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 June 30, 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 July 31, 1998:
Common Stock, $5 Par Value .............................. 18,967,527 Shares
INDEX
PART I..FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 .............................................. 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1998 and 1997................................. 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997................................. 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition....................... 7 - 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 21
Item 2. Changes in Securities............................................... 21
Item 6. Exhibits and Reports on Form 8-K.................................... 21
SIGNATURE .................................................................... 22
EXHIBITS........................................................................... 23 - 24
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ............................... $ 26,322 $ 29,668
Mortgage loans held for sale ............................ 735,927 513,533
Securities available for sale (amortized cost of
$50,450 and $121,109, respectively) ................... 50,089 119,881
Loans ................................................... 1,142,014 1,095,744
Less allowance for loan losses ........................ (9,816) (7,334)
----------- -----------
Net loans ............................................... 1,132,198 1,088,410
----------- -----------
Premises and equipment, net of depreciation ............. 14,084 12,505
Mortgage servicing rights ............................... 67,216 58,413
Other assets ............................................ 58,732 50,483
----------- -----------
Total assets ........................................ $ 2,084,568 $ 1,872,893
=========== ===========
LIABILITIES
Noninterest-bearing deposits ............................ $ 123,159 $ 96,644
Interest-bearing deposits ............................... 1,164,137 1,080,649
----------- -----------
Total deposits ...................................... 1,287,296 1,177,293
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings ....... 78,900 58,274
Short-term FHLB advances ................................ 268,500 281,000
Long-term FHLB advances ................................. 135,568 85,632
Accrued expenses and other liabilities .................. 124,730 91,142
Long-term debt .......................................... 47,500 47,500
----------- -----------
Total liabilities ................................... 1,942,494 1,740,841
Minority interest ....................................... 1,070 964
----------- -----------
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; 18,883,128 and 18,678,242 shares
issued and outstanding, respectively .................. 94,416 93,391
Capital surplus ......................................... 37,994 37,221
Retained earnings ....................................... 8,829 1,274
Net unrealized losses on securities available for sale .. (235) (798)
----------- -----------
Total shareholders' equity .......................... 141,004 131,088
----------- -----------
Total liabilities and shareholders' equity .......... $ 2,084,568 $ 1,872,893
=========== ===========
<FN>
See notes to consolidated financial statements.
3
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
Interest Income:
Loans, including fees ......................................... $ 35,437 $ 24,389 $ 67,596 $ 45,919
Investment securities ......................................... 1,040 3,813 2,756 7,329
-------- -------- -------- --------
Total interest income ................................... 36,477 28,202 70,352 53,248
-------- -------- -------- --------
Interest Expense:
Demand deposits ............................................... 154 290 280 601
Savings and time deposits ..................................... 14,402 11,310 28,130 22,066
Short-term borrowings ......................................... 706 1,816 1,492 3,070
FHLB advances ................................................. 5,511 2,745 10,685 4,592
Long-term debt ................................................ 858 857 1,717 1,746
-------- -------- -------- --------
Total interest expense .................................. 21,631 17,018 42,304 32,075
-------- -------- -------- --------
Net interest income ........................................... 14,846 11,184 28,048 21,173
Provision for loan losses ..................................... 1,500 2,188 2,725 2,485
-------- -------- -------- --------
Net interest income after
provision for loan losses ................................... 13,346 8,996 25,323 18,688
-------- -------- -------- --------
Noninterest Income:
Service charges ............................................... 362 359 723 711
Mortgage banking .............................................. 32,224 21,241 60,171 40,191
Loss on sales of securities ................................... (46) (682) (144) (645)
Gain on sales of SBA loans .................................... 477 291 1,096 475
Gain on sale of bank branches and deposits .................... -- 4,442 -- 4,442
Other noninterest income ...................................... 381 454 679 1,267
-------- -------- -------- --------
Total noninterest income ................................ 33,398 26,105 62,525 46,441
-------- -------- -------- --------
Noninterest Expense:
Salaries and employee benefits ................................ 11,967 11,524 23,783 21,557
Mortgage loan commissions ..................................... 12,577 7,008 23,230 12,124
Occupancy expense of premises ................................. 1,939 1,805 3,797 3,538
Equipment expense ............................................. 1,313 1,097 2,580 2,198
Other noninterest expense ..................................... 9,773 6,498 16,922 12,668
-------- -------- -------- --------
Total noninterest expense ............................... 37,569 27,932 70,312 52,085
-------- -------- -------- --------
Income before income taxes .................................... 9,175 7,169 17,536 13,044
Provision for income taxes .................................... 3,275 2,456 6,227 4,375
-------- -------- -------- --------
Net Income .................................................... $ 5,900 $ 4,713 $ 11,309 $ 8,669
======== ======== ======== ========
Basic earnings per share...................................... $ .31 $ .25 $ .60 $ .46
======== ======== ======== ========
Diluted earnings per share .................................... $ .31 $ .25 $ .59 $ .45
======== ======== ======== ========
Average common shares outstanding - diluted ................... 19,107 18,951 19,056 19,108
======== ======== ======== ========
Cash dividends declared per common share...................... $ .10 $ .09 $ .20 $ .18
======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
4
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30 (In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income ....................................................... $ 11,309 $ 8,669
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 2,782 2,431
Amortization of mortgage servicing rights .................... 7,059 2,996
Net losses on sale of securities available for sale .......... 144 645
Net gains on sale of mortgage servicing rights ............... (15,556) (8,857)
Net gains on sale of loans ................................... (2,182) (2,011)
Origination of mortgage loans held for sale .................. (2,671,900) (1,496,661)
Proceeds from sales of mortgage loans held for sale .......... 2,449,505 1,458,628
Net (increase) decrease in other assets ...................... (10,074) 5,798
Net increase in other liabilities ............................ 33,694 1,883
Other, net ................................................... (1,177) 1,020
----------- -----------
Total adjustments .......................................... (207,705) (34,128)
----------- -----------
Net cash used in operating activities ................... (196,396) (25,459)
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of securities available for sale .............. 57,195 93,901
Proceeds from maturities/payments of securities available for sale 18,927 11,574
Purchases of securities available for sale ....................... (6,148) (98,269)
Proceeds from sale of loans ...................................... 105,801 88,953
Net increase in loans made to customers .......................... (149,169) (259,074)
Proceeds from sale of fixed assets ............................... 205 4,136
Proceeds from sale of mortgage servicing rights .................. 14,950 8,105
Additions to mortgage servicing rights ........................... (15,879) (11,903)
----------- -----------
Net cash provided by (used in) investing activities ..... 25,882 (162,577)
----------- -----------
Cash Flows From Financing Activities:
Net increase in deposits ......................................... 110,003 87,603
Sale of bank branch deposits ..................................... -- (52,136)
Net increase in short-term borrowings ............................ 20,626 46,295
Net (decrease) increase in short-term FHLB advances .............. (12,500) 76,483
Net increase in long-term FHLB advances .......................... 74,936 37,432
Payments on long-term FHLB advances .............................. (25,000) (15,000)
Payments on long-term debt ....................................... -- (1,689)
Net proceeds from issuance of common shares ...................... 3,125 1,190
Repurchase of common shares ...................................... (288) (6,319)
Dividends paid ................................................... (3,734) (3,429)
----------- -----------
Net cash provided by financing activities ............... 167,168 170,430
----------- -----------
Net decrease in cash and cash equivalents ........................ (3,346) (17,606)
Cash and cash equivalents at beginning of period ................. 29,668 40,114
----------- -----------
Cash and cash equivalents at end of period ....................... $ 26,322 $ 22,508
=========== ===========
<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 footnotes 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 six months ended
June 30, include:
(In thousands) 1998 1997
---- ----
Cash paid during the period for:
Interest ................... $42,138 $32,201
Income taxes ............... $ 4,738 --
Non-cash investing activities:
Loan charge-offs ........... $ 367 $ 142
6
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net income ................................. $ 5,900 $ 4,713 $ 11,309 $ 8,669
Denominator:
Denominator for basic earnings per share--
weighted-average shares .................. 18,823,437 18,603,336 18,761,179 18,727,367
Effect of dilutive securities:
Employee stock options ............... 184,860 184,425 192,406 219,510
Warrants ............................. 98,923 163,703 102,336 161,499
----------- ----------- ----------- -----------
Dilutive potential common shares 283,783 348,128 294,742 381,009
----------- ----------- ----------- -----------
Denominator for diluted earnings per share--
adjusted weighted-average shares for
assumed conversions ...................... 19,107,220 18,951,464 19,055,921 19,108,376
=========== =========== =========== ===========
Basic earnings per share ................... $ .31 $ .25 $ .60 $ .46
=========== =========== =========== ===========
Diluted earnings per share ................. $ .31 $ .25 $ .59 $ .45
=========== =========== =========== ===========
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.
For the second quarter of 1998 and 1997, total comprehensive income amounted
to $6.0 million for both periods. For the six months ended June 30, 1998 and
1997, total comprehensive income amounted to $11.9 million and $9.5 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 $5.9 million for the quarter ended June
30, 1998, an increase of 25% over the $4.7 million reported in the second
quarter of 1997. Fully diluted earnings per share for the quarter were $0.31,
up 24% from $0.25 for the same period last year. Return on average
shareholders' equity was 17.01% and return on average assets was 1.20% for
the quarter, compared to 15.62% and 1.22%, respectively, in 1997.
For the six months ended June 30, 1998, the Company earned $11.3 million, an
increase of 30% over the $8.7 million reported for the corresponding period
in 1997. Fully diluted earnings per share were $0.59, up 31% from $0.45 for
the first six months of 1997. Return on average shareholders' equity was
16.62% and return on average assets was 1.17% for the first half of 1998,
compared to 14.32% and 1.17%, 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 $1.5 billion in single-family residential mortgage loans
in the second quarter of 1998, a 51% increase from $960 million closed in the
same period last year. During the first half of 1998, mortgage loan closings
were $2.9 billion, compared to $1.7 billion for the comparable period in
1997. Retail mortgage loan volumes during the first half of 1998 were
favorably impacted by relatively low mortgage interest rates which has
resulted in a higher level of refinance activity. Refinancings for the second
quarter of 1998 represented 31% of total closings compared to 19% in the
second quarter of 1997. During the first half of 1998, refinancings
represented 42% of total closings compared to 21% for the first half of 1997.
The following table summarizes the Company's income from mortgage banking
activities:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
Mortgage loan production income (1) ........... $ 32,318 $ 18,318 $ 59,532 $ 35,541
Net mortgage loan servicing income (expense)(2) (94) 1,819 639 3,546
Gains on bulk sales of mortgage servicing ..... -- 1,104 -- 1,104
-------- -------- -------- --------
Total mortgage banking income ............ $ 32,224 $ 21,241 $ 60,171 $ 40,191
======== ======== ======== ========
<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 June 30, 1998, mortgage banking income increased
$11.0 million, or 52%, to $32.2 million from $21.2 million a year earlier, as
relatively low mortgage interest rates contributed to growth in mortgage loan
production revenue that more than offset a decline in mortgage 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 $1.4 billion of
single-family residential mortgage loans in the second quarter of 1998, which
included $34 million of residential portfolio loans. In the second quarter of
1997, $807 million of residential mortgage loans were sold.
8
For the six months ended June 30, 1998, mortgage banking income increased
$20.0 million, or 50%, compared to the same period a year ago, reflecting
increased origination fee income and gains on the sale of mortgages with
servicing rights released. This increase in mortgage banking income was a
result of the record level of production volumes in 1998. Mortgage loan sales
totaled $2.5 billion for the first half of 1998, compared to $1.6 billion in
1997.
The Company serviced $3.3 billion, or 41,000 loans, for the benefit of others
at June 30, 1998, compared to $3.1 billion at December 31, 1997 and $2.9
billion at June 30, 1997. Changes in the size of the Company's servicing
portfolio over the past year reflect 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 declined
105% for the second quarter of 1998 reflecting an increase in mortgage
servicing rights amortization to $3.7 million compared to $1.5 million in
1997. For the six months ended June 30, 1998, net mortgage servicing income
declined 82% reflecting an increase in mortgage servicing amortization to
$6.8 million from $3.0 million for the six months ended June 30, 1997. These
increases in amortization reflect an increase in the level of prepayments
associated with the mortgage servicing portfolio. Significant changes in the
interest rates directly impact the amount of revenue generated by the
servicing portfolio.
The Company periodically sells, in bulk form, mortgage servicing rights that
were previously retained. However, there were no bulk sales of servicing for
the six months ended June 30, 1998. For the quarter and six months ended June
30, 1997, mortgage servicing rights for loans with a principal balance of
$247.2 million were sold, resulting in a net gain of $1.1 million
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 Tables I and II
on the following pages, which provide detailed analyses of the components
impacting net interest income for the three months and six months ended June
30, 1998 and 1997.
Net interest income, on a fully taxable equivalent (FTE) basis, was $14.9
million for the second quarter of 1998, an increase of $3.6 million, or 31%,
over the second quarter of 1997. This increase was fueled primarily by a
$326.3 million, or 126%, increase in average mortgage loans held for sale and
a $239.4 million, or 26%, increase in average portfolio loans during the
second quarter of 1998 compared to 1997. Funding the growth in mortgage loans
held for sale and portfolio loans was a reduction in the average balance of
investment securities and increases in deposits and FHLB advances. Net
interest income growth was partially offset by the interest expense
associated with a $276.2 million, or 30% increase in average interest-bearing
deposits and a $199.0 million, or 105%, increase in FHLB advances.
The net interest margin (FTE) was 3.28% for the quarter ended June 30, 1998,
an increase of 11 basis points from 3.17% in 1997. The increase in the margin
was primarily a result of strong portfolio loan growth across all loan
categories and a reduction in lower-yielding investment securities.
9
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
----------------- ------------------
Average Average Average Average
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate
- -----------------------------------------------------------------------------------------------------------
Assets:
Money market investments................. $ 5,891 $ 88 6.06% $ 4,508 $ 44 3.91%
Mortgage loans held for sale............. 585,273 11,049 7.57 258,986 5,087 7.86
Investment securities available for sale. 63,304 970 6.06 237,356 3,893 6.56
Commercial loans......................... 377,138 8,764 9.32 230,609 5,579 9.70
Residential real estate mortgage loans... 682,140 12,969 7.60 602,860 11,464 7.61
Installment loans........................ 102,814 2,655 10.36 89,198 2,259 10.16
---------- ------ ---- ---------- ------ ----
Loans, net of unearned income.......... 1,162,092 24,388 8.41 922,667 19,302 8.38
---------- ------ ---- ---------- ------ ----
Total interest-earning assets........ 1,816,560 36,495 8.05 1,423,517 28,326 7.97
Allowance for loan losses................ (8,906) (5,794)
Cash and due from banks.................. 25,542 22,283
Other assets............................. 133,097 99,888
---------- ---------
Total assets......................... $1,966,293 $1,539,894
=========== ===========
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits......... $ 25,098 154 2.46 $ 53,115 290 2.19
Savings deposits and money market accounts 431,762 3,856 3.58 266,867 3,018 4.54
Time deposits............................ 725,162 10,546 5.83 585,889 8,292 5.68
---------- ------ ---- ---------- ------ ----
Total interest-bearing deposits........ 1,182,022 14,556 4.94 905,871 11,600 5.14
Federal funds purchased and securities
sold under agreement to repurchase and
other short-term borrowings............. 49,511 706 5.74 124,392 1,816 5.84
FHLB advances........................... 387,848 5,511 5.65 188,815 2,745 5.83
Long-term debt........................... 47,500 858 7.23 47,500 857 7.23
---------- ------ ---- ---------- ------ ----
Total interest-bearing liabilities... 1,666,881 21,631 5.20 1,266,578 17,018 5.39
------ ---- ------ ----
Noninterest-bearing deposits............. 91,442 119,786
Other liabilities........................ 69,193 32,805
---------- ----------
Total liabilities.................... 1,827,516 1,419,169
Shareholders' equity..................... 138,777 120,725
---------- ----------
Total liabilities and shareholders'
equity............................. $ 1,966,293 $1,539,894
=========== ==========
Net interest income/Rate spread (FTE).... $ 14,864 2.85% $11,308 2.58%
========= ==== ======= =====
Net interest margin (FTE)................ 3.28% 3.17%
==== ====
Increase (decrease) due to
change in: Volume(2) Rate(2) Net Inc(Dec)
------------------------------------------------------------------------------------------
Money market investments......... $ 16 $ 28 $ 44
Mortgage loans held for sale..... 6,157 (195) 5,962
Investment securities available
for sale....................... (2,647) (276) (2,923)
Commercial loans................. 3,413 (228) 3,185
Residential real estate mortgage
loans.......................... 1,520 (15) 1,505
Installment loans................ 350 46 396
------ ------- -------
Loans, net of unearned income... 5,283 (197) 5,086
------ ------- -------
Total interest income......... 8,809 (640) 8,169
Interest-bearing demand deposits. (168) 32 (136)
Savings deposits................. 1,579 (741) 838
Time deposits.................... 2,028 226 2,254
------ ------- -------
Total interest-bearing deposits. 3,439 (483) 2,956
Federal funds purchased and
securities sold under agreement
to repurchase and other
short-term borrowings....... (1,074) (36) (1,110)
FHLB advances.................... 2,852 (86) 2,766
Long-term debt................... 1 -- 1
------ ------- -------
Total interest expense....... 5,218 (605) 4,613
------ ------- -------
Net interest income........... $3,591 $ (35) $ 3,556
====== ======= =======
<FN>
(1) Non-accrual loans and overdrafts are included in average balances.
(2) Rate/volume variances are proportionately allocated to rate and
volume based on the absolute value of the change in each.
10
Table II - Year-to-Date Net Interest Income and Rate/Volume Analysis (FTE)
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
------------------------------ ---------------------------------
Average Average Average Average
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate
- --------------------------------------------------------------------------------------------------------------
Assets:
Money market investments................. $ 4,793 $ 141 5.93% $ 9,029 $ 194 4.36%
Mortgage loans held for sale............. 524,923 19,304 7.42 249,079 9,747 7.83
Securities............................... 84,249 2,652 6.26 230,781 7,409 6.39
Commercial loans......................... 359,829 16,626 9.32 214,446 10,300 9.69
Residential real estate mortgage loans... 696,500 26,451 7.60 569,968 21,545 7.56
Installment loans........................ 102,878 5,215 10.22 86,866 4,327 10.05
---------- ------- ---- ---------- --------- -----
Loans, net of unearned income.......... 1,159,207 48,292 8.36 871,280 36,172 8.33
---------- ------- ---- ---------- --------- -----
Total interest-earning assets........ 1,773,172 70,389 7.98 1,360,169 53,522 7.88
Allowance for loan losses................ (8,270) (5,301)
Cash and due from banks.................. 26,051 21,436
Other assets............................. 140,973 103,076
---------- ----------
Total assets......................... $1,931,926 $1,479,380
========== ===========
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits......... $ 24,530 280 2.30 $ 55,291 601 2.19
Savings deposits......................... 419,502 7,347 3.53 265,358 5,830 4.43
Time deposits............................ 715,985 20,783 5.85 576,548 16,236 5.68
---------- ------- ---- ---------- --------- ----
Total interest-bearing deposits........ 1,160,017 28,410 4.94 897,197 22,667 5.09
Federal funds purchased and securities
sold under agreement to repurchase and
other short-term borrowings............ 52,167 1,492 5.77 106,275 3,070 5.83
FHLB advances........................... 378,719 10,685 5.67 158,207 4,592 5.85
Long-term debt........................... 47,500 1,717 7.23 48,396 1,746 7.22
---------- ------- ---- ---------- --------- ----
Total interest-bearing liabilities... 1,638,403 42,304 5.20 1,210,075 32,075 5.34
------- ---- --------- ----
Noninterest-bearing deposits............. 89,867 115,468
Other liabilities........................ 67,566 32,739
---------- ----------
Total liabilities.................... 1,795,836 1,358,282
Shareholders' equity..................... 136,090 121,098
---------- ----------
Total liabilities and shareholders'
equity............................ $1,931,926 $1,479,380
========== ==========
Net interest income/Rate spread (FTE).... $28,085 2.78% $ 21,447 2.54%
======= ==== ========= =====
Net interest margin...................... 3.17% 3.15%
==== ====
Increase (decrease) due to
change in: Volume(2) Rate(2) Net Inc(Dec)
---------------------------------------------------------------------------------------------
Money market investments......... $ (110) $ 57 $ (53)
Mortgage loans held for sale..... 10,101 (544) 9,557
Securities....................... (4,609) (148) (4,757)
Commercial loans................. 6,740 (414) 6,326
Residential real estate mortgage
loans........................... 4,792 114 4,906
Installment loans................ 813 75 888
---------- ------- ---------
Loans, net of unearned income... 12,345 (225) 12,120
---------- ------- ---------
Total interest income......... 17,727 (860) 16,867
Interest-bearing demand deposits. (350) 29 (321)
Savings deposits................. 2,893 (1,376) 1,517
Time deposits.................... 4,046 501 4,547
---------- ------- ---------
Total interest-bearing deposits. 6,589 (846) 5,743
Federal funds purchased and
securities sold under agreement
to repurchase and other
short-term borrowings........ (1,547) (31) (1,578)
FHLB advances.................... 6,240 (147) 6,093
Long-term debt................... (31) 2 (29)
---------- ------- ---------
Total interest expense....... 11,251 (1,022) 10,229
---------- ------- ---------
Net interest income........... $ 6,476 $ 162 $ 6,638
========== ======= =========
<FN>
(1) Non-accrual loans and overdrafts are included in average balances.
(2) Rate/volume variances are proportionately allocated to rate and volume
based on the absolute value of the change in each.
11
For the six months ended June 30, 1998, net interest income (FTE) was $28.1
million, an increase of $6.6 million, or 31%, over the first half of 1997.
The increase in net interest income was due to the continued growth in
earning assets and the improved mix of earning assets as lower-yielding
investment securities have been sold and reinvested in higher yielding
commercial loans and mortgage loans held for sale.
The net interest margin (FTE) for the six months ended June 30, 1998, rose 2
basis points to 3.17% from 3.15% for the comparable period in 1997, primarily
due to a favorable shift in the mix of earning assets toward higher-yielding
loan products.
Noninterest Income
- ------------------
Exclusive of mortgage banking revenue, noninterest income decreased during
the second quarter of 1998 compared to prior year, 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.
Noninterest Expense
- -------------------
For the quarter ended June 30, 1998, total noninterest expense increased $9.6
million, or 35%, to $37.6 million from $27.9 million a year earlier. On a
year-to-date basis, total noninterest expense was $70.3 million, up $18.2
million, or 35%, over the first six months of 1997. The rise in noninterest
expense primarily reflects an increase in commissions expense accompanying
the higher level of retail mortgage loans closed during 1998 compared to the
first half of 1997. The opening of 10 additional 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.
BALANCE SHEET ANALYSIS
- ----------------------
ASSETS
- ------
At June 30, 1998, the Company had $2.1 billion in total assets, an increase
of $211.7 million, or 11%, from $1.9 billion at December 31, 1997. Asset
growth was primarily the result of an increase in portfolio loans and
mortgage loans held for sale.
Securities
- ----------
Investment securities available for sale declined $69.8 million, or 58%, to
$50.1 million, and represented 2.4% of total assets, at June 30, 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 half of 1998, primarily to fund
growth in mortgage loans held for sale. During the second quarter of 1998,
the Company sold $7.4 million of investment securities. Gross realized gains
and losses on sales of available-for-sale securities were $58,000 and
$104,000, respectively, for the quarter ended June 30, 1998. For the first
six months of 1998, gross realized gains and losses totaled $390,000 and
$534,000, respectively.
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 June 30, 1998, the Company's balance
of FHLB stock was $25.1 million.
12
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at June 30, 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 . $ 7,160 $ 42 $ 31 $ 7,171
Collateralized mortgage obligations 2,475 43 3 2,515
Mortgage-backed securities ........ 6,563 1 70 6,494
Municipal and other securities .... 3,010 154 -- 3,164
------- ------- ------- -------
Total Debt Securities ........... 19,208 240 104 19,344
Equity securities ................... 31,242 -- 497 30,745
------- ------- ------- -------
Total Securities Available for Sale . $50,450 $ 240 $ 601 $50,089
======= ======= ======= =======
Certain securities having a carrying value of approximately $11.1 million and
$30.9 million at June 30, 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 $735.9 million at June 30, 1998, an
increase of $222.4 million, or 43%, from $513.5 million at December 31, 1997.
This growth was caused by the $337 million increase in residential mortgage
loan closings during the second quarter of 1998 over the fourth quarter of
1997.
Portfolio Loans
- ---------------
Total portfolio loans were $1.14 billion at June 30, 1998, an increase of
$46.3 million, or 4.2%, from $1.10 billion at December 31, 1997. This
increase resulted from the net increase in the commercial loan portfolio,
which was partially offset by a decline in residential real estate mortgage
loans. The residential mortgage portfolio loan balance decreased $22.1
million, or 3%, since year-end 1997 to $647.1 million at June 30, 1998. The
installment loan portfolio balance, which is predominantly comprised of home
equity loans, increased slightly since year-end 1997 to $104.9 million at
June 30, 1998.
The commercial loan balance increased $67.5 million during the first half of
1998, for an annualized growth rate of 42%, reflecting continued strong
demand for real estate-secured lending in markets served by the Company.
During the second quarter of 1998, the Company closed $8.5 million in Small
Business Administration (SBA) loans, a 42% increase from the $6.0 million
closed in the second quarter of 1997. For the first six months of 1998 and
1997, SBA loan closings were $15.0 million and $10.2 million, respectively.
The Company sold $14.9 million and $5.9 million of the guaranteed portion of
SBA loans in the first six months of 1998 and 1997, respectively, resulting
in corresponding gains of $1,096,000 and $475,000.
13
The following table provides further information regarding the Company's loan
portfolio:
June 30, 1998 December 31, 1997
------------------------ ----------------------
(Dollars in thousands) Amount Percent Amount Percent
------ ------- ------ -------
Commercial loans:
Commercial and industrial................. $ 37,724 3.3% $ 41,095 3.7%
Real estate construction.................. 57,766 5.0 48,346 4.4
Commercial real estate mortgage .......... 294,552 25.8 233,078 21.3
------------ ------ ---------- ------
Total commercial loans............... 390,042 34.1 322,519 29.4
Residential real estate mortgages........... 647,074 56.7 669,203 61.1
Installment loans........................... 104,898 9.2 104,022 9.5
----------- ------- ------------ -------
Total portfolio loans................. $ 1,142,014 100.0% $ 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 June 30, 1998, such loans
comprised approximately 95.0% 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 80% 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.
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.
14
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
June 30, December 31,
(Dollars in thousands) 1998 1997
-------- ------------
Non-Performing Assets:
Non-accrual loans:
Commercial .................................. $ 2,139 $ 1,457
Residential real estate mortgages ........... 13,788 9,217
Installment ................................. 421 307
------- -------
Total non-accrual loans ................... 16,348 10,981
Restructured loans .............................. -- --
------- -------
Total non-performing loans ................ 16,348 10,981
Other real estate owned ......................... 3,365 1,671
------- -------
Total non-performing assets ............... $19,713 $12,652
======= =======
Non-performing assets as a percentage of:
Portfolio loans and OREO .................... 1.72% 1.15%
Portfolio loans, mortgage loans held for
sale and OREO ......................... 1.05% .79%
Total assets ................................ .95% .68%
Loans past due 90 days or more and still accruing
interest:
Commercial .................................... $ -- $ --
Residential real estate ....................... 1,126 228
Installment ................................... 12 6
------- -------
Total loans past due 90 days or more ...... $ 1,138 $ 234
======= =======
At June 30, 1998, approximately $9.0 million, or .79% of total portfolio
loans were 30-89 days delinquent, compared to $8.2 million, or .75%, at
December 31, 1997.
Non-performing assets rose $7.1 million since year-end 1997. The increase in
non-accrual residential real estate mortgage loans accounted for 65% of the
overall increase in non-performing assets. 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.
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
15
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:
Six Months Ended
June 30,
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------
Allowance for loan losses:
Balance at January 1 ................................ $ 7,334 $ 4,709
Loans charged off ................................. (367) (142)
Recoveries of loans previously charged off ........ 124 90
------- -------
Net charge-offs ................................. (243) (52)
Provision charged to expense ...................... 2,725 2,485
------- -------
Balance at June 30 .................................. $ 9,816 $ 7,142
======= =======
Annualized net charge-offs as a percentage of average
portfolio loans (including loans held for sale) ... .03% .01%
Allowance for loan losses as a percentage of total
portfolio loans outstanding at period-end ........ .86 .75
Allowance for loan losses as a percentage of
non-performing loans ............................ 60.04 99.04
Off-Balance Sheet Instruments
- -----------------------------
Unused commitments to extend credit totaled $788.7 million for residential
real estate loans and $88.9 million for commercial real estate loans at June
30, 1998.
At June 30, 1998, the Company had outstanding $349.0 million of commitments
to fund residential real estate loan applications with agreed-upon rates,
including $55.1 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 June 30, 1998, the Company had outstanding mandatory forward commitments
to sell $917.0 million of residential mortgage loans, of which $665.6 million
covered mortgage loans held for sale and $251.4 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 third quarter of 1998 without producing any material gains or
losses. At June 30, 1998, the mortgage loans held for sale balance included
$70.3 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 $59.6 million, or 85%, of these loans
were loans that had been committed for bulk sale to third parties prior to
June 30, 1998 or were floating rate residential loans.
16
LIABILITIES.
- ------------
Total liabilities were $1.9 billion, a 12% 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 $110.0 million, or 9.3%, to $1.3 billion at June 30, 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 growth in 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 six months ended June 30,
1998 and the year ended December 31, 1997, were as follows:
June 30, 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 ........ $ 71,900 $ 38,028 5.77% $ 32,000 $ 38,091 5.75%
Securities sold under agreements
to repurchase ................ -- 10,820 5.80 20,770 62,163 5.67
Other short-term borrowings .... 7,000 3,319 5.10 5,504 7,017 6.64
-------- -------- ---- -------- -------- ----
Total short-term borrowings .. $ 78,900 $ 52,167 5.77% $ 58,274 $107,271 5.76%
======== ======== ==== ======== ======== ====
At June 30, 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 June 30, 1998 and December 31, 1997, were as
follows:
June 30, 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................... $268,500 5.59% $ 281,000 5.74%
Long-term FHLB advances..................... 135,568 5.81 85,632 6.09
-------- ---- -------- ----
Total................................... $404,068 5.66% $ 366,632 5.83%
======= ==== ========== ====
The long-term FHLB advances have original maturities ranging from August 1998
to April 2008.
17
Long-Term Debt
- --------------
Obligations with original maturities of more than one year consisted of the
following:
June 30, 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 $141.0 million at June 30, 1998, a $9.9 million, or
7.6%, increase from $131.1 million at December 31, 1997. This increase
primarily resulted from the retention of $7.6 million in earnings after the
payment of dividends, an increase of $1.8 million in common stock outstanding
and a $563,000 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 June 30, 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:
June 30, December 31,
1998 1997
-------- ------------
Total capital to risk-weighted assets (1)................. 10.20% 10.35%
Tier 1 capital to risk-weighted assets (1)................ 9.47 9.75
Tier 1 capital to average assets (1)...................... 6.52 6.58
<FN>
(1) As defined by the regulations.
As of June 30, 1998, the Company's Total risk-based capital was $137.1
million and Tier 1 risk-based capital was $127.3 million, an excess of $2.7
million and $29.6 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.
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.
18
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 June 30, 1998,
the Company's cumulative one-year gap was a positive 4.94% 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 June 30, 1998, the earnings simulation model
projects net interest income would increase by 8.0% if market interest rates
rose by 200 basis points and decrease by 10.6% assuming market interest rates
fell by 200 basis points. These results are well within the Company's policy
limits.
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. Management of the Company has
developed and maintains a Year 2000 Compliance Plan that is reviewed
quarterly 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 is also evaluating its significant suppliers and loan customers, as
well as other financial institutions, to determine the extent to which the
Company is at risk if those third parties' fail to remediate their own
Year 2000 issues. There is no guarantee that the systems of those third
parties will be Year 2000 compliant. Failure of those third parties to
remediate could have an adverse effect on the Company's operations.
The Company has completed both the awareness and assessment phases of the
Year 2000 Compliance Plan. As a part of the assessment phase, certain
ancillary applications have been identified which will not be Year 2000
compliant and must be replaced. These systems are off-the-shelf products
which will be purchased and
19
implemented within the next six months. The assessment of hardware compliance
has found all major systems compliant with only minimal personal computer
equipment not compliant. This personal computer equipment will be replaced
during the normal course of business.
The Company is expected to complete the validation/testing phase by March 31,
1999 and is expected to complete the Year 2000 project no later than June 30,
1999. The total Year 2000 project cost for the Company is estimated at $1.5
million and is not expected to have a material effect on the Company's
results.
The Company is in the process of developing a contingency plan that will
outline how it will continue to conduct its business in the event
that one or more of its systems is not made Year 2000 compliant, including
dates when contingency plans must be put into action. As a major component of
its contingency plan, the Company will use the separate data processing
platforms of its subsidiaries to perform common transaction processes.
Accounting Developments
- -----------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 the 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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999, with earlier application permitted. The impact of this Statement on the
Company's financial statements has not yet been determined.
20
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 May 22, 1998, the Board of Directors declared a quarterly cash
dividend of $0.10 per share of common stock, payable on July 3,
1998 to shareholders of record June 5, 1998.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second
quarter of 1998.
23
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: August 14, 1998 BY: /s/ Thomas F. Menacher
----------------------
Thomas F. Menacher
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
EXHIBIT INDEX
Sequential
Exhibit Number Exhibit Page Number
-------------- ------- -----------
27 Financial Data Schedule 24
23