SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1998 Commission File Number 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2604669
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices)
(517) 725-7337
(Registrant's telephone number)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock Outstanding as of April 30, 1998:
Common Stock, $5 Par Value ............................. 18,792,749 Shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 ........................................... 3
Consolidated Statements of Income for the three months
ended March 31, 1998 and 1997.................................... 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997............................. 5
Notes to Consolidated Financial Statements....................... 6 - 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.................... 8 - 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 18
Item 2. Changes in Securities............................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.............. 18 - 19
Item 6. Exhibits and Reports on Form 8-K................................. 19
SIGNATURE ................................................................. 20
EXHIBITS........................................................................ 21 - 27
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31,
(Dollars in thousands) 1998 1997
- ---------------------- -------- ------------
ASSETS
Cash and cash equivalents ............................... $ 41,082 $ 29,668
Mortgage loans held for sale ............................ 705,704 513,533
Securities available for sale (amortized cost of
$71,973 and $121,109, respectively) ................... 71,514 119,881
Loans, net of unearned income ........................... 1,076,625 1,095,744
Less allowance for loan losses .......................... (8,458) (7,334)
----------- -----------
Net loans ............................................. 1,068,167 1,088,410
----------- -----------
Premises and equipment, net of depreciation ............. 12,581 12,505
Mortgage servicing rights ............................... 65,035 58,413
Other assets ............................................ 52,965 50,483
----------- -----------
Total assets .......................................... $ 2,017,048 $ 1,872,893
=========== ===========
LIABILITIES
Noninterest-bearing deposits ............................ $ 126,391 $ 96,644
Interest-bearing deposits ............................... 1,169,171 1,080,649
----------- -----------
Total deposits .................................... 1,295,562 1,177,293
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings ......... 59,019 58,274
Short-term FHLB advances ................................ 257,000 281,000
Long-term FHLB advances ................................. 115,568 85,632
Accrued expenses and other liabilities .................. 106,133 91,142
Long-term debt .......................................... 47,500 47,500
----------- -----------
Total liabilities ................................... 1,880,782 1,740,841
Minority interest ....................................... 971 964
SHAREHOLDERS' EQUITY
Preferred stock, $25 stated value: $2.25 cumulative and
convertible; 5,000,000 shares authorized, none issued
and outstanding ....................................... -- --
Common stock, $5 par value, 30,000,000 shares
authorized; 18,755,358 and 18,678,242 shares
issued and outstanding, respectively .................. 93,777 93,391
Capital surplus ......................................... 37,000 37,221
Retained earnings ....................................... 4,816 1,274
Net unrealized losses on securities available for sale .. (298) (798)
----------- -----------
Total shareholders' equity .......................... 135,295 131,088
----------- -----------
Total liabilities and shareholders' equity .......... $ 2,017,048 $ 1,872,893
=========== ===========
<FN>
See notes to consolidated financial statements.
3
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
March 31,
(In thousands, except per share data) 1998 1997
- ------------------------------------- ---- ----
Interest Income:
Loans, including fees ............................. $ 32,159 $ 21,530
Investment securities ............................. 1,663 3,366
Money market investments .......................... 53 150
-------- --------
Total interest income ....................... 33,875 25,046
-------- --------
Interest Expense:
Demand deposits ................................... 126 311
Savings and time deposits ......................... 13,728 10,756
Short-term borrowings ............................. 786 1,254
FHLB advances ..................................... 5,174 1,847
Long-term debt .................................... 859 889
-------- --------
Total interest expense ...................... 20,673 15,057
-------- --------
Net interest income ............................... 13,202 9,989
Provision for loan losses ......................... 1,225 297
-------- --------
Net interest income after provision for loan losses 11,977 9,692
-------- --------
Noninterest Income:
Service charges ................................... 361 352
Mortgage banking .................................. 27,947 18,950
Gains (losses) on sale of securities .............. (98) 37
Gains on sale of SBA loans ........................ 619 184
Other noninterest income .......................... 298 813
-------- --------
Total noninterest income .................... 29,127 20,336
-------- --------
Noninterest Expense:
Salaries and employee benefits .................... 11,816 10,033
Mortgage loan commissions ......................... 10,653 5,116
Occupancy expense of premises ..................... 1,858 1,733
Equipment expense ................................. 1,267 1,101
Other noninterest expense ......................... 7,149 6,170
-------- --------
Total noninterest expense ................... 32,743 24,153
-------- --------
Income before income taxes ........................ 8,361 5,875
Provision for income taxes ........................ 2,952 1,919
-------- --------
Net Income ........................................ $ 5,409 $ 3,956
======== ========
Basic earnings per share .......................... $ .29 $ .21
======== ========
Diluted earnings per share ........................ $ .28 $ .21
======== ========
Average common shares outstanding - diluted ....... 19,138 19,267
======== ========
Cash dividends declared per common share .......... $ .10 $ .09
======== ========
<FN>
See notes to consolidated financial statements.
4
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31 (In thousands) 1998 1997
- ------------------------------------------- ---- ----
Cash Flows From Operating Activities:
Net income ....................................................... $ 5,409 $ 3,956
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 1,445 1,280
Amortization of mortgage servicing rights .................... 3,121 1,474
Net (gains) losses on sale of securities available for sale .. 98 (37)
Net gains on sale of mortgage servicing rights ............... (7,333) (3,402)
Net gains on sale of loans ................................... (1,378) (1,167)
Origination of mortgage loans held for sale .................. (1,426,835) (652,594)
Proceeds from sales of mortgage loans held for sale .......... 1,234,664 686,891
Net (increase) decrease in other assets ...................... (4,798) 7,631
Net increase in other liabilities ............................ 15,962 330
Other, net ................................................... (129) (289)
----------- -----------
Total adjustments .......................................... (185,183) 40,117
----------- -----------
Net cash provided by (used in) operating activities ..... (179,774) 44,073
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale ............. 49,475 11,024
Proceeds from maturities/payments of securities available for sale 4,814 5,226
Purchases of securities available for sale ....................... (5,548) (17,658)
Proceeds from sales of loans ..................................... 48,532 61,962
Net increase in loans made to customers .......................... (28,367) (104,880)
Proceeds from sale of fixed assets ............................... 201 3,550
Proceeds from sales of mortgage servicing rights ................. 7,483 1,084
Additions to mortgage servicing rights ........................... (9,743) (3,041)
----------- -----------
Net cash provided by (used in) investing activities .... 66,847 (42,733)
----------- -----------
Cash Flows From Financing Activities:
Net increase in deposits ......................................... 118,269 4,908
Net increase (decrease) in short-term borrowings ................. 745 (38,451)
Net (decrease) increase in short-term FHLB advances .............. (24,000) 33,000
Increase in long-term FHLB advances .............................. 54,936 2,432
Payments on long-term FHLB advances .............................. (25,000) (10,000)
Payments on long-term debt ....................................... -- (1,689)
Net proceeds from issuance of common shares ...................... 1,547 570
Repurchase of common shares ...................................... (289) (2,766)
Dividends paid ................................................... (1,867) (1,717)
----------- -----------
Net cash provided by (used in) financing activities ..... 124,341 (13,713)
----------- -----------
Net increase (decrease) in cash and cash equivalents ............. 11,414 (12,373)
Cash and cash equivalents at beginning of period ................. 29,668 40,114
----------- -----------
Cash and cash equivalents at end of period ....................... $ 41,082 $ 27,741
=========== ===========
<FN>
See notes to consolidated financial statements.
5
REPUBLIC BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of Republic
Bancorp Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes necessary for a comprehensive presentation of financial
position, results of operations and cash flow activity required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all normal recurring adjustments necessary for a fair
presentation of results have been included. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Certain amounts in prior periods have been reclassified to conform to the
current year's presentation.
Note 2 - Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the parent
company, Republic Bancorp Inc., and its wholly-owned banking subsidiaries,
Republic Bank and Republic Savings Bank. Republic Bank has three mortgage
company subsidiaries: Republic Bancorp Mortgage Inc., including its three
divisions, Home Funding, Inc., Unlimited Mortgage Services, Inc., and
Exchange Mortgage Corporation; CUB Funding Corporation, including its
division, Leader Financial; and Market Street Mortgage Corporation. Republic
Bank has an 80%- majority ownership interest in Market Street Mortgage, while
Republic Bancorp Mortgage and CUB Funding are wholly-owned. All material
intercompany transactions and balances have been eliminated in consolidation.
Note 3 - Consolidated Statements of Cash Flows
-------------------------------------
Supplemental disclosures of cash flow information for the three months ended
March 31, include:
(In thousands) 1998 1997
---- ----
Cash paid during the period for:
Interest ................... $19,548 $13,905
Income taxes ............... $ -- $ --
Non-cash investing activities:
Loan charge-offs ........... $ 145 $ 55
6
Note 4 - Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted earnings
per share:
March 31, March 31,
(Dollars in thousands, except per share data) 1998 1997
- --------------------------------------------- --------- ---------
Numerator for basic and diluted earnings per share:
Net income .................................... $ 5,409 $ 3,956
Denominator:
Denominator for basic earnings per share--
weighted-average shares ..................... 18,698,216 18,852,776
Effect of dilutive securities:
Employee stock options .................... 278,072 254,984
Warrants .................................. 161,971 159,270
----------- -----------
Dilutive potential common shares ....... 440,043 414,254
----------- -----------
Denominator for diluted earnings per share--
adjusted weighted-average shares for
assumed conversions ......................... 19,138,259 19,267,030
=========== ===========
Basic earnings per share .......................... $ .29 $ .21
=========== ===========
Diluted earnings per share ........................ $ .28 $ .21
=========== ===========
Note 5 - Comprehensive Income
--------------------
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on
the Company's net income or shareholders' equity. This Statement requires
unrealized gains or losses on the Company's available-for-sale securities,
which prior to adoption were reported separately in shareholders' equity, to
be included in comprehensive income.
During the first quarter of 1998 and 1997, total comprehensive income
amounted to $5.9 million and $3.5 million, respectively.
7
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
EARNINGS PERFORMANCE
- --------------------
The Company reported net income of $5.4 million for the quarter ended March
31, 1998, an increase of 37% over the $4.0 million reported for the same
period in 1997. Diluted earnings per share for the first quarter of 1998 were
$0.28, up 33% from $0.21 earned a year ago. Return on average shareholders'
equity was 16.22% and return on average assets was 1.14% for the quarter,
compared to 13.03% and 1.12%, respectively, in 1997.
RESULTS OF OPERATIONS
- ---------------------
Mortgage Banking
The following discussion provides information that relates specifically to
the Company's mortgage banking line of business, which generates revenue from
mortgage loan production and mortgage loan servicing activities. Mortgage
banking revenue represents the largest component of the Company's total
noninterest income.
The Company closed $1.4 billion in single-family residential mortgage loans
in the first quarter of 1998, a 93% increase from $734 million closed in the
same period of 1997. This improvement resulted primarily from a $751 million,
or 124%, increase in retail production, which benefited from a higher level
of refinance activity during the quarter due to relatively low mortgage
interest rates. Refinancings represented 53% of total closings in the first
quarter of 1998, compared to 26% in the first quarter of 1997.
The following table summarizes the Company's income from mortgage banking
activities:
Three Months Ended
March 31,
(In thousands) 1998 1997
- -------------- ---- ----
Mortgage loan production revenue (1) .... $27,215 $17,222
Net mortgage loan servicing revenue (2) . 732 1,728
Gains on bulk sales of mortgage servicing -- --
------- -------
Total mortgage banking income ...... $27,947 $18,950
======= =======
<FN>
(1) Includes fee revenue derived from the loan origination process (i.e.,
points collected), gains on the sale of mortgage loans and gains on the
sale of 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.
For the three months ended March 31, 1998, mortgage banking revenue increased
$9.0 million, or 47%, to $27.9 million from $19.0 million a year earlier, as
relatively low mortgage interest rates allowed mortgage loan production
revenue growth to more than offset a decline in mortgage loan servicing
revenue. Mortgage loan production revenue grew primarily as a result of
significant increases in origination fee income and gains on the sale of
mortgages with servicing rights released. The Company sold $1.3 billion of
single-family residential mortgage loans in the first quarter of 1998, which
included $42 million of residential mortgage portfolio loans. In the first
quarter of 1997, $747 million residential mortgage loans were sold, including
$60 million in portfolio loans.
8
The Company serviced $3.4 billion, or 41,000 loans, for the benefit of others
at March 31, 1998, compared to $3.1 billion, or 39,000 loans, at December 31,
1997 and $2.7 billion, or 36,000 loans, at March 31, 1997. Changes in the
size of the Company's servicing portfolio over the past year reflects the net
result of additions from loan production and reductions from prepayments,
partial prepayments and scheduled amortization of mortgage loans. Net
mortgage loan servicing income for the first quarter of 1998 decreased 58%
from the same period a year ago. This decrease is attributable to an increase
in mortgage servicing rights amortization to $3.1 million compared to $1.5
million for the first quarter of 1997. This increase in amortization reflects
an increase in the level of prepayments associated with the mortgage
servicing portfolio. Significant changes in the level of interest rates
directly impact the amount of revenue generated by the servicing portfolio.
The Company periodically sells, in bulk form, mortgage servicing rights
(MSRs) that were previously retained. However, there were no bulk sales of
servicing in the first quarters of 1998 and 1997.
Commercial and Retail Banking
The remaining disclosures and analyses within Management's Discussion and
Analysis regarding the Company's results of operations and financial
condition relate principally to the commercial and retail banking line of
business.
Net Interest Income
- -------------------
The following discussion should be read in conjunction with Table I on the
following page, which provides a detailed analysis of the components
impacting net interest income for the three months ended March 31, 1998 and
1997.
Net interest income, on a fully taxable equivalent (FTE) basis, was $13.2
million for the first quarter of 1998, an increase of $3.1 million, or 30%,
over the first quarter of 1997. The increase in net interest income resulted
from strong portfolio loan growth across all loan categories. Average
portfolio loans for the first quarter of 1998 totaled $1.2 billion, an
increase of $336.9 million, or 41%, over the prior year. This growth was
partially funded by a reduction in investment securities as well as increases
in average total deposits and FHLB advances.
The net interest margin (FTE) was 3.06% for the quarter ended March 31, 1998,
a decrease of 7 basis points from 3.13% a year ago. This decrease was a
result of funding additional noninterest earning assets such as mortgage
servicing rights and the growth in morgage loans held for sale at a reduced
interest rate spread, compared to the prior period.
Noninterest Expense
- -------------------
For the quarter ended March 31, 1998, noninterest expense totaled $32.7
million, an increase of $8.6 million, or 36%, from $24.2 million a year
earlier. The rise in noninterest expense primarily reflects an increase in
commissions expense accompanying the higher level of retail mortgage loans
closed in the first quarter of 1998 compared to the first quarter 1997. The
opening of 22 retail bank and loan production offices, including the
acquisition of Exchange Mortgage, during the past twelve months also
contributed to the increase in noninterest expense.
9
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
----------------------------------- -----------------------------
Average Average Average Average
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate
- ---------------------- ---------- -------- ------ ---------- -------- -------
Assets:
Money market investments................. $ 3,708 $ 53 5.80% $ 12,490 $ 149 4.84%
Mortgage loans held for sale............. 464,460 8,255 7.21 239,755 4,661 7.78
Investment securities available for sale. 105,412 1,681 6.38 224,115 3,516 6.28
Commercial loans......................... 342,383 7,863 9.31 198,179 4,720 9.66
Residential real estate loans............ 711,071 13,481 7.58 536,831 10,076 7.51
Installment loans........................ 102,952 2,560 10.08 84,520 2,073 9.95
---------- -------- ---- ---------- ------- ----
Loans, net of unearned income.......... 1,156,406 23,904 8.32 819,530 16,869 8.28
---------- -------- ---- ---------- ------- ----
Total interest-earning assets........ 1,729,986 33,893 7.90 1,295,890 25,195 7.78
Allowance for loan losses................ (7,628) (4,801)
Cash and due from banks.................. 26,548 20,622
Other assets............................. 149,998 105,890
---------- ----------
Total assets......................... $ 1,898,904 $ 1,417,601
========== ==========
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits......... $ 23,962 126 2.13 $ 57,487 311 2.19
Savings and money market accounts........ 407,149 3,490 3.48 263,860 2,812 4.32
Time deposits............................ 706,737 10,238 5.87 567,210 7,944 5.68
---------- -------- ---- ---------- ------- ----
Total interest-bearing deposits........ 1,137,848 13,854 4.94 888,557 11,067 5.05
Federal funds purchased, securities
sold under agreements to repurchase
and other short-term borrowings........ 54,857 786 5.81 88,308 1,254 5.76
FHLB advances........................... 370,501 5,174 5.64 127,485 1,847 5.88
Long-term debt........................... 47,500 859 7.23 49,292 889 7.21
---------- -------- ---- ---------- ------- ----
Total interest-bearing liabilities... 1,610,706 20,673 5.20 1,153,642 15,057 5.29
Noninterest-bearing deposits............. 88,275 -------- ---- 111,111 ------- ----
Other liabilities........................ 66,521 31,378
---------- ----------
Total liabilities.................... 1,765,502 1,296,131
Shareholders' equity..................... 133,402 121,470
---------- ----------
Total liabilities and shareholders'
equity $ 1,898,904 $1,417,601
=========== ==========
Net interest income/Rate spread (FTE).... $13,220 2.70% $10,138 2.49%
======= ==== ======= =====
Net interest margin (FTE)................ 3.06% 3.13%
==== =====
<FN>
(1) Non-accrual loans and overdrafts are included in average balances.
Increase (decrease) due to change in: Volume(2) Rate(2) Net Inc(Dec)
------------------------------------- --------- ------- ------------
Money market investments......... $ (122) $ 26 $ (96)
Mortgage loans held for sale..... 3,967 (373) 3,594
Investment securities available
for sale (1,890) 55 (1,835)
Commercial loans................. 3,324 (181) 3,143
Residential real estate loans.... 3,310 95 3,405
Installment loans................ 460 27 487
------- ----- -------
Loans, net of unearned income... 7,094 (59) 7,035
------- ----- -------
Total interest income......... 9,049 (351) 8,698
Interest-bearing demand deposits. (176) (9) (185)
Savings deposits................. 1,315 (637) 678
Time deposits.................... 2,020 274 2,294
------- ----- -------
Total interest-bearing deposits. 3,159 (372) 2,787
Federal funds purchased,
securities sold under agreement to
repurchase and other short-term
borrowings...................... (479) 11 (468)
FHLB advances.................... 3,407 (80) 3,327
Long-term debt................... (32) 2 (30)
------- ----- -------
Total interest expense....... 6,055 (439) 5,616
------- ----- -------
Net interest income........... $ 2,994 $ 88 $ 3,082
======= ===== =======
<FN>
(2) Rate/volume variances are proportionately allocated to rate and volume
based on the absolute value of the change in each.
10
BALANCE SHEET ANALYSIS
- ----------------------
ASSETS
- ------
At March 31, 1998, the Company had $2.0 billion in total assets, an increase
of $144.2 million, or 8%, from $1.9 billion at December 31, 1997. Asset
growth during the first quarter of 1998 primarily resulted from an increase
in residential mortgage loan closings, which resulted in a higher balance of
mortgage loans held for sale.
Securities
- ----------
Investment securities available for sale declined $48.4 million, or 40%, to
$71.5 million, and represented 3.5% of total assets at March 31, 1998. At
December 31, 1997, the investment securities portfolio totaled $119.9
million, or 6.4% of total assets. This decrease resulted from sales and
maturities of securities during the first quarter of 1998, primarily to fund
growth in mortgage loans held for sale. During the first quarter of 1998, the
Company sold $49.5 million of investment securities. Gross realized gains and
losses on sales of securities were $332,000 and $430,000, respectively, for
the quarter ended March 31, 1998.
The Company's securities portfolio serves as a source of liquidity and
earnings, carries relatively minimal principal risk and contributes to the
management of interest rate risk. The debt securities portfolio is comprised
primarily of U.S. Government agency securities, obligations collateralized by
U.S. Government agencies, mainly in the form of mortgage-backed securities
and collateralized mortgage obligations, and municipal obligations. With the
exception of municipal obligations, the maturity structure of the debt
securities portfolio is generally short-term in nature or indexed to variable
rates. The Company's equity securities portfolio is primarily made up of
Federal Home Loan Bank (FHLB) stock. At March 31, 1998, the Company's balance
of FHLB stock was $24.3 million.
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at March 31, 1998:
Securities Available for Sale
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -------------- --------- ---------- --------- ---------
Debt Securities:
U.S. Government agency securities......... $ 8,235 $ -- $ 60 $ 8,175
Collateralized mortgage obligations....... 19,045 245 119 19,171
Mortgage-backed securities................ 59,659 5 1,608 58,056
Mortgage-backed securities................ 10,503 2 111 10,394
Municipal and other securities............ 3,051 125 -- 3,176
---------- --------- --------- ----------
Total Debt Securities................... 40,834 372 290 40,916
Equity securities........................... 31,139 -- 541 30,598
---------- --------- --------- ----------
Total Available-for-Sale Securities..... $ 71,973 $ 372 $ 831 $ 71,514
========== ========= ========= ==========
Certain securities having a carrying value of approximately $32.0 million and
$30.9 million at March 31, 1998 and December 31, 1997, respectively, were
pledged to secure certain securities sold under agreements to repurchase and
public deposits as required by law.
Mortgage Loans Held for Sale
- ----------------------------
Mortgage loans held for sale were $705.7 million at March 31, 1998, an
increase of $192.2 million, or 37%, from $513.5 million at December 31, 1997.
This growth was caused by the $229 million increase in residential mortgage
loan closings during the first quarter of 1998 over the fourth quarter of
1997.
11
Portfolio Loans
- ---------------
Portfolio loans totaled $1.08 billion at March 31, 1998, down $19.1 million,
or 2%, from $1.10 billion at December 31, 1997. This decline resulted from
the sale of fixed-rate residential mortgage loans to private investors, which
offset the net increase in the commercial loan portfolio. The residential
real estate portfolio loan balance decreased $55.4 million, or 8%, during the
first quarter to $613.8 million at March 31, 1998. The installment portfolio
loan balance, which is predominantly comprised of home equity loans,
decreased slightly since year-end 1997 to $101.7 million at March 31, 1998,
reflecting a seasonal slowdown in home improvement activities.
The commercial portfolio loan balance rose $38.6 million during the first
quarter, for an annualized growth rate of 48%, reflecting continued strong
demand for real estate-secured lending in markets served by the Company.
During the first quarter of 1998, the Company closed $6.5 million in Small
Business Administration (SBA) loans, an increase of 55% from the $4.2 million
closed in the same quarter last year. For the three months ended March 31,
1998 and 1997, the Company sold $6.9 million and $2.1 million, respectively,
of the guaranteed portion of SBA loans for corresponding gains of $619,000
and $184,000.
The following table provides further information regarding the Company's loan
portfolio:
March 31, 1998 December 31, 1997
--------------------- ----------------------
(Dollars in thousands) Amount Percent Amount Percent
- ---------------------- ------ ------- ------ -------
Commercial loans:
Commercial and industrial ..... $ 37,927 3.5% $ 41,095 3.7%
Real estate construction ...... 57,663 5.3 48,346 4.4
Commercial real estate mortgage 265,523 24.7 233,078 21.3
---------- ----- ---------- -----
Total commercial loans ... 361,113 33.5 322,519 29.4
Residential real estate loans ... 613,825 57.0 669,203 61.1
Installment loans ............... 101,687 9.5 104,022 9.5
---------- ----- ---------- -----
Total portfolio loans ..... $1,076,625 100.0% $1,095,744 100.0%
========== ===== ========== =====
Credit Quality
- --------------
The Company attempts to minimize credit risk in the loan portfolio by
focusing primarily on real estate-secured lending (i.e., residential
construction and mortgage loans, commercial real estate construction and
mortgage loans, and home equity loans). As of March 31, 1998, such loans
comprised approximately 94.9% of total portfolio loans. The Company's general
policy is to originate conventional residential real estate mortgages with
loan-to-value ratios of 80% or less and SBA-secured loans or real
estate-secured commercial loans with loan-to-value ratios of 70% or less.
The substantial majority of the Company's residential mortgage loan
production is underwritten in compliance with the requirements for sale to or
conversion to mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal National Mortgage Association
(FNMA), or the Government National Mortgage Association (GNMA). The majority
of the Company's commercial loans is secured by real estate and is generally
made to small and medium-size businesses. These loans are made at rates based
on the prevailing prime interest rates of Republic Bank and Republic Savings
Bank, as well as fixed rates for terms generally ranging from three to five
years. Management's emphasis on real estate-secured lending and adherence to
conservative underwriting standards is reflected in the Company's
historically low net charge-offs.
12
Non-Performing Assets
- ---------------------
Non-performing assets consist of non-accrual loans and other real estate
owned (OREO). OREO represents real estate properties acquired through
foreclosure or by deed in lieu of foreclosure and is classified as other
assets on the balance sheet until such time as the property is sold.
Commercial loans, residential real estate 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. 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.
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
March 31, December 31,
(Dollars in thousands) 1998 1997
- ---------------------- --------- ------------
Non-Performing Assets:
Non-accrual loans:
Commercial ............................. $ 1,975 $ 1,457
Residential real estate ................ 12,495 9,217
Installment ............................ 564 307
------- -------
Total non-accrual loans .............. 15,034 10,981
Restructured loans ....................... -- --
------- -------
Total non-performing loans ........... 15,034 10,981
Other real estate owned .................. 1,266 1,671
------- -------
Total non-performing assets .......... $16,300 $12,652
======= =======
Non-performing assets as a percentage of:
Portfolio loans and OREO ............... 1.51% 1.15%
Portfolio loans, mortgage loans held for
sale and OREO ...................... .91% .79%
Total assets ........................... .81% .68%
Loans past due 90 days or more and still
accruing interest:
Commercial ............................... $ -- $ --
Residential real estate .................. 924 228
Installment .............................. 7 6
------- -------
Total loans past due 90 days or more ....... $ 931 $ 234
======= =======
At March 31, 1998, approximately $9.4 million, or .88% of total portfolio
loans were 30-89 days delinquent, compared to $8.2 million, or .75%, at
December 31, 1997.
Non-performing assets rose $3.6 million since year-end 1997. The increase in
non-accrual residential real estate mortgage loans accounted for 90% of the
overall increase in non-performing assets. The primary cause for the rise in
non-accrual residential mortgages was due to the overall 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 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.
13
Allowance for Loan Losses
- -------------------------
Management is responsible for maintaining an adequate allowance for loan
losses. 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 agencies. In addition, specific reserves are
established for individual loans when deemed necessary by management.
Management believes the allowance for loan losses is adequate to meet
potential losses in the loan portfolio that can be reasonably anticipated
based on current conditions. 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
and adversely affected.
The following table provides an analysis of the allowance for loan losses:
Three Months Ended
March 31,
(Dollars in thousands) 1998 1997
--------- ---------
Allowance for loan losses:
Balance at January 1............................................. $ 7,334 $ 4,709
Loans charged off.............................................. (145) (55)
Recoveries of loans previously charged off..................... 44 32
--------- -----------
Net charge-offs.............................................. (101) (23)
Provision charged to expense................................... 1,225 297
--------- ----------
Balance at March 31.............................................. $ 8,458 $ 4,983
======== ========
Annualized net charge-offs as a percentage of average total loans
(including loans held for sale) ............................. .03% .01%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end.................................... .79 .60
Allowance for loan losses as a percentage of non-performing
loans........................................................ 56.26 85.48
Off-Balance Sheet Instruments
- -----------------------------
Unused commitments to extend credit totaled $760.7 million for residential
real estate loans and $118.9 million for commercial real estate loans at
March 31, 1998.
At March 31, 1998, the Company had outstanding $334.4 million of commitments
to fund residential real estate loan applications with agreed-upon rates,
including $35.0 million of residential portfolio 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 before the loans 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 March 31, 1998, the Company had outstanding mandatory forward commitments
to sell $861.4 million of residential mortgage loans, of which $600.5 million
covered mortgage loans held for sale and $260.9 million
14
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 second quarter of 1998 without producing
any material gains or losses. At March 31, 1998, the mortgage loans held for
sale balance included $105.2 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 $98.1 million, or
93%, of these loans were loans that had been committed for bulk sale to third
parties prior to March 31, 1998 or were floating rate residential loans.
LIABILITIES.
- ------------
Total liabilities were $1.9 billion at March 31, 1998, an 8% increase from
$1.7 billion at December 31, 1997. This increase was primarily due to
increases in deposits, FHLB advances and other liabilities.
Deposits
- --------
Total deposits grew $118.3 million, or 10%, to $1.3 billion at March 31, 1998
from $1.2 billion at December 31, 1997. This increase reflects positive
consumer response to special promotions for the Company's Diamond savings
account product as well as retail and municipal certificates of deposit.
Short-Term Borrowings
- ---------------------
Short-term borrowings with maturities of less than one year, along with the
related average balances and interest rates for the quarter ended March 31,
1998 and the year ended December 31, 1997, were as follows:
March 31, 1998 December 31, 1997
------------------------------------------------------------------------------
Average Average
Ending Average Rate During Ending Average Rate During
(Dollars in thousands) Balance Balance Period Balance Balance Period
- ---------------------- ------- ------- ------ ------- ------- ------
Federal funds purchased............. $47,000 $37,197 5.81% $32,000 $ 38,091 5.75%
Securities sold under agreements
to repurchase..................... 8,043 14,860 5.81 20,770 62,163 5.67
Other short-term borrowings......... 3,976 2,800 5.21 5,504 7,017 6.64
-------- ------- ---- ------- ------- ----
Total short-term borrowings....... $59,019 $54,857 5.81% $58,274 $107,271 5.76%
======== ======= ==== ======= ======= ====
At March 31, 1998 and December 31, 1997, other short-term borrowings
consisted of treasury, tax and loan (TT&L) demand notes.
FHLB Advances
- -------------
Republic Bank and Republic Savings Bank routinely borrow short-and long-term
advances from the Federal Home Loan Bank (FHLB) to provide liquidity for
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 with an aggregate book value equal to at least 150% of
the advances.
FHLB advances outstanding at March 31, 1998 and December 31, 1997, were as
follows:
March 31, 1998 December 31, 1997
------------------------ ---------------------
Average Average
Ending Rate At Ending Rate At
(Dollars in thousands) Balance Period-End Balance Period-End
- ---------------------- ------------ ---------- ---------- ----------
Short-term FHLB advances................... $ 257,000 5.74% $ 281,000 5.74%
Long-term FHLB advances..................... 115,568 5.83 85,632 6.09
--------- ---- ---------- ----
Total................................... $ 372,568 5.77% $ 366,632 5.83%
========= ==== ========= ====
15
The long-term FHLB advances have original maturities ranging from August 1998
to March 2008.
Long-Term Debt
- --------------
Obligations with original maturities of more than one year consisted of the
following:
March 31, December 31,
(Dollars in thousands) 1998 1997
- ---------------------- -------- ------------
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
------- -------
Total long-term debt ..... $47,500 $47,500
======= =======
CAPITAL
- -------
Shareholders' equity was $135.3 million at March 31, 1998, a $4.2 million, or
3%, increase from $131.1 million at December 31, 1997. This increase
primarily resulted from the retention of $3.5 million in earnings after the
payment of dividends and a $500,000 decrease in net unrealized losses on
securities available for sale.
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 3.00% for Tier 1 leverage. 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.
As of March 31, 1998, the Company met all capital adequacy requirements to
which it is subject and management does not anticipate any difficulty in
meeting these requirements on an ongoing basis. The Company's capital ratios
were as follows:
March 31, December 31,
1998 1997
--------- ------------
Total capital to risk-weighted assets (1)................. 10.12% 10.35%
Tier 1 capital to risk-weighted assets (1)................ 9.46 9.75
Tier 1 capital to average assets (1)...................... 6.42 6.58
<FN>
(1) As defined by the regulations.
As of March 31, 1998, the Company's Total risk-based capital was $129.8
million and Tier 1 risk-based capital was $121.3 million, an excess of $1.5
million and $44.4 million, respectively, over the minimum guidelines
prescribed by regulatory agencies for a well-capitalized institution. In
addition, Republic Bank and Republic Savings Bank had regulatory capital
ratios in excess of the minimum levels established for well-capitalized
institutions.
16
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 interest-bearing
liabilities that are prepaid/withdrawn, reprice or mature in specified
periods.
The Company's Asset and Liability Management Committee (ALCO) regularly
reviews the interest rate sensitivity position of the Company to ensure
compliance with policies established to limit interest rate risk exposure.
Two complimentary quantitative tools are utilized 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: This measurement provides a general indication of the
sensitivity of net interest income to interest rate changes. If the gap is
positive, meaning more assets than liabilities reprice or mature in a given
period, increases in market interest rates will generally benefit net
interest income because earning asset rates will reflect the changes more
quickly. If the gap is negative, increases in market interest rates will
generally have an adverse impact on net interest income. At March 31, 1998,
the Company's cumulative one-year gap was a positive 8.20% of total earning
assets.
Earnings Simulation Modeling: This measurement 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 the evaluation of the effects of various immediate parallel shifts of
the U.S. Treasury yield curve, upward and downward, on the amount of net
interest income expected in a stable interest rate environment (i.e., base
net interest income). As of March 31, 1998, the earnings simulation model
projects net interest income would increase by 11.5% if market interest rates
rose by 200 basis points and decrease by 15.0% assuming market interest rates
fell by 200 basis points. These results are well within the Company's policy
limits.
ACCOUNTING DEVELOPMENTS
- -----------------------
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 in deciding how to allocate resources to
segments. 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.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In the ordinary course of business, the Company and its
subsidiaries are parties to certain routine litigation. In the
opinion of management, the aggregate liabilities, if any, arising
from such legal proceedings would not have a material adverse
effect on the Company's consolidated financial position, results
of operations and liquidity.
Item 2. Changes in Securities
---------------------
On February 23, 1998, the Board of Directors declared a $0.10 per
share cash dividend, payable April 3, 1998 to shareholders of
record March 6, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Republic Bancorp Inc. held its 1998 Annual Meeting of Shareholders
on April 22, 1998. The following directors were elected at the
annual meeting to serve until the next annual meeting:
Director For Against Abstentions Broker Non-Votes
-------- --- ------- ----------- ----------------
Jerry D. Campbell 16,314,504 0 99,203 0
Dana M. Cluckey 16,315,342 0 98,366 0
Bruce L. Cook 16,315,212 0 98,496 0
Richard J. Cramer 16,315,427 0 98,281 0
Dr. George A. Eastman 16,108,301 0 305,407 0
Howard J. Hulsman 16,004,985 0 408,723 0
Gary Hurand 16,311,421 0 102,287 0
Dennis J. Ibold 16,314,238 0 99,470 0
Stephen M. Klein 15,109,030 0 1,304,678 0
John J. Lennon 16,313,814 0 99,894 0
Sam H. McGoun 16,193,719 0 219,989 0
Kelly E. Miller 15,082,039 0 1,331,669 0
Joe D. Pentecost 16,310,666 0 103,042 0
George B. Smith 16,302,130 0 111,577 0
Dr. Jeoffrey K. Stross 16,310,778 0 102,930 0
The adoption of the Republic Bancorp Inc. 1998 Stock Option Plan
(the "1998 Plan") was submitted to shareholders for approval. The
1998 Plan authorizes grants of stock options to officers and key
employees of the Company and its subsidiaries up to a maximum of
1,000,000 shares. The options will vest and may be exercised to
the full extent of shares covered after the fourth anniversary of
the grant. The 1998 Plan was approved at the annual meeting by the
following votes: 10,998,889 for; 863,023 against; and 191,663
abstentions.
The adoption of the Republic Bancorp Inc. Voluntary Management
Stock Accumulation Program (the "Program") was submitted for
shareholders' approval. Under the Program, key management
personnel will have the right to acquire shares of the Company's
common stock at fair market value; if shares are so acquired under
the Program, the key management employee will be granted two
tandem options, exercisable at the current fair market value
price, for every one share purchased. The 1998 Plan was approved
at the annual meeting by the following votes: 11,265,048 for;
572,079 against; and 216,446 abstentions.
18
A proposal to ratify amendments to the Company's Restricted Stock
was submitted to shareholders for approval. The amendment would
add additional shares to the Restricted Stock Plan and extend the
restriction period on the shares from three to four years. The
amendments to the Company's Restricted Stock Plan were approved at
the annual meeting by the following votes: 10,165,528 for;
1,519,856 against; and 368,191 abstentions.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(27) Financial Data Schedules
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first
quarter of 1998.
19
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC BANCORP INC.
(Registrant)
Date: May 14, 1998 BY: /s/ THOMAS F. MENACHER
Thomas F. Menacher
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
EXHIBIT INDEX
-------------
Exhibit Sequential
Number Exhibit Page Number
------ ------- -----------
27 March 31, 1998 Financial Data Schedule 22
27.1 December 31, 1995 Financial Data Schedule - Restated 23
27.2 December 31, 1996 Financial Data Schedule - Restated 24
27.3 March 31, 1997 Financial Data Schedule - Restated 25
27.4 June 30, 1997 Financial Data Schedule - Restated 26
27.5 September 30, 1997 Financial Data Schedule - Restated 27
21