital
(to risk weighted assets)(1):
Consolidated $120,120 13.84% $ 69,439 8.00% $ 86,799 10.00%
Republic Bank 79,232 14.01 45,252 8.00 56,566 10.00
Republic Savings Bank 32,434 13.31 19,248 8.00 24,061 10.00
Tier 1 capital
(to risk weighted assets)(1):
Consolidated $115,411 13.30% $ 34,720 4.00% $ 52,079 6.00%
Republic Bank 76,469 13.52 22,626 4.00 33,939 6.00
Republic Savings Bank 30,489 12.51 9,624 4.00 14,436 6.00
Tier 1 capital
(to average assets)(1):
Consolidated $115,411 8.16% $ 42,454 3.00% $ 70,756 5.00%
Republic Bank 76,469 7.88 29,104 3.00 48,506 5.00
Republic Savings Bank 30,489 6.93 13,198 3.00 21,996 5.00
<FN>
(1) As defined in the regulations
56
Notes to Consolidated Financial Statements
Note 23. Parent Company Financial Information
The condensed financial statements of Republic Bancorp Inc. (Parent Company
only) are as follows:
Parent Company Only Balance Sheets
December 31 (In thousands) 1997 1996
- ---------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 743 $ 743
Interest earning deposits 35,154 1,771
-------- ---------
Cash and cash equivalents 35,897 2,514
Investment in subsidiaries 144,274 132,258
Notes and advances receivable from subsidiaries 3,147 38,384
Furniture and equipment 130 88
Other assets 4,588 4,539
-------- ---------
Total assets $188,036 $ 177,783
======== =========
Liabilities and Shareholders' Equity:
Accrued expenses and other liabilities $ 9,448 $ 6,593
Short-term borrowings -- 1,875
Long-term debt 47,500 47,500
-------- ---------
Total liabilities 56,948 55,968
Total shareholders' equity 131,088 121,815
-------- ---------
Total liabilities and shareholders' equity $188,036 $ 177,783
======== =========
Parent Company Only Income Statements
Year Ended December 31 (In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
Interest income $ 2,544 $ 3,323 $ 2,751
Dividends from subsidiaries 13,646 12,579 23,586
Other income -- -- 4
-------- -------- --------
Total income 16,190 15,902 26,341
Interest expense 3,739 3,637 4,365
Salaries and employee benefits 4,305 2,229 1,058
Other expenses 1,824 1,382 1,260
-------- -------- --------
Total expenses 9,868 7,248 6,683
-------- -------- --------
Income before income taxes, extraordinary item and
excess (deficiency) of undistributed earnings of
subsidiaries over dividends 6,322 8,654 19,658
Income tax credits (2,532) (1,307) (1,272)
-------- -------- --------
Income before extraordinary item and excess
(deficiency) of undistributed earnings of
subsidiaries over dividends 8,854 9,961 20,930
Extraordinary item - loss on early redemption
of debt, net of tax -- (388) --
Excess (deficiency) of undistributed earnings of
subsidiaries over dividends 9,935 5,105 (6,666)
-------- -------- --------
Net income $ 18,789 $ 14,678 $ 14,264
======== ======== ========
57
Notes to Consolidated Financial Statements
Note 23. Parent Company Financial Information (Continued)
Parent Company Only Statements of Cash Flows
Year Ended December 31 (In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 18,789 $ 14,678 $ 14,264
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 557 475 598
(Excess) deficiency of undistributed
earnings of subsidiaries over
dividends (9,935) (5,105) 6,666
(Increase) decrease in other assets (382) (3,495) 1,959
Increase in other liabilities 2,708 1,590 312
Other, net -- 1,389 (21)
-------- -------- --------
Total adjustments (7,052) (5,146) 9,514
-------- -------- --------
Net cash provided by operating activities 11,737 9,532 23,778
Cash Flows from Investing Activities:
Return of capital from (capital investment in)
subsidiaries (430) 4,000 (3,547)
Equipment expenditures (74) -- --
(Increase) decrease in notes and advances
receivable from subsidiaries 35,422 6,062 (22,635)
-------- -------- --------
Net cash provided by (used in)
investing activities 34,918 10,062 (26,182)
Cash Flows from Financing Activities:
Net proceeds from issuance of common shares
through exercise of stock options and
stock warrants 1,755 1,040 1,195
Repurchase of common shares (6,320) (13,020) (5,117)
Dividends paid on common shares (6,802) (6,305) (5,270)
Net increase (decrease) in short-term borrowings (1,875) (6,250) 8,125
Issuance of senior debentures, net of
issuance costs (30) 22,233 --
Repayment of subordinated notes -- (17,250) --
-------- -------- --------
Net cash (used in) provided by
financing activities (13,272) (19,552) (1,067)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 33,383 42 (3,471)
Cash and cash equivalents at beginning of year 2,514 2,472 5,943
-------- -------- --------
Cash and cash equivalents at end of year $ 35,897 $ 2,514 $ 2,472
======== ======== ========
58
Report of Management
The management of Republic Bancorp Inc. is responsible for the preparation of
the financial statements and other related financial information included in
the Annual Report on Form 10-K. The financial statements have been prepared
in accordance with generally accepted accounting principles and include the
amounts based on management's estimates and judgments where appropriate.
Financial information appearing throughout the Annual Report on Form 10-K is
consistent with the financial statements.
Management is responsible for the integrity and objectivity of the
consolidated financial statements. Established accounting procedures are
designed to provide financial records and accounts which fairly reflect the
transactions of the Company. The training of qualified personnel and the
assignment of duties are intended to provide an internal control structure at
a cost consistent with management's evaluation of the risks involved. Such
controls are monitored by an internal audit staff to provide reasonable
assurances that transactions are executed in accordance with management's
authorization and that adequate accountability for the Company's assets is
maintained.
The 1997 financial statements have been audited by Ernst & Young LLP,
independent auditors, and their report follows.
The Audit Committee of the Board of Directors is composed of outside
directors who meet with management, internal auditors, independent auditors
and regulatory examiners to review matters relating to financial reporting
and internal controls. The internal auditors, independent auditors and
regulatory examiners have direct access to the Audit Committee.
/s/ Jerry D. Campbell /s/ Thomas F. Menacher
- --------------------- -----------------------
Jerry D. Campbell Thomas F. Menacher, CPA
Chairman of the Board and Senior Vice President, Treasurer and
Chief Executive Officer Chief Financial Officer
59
Independent Auditors' Report
Republic Bancorp Inc. Board of Directors
We have audited the accompanying consolidated balance sheet of Republic
Bancorp Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of Republic Bancorp Inc. for each of the two years in the period
ended December 31, 1996, were audited by other auditors whose report dated
January 16, 1997, expressed an unqualified opinion on those statements and
included an explanatory paragraph that disclosed the change in the Company's
method of accounting for mortgage servicing rights discussed in Note 6 to
these financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Republic Bancorp Inc. and subsidiaries at December 31, 1997 and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
January 15, 1998
60
Quarterly Data (Unaudited)
The following is a summary of unaudited quarterly results of operations for
the years 1997 and 1996:
Full
(Dollars in thousands, except per share data) 1Q 2Q 3Q 4Q Year
- ----------------------------------------------------------------------------------------------
1997
Earnings Summary
Interest income $25,046 $ 28,191 $31,689 $33,926 $118,852
Interest expense 15,057 17,007 19,375 20,473 71,912
Net interest income 9,989 11,184 12,314 13,453 46,940
Provision for loan losses 297 2,188 136 410 3,031
Mortgage banking revenue 18,950 21,241 26,041 27,468 93,700
Other noninterest income 1,386 4,864 1,347 1,218 8,815
Noninterest expense 24,153 27,933 31,217 34,439 117,742
Income before taxes 5,875 7,168 8,349 7,290 28,682
Net income 3,956 4,712 5,375 4,746 18,789
Per Common Share
Basic earnings $ .21 $ .26 $ .29 $ .25 $ 1.01
Diluted earnings .21 .25 .28 .25 .99
Cash dividends declared .09 .09 .09 .10 .37
- ----------------------------------------------------------------------------------------------
1996
Earnings Summary
Interest income $24,162 $ 24,216 $25,608 $25,161 $99,147
Interest expense 16,060 15,339 15,659 15,369 62,427
Net interest income 8,102 8,877 9,949 9,792 36,720
Provision for loan losses 65 45 90 90 290
Mortgage banking revenue 19,444 21,939 22,225 22,769 86,377
Other noninterest income 1,219 826 1,350 1,074 4,469
Noninterest expense 24,189 25,280 27,691 27,332 104,492
Income before taxes and
extraordinary item 4,511 6,317 5,743 6,213 22,784
Income before extraordinary item 3,015 4,146 3,754 4,151 15,066
Net income 2,627 4,146 3,754 4,151 14,678
Per Common Share
Basic earnings $ .13 $ .21 $ .20 $ .22 $ .76
Diluted earnings .13 .21 .19 .21 .74
Cash dividends declared .08 .08 .09 .09 .34
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item relating to a change in accountants
was previously reported in the Registrant's Form 8-K/A dated June 20, 1997
filed with the Securities and Exchange Commission.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information set forth under the caption "Board of Directors" on pages
13 to 14 of the Registrant's 1998 Proxy Statement is incorporated herein by
reference.
The executive officers of Republic Bancorp Inc. are listed under Item 1
of this document.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Personnel, Compensation and
Nominating Committee Report" on pages 16 to 17 and "Compensation of Executive
Officers" on pages 19 to 21 of the Registrant's 1998 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Voting Securities" on pages
10 to 12 of the Registrant's 1998 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" on page 22 of the Registrant's 1998 Proxy Statement is
incorporated herein by reference.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following financial statements of the Company are filed as a part
of this document under Item 8. Financial Statements and Supplementary
Data:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
All financial statement schedules required by Article 9 of Regulation
S-X have been included in the consolidated financial statements or
are either not applicable or not significant.
3. Exhibits
3(a) Articles of Incorporation are incorporated herein by reference
to Exhibit 3(a) to Form 10-K filed March 17, 1994.
3(b) Bylaws, as amended, are incorporated herein by reference to
Exhibit 3(b) to Registration Statement on Form S4 filed March 1,
1990, Registration No. 3333811.
4(a) Debenture Purchase Agreement dated as of March 30, 1994, between
the Company and Scudder, Stevens & Clark, Inc., Business Men's
Assurance Company of America, Columbus Life Insurance Company
and Mutual of America Life Insurance Company, related to 7.17%
Senior Debentures due 2001, filed as Exhibit 4(p) to Form 10-K
filed March 27, 1995, is incorporated herein by reference.
4(b) Debenture Purchase Agreement dated as of January 29, 1996,
between the Company and American United Life Insurance, State
Life Insurance Co., Mutual of America Life Insurance Co., GNA,
Mega Life & Health Insurance Co. and Provident Mutual Life
Insurance Company, related to 6.75% Senior Debentures due
January 15, 2001 and 6.95% Senior Debentures due January 15,
2003, filed as Exhibit 4(c) to Form 10-K filed March 29, 1996,
is incorporated herein by reference.
10(a) 1998 Stock Option Plan of the Company, effective February 19,
1998, subject to shareholder approval.
10(b) 1997 Stock Option Plan of the Company, effective January 16,
1997, filed as Exhibit 10(b) to Form 10-K filed March 28, 1997,
is incorporated herein by reference.
10(c) Non-Qualified Stock Option Plan of the Company, effective March
24, 1986, as amended and restated, filed as Exhibit 10(b) to
Form 10-K filed March 23, 1993, is incorporated herein by
reference.
10(d) Restricted Stock Plan of the Company as amended.
63
10(e) Voluntary Management Stock Accumulation Program, effective
February 19, 1998, subject to shareholder approval.
10(f) Directors Compensation Plan of the Company, adopted by the Board
of Directors on October 15, 1992, filed as Exhibit 10(e) to Form
10-K filed March 23, 1993, is incorporated herein by reference.
10(g) Deferred Compensation Plan of the Company, adopted by the Board
of Directors on December 16, 1993, filed as Exhibit 10(e) to
Form 10-K filed March 17, 1994, is incorporated herein by
reference.
10(h) Form of Indemnity Agreement and schedule of officers and
directors of the Company who executed such agreements, filed as
Exhibit 10(e) to Form S2 filed February 28, 1992, Registration
No. 3346069, is incorporated herein by reference.
10(i) First Amended and Restated Agreement and Plan of Reorganization,
dated as of October 29, 1992, by and between the Company and
Horizon Financial Services, Inc., filed as Exhibit 2 to Form 8-K
filed November 6, 1992, is incorporated herein by reference.
10(j) Agreement and Plan of Merger between the Company and Premier
Bancorporation, Inc., dated as of March 31, 1993, filed as
Exhibit 28(c) to Form 10-K filed March 17, 1994, is incorporated
herein by reference.
10(k) Purchase and Sale Agreement by and between Republic Bancorp Inc.
("Purchaser") and California United Bank, National Association
("Seller"), dated October 22, 1993, filed as Exhibit 28(e) to
Form 10-K filed March 17, 1994, is incorporated herein by
reference.
10(l) Purchase and Sale Agreement by and between Republic Bank
("Seller") and CB North ("Purchaser"), dated as of September 27,
1994, filed as Exhibit 28(g) to Form 10-K filed March 27, 1995,
is incorporated herein by reference.
10(m) Form of Servicing and Disposition Agreement for Inventory and
Construction Loan Portfolio, dated November 21, 1992 between
Market Street Mortgage Corporation and the Company, filed as
Exhibit 2(b) to Form 8-K filed November 23, 1992, is
incorporated herein by reference.
13. 1997 Annual Report to Shareholders.
21. Subsidiaries of the Registrant are incorporated herein by
reference to Note 1 of the Notes to Consolidated Financial
Statements included under Item 8 of this document.
23(a) Consent of Ernst & Young LLP, independent auditors, to
incorporation by reference to its report dated January 15, 1998
appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
23(b) Consent of Deloitte & Touche LLP, independent auditors, to
incorporation by reference to its report dated January 16, 1997
appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and into the Company's Registration
Statements on Form S-8 dated May 5, 1997, Registration No.
333-26515; Form S-8 dated December 4, 1992, Registration No.
33-55336; Form S-8 dated December 4, 1992, Registration No.
33-55304; and Form S-8 dated May 10, 1993, Registration No.
33-62508 and into the Company's Registration Statement on Form
S-3 dated May 26, 1993, Registration No. 33-61842.
24. Powers of Attorney
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 18th day
of March 1998.
REPUBLIC BANCORP INC.
By: /s/ JERRY D. CAMPBELL
-------------------------
Jerry D. Campbell
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities indicated, on the 18th day of March 1998.
Signature Title Date
--------- ----- ----
/s/ JERRY D. CAMPBELL Chairman of the Board and March 18, 1998
- ------------------------- Chief Executive Officer
Jerry D. Campbell
/s/ THOMAS F. MENACHER Senior Vice President, Treasurer March 18, 1998
- ------------------------- and Chief Financial Officer
Thomas F. Menacher (Principal Financial Officer and
Principal Accounting Officer)
DIRECTORS *
Dana M. Cluckey Howard J. Hulsman John J. Lennon George B. Smith
Bruce L. Cook Gary Hurand Sam H. McGoun Jeoffrey K. Stross
Richard J. Cramer Dennis J. Ibold Kelly E. Miller
George A. Eastman Stephen M. Klein Joe D. Pentecost
* By: /s/ THOMAS F. MENACHER
----------------------
Attorney in Fact
65
SKU #: REPCO-PS98