CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1994
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REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Commission File Number 0-15734
Michigan 38-2604669
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 725-7337
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of
February 1, 1995, based on the last reported sale price on that date of
$10.125 of the registrant's Common Stock outstanding: $134,165,980.
Number of shares of the registrant's Common Stock outstanding as of March
10, 1995: 15,115,948
DOCUMENTS INCORPORATED BY REFERENCE
PART II: Certain portions of the registrant's Annual Report to Shareholders
for the fiscal year ended December 31, 1994.
PART III: Certain portions of the registrant's definitive Proxy Statement
in connection with the Annual Meeting of Shareholders of the
registrant to be held on April 26, 1995.
PART I
Item 1. BUSINESS
General
Republic Bancorp Inc. (the "Company") is a bank holding company headquartered
in Ann Arbor, Michigan which offers retail, commercial and mortgage banking
services through its bank subsidiary, Republic Bank, and its savings bank
subsidiary, Republic Savings Bank ("Republic Savings"), formerly Horizon
Savings Bank, and mortgage banking services through its non-depository
mortgage banking subsidiaries, Republic Bancorp Mortgage Inc. ("Republic
Mortgage"), Market Street Mortgage Corporation ("Market Street") and CUB
Funding Corporation ("CUB Funding"). The Company's mortgage banking services
include the origination or purchase, short-term funding, sale and servicing of
residential first mortgage loans, and the purchase and sale of servicing
rights associated with such loans.
At December 31, 1994, the Company had consolidated total assets of $1.4
billion, total deposits of $819 million and shareholders' equity of $118
million. For the year ended December 31, 1994, the Company reported net income
of $15.7 million versus $23.2 million for 1993 and originated or purchased
$2.8 billion of residential mortgage loans versus $4.9 billion for the prior
year. At December 31, 1994, the Company had a mortgage loan servicing
portfolio of $4.7 billion.
The Company's current operating strategy is to grow its mortgage banking fee
income and related interest income while managing its liquidity needs and the
interest rate risks of its balance sheet. The Company's mortgage banking
operations earn origination and loan servicing fees and typically sell their
mortgage loan originations into the secondary market. Between the time the
Company funds its mortgage loans and their delivery into the secondary market,
the mortgage loans are held for sale. The Company can thereby, in effect, earn
long-term interest rates on short-term investments while minimizing interest
rate risk. Consistent with a strategy of managing interest rate risk, the
Company typically securitizes and sells all long-term fixed-rate mortgages and
retains a portion of variable rate and short-term fixed-rate mortgages. The
growth of the Company's residential mortgage origination business has been
funded primarily with Republic Bank's and Republic Savings' retail deposits
and short-term borrowings, and the mortgage subsidiaries' warehousing lines of
credit.
On November 1, 1994, pursuant to an agreement with Home Funding, Inc. of
Hopewell Junction, New York, the Company's subsidiary, Republic Mortgage,
purchased the assets and mortgage origination network of Home Funding, Inc.
The purchase included the acquisition of Home Funding's $130 million mortgage
servicing portfolio. The total purchase price was approximately $2.5 million,
of which $1.2 million was attributable to goodwill. The purchased assets and
results of operations of Home Funding, Inc. are included in the consolidated
financial statements from November 1, 1994, the effective date of the
acquisition.
-1-
Mortgage Banking
The Company originates residential mortgage loans through 78 retail offices
located in Michigan, Alabama, Arizona, California, Colorado, Connecticut,
Florida, Georgia, Illinois, Massachusetts, Maryland, New York, North Carolina,
Ohio, Texas, Virginia and Washington and through its wholesale operations. The
Company's wholesale operations are conducted from 8 offices (one each in
Michigan, Arizona, Iowa and Oregon and four in California), and involve the
purchase of residential loans from approximately 200 participating
correspondent institutions and brokers.
Each retail office is responsible for processing loan applications and
preparing loan documentation. Residential loans purchased through the
wholesale operation are processed and prepared by the correspondent
institutions and brokers. Quality control personnel then review loans to be
purchased through the wholesale operation using certain verification
procedures. Loan applications are then evaluated by the underwriting
departments of either the Company's mortgage or banking subsidiaries for
compliance with the Company's underwriting criteria, including loan to value
ratios, borrower qualifications and required insurance.
The substantial majority of the loans are conventional mortgage loans which
are secured by residential properties and comply with the requirements for
sale to, or conversion to mortgage-backed securities issued by, the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company also originates Federal Housing
Administration ("FHA") insured and Department of Veterans Affairs ("VA")
guaranteed mortgage loans for sale in the form of modified pass-through
mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA").
The residential loans originated or purchased by the Company are funded by
either: (1) Republic Bank or Republic Savings retail deposits or short-term
funding sources such as Federal Home Loan Bank ("FHLB") Advances or reverse
repurchase agreements; (2) Republic Mortgage through borrowings under a $20
million warehousing line of credit with NBD Bank, N.A.; (3) Market Street
through borrowings under a $75 million warehousing line of credit with G.E.
Capital Mortgage Services, Inc and Cooper River Funding Inc; or (4) CUB
Funding through borrowings under a $16 million warehousing line of credit with
The Prudential Home Mortgage Company, Inc. While some variable rate
residential loans may be retained by Republic Bank and Republic Savings, the
majority of all residential loans are held for a short period of time
(generally less than 60 days) and are then sold to secondary market investors
either directly or by pooling them and selling the resulting mortgage-backed
securities. Such residential loans and mortgage-backed securities are
typically sold without recourse to the Company in the event of default by the
borrowers. To minimize the interest rate risk, the Company obtains purchase
commitments from investors prior to funding the loans.
-2-
When the Company sells the residential loans it has originated or purchased,
it may either retain or sell the rights to service those loans and to receive
the related fees. While there is an active market for selling servicing rights
(which are generally valued in relation to the present value of the
anticipated cash flow generated by the servicing rights), the aggregation of a
servicing portfolio can also create a substantial continuing source of income.
Republic Mortgage, Market Street and CUB Funding receive servicing fees
ranging generally from 25 to 45 basis points per annum on their respective
servicing portfolios.
Commercial and Retail Banking
The Company's bank subsidiary, Republic Bank, is a Michigan chartered bank
which engages in the business of commercial banking and exercises the powers
of a full service commercial bank with the exception of trust services. See
"Regulation." Republic Bank operates in six distinct market areas in Michigan.
At December 31, 1994, the subsidiary bank had assets of $801 million, deposits
of $608 million, and 25 offices.
The Company's savings bank subsidiary, Republic Savings Bank, is an Ohio
chartered savings bank which engages in the business and exercises the powers
of a savings bank. See "Regulation." Republic Savings operates primarily in
the greater Cleveland, Ohio area and at December 31, 1994, had assets of $407
million, deposits of $217 million and 11 offices.
Republic Bank and Republic Savings offer checking, savings and time deposits,
loans to individuals, commercial enterprises and governmental agencies,
installment credit to consumers and small businesses, and other banking
services. While Republic Bank's and Republic Savings' lending activities focus
primarily on residential real estate mortgages, they also emphasize loans to
small and medium-sized businesses through the Small Business Administration
("SBA"). The Company's general policy is to originate SBA-secured loans or
real estate secured commercial loans with loan to value ratios of 70% or less.
Republic Bank and Republic Savings target that segment of the banking market
which is interested in personalized service for their deposits. The deposits
are primarily retail deposits from within their market areas. At December 31,
1994, the subsidiaries' combined interest-bearing deposits comprised 85% of
total deposits, and time deposits of $100,000 or more comprised 24% of
interest-bearing deposits.
Revenues
The principal sources of revenue for the Company are interest income and fees
on loans and mortgage banking income. On a consolidated basis, interest and
fees on loans accounted for approximately 35%, 39% and 52% of total revenues
in 1994, 1993 and 1992, respectively. Non-interest income, primarily
consisting of mortgage banking income (i.e., gain on sales of mortgage loans
and mortgage servicing rights, origination fee income and mortgage loan
servicing fees, net of amortization), gain on sale of securities, and service
charges accounted for approximately 49%, 54% and 33% of total revenues in
1994, 1993 and 1992, respectively.
-3-
Interest income from securities, money market investments and interest earning
deposits accounted for approximately 16%, 7% and 15% of total revenues during
1994, 1993 and 1992, respectively.
For further information, see the Company's financial statements incorporated
herein by reference.
Competition
The Company is subject to and has faced increasing competition from other
banking and non-banking institutions in attempting to negotiate bank and
mortgage bank-related acquisitions. Under Michigan and Ohio law, bank holding
companies located in other states having appropriate reciprocal legislation
are also allowed to acquire Michigan or Ohio banking institutions,
respectively. Effective September 29, 1995, under certain circumstances bank
holding companies in other States will be allowed to acquire Michigan or Ohio
banking institutions without regard to State law reciprocity requirements. See
"Recently Enacted and Proposed Legislation". Generally, larger banking
institutions have greater resources to use in making acquisitions and higher
lending limits than the Company's bank or savings bank subsidiaries or any
banking institution that the Company could acquire. Such institutions
can perform certain functions for their customers which the Company or
its subsidiary bank or savings bank may not offer.
The principal factors in the markets for deposits and loans are interest rates
paid and charged. Republic Bank and Republic Savings compete for deposits by
offering depositors a variety of savings accounts, checking accounts,
convenient office locations and other miscellaneous services. The Company
competes for loans through the efficiency and quality of the services it
provides to borrowers, real estate brokers and home builders. The Company
seeks to compete for mortgages primarily on the basis of customer service
including prompt underwriting decisions and funding of loans and by offering a
variety of loan programs as well as competitive interest rates.
Regulation
Bank holding companies, banks and savings banks are subject to extensive
regulation under both federal and state law. To the extent the following
material describes statutory and regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provisions. A
change in applicable law or regulation could have a material effect on the
business of the Company.
1. Bank Holding Company
The Company, as a bank holding company, is regulated under the Bank
Holding Company Act of 1956, as amended ("BHC Act"), and is subject to
the supervision of the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). The Company is registered as a bank holding
company with the Federal Reserve Board and is required to file with the
Federal Reserve Board an annual report and such additional information as
the Federal Reserve Board may require pursuant to the BHC Act. The
Federal Reserve Board may also make inspections and examinations of the
Company and its subsidiaries.
-4-
Under the BHC Act, bank holding companies such as the Company are
prohibited, with certain limited exceptions, from engaging in activities
other than those of banking or of managing or controlling banks and from
acquiring or retaining direct or indirect ownership or control of voting
shares or assets of any company which is not a bank or bank holding
company, other than subsidiary companies furnishing services to or
performing services for its subsidiaries, and other subsidiaries engaged
in activities which the Federal Reserve Board determines to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto. Under the BHC Act, bank holding companies may not
(subject to certain limited exceptions) directly or indirectly acquire
the ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company, including a bank or bank
holding company, without the prior written approval of the Federal
Reserve Board.
The BHC Act prohibits the Federal Reserve Board (subject to certain
limited exceptions) from approving the acquisition, by a bank holding
company such as the Company, the principal banking operations of which
are conducted in one state, of control of a bank or bank holding company
conducting its principal banking operations in another state, unless the
statutory laws of the state in which the principal banking operations of
the bank holding company or bank to be acquired are conducted explicitly
authorize such an acquisition. Effective September 29, 1995, the BHC Act
will no longer prevent the Federal Reserve Board from approving the
acquisition of a bank because of contrary State law. See "Recently
Enacted and Proposed Legislation." Under existing Michigan law and with
the approval of the Commissioner of the Michigan Financial Institutions
Bureau, a Michigan- based bank or bank holding company (such as the
Company) may be acquired by a bank holding company located in any state,
if the laws of such state would grant Michigan-based banks or bank
holding companies the right to acquire one or more banks or bank holding
companies located in such state under conditions which are not unduly
restrictive. Under the Michigan statute, the Commissioner of the Michigan
Financial Institutions Bureau must not approve any such transaction
without first determining among other things that the other state's law
satisfies the reciprocity requirement imposed by the Michigan statute.
Most states have adopted legislation that permits out-of-state bank
holding companies to acquire local banks and bank holding companies
subject, in most cases, to reciprocity requirements.
Under Federal Reserve Board policy, the Company is expected to act as a
source of financial strength to Republic Bank and Republic Savings and to
commit resources to support them. This support may be required at times
when, in the absence of such Federal Reserve Board policy, the Company
would not otherwise be required to provide it.
-5-
Under Michigan law, if the capital of a Michigan state chartered bank
(such as Republic Bank) has become impaired by losses or otherwise, the
Commissioner of the Michigan Financial Institutions Bureau may require
that the deficiency in capital be met by assessment upon the bank's
shareholders pro rata on the amount of capital stock held by each, and if
any such assessment is not paid by any shareholder within 30 days of the
date of mailing of notice thereof to such shareholder, cause the sale of
the stock of such shareholder to pay such assessment and the costs of
sale of such stock. The Commissioner may appoint a receiver for any bank
failing for two months after receiving such notice from the Commissioner
either to restore its capital or to take steps to liquidate its business.
Any capital loans by a bank holding company to a subsidiary bank are
subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary
bank will be assumed by the bankruptcy trustee and entitled to a priority
of payment. This priority would apply to guarantees of capital plans
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA").
The Federal Reserve Board has adopted capital adequacy guidelines to
provide a framework for supervisory evaluation of the capital adequacy of
bank holding companies. The guidelines measure four principal ratios: (1)
primary capital to total assets; (2) total capital to total assets; (3)
qualifying capital to weighted-risk assets; and (4) Tier 1 capital to
total assets. Primary capital consists of common stock, certain amounts
of perpetual preferred stock, surplus (excluding surplus related to
limited-life preferred stock), undivided profits, capital reserves,
allowance for loan and lease losses, certain types and amounts of
convertible debt instruments, and minority interests in equity accounts
of consolidated subsidiaries. Total capital consists of primary capital
plus certain limited-life preferred stock (and related surplus), certain
unsecured long-term debt, and certain subordinated notes and debentures.
Total assets for purposes of ratios (1) and (2) consist of total assets
plus the allowance for loan and lease losses, all measured at the end of
appropriate fiscal periods. For purposes of ratio (3), weighted-risk
assets consist of total risk-adjusted assets (as described below) less
the amount of assets not included in qualifying capital (as described
below), all measured at the end of appropriate fiscal periods. For
purposes of ratio (4), total assets consist of quarterly average total
assets (net of the allowance for loan and lease losses) less (i)
goodwill, (ii) excess purchased mortgage servicing rights and purchased
credit card relationships, (iii) all other intangibles, (iv) investments
in subsidiaries deducted from Tier 1 capital, and (v) excess deferred tax
assets realizable only from future taxable income.
-6-
The Federal Reserve Board measures ratios (3) and (4) pursuant to its
risk-based capital adequacy guidelines. These guidelines are intended to
make regulatory capital requirements more sensitive to the risk profile
of each bank holding company, to factor off-balance-sheet exposures into
capital adequacy assessment, to minimize disincentives to holding liquid,
low-risk assets, and to further uniformity of capital measurement on a
worldwide basis.
Under the risk-based guidelines, qualifying capital is measured against a
bank holding company's total risk-adjusted assets. Each asset on the
balance sheet, as well as a balance sheet equivalent amount of certain
contingent liabilities that are off-balance-sheet, is assigned to a broad
risk category, ranging from zero to 100%. The sum of these risk-weighted
items is the bank holding company's risk-based assets. Effective March
22, 1995, the Federal Reserve Board has reduced the regulatory capital
requirement for certain recourse obligations resulting from asset
transfers to reflect the maximum contractual liability of the bank
holding company under the recourse agreement. This change was mandated by
the Riegle Community Development and Regulatory Improvement Act of 1994
(the "Riegle Act"). See "Recently Enacted and Proposed Legislation".
Qualifying capital consists of Tier 1 capital and Tier 2 capital less (i)
aggregate investments in banking or finance subsidiaries which are not
consolidated for financial accounting or regulatory purposes and in
certain other subsidiaries to the extent designated by the Federal
Reserve Board, and (ii) aggregate reciprocal holdings of capital
instruments of other banking organizations. Tier 1 capital must comprise
at least 4% of risk-adjusted assets and consists of common stock, related
surplus, retained earnings, net of any treasury stock, certain amounts of
qualifying cumulative and noncumulative perpetual preferred stock
(including related surplus) and certain minority interests in equity
accounts of consolidated subsidiaries, less goodwill, and effective April
1, 1995, deferred tax assets realizable only from future taxable income,
other than the amount of such assets not exceeding the lesser of the
Company's projected taxable income within one year of the relevant
quarter-end report date or 10% of Tier 1 capital (net of goodwill and
intangible assets other than purchased mortgage servicing rights and
purchased credit card relationships but before any disallowed deferred
tax assets are deducted), and generally all identifiable intangibles
other than readily marketable purchased mortgage servicing rights and
purchased credit card relationships, each valued by the bank holding
company at least quarterly at the lesser of 90% of their fair market
value or 100% of their book value, in an aggregate amount not exceeding
50% of Tier 1 capital (net of goodwill and all identifiable intangible
assets other than such purchased mortgage servicing rights and purchased
credit card relationships), with a separate sublimit of 25% of Tier 1
capital for purchased credit card relationships. Tier 2 capital, which
may be included in qualifying total capital in an amount not exceeding
100% of Tier 1 capital (net of goodwill and other identifiable
intangibles required to be deducted from Tier 1 capital), consists of
certain amounts of the reserve for loan and lease losses, perpetual
preferred stock and related surplus, certain types
-7-
of hybrid capital instruments and mandatory convertible debt instruments,
and certain types and amounts of term subordinated debt and
intermediate-term preferred stock (including related surplus). After
extended consideration of Financial Accounting Standards Board Statement
No. 115 (relating to valuation of investments in debt and equity
securities), in December 1994, the Federal Reserve Board determined to
adhere to longstanding supervisory practice by generally not recognizing
unrealized appreciation or depreciation of such assets in capital ratio
calculations. Unrealized net losses on marketable equity securities will,
however, continue to be deducted from Tier 1 capital.
Under current regulations, the following minimums are prescribed for the
capital adequacy ratios: (1) primary capital to total assets, 5.5%; (2)
total capital to total assets, 6.0%; (3) qualifying capital (Tier 1 plus
Tier 2) to risk-weighted assets, 8.0%; and (4) Tier 1 capital to total
assets, 3.0% to 5.0%.
The Federal Reserve Board has published for public comment two proposed
changes to its capital adequacy regulations for bank holding companies.
If adopted, these proposals would, respectively, (i) change the
conversion factors currently applied to calculate the potential future
exposure resulting from certain derivatives contracts and permit a
reduction in potential future exposure for certain such transactions
which are subject to qualifying bilateral netting arrangements, and (ii)
implement lower regulatory capital requirements for qualifying recourse
transfers of small business loans and leases, as required by the Riegle
Act. The comment periods on these proposals expired on October 21, 1994,
and February 27, 1995, respectively.
FDICIA requires the federal bank regulatory agencies biennially to review
risk-based capital standards to ensure that they adequately address
interest rate risk, concentration of credit risk and risks from
non-traditional activities and, since adoption of the Riegle Act, to do
so taking into account the size and activities of depository institutions
and the avoidance of undue reporting burdens. See "Recently Enacted and
Proposed Legislation." Effective January 17, 1995, the Federal depository
institution regulatory agencies adopted regulations identifying
concentrations of credit risk and risks arising from nontraditional
activities as important factors to consider in assessing an institution's
overall capital adequacy. The agencies have not yet adopted final
regulations concerning interest rate risk.
2. Bank Subsidiaries
The Company's commercial bank subsidiary, Republic Bank, is subject to
regulation and examination primarily by the Michigan Financial
Institutions Bureau. The Company's savings bank subsidiary, Republic
Savings, is subject to regulation and examination primarily by the Ohio
Superintendent of Savings Banks. As insured state banks, Republic Bank
and Republic Savings are also subject to regulation and examination by
the Federal Deposit Insurance Corporation ("FDIC").
-8-
These agencies and federal and state law extensively regulate various
aspects of the banking business including, among other things,
permissible types and amounts of loans, investments and other activities,
capital adequacy, branching, interest rates on loans and on deposits, the
maintenance of non-interest bearing reserves on deposit accounts, and the
safety and soundness of banking practices. As insured banks, Republic
Bank and Republic Savings are subject to uniform real estate lending
regulations adopted by the Federal depository institution regulatory
agencies. These regulations require each institution to adopt
comprehensive and appropriate real estate lending policies, including
underwriting standards and measurable loan to value ratios which are
consistent with safe and sound banking practice, and documentation,
approval and administration standards, all of which are reviewed and
approved annually by the institution's board of directors. The
regulations provide specific guidance on loan to value ratios which are
acceptable, ranging from a maximum of 65% for loans secured by raw land
up to 85% for loans secured by 1-4 family residential construction or
improved property. Although no maximum is prescribed for home equity or
1-4 family permanent mortgage loans, the regulations indicate that such
loans equal to or in excess of a 90% ratio would be expected to be
supported by private mortgage insurance or readily marketable collateral.
The FDIC imposes capital adequacy guidelines on Republic Bank and
Republic Savings. Subject to certain variations and exceptions, these
guidelines are generally similar to those of the Federal Reserve Board
discussed above with respect to bank holding companies.
Banking laws and regulations also restrict transactions by insured banks
owned by a bank holding company, including loans to and certain purchases
from the parent holding company, non-bank and bank subsidiaries of the
parent holding company, principal shareholders, officers, directors and
their affiliates, and investments by the subsidiary bank in the shares or
securities of the parent holding company (or of any other non-bank or
bank affiliates), and acceptance of such shares or securities as
collateral security for loans to any borrower. The bank's regulators also
review other payments, such as management fees, made by the subsidiary
bank to affiliated companies.
The Company's bank subsidiaries are also subject to legal limitations on
the frequency and amount of dividends that can be paid to the Company. A
Michigan state bank may not declare a cash dividend or a dividend in kind
except out of net profits then on hand after deducting all losses and bad
debts, and then only if it will have a surplus amounting to not less than
20% of its capital after the payment of the dividend. Moreover, a
Michigan state bank may not declare or pay any cash dividend or dividend
in kind until the cumulative dividends on its preferred stock, if any,
have been paid in full. Further, if the surplus of a Michigan state bank
is at any time less than the amount of its capital, before the
declaration of a cash dividend or dividend in kind, it must transfer to
surplus not less than 10% of its net profits for the preceding half-year
(in the case of quarterly or semi-annual dividends) or the preceding two
consecutive half-year periods (in the case of annual dividends).
-9-
An Ohio savings bank must pay all its expenses each year only out of its
gross earnings. Only after provision has been made for the payment of
such expenses, interest, and the maintenance of a reserve for absorption
of bad debts and other losses and other net worth accounts at levels
required by Ohio law and regulations of the Ohio Superintendent of
Savings Banks, may an Ohio savings bank declare and pay dividends. Such
dividends may be declared and paid out of current earnings and undivided
profits.
The payment of dividends by the Company and its bank subsidiaries is also
affected by various regulatory requirements and policies, such as the
requirement to maintain adequate capital above regulatory guidelines. The
"prompt corrective action" provisions of FDICIA impose further
restrictions on the payment of dividends by insured banks which fail to
meet specified capital levels and, in some cases, their parent bank
holding companies.
FDICIA establishes five capital categories, and the federal depository
institution regulators, as directed by FDICIA, have adopted, effective
December 19, 1992, and subject to certain exceptions, the following
minimum requirements for each of such categories:
Total Tier 1
Risk-Based Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized
__ __ A ratio of
tangible equity
to total assets
of 2% or less
Subject to certain exceptions, these capital ratios are generally
determined on the basis of periodic Reports of Condition and Income
("Call Reports") submitted by each depository institution and the reports
of examination by each institution's appropriate federal depository
institution regulatory agency.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized.
-10-
The FDIC may prevent an insured bank from paying dividends if the bank is
in default of payment of any assessment due to the FDIC. In addition,
payment of dividends by a bank may be prevented by the applicable federal
regulatory authority if such payment is determined, by reason of the
financial condition of such bank, to be an unsafe and unsound banking
practice. The Federal Reserve Board has issued a policy statement
providing that bank holding companies and insured banks should generally
only pay dividends out of current operating earnings.
These regulations and restrictions may limit the Company's ability to
obtain funds from its subsidiaries for its cash needs, including funds
for acquisitions, payment of dividends and interest and the payment of
operating expenses.
Republic Bank is subject to FDIC deposit insurance assessments paid to
the Bank Insurance Fund ("BIF"). Republic Savings is subject to FDIC
deposit insurance assessments paid to the Savings Association Insurance
Fund ("SAIF"). Pursuant to FDICIA, the FDIC has implemented a risk-based
assessment scheme. Under this arrangement, each depository institution is
assigned to one of nine categories (based upon three categories of
capital adequacy and three categories of perceived risk to the applicable
insurance fund). The deposit insurance assessment ranges from 23 basis
points for well-capitalized institutions displaying little risk, to 31
basis points for undercapitalized institutions displaying high risk. In
February, 1995, the FDIC published for comment a proposed rule which
would automatically reduce the insurance premium assessments for
BIF-insured institutions in all but the worst assessment risk
classification when the BIF reaches the mandated reserve ratio. Under the
proposal's new schedule, insurance premium assessments for BIF-insured
banks would range from 4 basis points to 31 basis points. Because of
continued underfunding of the SAIF, the FDIC has proposed no change to
the existing insurance assessment for SAIF-insured banks (such as
Republic Savings). The comment period expires April 17, 1995. In
addition, in October, 1994, the FDIC issued an advance notice of proposed
rulemaking to redefine the deposit insurance assessment base. The comment
period expired on February 2, 1995. There can be no assurance whether, or
in what form, either of these regulatory proposals will be finally
adopted.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any insured bank subsidiary of
a holding company may be required to reimburse the FDIC for any loss
incurred or reasonably anticipated to be incurred by the FDIC after
August 9, 1989 in connection with a default of any of such holding
company's other insured subsidiary banks or from assistance provided to
such other subsidiaries in danger of default. This right of recovery by
the FDIC generally is superior to any claim of the shareholders of the
depository institution that is liable or any affiliate of such
institution. The bank and savings bank subsidiaries of the Company are
subject to such cross-guarantees.
-11-
Among other things, FDICIA requires the federal depository institution
regulators to take prompt corrective action in respect of depository
institutions that do not meet minimum capital requirements. The scope and
degree of regulatory intervention is linked to the capital category to
which a depository institution is assigned.
A depository institution may be reclassified to a lower category than is
indicated by its capital position if the appropriate federal depository
institution regulatory agency determines the institution to be otherwise
in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution,
following receipt of a less-than-satisfactory rating on its most recent
examination report, to correct the deficiency.
Among other things, undercapitalized depository institutions are subject
to growth limitations and are required to submit capital restoration
plans. A depository institution's holding company must guarantee a
capital restoration plan, up to an amount equal to the lesser of 5% of
the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The Federal depository
institution agencies may not accept a capital plan without determining,
among other things, that the plan is based on realistic assumptions and
is likely to succeed in restoring the depository institution's capital.
If a depository institution fails to submit an acceptable plan, or fails
in any material respect to implement an approved plan, it is treated as
if it is significantly undercapitalized.
In addition to these restrictions applicable to undercapitalized
institutions, significantly undercapitalized depository institutions may
be subject to a number of requirements and restrictions, including orders
to sell sufficient voting stock to become adequately capitalized, reduce
total assets, make changes in management personnel, prohibit payment of
dividends by its parent holding company, and require such holding company
to divest or liquidate any affiliate of the institution under certain
circumstances. Subject to certain exceptions, critically undercapitalized
depository institutions are required to be placed in conservatorship or
receivership, generally within 90 days.
The FDIC is further required by FDICIA to establish the BIF and SAIF
deposit insurance assessment rates, respectively, at a level which will
maintain, or restore over a period of not more than 15 years, the
mandated reserve ratios of 1.25%. In February, 1995, the FDIC published
projections indicating that the BIF would reach the mandated reserve
ratio by July 31, 1995. The FDIC does not expect the SAIF to reach the
mandated reserve ratio until 2002. FDICIA also grants the FDIC the power
to impose special deposit insurance assessments in addition to the
regular assessments.
-12-
FDICIA added numerous other provisions, including new accounting, audit
and reporting requirements, new regulatory standards in areas such as
asset quality, earnings and compensation, and revised regulatory
standards for, among other things, powers of state chartered banks,
branch closures, and reduction of systemic risk in the payments system.
4. Mortgage Subsidiaries
The Company's non-depository mortgage banking subsidiaries, Republic
Mortgage, Market Street, and CUB Funding are engaged in the business of
originating or purchasing, selling and servicing mortgage loans secured
by residential real estate. In the origination of mortgage loans,
Republic Mortgage, Market Street and CUB Funding are subject to State
usury and licensing laws and to various federal statutes, such as the
Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending
Act, Real Estate Settlement Procedures Act, and Home Mortgage Disclosure
Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding
credit and settlement costs, and regulate the mortgage loan servicing
activities of such entities, including the maintenance and operation of
escrow accounts and the transfer of mortgage loan servicing. The Riegle
Act imposed new escrow requirements on depository and non-depository
mortgage lenders and servicers under the National Flood Insurance
Program. See "Recently Enacted and Proposed Legislation."
Republic Mortgage, Market Street and CUB Funding purchase mortgage loans
from approved correspondents. In addition to the underwriting done by the
correspondent, each of the mortgage companies performs its own
underwriting review of the mortgage loans it purchases. Correspondents
qualify to participate in Republic Mortgage, Market Street and CUB
Funding's wholesale program only after a review of their reputation,
mortgage lending experience and financial condition, including a review
of references and financial statements. In such activities, the mortgage
companies are also subject to applicable usury and other state and
federal laws, including various states' licensing statutes. As a seller
and servicer of mortgage loans, each of Republic Mortgage, Market Street
and CUB Funding is a participant in the secondary mortgage market with
some or all of the following: private institutional investors, FNMA,
GNMA, FHLMC, VA and FHA. In their dealings with these agencies, Republic
Mortgage, Market Street and CUB Funding are subject to various
eligibility requirements prescribed by the agencies, including but not
limited to net worth, quality control, bonding, financial reporting and
compliance reporting requirements. The mortgage loans which they
originate and purchase are subject to agency-prescribed procedures,
including without limitation inspection and appraisal of properties,
maximum loan-to-value ratios, and obtaining credit reports on prospective
borrowers. On some types of loans, the agencies prescribe maximum loan
amounts, interest rates and fees. When selling mortgage loans to FNMA,
FHLMC, GNMA, VA and FHA, each of Republic Mortgage, Market Street and CUB
Funding represents and warrants that all such mortgage loans sold by it
conform to their requirements. If the
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mortgage loans sold are found to be non-conforming mortgage loans, such
agency may require the seller (i.e., Republic Mortgage, Market Street or
CUB Funding) to repurchase the non-conforming mortgage loans.
Additionally, FNMA, FHLMC, GNMA, VA and FHA may require Republic
Mortgage, Market Street or CUB Funding, respectively, to indemnify them
against all losses arising from their failure, respectively, to perform
their contractual obligations under the applicable selling or servicing
contract. Certain provisions of the Housing and Community Development Act
of 1992, and regulations adopted thereunder may affect the operations and
programs of FNMA and FHLMC. See "Recently Enacted and Proposed
Legislation."
5. Recently Enacted and Proposed Legislation
The Housing and Community Development Act of 1992 ("HCDA") amended (i)
the Real Estate Settlement Procedures Act ("RESPA") to extend its
coverage to loans made to refinance existing residential loans and to
residential loans secured by junior liens, and (ii) the Home Mortgage
Disclosure Act ("HMDA") to require that covered lenders make a modified
form of their mortgage loan application registers available for public
inspection on request, and more rapidly make available to the public
their mortgage loan disclosure statements. The Federal Reserve Board
published final regulations implementing the changes to HMDA on March 11,
1993.
The Department of Housing and Urban Development ("HUD") adopted
regulations implementing the extension of RESPA to junior lien and
refinancing transactions which became generally effective on August 9,
1994. HUD has also adopted, now effective May 24, 1995 with respect to
new mortgage loans (and phased in over a three-year period for existing
mortgage loans), detailed regulations governing escrow accounting
practices (including mandatory use of the aggregate accounting method)
and periodic escrow disclosures by servicers of mortgage loans (including
lenders which service the loans they originate). Further, effective June
19, 1995, HUD has adopted regulations under RESPA revising the mortgage
servicing transfer disclosure requirements to implement amendments made
to the statute by the Riegle Act, and also to exempt mortgage loans
secured by subordinate liens and open-end lines of credit secured by
first liens from such requirements. Finally, in July, 1994, HUD published
for public comment regulations which would (i) prohibit the payment by an
employer of fees to its employees calculated as a function of the number
or value of referrals of business from the employer to an affiliated
entity, (ii) regulate the operation and fees of computer loan origination
services, and (iii) expand the scope, and require consumer
acknowledgment, of disclosures of business affiliations by mortgage loan
service providers which refer customers to affiliated entities. The
comment period expired September 14, 1994.
-14-
HCDA established housing goals for FNMA and FHLMC for low- and
moderate-income housing, special affordable housing, and central cities,
rural areas, and other underserved areas, each as defined by the Act.
Each of FNMA and FHLMC is required to (i) review its underwriting
guidelines, (ii) take affirmative steps to assist primary lenders such as
the Company in making housing credit available in areas with
concentrations of low income and minority families, (iii) collect
expanded data from seller servicers on mortgage loans (including race,
gender and income of mortgagors), and (iv) assist governmental agencies
in investigations of, and take remedial actions against, mortgage lenders
violating the Fair Housing Act or Equal Credit Opportunity Act. The
Secretary of HUD is required to issue implementing regulations, and to
monitor and enforce compliance by FNMA and FHLMC with those goals and
provisions.
The Secretary of HUD has extended the 1994 housing goals of FNMA and
FHLMC to 1995 on an interim basis, pending final action on new goals. In
February 1995, the Secretary of HUD published for public comment proposed
regulations for FNMA and FHLMC which among other things would establish
annual goals, stated as a percentage of the number of dwelling units
financed by each agency's mortgage purchases during the year. The
aggregate of the goals for the HCDA - established categories for each of
FNMA and FHLMC under the proposed regulations are 67% for 1995 and 73%
for 1996. The proposal stated the Secretary's intention that
accomplishment of these goals should not cause FNMA or FHLMC to reduce
the volume of their respective purchases of mortgage loans granted to
higher income borrowers. The comment period expires May 2, 1995.
HCDA also established the Office of Federal Housing Enterprise Oversight
("OFHEO"), a new supervisory authority over FNMA and FHLMC. Among other
things, the Director of OFHEO is required to adopt regulations within 18
months of appointment prescribing minimum risk-based capital levels for
FNMA and FHLMC, to take supervisory action against such an enterprise
which fails to meet required capital levels (including the adoption of a
capital restoration plan and restrictions on capital distributions by the
enterprise to its shareholders such as the Company), and, in the
Director's discretion, to take other supervisory action, including
appointment of a conservator for an enterprise which becomes
significantly or critically undercapitalized. These provisions are
generally subject to phased introduction over the period expiring one
year after final adoption of the risk-based capital regulations of the
Director.
In February 1995, the OFHEO published an advance notice of proposed
rule-making, seeking public comment on various issues prior to the
publication of proposed rules to implement the foregoing provisions of
HCDA. It is not possible to predict the potential impact upon the
Company, if any, of compliance by FNMA and FHLMC with the requirements of
HCDA and such regulations.
-15-
As part of the Omnibus Budget Reconciliation Act of 1993, Congress
amended the Federal Deposit Insurance Act ("FDIA") to require receivers
of failed depository institutions to give priority to depositors over
general creditors, subordinated creditors and shareholders when
distributing assets of a failed institution. This depositor preference
will apply on a nationwide basis.
In 1994, the Congress enacted two major pieces of banking legislation,
the Riegle Act and the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"). The Riegle Act addressed
such varied issues as the promotion of economic revitalization of defined
urban and rural "qualified distressed communities" through special
purpose "Community Development Financial Institutions", the expansion of
consumer protection with respect to certain loans secured by a consumer's
home and reverse mortgages, and reductions in compliance burdens
regarding Currency Transaction Reports, in addition to reform of the
National Flood Insurance Program, the promotion of a secondary market for
small business loans and leases, and mandating specific changes to reduce
regulatory impositions on depository institutions and holding companies.
Among other reforms to the National Flood Insurance Program, the Riegle
Act requires (i) FNMA and FHLMC to implement procedures reasonably
designed to ensure that mortgage loans sold to such agencies and secured
by properties located in a special flood hazard area (a "Flood Property")
are covered by flood insurance for the full term of the loan, even if the
identification of the special flood hazard area occurs after the loan is
closed, (ii) that if an escrow account is established by a lender or
servicer with respect to a mortgage loan secured by a Flood Property, the
escrow must cover flood insurance payments, and (iii) a lender or
servicer with respect to a mortgage loan secured by a Flood Property to
"force place" flood insurance for such property if the borrower fails to
obtain such insurance. The provisions of the Riegle Act described in
clauses (i) and (ii) apply to mortgage loans made, increased, extended or
renewed after September 23, 1995; the provisions regarding "force
placement" of flood insurance took effect on September 23, 1994.
The Riegle Act seeks to encourage the development of a secondary market
for small business loans and leases by amending the Secondary Mortgage
Market Enhancement Act of 1984 to expand the scope of loans eligible for
securitization thereunder to include small business loans and leases
(subject to the right of any State to opt out within seven years of
enactment), and by making such securities legal investments for
depository institutions. It further facilitates such securitizations by
directing the Federal depository institution regulators to treat
transfers of small business loans and leases by depository institutions
in accordance with generally accepted accounting principles, and to limit
the capital required to be maintained by such institutions with respect
to such transfers to the amount of the institution's contractual recourse
liability.
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The regulatory reform provisions of the Riegle Act require Federal
banking agencies to consider burdens and benefits to depository
institutions and their customers before imposing new compliance
requirements, and in general to make new or amended regulations effective
on the first day of a calendar quarter. Each such agency must review and
streamline its regulations and policies within two years, and establish
an internal administrative appeal procedure for "material supervisory
determinations" within six months. The agencies are directed to
coordinate their examinations of depository institutions, and to simplify
and permit electronic filing of statements of condition (known as Call
Reports) by depository institutions. The Act also repealed the
requirement of newspaper publication of statements of condition. Among
other things, the Riegle Act also (i) modified certain consumer
disclosure requirements, (ii) directed the agencies to complete their
regulatory review of the Community Reinvestment Act at the earliest
practicable time, (iii) modified the FDIA to give the agencies more
flexibility in implementing safety and soundness standards, (iv) provided
simplified procedures for formation of one-bank bank holding companies,
(v) mandated expedited notice procedures to the Federal Reserve Board for
bank holding companies to engage in non-banking activities, (vi) reduced
the 30-day post-approval waiting period for certain depository
institution mergers and bank holding company acquisitions to 15 days
under certain circumstances, (vii) eliminated the requirement of prior
board of directors' approval of first-mortgage home loans to executive
officers of the depository institution and expanded the Federal Reserve
Board's authority to provide regulatory exceptions in respect of loans to
certain directors and officers of subsidiaries of a bank holding company,
and (viii) modified FDICIA by directing the Federal banking agencies to
take into account the size and activities of depository institutions, and
not to cause undue reporting burdens, in their biennial review of capital
adequacy standards.
The Riegle-Neal Act will substantially change the geographic constraints
applicable to the banking industry. Effective September 29, 1995, the
application of a bank holding company located in one State (the "home
State") to acquire a bank located in any other State (the "host State")
may be approved by the Federal Reserve Board under the BHC Act
notwithstanding any prohibition of such acquisition in the law of the
host State. The Riegle-Neal Act permits States to require that a target
bank have been in operation for a minimum period, up to five years, and
to impose non-discriminatory limits on the percentage of the total amount
of deposits with insured depository institutions in the State which may
be controlled by a single bank or bank holding company. In addition, the
new Act imposes Federal deposit concentration limits (10% of nationwide
total deposits, and 30% of total deposits in the host State on
applications subsequent to the applicant's initial entry to the host
State), and adds new statutory conditions to Federal Reserve Board
approval, i.e., that the applicant meets or exceeds all applicable
Federal regulatory capital standards and is "adequately managed."
-17-
Also effective September 29, 1995, any bank subsidiary (and, in certain
circumstances thrift subsidiary) of a bank holding company may receive
deposits to existing accounts, renew time deposits, and close, service
and receive payments on (but not disburse proceeds of) loans, as an agent
for its depository institution affiliates without being considered a
branch of the affiliate under any otherwise applicable law. Such agency
activities must be conducted on terms consistent with safe and sound
banking practices.
The Riegle-Neal Act also authorizes, effective June 1, 1997, the
responsible Federal banking agency to approve applications for the
interstate acquisition of branches or mergers of depository institutions
across State lines without regard to whether such activity is contrary to
State law. Any State may, however, by adoption of a non-discriminatory
law after September 29, 1994 and before June 1, 1997, either elect to
have this provision take effect before June 1, 1997 (as Virginia and Utah
have already done) or opt-out of the provision. The effect of opting out
is to prevent banks chartered by, or having their main office located in,
such State from participating in any interstate branch acquisition or
merger. Each State is permitted to prohibit interstate branch
acquisitions (i.e., acquisition of a branch without acquisition of the
entire target bank), to examine acquired or de novo branches of
out-of-State banks with respect to compliance with certain host State
laws, and to retain a minimum age requirement of up to five years, a
non-discriminatory deposit cap, and non-discriminatory notice or filing
requirements. The responsible Federal agency will apply the same Federal
concentration limits and capital and management adequacy requirements
noted above with respect to BHC Act applications. Branches acquired in a
host State by a State-chartered bank will be subject to the activity
limits and other laws of the host State to the same extent as a branch of
a bank chartered by the host State. Branches acquired in a host State by
an out-of-State national bank will be subject to community reinvestment,
consumer protection, fair lending and intrastate branching laws of the
host State (except to the extent the application of such laws to national
banks is preempted by Federal law or is determined by the Comptroller of
the Currency to be discriminatory), and to other non-tax laws of the host
State to the same extent as branches of a national bank having its main
office in the host State. The establishment of de novo branches by an
out-of State bank will continue to require express statutory authority
under the law of the host State and of the chartering jurisdiction.
Among other things, the Riegle-Neal Act also preserves State taxation
authority, prohibits the operation by out-of-State banks of interstate
branches as deposit production offices, imposes additional notice
requirements upon interstate banks proposing to close branch offices in a
low or moderate-income area, and creates new Community Reinvestment Act
evaluation requirements for interstate depository institutions. The Act
mandates new restrictions on interstate activities of foreign banks, and
requires public notice of, and opportunity to comment on, any proposed
ruling by a Federal banking agency which would preempt certain State
laws.
-18-
At the request of the Administration, the Federal depository institution
regulatory agencies published in December 1993 proposed rules to replace
completely existing regulations under the Community Reinvestment Act.
Following receipt of over 6,700 written comments on the December 1993
proposals, the Federal bank regulatory agencies published revised
proposed CRA rules in October, 1994. In January, 1995, the chair of the
House Banking Committee's financial institutions subcommittee wrote to
the agencies requesting a delay in promulgating revised CRA rules until
her panel could conduct hearings. In March, 1995, the Comptroller of the
Currency stated publicly that issuance of the new CRA rules would not
occur until April, 1995. In addition, on March 8, 1994, the Interagency
Task Force on Fair Lending, a body consisting of the Federal depository
institution regulators, the Departments of Justice and Housing and Urban
Development and four other Federal agencies (including the OFHEO), issued
a joint policy statement on discrimination in lending. The policy
statement applies to all lenders, and provides an agreed basis for future
agency rulemaking and administrative enforcement of various federal laws
prohibiting lending discrimination.
Each of the chairman of the House and Senate banking committees has
introduced in Congress a bill to repeal certain of the investment banking
restrictions applicable to commercial banks under the Banking Act of
1933, commonly known as the Glass-Steagall Act. The Administration
announced in February, 1995, that it would propose legislation permitting
common ownership of commercial banks, securities firms and insurance
companies, by repeal of provisions of the Glass-Steagall Act and revision
of the BHC Act. In addition, bills are pending in Congress to impose a
general moratorium on issuance of regulations by Federal agencies, which
may be made applicable to the Federal banking agencies. There can be no
assurance whether, or in what form, any of these bills will become law.
-19-
6. Regulation of Proposed Acquisitions
In general, any direct or indirect acquisition by the Company of any
voting shares of any bank which would result in the Company's direct or
indirect ownership or control of more than 5% of any class of voting
shares of such bank, and any merger or consolidation of the Company with
another bank holding company, will require the prior written approval of
the Federal Reserve Board under the BHC Act. In reaching its decision on
an application for such approval, the Federal Reserve Board must consider
a number of factors, including the effect of the proposed acquisition or
merger on competition in relevant geographic and product markets, the
financial condition of both parties, capital adequacy before and after
the proposed acquisition, the managerial resources and future prospects
of the parties, the convenience and needs of the communities to be
served, and the prior record of both the Company's existing bank
subsidiaries and the bank to be acquired (or the bank subsidiary of the
other party to the merger) under the Community Reinvestment Act.
Amendments made to the BHC Act by FDICIA further require the Federal
Reserve Board (a) to disapprove any application by a bank holding company
which fails to provide the Board with adequate assurances that it will
furnish to the Board information on the operations and activities of such
bank holding company and its affiliates determined by the Board to be
appropriate to determine and enforce compliance with the statute, and (b)
in its consideration of managerial resources, to include consideration of
the competence, experience and integrity of the officers, directors, and
principal shareholders of the parties. In addition, subject to certain
exceptions, the Federal Reserve Board may not approve any such
application by a bank holding company to acquire a bank or bank holding
company located outside the state in which the applicant's banking
subsidiaries conduct their principal banking operations unless the
acquisition is expressly authorized by the statute laws of the state in
which the bank or bank holding company to be acquired is located.
Effective September 29, 1995, the BHC Act will no longer prevent the
Federal Reserve Board from approving the acquisition of a bank because of
contrary State law. See "Recently Enacted and Proposed Legislation."
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of assets of
another bank, or the assumption of liability by such a subsidiary to pay
any deposits in another bank, will require the prior written approval of
the responsible Federal depository institution regulatory agency under
the Bank Merger Act. In reaching its decision, the responsible Federal
depository institution regulatory agency must consider a number of
factors, including the effect of the proposed transaction on competition
in relevant geographic and product markets, the financial and managerial
resources and future prospects of the parties, capital adequacy before
and after the proposed transaction, the convenience and needs of the
communities to be served, and the prior record of both the Company's
existing subsidiaries and the other bank under the Community Reinvestment
Act. In addition, an application to, and the prior approval of, the
Federal Reserve Board may be required under the BHC Act, in certain such
cases.
-20-
In all of the foregoing cases, the required regulatory approvals are
subject to public notice and comment procedures. Adverse public comments
received, or adverse considerations raised by the regulatory agencies,
may delay or prevent consummation of the proposed transaction. In
addition, such a transaction generally may not be consummated before the
thirtieth calendar day (or if the Attorney General has made no adverse
comment to the Federal Reserve Board thereon, such shorter period not
less than 15 calendar days as the Board may specify with the concurrence
of the Attorney General) after final approval of the transaction by the
Federal depository institution regulatory agency. In some of the
foregoing cases, prior approvals of state bank regulatory authorities
must also be obtained prior to consummation of the proposed transactions.
With certain limited exceptions, the BHC Act prohibits bank holding
companies, such as the Company, from acquiring direct or indirect
ownership or control of voting shares or assets of any company other than
a bank, unless the company involved is engaged solely in one or more
activities which the Federal Reserve Board has determined to be so
closely related to banking or managing or controlling banks as to be a
proper incident thereto. Any such acquisition will require, except in
certain limited cases, at least 60 days' prior written notice to the
Federal Reserve Board.
In evaluating a written notice of such an acquisition, the Federal
Reserve Board will consider whether the performance by an affiliate of
the Company of the activity can reasonably be expected to produce
benefits to the public (such as greater convenience, increased
competition, or gains in efficiency) that outweigh possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices). The
Board may apply different standards to activities proposed to be
commenced de novo and activities commenced by acquisition, in whole or in
part, of a going concern. The Board's consideration will also include an
evaluation of the financial and managerial resources of the Company,
including its existing subsidiaries, and of any entity to be acquired,
and the effect of the proposed transaction on those resources. The
required notice period may be extended by the Board under certain
circumstances, including a notice for acquisition of a company engaged in
activities not previously approved by regulation of the Board. This
required regulatory written notice is subject to public notice and
comment procedures, and adverse public comments received, or adverse
considerations raised by regulatory agencies, may delay or prevent
consummation of such an acquisition. If such a proposed acquisition is
not disapproved or subjected to conditions by the Board within the
applicable notice period, it is deemed approved by the Board. Such an
acquisition may also require 30 days' prior notice to the Department of
Justice and the Federal Trade Commission.
-21-
FIRREA amended the BHC Act in 1989 to permit the Federal Reserve Board to
approve an application by any bank holding company to acquire and operate
a savings association as a non-bank subsidiary of such bank holding
company. A bank holding company such as the Company may submit a written
notice to the Board of the acquisition of a savings association engaged
in deposit-taking, lending and other activities that the Board has
determined to be permissible for bank holding companies, in accordance
with the procedures and standards described in the preceding paragraph.
Subject to certain exceptions, the direct or indirect association by a
bank holding company such as the Company which does not already control a
savings association will cause the bank holding company to become a
savings and loan holding company. Each company becoming a savings and
loan holding company must register as such with the Office of Thrift
Supervision ("OTS") within 90 days after becoming a savings and loan
holding company. Thereafter, the savings and loan holding company is
subject to regulation, periodic reporting requirements, and examination
by the OTS. In the case of a bank holding company which is also a savings
and loan holding company, such OTS regulation is in addition to
continuing regulation by the Federal Reserve Board under the BHC Act.
Item 2. PROPERTIES AND EMPLOYEES
The executive offices of the Company are located at 1070 East Main Street,
Owosso, Michigan, a two-story building which is also occupied by the Owosso
branch of Republic Bank. This building is owned by Republic Bank. The Company
also maintains administrative offices at the principal office of Republic Bank
in Ann Arbor, Michigan.
Currently, the Company's bank subsidiary Republic Bank, operates 25 offices,
including two loan production offices within the State of Michigan, of which
fourteen are owned and eleven are leased. The Company's state savings bank
operates eleven offices within the state of Ohio, of which two are owned and
nine are leased.
Currently, the Company's mortgage banking subsidiaries operate ten offices in
Michigan, one office in Iowa, twelve offices in Florida, two offices in
Virginia, one office in North Carolina, two offices in Maryland, two offices
in Alabama, one office in Illinois, two offices in Georgia, one office in
Colorado, one office in Texas, five offices in California, three offices in
New York, two offices in Connecticut, one office in Massachusetts, two offices
in Arizona, one office in Washington and one office in Oregon. All of the
Company's mortgage banking offices are leased, with the exception of Republic
Mortgage's corporate office located in Farmington Hills, Michigan.
At December 31, 1994, total annual rental expense under real estate lease
obligations of the Company and its subsidiaries, other than intercompany
items, was approximately $3.7 million. Rental expense for 1995 is expected to
decline due to the closing of certain mortgage banking offices during the
third and fourth quarters of 1994.
The Company had approximately 1,050 full-time equivalent employees at December
31, 1994.
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Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to certain ordinary, routine
litigation incidental to the Company's business. Management considers that the
aggregate liability, if any, arising from such actions would not have a
material adverse effect on the consolidated financial position of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information set forth under caption "Summary of Common Share Market Data"
on Page 46 of the 1994 Annual Report of the Company is incorporated herein by
reference.
Item 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Five Year Summary of Selected
Financial Data" on Page 6 of the 1994 Annual Report of the Company is
incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information set forth under the caption "Management's Discussion and
Analysis" on Pages 7 through 20 of the 1994 Annual Report of the Company is
incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information set forth on Pages 21 through 43 and Pages 45 and 46 of the
1994 Annual Report of the Company is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable
-23-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 1, 1995 are as follows:
Position
Name Position Held Since Age
Jerry D. Campbell Chairman of the Board, President 1985 54
and Chief Executive Officer
Dana M. Cluckey Executive Vice President, 1986 35
Treasurer and Assistant Secretary
Barry J. Eckhold Vice President, Chief Credit 1990 48
Officer and Secretary
Richard H. Shaffner Vice President 1992 41
Thomas F. Menacher Chief Financial and 1992 38
Accounting Officer
The information set forth under the caption "Directors" on Pages 5 through 7
of the definitive Proxy Statement of the Company dated March 27, 1995 filed
with the Securities and Exchange Commission pursuant to Regulation 14A is
incorporated herein by reference for information as to directors of the
Company.
Item 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Compensation of Executive
Officers" on Pages 10 through 14 of the definitive Proxy Statement of the
Company dated March 27, 1995 filed with the Securities and Exchange Commission
pursuant to Regulation 14A is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Principal Holders of the
Company's Common Stock" on Pages 2 through 4 of the definitive Proxy Statement
of the Company dated March 27, 1995 filed with the Securities and Exchange
Commission pursuant to Regulation 14A is incorporated herein by reference.
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Related Transactions" on Page 9
of the definitive Proxy Statement of the Company dated March 27, 1995 filed
with the Securities and Exchange Commission pursuant to Regulation 14A is
incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements:
Page *
Consolidated Balance Sheets - December 31, 1994 and 1993... 21
Consolidated Statements of Income - Three Years Ended
December 31, 1994........................................ 22
Consolidated Statements of Shareholders' Equity -
Three Years Ended December 31, 1994...................... 23
Consolidated Statement of Cash Flows - Three
Years Ended December 31, 1994............................ 24-25
Notes to Consolidated Financial Statements................. 26-43
Independent Auditors' Report............................... 45
*Refers to page number of the Annual Report of the Company for the year ended
December 31, 1994.
2. Schedules:
I - Indebtedness to Related Parties (Not Applicable)
II - Guarantees of Securities of Other Issuers (Not Applicable)
(b) Reports on Form 8-K:
Not Applicable
(c) Exhibits:
3. (a) Articles of Incorporation, are incorporated herein by reference to
Exhibit 3(a) to Form 10K filed March 17, 1994.
(b) Bylaws, as amended, are incorporated herein by reference to Exhibit
3(b) to Registration Statement on Form S-4 filed March 1, 1990,
Registration No. 33-33811.
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4(a) Indenture dated as of February 1, 1993, between the Company and
NBD Bank, N.A., as Trustee, relating to 9% Subordinated Notes due
2003, including Form of 9% Subordinated Note due 2003: filed as
Exhibit 4(d) to Amendment No. 1 to Form S-4 filed January 28, 1993,
Registration No. 33-56112, and incorporated herein by reference.
4(b) Warehousing Credit Agreement, dated as of December 18, 1992, between
Mayflower Mortgage Corporation, d/b/a Republic Bancorp Mortgage Inc.,
the banks named therein and NBD Bank, N.A., as Agent: filed as
Exhibit 4(c) to Form S-3 filed January 8, 1993, Registration No.
33-56328, and incorporated herein by reference.
4(c) First Amendment to Warehousing Credit Agreement, dated as of May 1,
1993, between Mayflower Mortgage Corporation, d/b/a Republic Bancorp
Mortgage Inc., the banks named therein and NBD Bank, N.A., as Agent,
filed as Exhibit 4(c) to Form S-3, filed May 26, 1993, Registration
No. 33-61842, and incorporated herein by reference.
4(d) Second Amendment to Warehousing Credit Agreement, dated as of
December 17, 1993, between Mayflower Mortgage Corporation, d/b/a
Republic Bancorp Mortgage Inc., the banks named therein and NBD Bank,
N.A., as Agent: filed as Exhibit 4(d) to Form 10-K, filed March 17,
1994 and incorporated herein by reference.
4(e) Third Amendment dated as of March 31, 1994 and Fourth Amendment
dated as of April 30, 1994, to Warehousing Credit Agreement between
Mayflower Mortgage Corporation, d/b/a Republic Bancorp Mortgage Inc.,
the banks named therein and NBD Bank, N.A., as Agent.
4(f) Fifth Amendment to Warehousing Credit Agreement, dated as of
September 1, 1994, between Mayflower Mortgage Corporation, d/b/a
Republic Bancorp Mortgage Inc., NBD Bank, N.A., and NBD Bank, N.A.,
as Agent.
4(g) Revolving Credit Agreement between the Company and Firstar Bank
Milwaukee, N.A., dated as of January 26, 1995.
4(h) Collateral Pledge Agreement between the Company and Firstar Bank
Milwaukee, N.A., dated as of October 1, 1993: filed as Exhibit 4(g)
to Form 10-K, filed March 17, 1994 and incorporated herein by
reference.
4(i) Warehousing Credit Agreement, dated as of July 30, 1993, among Market
Street Mortgage Corporation and G.E. Capital Mortgage Services, Inc.
and Warehousing Credit Agreement, dated as of July 30, 1993, among
Market Street Mortgage Corporation, Cooper River Funding, Inc., as
lender, and G.E. Capital Mortgage Services, Inc., as Agent: filed as
Exhibit 4(h) to Form 10-K, filed March 17, 1994 and incorporated
herein by reference.
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4(j) Term notes dated December 29, 1992, in the amounts of $2.2 million
and $211,000 given by Republic Mortgage in favor of Poughkeepsie
Savings Bank, FSB: filed as Exhibit 4(h) to Form S-3 filed January 8,
1993, Registration No. 33-56328, and incorporated herein by
reference.
4(k) First Amendment dated as of October 16, 1993, Second Amendment dated
as of February 23, 1994, Third Amendment dated as of May 20, 1994,
Fourth Amendment dated as of July 30, 1994, and Fifth Amendment dated
as of August 31, 1994, to Warehousing Credit Agreement between Market
Street Mortgage Corporation and G.E. Capital Mortgage Services, Inc.
4(l) First Amendment to Warehousing Security Agreement, dated as of
February 23, 1994, between Market Street Mortgage Corporation and
G.E. Capital Mortgage Services, Inc.
4(m) First Amendment dated as of May 20, 1994, Second Amendment dated as
of July 30, 1994, and Third Amendment dated as of August 31, 1994, to
Warehousing Credit Agreement between Market Street Mortgage
Corporation, Cooper River Funding, Inc., as lender, and G.E. Capital
Mortgage Services, Inc. as Agent.
4(n) Term Loan Agreement, dated as of April 29, 1994, between Market
Street Mortgage Corporation and G. E. Capital Mortgage Services, Inc.
4(o) First Amendment to Term Loan Agreement, dated as of November 11,
1994, between Market Street Mortgage Corporation and G.E. Capital
Mortgage Services, Inc.
4(p) Debenture Purchase Agreement dated as of March 30, 1994, between the
Company and Scudder, Stevens & Clark, Inc., Business Men's Assurance
Company of America, Columbus Life Insurance Company and Mutual of
America Life Insurance Company, related to 7.17% Senior Debentures
due 2001.
4(q) Warehousing Credit Agreement, dated as of August 11, 1994, between
CUB Funding Corporation and The Prudential Home Mortgage Company,
Inc.
4(r) First Amendment to Warehousing Credit Agreement, dated as of
November 1, 1994, between CUB Funding Corporation and The Prudential
Home Mortgage Company, Inc.
10(a) Non-Qualified Stock Option Plan of the Company, effective March 24,
1986, as amended and restated: filed as Exhibit 10(b) to Form 10-K,
filed March 23, 1993 and incorporated herein by reference.
10(b) Restricted Stock Plan of the Company, effective March 24, 1986, as
amended and restated: filed as Exhibit 10(c) to Form 10-K, filed
March 23, 1993 and incorporated herein by reference.
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10(c) Form of Indemnity Agreement and Schedule of officers and directors
of the Company who executed such agreements: filed as Exhibit 10(e)
to Form S-2, Registration No. 33-46069, and incorporated herein by
reference.
10(d) Directors Compensation Plan of the Company, adopted by the Board of
Directors on October 15, 1992: filed as Exhibit 10(e) to Form 10-K,
filed March 23, 1993 and incorporated herein by reference.
10(e) Deferred Compensation Plan of the Company, adopted by the Board of
Directors on December 16, 1993: filed as Exhibit 10(e) to Form 10-K,
filed March 17, 1994 and incorporated herein by reference.
11. Statement Re: Computation of per share earnings (See Annual Report
to Security Holders, Pages 36 and 37, filed herewith as Exhibit 13).
13. 1994 Annual Report of the Company and Independent Auditors' Report
on the Company's December 31, 1994, 1993, and 1992 Financial
Statements.
22. Subsidiaries of the Registrant are incorporated by reference to
Note 1 to the Notes to Consolidated Financial Statements.
23. Consent of Deloitte & Touche LLP to incorporation by reference of its
report dated January 18, 1995 appearing in the Company's Form 10-K
for the year ended December 31, 1994 into the Company's Registration
Statements on Form S-8 dated December 4, 1992, Registration No.
33-55336, and Form S-8 dated December 4, 1992, Registration No.
33-55304, and Form S-8 dated May 10, 1993, Registration No. 33-62508,
and the Company's Registration Statement on Form S-3 dated May 26,
1993, Registration No. 33-61842.
27. Financial Data Schedule containing summary financial information
extracted from the consolidated balance sheet as of December 31, 1994
and consolidated statement of income for the twelve months ended
December 31, 1994.
28(a) Form of Servicing and Disposition Agreement for Inventory and
Construction Loan Portfolio, dated November 21, 1992, between Market
Street Mortgage Corporation and the Company: filed as Exhibit 2(b) to
Form 8-K filed November 23, 1992, and incorporated herein by
reference.
28(b) First Amended and Restated Agreement and Plan of Reorganization,
dated as of October 29, 1992, by and between the Company and Horizon
Financial Services, Inc.: filed as Exhibit 2 to Form 8-K filed
November 6, 1992, and incorporated herein by reference.
28(c) Agreement and Plan of Merger between the Company and Premier
Bancorporation, Inc., dated as of March 31, 1993: filed as Exhibit
28(c) to Form 10-K, filed March 17, 1994 and incorporated herein by
reference.
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28(d) Agreement of Consolidation, dated as of July 23, 1993, by and among
the following six consolidating banks: Republic Bank, a Michigan
banking corporation, Republic Bank - Central, a Michigan banking
corporation, Republic Bank - North, a Michigan banking corporation,
Republic Bank Ann Arbor, a Michigan banking corporation, Republic
Bank S.E., a Michigan banking corporation (collectively the
"Constituent Banks"), and Premier Bank ("Premier"), a Michigan
banking corporation: filed as Exhibit 28(d) to Form 10-K, filed March
17, 1994 and incorporated herein by reference.
28(e) Purchase and Sale Agreement by and between Republic Bancorp Inc.
("Purchaser") and California United Bank, National Association
("Seller"), dated October 22, 1993: filed as Exhibit 28(e) to Form
10-K, filed March 17, 1994 and incorporated herein by reference.
28(f) Purchase and Sale Agreement by and between Republic Bancorp Mortgage
Inc. ("Purchaser") and Home Funding, Inc. ("Seller"), dated November
1, 1994.
28(g) Purchase and Sale Agreement by and between Republic Bank ("Seller")
and CB North ("Purchaser"), dated as of September 27, 1994.
28(h) Purchase and Sale Agreement by and between Republic Bank ("Purchaser")
and Standard Federal Bank ("Seller"), dated as of November 14, 1994.
NOTE: Items 1, 2, 5, 6, 7, 8, 9, 12, 14, 15, 16, 17, 18, 19, 20, 21, 24,
25, 26, and 29 are not applicable.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 16th day
of March, 1995.
/s/ Jerry D. Campbell /s/ Thomas F. Menacher
------------------------- -------------------------
Jerry D. Campbell Thomas F. Menacher
Chief Executive Officer and President Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in their capacity as Directors of the Company on the 16th day
of March, 1995.
/s/ Jerry D. Campbell /s/ Stephen M. Klein
------------------------- -------------------------
Jerry D. Campbell Stephen M. Klein
/s/ Dana M. Cluckey
------------------------- -------------------------
Dana M. Cluckey John J. Lennon
/s/ Bruce L. Cook
------------------------- -------------------------
Bruce L. Cook Sam H. McGoun
/s/ Richard J. Cramer
------------------------- -------------------------
Richard J. Cramer Kelly E. Miller
/s/ George A. Eastman /s/ Joe D. Pentecost
------------------------- -------------------------
George A. Eastman Joe D. Pentecost
/s/ Howard J. Hulsman /s/ George B. Smith
------------------------- -------------------------
Howard J. Hulsman George B. Smith
/s/ Gary Hurand /s/ Jeoffrey K. Stross
------------------------- -------------------------
Gary Hurand Jeoffrey K. Stross
------------------------- -------------------------
Dennis J. Ibold Lyman H. Treadway