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 September 30, 2000 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 October 31, 2000:
Common Stock, $5 Par Value .......................... 45,017,000 Shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 ..................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999................... 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999................... 5
Notes to Consolidated Financial Statements................. 6 - 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition..............10 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 23
Item 2. Changes in Securities...................................... 23
Item 6. Exhibits and Reports on Form 8-K........................... 23
SIGNATURE................................................................ 24
EXHIBITS................................................................. 25
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 65,512 $ 83,761
Mortgage loans held for sale 400,746 459,059
Securities available for sale (amortized cost of
$191,031 and $210,385, respectively) 188,051 206,459
Loans 3,738,361 3,373,425
Less allowance for loan losses (28,379) (27,128)
----------- -----------
Net loans 3,709,982 3,346,297
----------- -----------
Premises and equipment 35,208 40,025
Mortgage servicing rights 60,546 67,290
Other assets 91,745 98,724
----------- -----------
Total assets $ 4,551,790 $ 4,301,615
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 251,119 $ 206,990
Interest-bearing deposits 2,397,393 2,406,060
----------- -----------
Total deposits 2,648,512 2,613,050
Federal funds purchased and other short-term borrowings 2,153 57,243
FHLB advances 1,402,114 1,172,211
Accrued expenses and other liabilities 135,327 116,451
Long-term debt 47,500 47,500
----------- -----------
Total liabilities 4,235,606 4,006,455
Preferred stock of subsidiary 28,719 28,719
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, 75,000,000 shares
authorized; 44,998,000 and 45,286,000 shares
issued and outstanding, respectively 224,990 226,429
Capital surplus 37,767 39,163
Retained earnings 26,645 3,401
Accumulated other comprehensive loss (1,937) (2,552)
----------- -----------
Total shareholders' equity 287,465 266,441
----------- -----------
Total liabilities and shareholders' equity $ 4,551,790 $ 4,301,615
=========== ===========
See notes to consolidated financial statements.
3
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------
Interest Income:
Loans, including fees $ 87,218 $ 70,017 $ 247,299 $ 191,924
Investment securities 3,633 6,325 10,966 26,469
--------- --------- --------- ---------
Total interest income 90,851 76,342 258,265 218,393
--------- --------- --------- ---------
Interest Expense:
Deposits 33,098 25,357 90,056 79,445
Short-term borrowings 447 744 2,848 2,638
FHLB advances 22,867 15,506 61,916 40,158
Long-term debt 859 930 2,576 2,854
--------- --------- --------- ---------
Total interest expense 57,271 42,537 157,396 125,095
--------- --------- --------- ---------
Net interest income 33,580 33,805 100,869 93,298
Provision for loan losses 1,600 1,575 4,800 9,675
--------- --------- --------- ---------
Net interest income after provision for loan losses 31,980 32,230 96,069 83,623
--------- --------- --------- ---------
Non-interest Income:
Service charges 2,073 1,922 5,749 5,431
Mortgage loan production and servicing revenue 14,813 19,024 50,313 67,522
Gain (loss) on sale of securities -- 10 97 (6,578)
Other non-interest income 1,083 1,364 3,119 3,616
--------- --------- --------- ---------
Total non-interest income 17,969 22,320 59,278 69,991
--------- --------- --------- ---------
Non-interest Expense:
Salaries and employee benefits 17,485 18,320 55,108 61,559
Occupancy expense of premises 3,320 3,492 10,275 10,284
Equipment expense 2,192 2,195 6,699 5,640
Other non-interest expense 9,333 10,657 28,604 33,651
Merger integration and restructuring -- -- -- 31,521
--------- --------- --------- ---------
Total non-interest expense 32,330 34,664 100,686 142,655
--------- --------- --------- ---------
Income before income taxes 17,619 19,886 54,661 10,959
Provision for income taxes 5,611 6,750 17,874 4,815
--------- --------- --------- ---------
Income before preferred stock dividends 12,008 13,136 36,787 6,144
Preferred stock dividends 681 681 2,042 2,042
--------- --------- --------- ---------
Net income $ 11,327 $ 12,455 $ 34,745 $ 4,102
========= ========= ========= =========
Basic earnings per share $ .25 $ .28 $ .77 $ .09
========= ========= ========= =========
Diluted earnings per share $ .25 $ .27 $ .77 $ .09
========= ========= ========= =========
Average common shares outstanding - diluted 45,292 45,858 45,409 45,723
========= ========= ========= =========
Cash dividends declared per common share $ .085 $ .082 $ .255 $ .245
========= ========= ========= =========
See notes to consolidated financial statements.
4
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30 (In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 34,745 $ 4,102
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,723 7,190
Amortization of mortgage servicing rights 5,858 10,096
Net (gain) loss on sale of securities available for sale (97) 6,578
Net gain on sale of mortgage servicing rights (22,223) (29,263)
Net gain on sale of loans (1,021) (2,627)
Origination of mortgage loans held for sale (2,586,521) (3,330,280)
Proceeds from sales of mortgage loans held for sale 2,644,833 3,659,847
Net decrease in other assets 11,747 4,238
Net increase (decrease) in other liabilities 18,876 (33,638)
Other, net (3,226) (3,755)
----------- -----------
Total adjustments 74,949 288,386
----------- -----------
Net cash provided by operating activities 109,694 292,488
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of securities available for sale 19,114 423,499
Proceeds from maturities/payments of securities available for sale 9,347 308,765
Purchases of securities available for sale (9,191) (243,561)
Proceeds from maturities/payments of securities held to maturity -- 11,149
Purchases of securities held to maturity -- (121,561)
Proceeds from sale of consumer loans 56,400 --
Proceeds from sale of commercial and residential real estate loans 103,383 54,025
Net increase in loans made to customers (522,375) (792,331)
Proceeds from sale of mortgage servicing rights 47,074 57,482
Additions to mortgage servicing rights (26,734) (38,767)
----------- -----------
Net cash used in investing activities (322,982) (341,300)
----------- -----------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 35,462 (120,353)
Net decrease in short-term borrowings (55,090) (51,313)
Net (decrease) increase in short-term FHLB advances (128,000) 427,000
Proceeds from long-term FHLB advances 625,000 35,000
Payments on long-term FHLB advances (267,097) (229,660)
Payments on long-term debt -- (903)
Net proceeds from issuance of common shares 2,129 5,177
Repurchase of common shares (5,821) (1,729)
Dividends paid (11,544) (8,205)
----------- -----------
Net cash provided by financing activities 195,039 55,014
----------- -----------
Net (decrease) increase in cash and cash equivalents (18,249) 6,202
Cash and cash equivalents at beginning of period 83,761 47,712
----------- -----------
Cash and cash equivalents at end of period $ 65,512 $ 53,914
=========== ===========
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, 1999.
Certain amounts in prior periods have been reclassified to conform to the
current year's presentation. The primary reclassification from the prior year is
the deduction of mortgage loan commission expense against mortgage loan
production and servicing revenue.
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 (including its subsidiaries Republic Banc Mortgage Corporation and
Market Street Mortgage Corporation) and D&N Bank (including its wholly-owned
subsidiaries D&N Capital Corporation and Quincy Investment Services, Inc.).
Republic Banc Mortgage Corporation, including its division, Home Banc Mortgage
Corporation, is a wholly-owned mortgage company subsidiary and Market Street
Mortgage Corporation is an 80% majority-owned mortgage company subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Note 3 - Merger Integration and Restructuring Charge
-------------------------------------------
In connection with the merger of D&N Financial Corporation on May 17, 1999, the
Company recorded $31.5 million ($22.0 million after tax) in merger integration
and restructuring charges in the second quarter of 1999. Actions incorporated in
the business combination and restructuring plan are targeted for implementation
over a 12 - 18 month period following the merger. The Company expects to
complete these actions in the fourth quarter of 2000 when Republic Bank and D&N
Bank merge. The merger integration and restructuring costs include appropriate
accruals, reserves and charges for severance and employee benefit accruals,
professional fees, branch closings and real estate transactions, systems and
other charges.
Severance and employee benefit accruals consisted primarily of severance and
benefits costs for separated employees that resulted from the elimination of
duplicate functions such as finance, investor relations, human resources,
operations and marketing. The expected net reduction of approximately 200
full-time positions represents 14% of the combined workforce of Republic Bank
and D&N Bank. As of September 30, 2000, 173 positions had been eliminated under
the merger integration and restructuring plan. Professional fees represent
investment banking fees and accounting and legal fees associated with the merger
transaction. Branch closings and real estate transactions primarily represent
the costs associated with the closing of 3 offices and the divestiture of
identified facilities related to the consolidation of operations. The Company
also recorded write-downs of certain fixed assets in conjunction with the
merger. The impairment of these assets was included in the $8.7 million charge
for branch closings and real estate transactions. Systems charges include the
expenses
6
expected from the integration of the two banking systems which is expected to be
completed in the fourth quarter of 2000. Other merger-related costs include
various transaction costs.
The following table provides details of the pre-tax merger integration and
restructuring charge by type of cost recorded in the second quarter of 1999 and
the reserve balance remaining at September 30, 2000:
- ------------------------------------------------------------------------------------
Initial Amount Reserve
(In thousands) Reserve Utilized Balance
- ------------------------------------------------------------------------------------
Type of Costs:
Severance and employee benefit accruals $10,446 $ 9,184 $ 1,262
Professional fees 5,133 5,133 --
Branch closings and real estate transactions 8,652 7,493 1,159
Systems 2,201 195 2,006
Other 5,089 5,089 --
------- ------- -------
Total merger integration and restructuring charge $31,521 $27,094 $ 4,427
======= ======= =======
- ------------------------------------------------------------------------------------
Note 4 - Consolidated Statements of Cash Flows
-------------------------------------
Supplemental disclosures of cash flow information for the nine months ended
September 30, include:
(In thousands) 2000 1999
---- ----
Cash paid during the period for:
Interest .................................. $156,477 $123,917
Income taxes .............................. $ 12,459 5,999
Non-cash investing activities:
Loan charge-offs .......................... $ 4,565 $ 6,420
Note 5 - Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands, except per share data) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net income .................................... $ 11,327 $ 12,455 $ 34,745 $ 4,102
Denominator for basic earnings per share--
weighted-average shares ....................... 45,053,754 45,259,162 45,110,577 45,094,358
Effect of dilutive securities:
Employee stock options .................. 222,526 554,049 280,485 580,537
Warrants ................................ 15,869 44,508 18,227 48,376
----------- ----------- ----------- -----------
Dilutive potential common shares ... 238,395 598,557 298,712 628,913
----------- ----------- ----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares for assumed conversions 45,292,149 45,857,719 45,409,289 45,723,271
=========== =========== =========== ===========
Basic earnings per share ...................... $ .25 $ .28 $ .77 $ .09
=========== =========== =========== ===========
Diluted earnings per share .................... $ .25 $ .27 $ .77 $ .09
=========== =========== =========== ===========
7
Note 6 - Comprehensive Income
--------------------
The following table sets forth the computation of comprehensive income:
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------
Net income ................................................ $ 11,327 $ 12,455 $ 34,745 $ 4,102
Unrealized holding gains (losses) on securities, net of tax $ 967 $ (289) $ 678 $ (7,998)
Reclassification adjustment for (gains) losses included
in net income, net of tax ......................... -- (7) (63) 4,276
-------- -------- -------- --------
Net unrealized gains (losses) on securities, net of tax ... 967 (296) 615 (3,722)
-------- -------- -------- --------
Comprehensive income ...................................... $ 12,294 $ 12,159 $ 35,360 $ 380
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------
Note 7 - Segment Information
-------------------
The Company's operations are managed as two major business segments: (1)
commercial and retail banking and (2) mortgage banking. The commercial and
retail banking segment consists of commercial lending to small- and medium-sized
companies, primarily in the form of commercial real estate and Small Business
Administration (SBA) loans; mortgage portfolio lending; home equity lending; and
the deposit-gathering function. The mortgage banking segment is comprised of
mortgage loan production and mortgage loan servicing.
The following table presents the financial results of each business segment for
the three months ended September 30, 2000 and 1999.
Commercial and
Retail Banking Mortgage Banking Consolidated
- ---------------------------------------------------------------------------------------------------------
Three Months Ended, Three Months Ended, Three Months Ended,
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 2000 1999 2000 1999 (2) 2000 1999
- ---------------------------------------------------------------------------------------------------------
Interest income ................. $ 82,096 $ 67,495 $ 8,755 $ 8,847 $ 90,851 $ 76,342
Interest expense ................ 48,350 35,304 8,921 7,233 57,271 42,537
-------- -------- -------- -------- -------- --------
Net interest income(3) .......... 33,746 32,191 (166) 1,614 33,580 33,805
Provision for loan losses ....... 1,600 1,575 -- -- 1,600 1,575
Noninterest income .............. 3,156 1,991 14,813 20,329 17,969 22,320
Noninterest expense ............. 17,185 15,760 15,145 18,904 32,330 34,664
-------- -------- -------- -------- -------- --------
Income before taxes .......... $ 18,117 $ 16,847 $ (498) $ 3,039 $ 17,619 $ 19,886
======== ======== ======== ======== ======== ========
Preferred stock dividend ........ $ 681 $ 681 $ -- $ -- $ 681 $ 681
Income taxes .................... $ 5,785 $ 5,680 $ (174) $ 1,070 $ 5,611 $ 6,750
Depreciation and amortization ... $ 1,185 $ 775 $ 3,093 $ 2,807 $ 4,278 $ 3,582
Capital expenditures ............ $ 2,012 $ 1,387 $ 256 $ 1,708 $ 2,268 $ 3,095
Identifiable assets (in millions) $ 4,026 $ 3,676 $ 526 $ 559 $ 4,552 $ 4,235
Efficiency ratio ................ 42.33% 50.37% 103.4% 86.15% 62.72% 61.77%
- ---------------------------------------------------------------------------------------------------------
8
Note 7 - Segment Information (continued)
-------------------------------
The following table presents the financial results of each business segment for
the nine months ended September 30, 2000 and 1999.
- --------------------------------------------------------------------------------------------------------
Commercial and
Retail Banking Mortgage Banking Consolidated
- --------------------------------------------------------------------------------------------------------
Nine Months Ended, Nine Months Ended, Nine Months Ended,
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 2000 1999(1) 2000 1999(1) (2) 2000 1999(1)
- --------------------------------------------------------------------------------------------------------
Interest income ................. $231,227 $190,014 $ 27,038 $ 28,379 $258,265 $218,393
Interest expense ................ 130,886 101,067 26,510 24,028 157,396 125,095
-------- -------- -------- -------- -------- --------
Net interest income(3) .......... 100,341 88,947 528 4,351 100,869 93,298
Provision for loan losses ....... 4,800 4,675 -- -- 4,800 4,675
Noninterest income .............. 8,965 8,717 50,313 68,827 59,278 77,544
Noninterest expense ............. 50,642 48,641 50,044 62,493 100,686 111,134
-------- -------- -------- -------- -------- --------
Income before taxes ............. $ 53,864 $ 44,348 $ 797 $ 10,685 $ 54,661 $ 55,033
======== ======== ======== ======== ======== ========
Preferred stock dividend ........ $ 2,042 $ 2,042 $ -- $ -- $ 2,042 $ 2,042
Income taxes .................... $ 17,595 $ 15,050 $ 279 $ 3,639 $ 17,874 $ 18,689
Depreciation and amortization ... $ 3,757 $ 4,794 $ 8,824 $ 12,492 $ 12,581 $ 17,286
Capital expenditures ............ $ 2,702 $ 4,095 $ 3,453 $ 4,107 $ 6,155 $ 8,202
Identifiable assets (in millions) $ 4,026 $ 3,676 $ 526 $ 559 $ 4,552 $ 4,235
Efficiency ratio ................ 41.76% 54.31% 98.43% 85.40% 62.91% 65.42%
- --------------------------------------------------------------------------------------------------------
(1) Amounts for 1999 exclude $31.5 million of pre-tax merger integration and
restructuring charges related to the merger with D&N Financial Corporation in
the second quarter , a $7.6 million pre-tax loss on the sale of low-yielding
fixed rate securities, and an additional $5 million pre-tax provision for loan
losses.
(2) In the third quarter of 1999, the mortgage banking segment was allocated
$1,305,000 of noninterest income for forgone gains on sale of mortgages due to
the Company maintaining $230 million of its mortgage loan production in its
portfolio rather than selling the loans in the secondary market.
(3) Net interest income for the mortgage banking segment is generated from the
interest earned on mortgage loans held for sale, less the interest expense
incurred to fund loan production and servicing acquisitions. The Company's
internal funds transfer pricing charges the mortgage banking segment an interest
rate based on LIBOR to fund its loans held for sale balances and an interest
rate based on the prime rate to fund its servicing portfolio and operations.
9
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
EARNINGS PERFORMANCE
- --------------------
Net income for the nine months ended September 30, 2000 was $34.7 million, a 1%
increase over net operating income of $34.3 million for the nine months ended
September 30, 1999. For the nine months period ended September 30, 2000, diluted
earnings per share were $0.77, an increase of 3% over the $0.75 earned in 1999.
Annualized returns on average assets and shareholders' equity for the first nine
months of 2000 were 1.04% and 16.74%, respectively.
The Company reported net income for the third quarter of 2000 of $11.3 million
compared to net income of $12.5 million for the third quarter of 1999. Diluted
earnings per share were $0.25 for the quarter compared to $0.27 earned for the
third quarter of 1999. Net income for the quarter generated annualized returns
of .99% on average assets and 15.93% on average equity.
To better understand underlying trends and performance, net operating earnings
for 1999 exclude the impact of the one-time charges related to the Company's
merger with D&N Financial Corporation. In total, $44.1 million of charges were
recorded in the second quarter of 1999, consisting of $31.5 million in merger
and restructuring charges, a $7.6 million loss on the sale of low-yielding fixed
rate securities, and an additional $5.0 million provision for loan losses.
Including these charges, the Company reported net income for the nine months
ended September 30, 1999 of $4.1 million.
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 $941 million in single-family residential mortgage loans in
the third quarter of 2000, compared to $1.31 billion closed in the same period
last year. During the nine months ended September 30, 2000, mortgage loan
closings were $2.94 billion, compared to $4.14 billion for the comparable period
in 1999. Mortgage loan volumes during 2000 decreased due to a rising interest
rate environment which has resulted in a lower level of mortgage lending
activity and the closing of 42 mortgage loan production offices at September 30,
2000 compared to a year ago. Refinancings for the third quarter of 2000
represented approximately 10% of total closings compared to 12% in the third
quarter of 1999. During the nine months ended September 30, 2000, refinancings
represented approximately 11% of total closings compared to 24% for the same
period of 1999.
The following table summarizes the Company's income from mortgage banking
activities:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------
Mortgage loan production revenue (1)..........$ 13,441 $ 16,651 $ 42,179 $ 64,001
Net mortgage loan servicing revenue (2)....... 1,372 2,373 5,916 3,521
Gain on sale of bulk servicing................ - - 2,218 -
-------- -------- -------- --------
Total mortgage banking revenue..........$ 14,813 $ 19,024 $ 50,313 $ 67,522
======== ======== ======== ========
(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, net of commissions paid to loan originators.
(2) Includes servicing fees, late fees and other ancillary charges, net of
amortization and charges for impairment of mortgage servicing rights, if
any.
10
For the three months ended September 30, 2000, mortgage banking revenue
decreased $4.2 million, or 22%, to $14.8 million from $19.0 million a year
earlier. For the nine months ended September 30, 2000, mortgage banking revenue
decreased $17.2 million, or 25%, compared to the same period a year ago. These
decreases are primarily the result of decreases in mortgage loan production
revenue of 19% for the third quarter of 2000 and 34% for the nine months ended
September 30, 2000 compared to 1999 primarily reflecting the decrease in
mortgage loan closing volume discussed above. The decrease in mortgage loan
production revenue was also due to a higher demand for adjustable rate mortgage
loans which yield a lower margin than fixed rate mortgage loans when sold in the
secondary market. The decrease in mortgage loan production revenue for the nine
months ended September 30, 2000 was partially offset by an increase in net
mortgage loan servicing revenue and gain on sale of bulk servicing during the
first and second quarters.
Net mortgage loan servicing revenue was $1.4 million for the quarter ended
September 30, 2000 compared to $2.4 million for the quarter ended September 30,
1999. The decrease reflects a reduction in the average mortgage loan servicing
portfolio as loans serviced for others averaged $2.6 billion for the third
quarter of 2000 compared to $3.5 billion for 1999. Net mortgage loan servicing
revenue for the nine months ended September 30, 2000 increased to $5.9 million
compared to $3.5 million in 1999 primarily due to a decrease in amortization
expense of mortgage servicing rights offset by a decrease in servicing fees as a
result of a decrease in the average loans serviced. Loans serviced for others
averaged $2.8 billion and $3.8 billion for the nine months ended September 30,
2000 and 1999, respectively.
Amortization of mortgage servicing rights totaled $2.1 million for the third
quarter of 2000 compared to $2.2 million for the same quarter last year. For the
nine months ended September 30, 2000, amortization of mortgage servicing rights
totaled $5.9 million compared to $10.1 million for the same period in 1999. The
decreases in amortization expense were the result of a decline in residential
mortgage loan refinance activity during 2000 and corresponding declines in
mortgage prepayments compared to 1999.
The Company evaluates its mortgage servicing rights for impairment on a
quarterly basis and as of September 30, 2000 had $2.0 million recorded in
impairment reserves, a decrease of $360,000 from December 31, 1999. The
impairment reserves were reduced as a result of the bulk sales of mortgage
servicing rights during the first half of 2000.
The Company may elect to sell mortgage servicing rights concurrently with the
sale of the underlying loans or retain the servicing rights. Any servicing
rights retained may subsequently be sold in bulk form. The level of bulk
servicing sales is dependent upon the Company's strategy to either build or
reduce the servicing portfolio and is further based upon current market
conditions. During the nine months ended September 30, 2000, bulk sales of
mortgage servicing rights for loans with principal balances of $657 million
resulted in a gain of $2.2 million. The Company did not have any bulk sales of
mortgage servicing rights in the first nine months of 1999.
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 and nine months ended September 30, 2000 and
1999.
11
Net interest income, on a fully taxable equivalent (FTE) basis, was $33.6
million for the third quarter of 2000 compared to $33.8 million for the third
quarter of 1999. The decrease was primarily the result of an increase in the
Company's cost of funds offsetting the Company's growth in portfolio loans. The
average portfolio loan balance increased $640.6 million, or 20% during the third
quarter of 2000 compared to 1999, which reflects a $289.8 million, or 37%
increase in average commercial loans, a $296.8 million, or 18% increase in
residential real estate mortgage loans, and a $54.0 million, or 8% increase in
installment loans. Funding the growth in portfolio loans were increases in the
Company's time deposits and FHLB advances as well as a reduction in the average
balance of investment securities and mortgage loans held for sale. In order to
reduce interest rate risk and improve future net interest income, the Company
sold $400 million of low-yielding fixed rate investment securities in the second
and third quarters of 1999. The proceeds from the sale were redeployed into
higher yielding commercial and residential mortgage loans.
The net interest margin (FTE) was 3.07% for the quarter ended September 30,
2000, a decrease of 33 basis points from 3.40% in 1999. The decrease in the
margin was due to an increase in the Company's cost of funds during the third
quarter of 2000, which was partially offset by an increase in the yield on
earning assets and an improved mix of earning assets from low-yielding fixed
rate investment securities toward higher-yielding loan products.
For the nine months ended September 30, 2000, net interest income (FTE) was
$100.9 million, an increase of $7.6 million, or 8%, over the same period of
1999. The net interest margin (FTE) for the nine months ended September 30,
2000, decreased 9 basis points to 3.15% from 3.24% for the comparable period in
1999. The decrease in the net interest margin was due to an increase in the
Company's cost of funds during the first nine months of 2000 more than
offsetting the improved mix of earning assets.
Noninterest Expense
- -------------------
For the quarter ended September 30, 2000, total noninterest expense decreased
$2.3 million, or 7%, to $32.3 million compared to $34.7 million for the third
quarter of 1999. For the nine months ended September 30, 2000, total noninterest
expense decreased $10.4 million, or 9%, to $100.7 million from $111.1 million in
1999, excluding the one-time merger integration and restructuring charge of
$31.5 million related to the merger with D&N Financial Corporation. These
decreases are primarily the result of decreases in salaries and employee
benefits and other noninterest expense, reflecting cost savings associated with
the integration of D&N Bank, the reduced level of mortgage loan production and
the closing of 42 mortgage loan production offices at September 30, 2000
compared to a year ago.
12
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments............................ $ 3,805 $ 59 6.15% $ 2,221 $ 28 5.00%
Mortgage loans held for sale...................... 406,368 8,551 8.35 459,526 8,524 7.36
Securities available for sale .................... 191,401 3,587 7.50 372,264 6,315 6.79
Portfolio loans(1):
Commercial loans............................... 1,063,068 24,799 9.26 773,239 16,696 8.57
Residential real estate mortgage loans......... 1,975,965 36,940 7.48 1,679,195 29,784 7.09
Installment loans.............................. 742,229 16,928 9.05 688,253 15,013 8.65
----------- -------- ----- ----------- ------- -----
Total loans, net of unearned income...... 3,781,262 78,667 8.29 3,140,687 61,493 7.80
----------- -------- ----- ----------- ------- -----
Total interest-earning assets................ 4,382,836 90,864 8.26 3,974,698 76,360 7.65
Allowance for loan losses......................... (28,680) (25,091)
Cash and due from banks........................... 67,588 45,306
Other assets...................................... 177,956 118,642
----------- -----------
Total assets................................. $ 4,599,700 $ 4,113,555
=========== ===========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits.................. $ 101,245 438 1.72 $ 95,188 441 1.84
Savings deposits ................................. 733,319 5,827 3.15 784,145 5,728 2.90
Time deposits..................................... 1,701,311 26,833 6.26 1,433,856 19,188 5.31
----------- -------- ---- ----------- ------- ----
Total interest-bearing deposits................ 2,535,875 33,098 5.18 2,313,189 25,357 4.35
Short-term borrowings............................. 26,456 447 6.70 56,728 744 5.20
FHLB advances.................................... 1,421,401 22,867 6.38 1,117,085 15,506 5.51
Long-term debt.................................... 47,500 859 7.23 51,468 930 7.23
----------- -------- ----- ----------- ------- -----
Total interest-bearing liabilities........... 4,031,232 57,271 5.64 3,538,470 42,537 4.77
-------- ----- ------- -----
Noninterest-bearing deposits...................... 187,235 183,951
Other liabilities................................. 68,072 106,244
----------- -----------
Total liabilities............................ 4,286,539 3,828,665
Preferred stock of subsidiary..................... 28,719 28,719
Shareholders' equity.............................. 284,442 256,171
----------- -----------
Total liabilities and shareholders' equity... $ 4,599,700 $ 4,113,555
=========== ===========
Net interest income/rate spread (FTE)............. $ 33,593 2.62% $33,823 2.88%
======== ==== ======= ====
Net interest margin (FTE)......................... 3.07% 3.40%
==== ====
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
--------------------------------------------------------------------------------------------------------------
Short-term investments................... $ 24 $ 7 $ 31
Mortgage loans held for sale............. (1,039) 1,066 27
Securities available for sale............ (3,332) 604 (2,728)
Portfolio loans(1):
Commercial loans...................... 6,670 1,433 8,103
Residential real estate mortgage loans 5,458 1,698 7,156
Installment loans..................... 1,205 710 1,915
-------- -------- --------
Total loans, net of unearned income. 13,333 3,841 17,174
-------- -------- --------
Total interest income............... 8,986 5,518 14,504
Interest-bearing demand deposits......... 27 (30) (3)
Savings deposits......................... (378) 477 99
Time deposits............................ 3,902 3,743 7,645
-------- -------- --------
Total interest-bearing deposits........ 3,551 4,190 7,741
Short-term borrowings.................... (469) 172 (297)
FHLB advances............................ 4,660 2,701 7,361
Long-term debt........................... (71) -
-------- --------
(71)
Total interest expense............. 7,671 7,063 14,734
-------- -------- --------
Net interest income................. $ 1,315 $ (1,545) $ (230)
======== ======== =======
(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.
13
Table II - Year-to-Date Net Interest Income and Rate/Volume Analysis (FTE)
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments............................ $ 2,571 $ 113 5.85% $ 19,858 $ 631 4.25%
Mortgage loans held for sale...................... 437,199 26,726 8.14 523,327 28,078 7.17
Securities available for sale..................... 198,959 10,903 7.31 532,444 25,892 6.48
Portfolio loans(1):
Commercial loans............................... 987,633 66,939 9.03 703,793 45,289 8.60
Residential real estate mortgage loans......... 1,900,158 104,376 7.32 1,414,839 76,575 7.22
Installment loans.............................. 742,636 49,258 8.84 651,537 41,982 8.61
---------- -------- ---- ---------- -------- ----
Total loans, net of unearned income.......... 3,630,427 220,573 8.10 2,770,169 163,846 7.90
---------- -------- ---- ---------- -------- ----
Total interest-earning assets................ 4,269,156 258,315 8.06 3,845,798 218,447 7.58
Allowance for loan losses......................... (28,188) (23,138)
Cash and due from banks........................... 63,260 40,508
Other assets...................................... 160,492 158,134
---------- ----------
Total assets................................. $4,464,720 $4,021,302
========== ==========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits.................. $ 107,295 1,310 1.63 $ 98,115 1,287 1.75
Savings deposits.................................. 722,131 16,646 3.07 788,680 17,198 2.92
Time deposits..................................... 1,621,151 72,100 5.92 1,508,219 60,960 5.40
---------- -------- ---- ---------- -------- ----
Total interest-bearing deposits................ 2,450,577 90,056 4.90 2,395,014 79,445 4.43
Short-term borrowings............................. 61,188 2,848 6.20 66,591 2,638 5.30
FHLB advances.................................... 1,339,872 61,916 6.16 954,820 40,158 5.62
Long-term debt.................................... 47,500 2,576 7.23 52,949 2,854 7.19
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities........... 3,899,137 157,396 5.38 3,469,374 125,095 4.82
-------- ---- -------- ----
Noninterest-bearing deposits...................... 190,769 178,735
Other liabilities................................. 69,273 80,261
---------- ----------
Total liabilities............................ 4,159,179 3,728,370
Preferred stock of subsidiary..................... 28,719 28,719
Shareholders' equity.............................. 276,822 264,213
---------- ----------
Total liabilities and shareholders' equity... $4,464,720 $4,021,302
========== ==========
Net interest income/Rate spread (FTE)............. $100,919 2.68% $ 93,352 2.76%
======== ==== ======== ====
Net interest margin............................... 3.15% 3.24%
==== ====
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
--------------------------------------------------------------------------------------------------------------
Short-term investments................... $ (694) $ 176 $ (518)
Mortgage loans held for sale............. (4,921) 3,569 (1,352)
Investment securities.................... (17,947) 2,958 (14,989)
Portfolio loans(1):
Commercial loans...................... 19,262 2,388 21,650
Real estate mortgage loans............ 26,722 1,079 27,801
Installment loans..................... 6,109 1,167 7,276
-------- -------- --------
Total loans, net of unearned income. 52,093 4,634 56,727
-------- -------- --------
Total interest income............... 28,531 11,337 39,868
Interest-bearing demand deposits......... 115 (92) 23
Savings deposits......................... (1,446) 894 (552)
Time deposits............................ 4,873 6,267 11,140
-------- -------- --------
Total interest-bearing deposits........ 3,542 7,069 10,611
Short-term borrowings.................... (223) 433 210
FHLB advances............................ 26,940 (5,182) 21,758
Long-term debt........................... (374) 96 (278)
-------- -------- --------
Total interest expense............. 29,885 2,416 32,301
-------- -------- --------
Net interest income................. $ (1,354) $ 8,921 $ 7,567
======== ======== ========
(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.
14
BALANCE SHEET ANALYSIS
- ----------------------
ASSETS
- ------
At September 30, 2000, the Company had $4.6 billion in total assets, an increase
of $250.2 million, or 6%, from $4.3 billion at December 31, 1999. The increase
is primarily the result of increases in the Company's portfolio of commercial
and residential real estate mortgage loans.
Securities
- ----------
Investment securities available for sale decreased $18.4 million, to $188.1
million, representing 4.1% of total assets at September 30, 2000. At December
31, 1999, the investment securities portfolio totaled $206.5 million, or 4.8% of
total assets. During the first nine months of 2000, the company sold $19.1
million of investment securities and realized gross gains and losses on the
sales of available for sale securities of $111,000 and $14,000, respectively.
The Company's investment securities portfolio, while serving as a source of
earnings and liquidity risk, carries relatively minimal principal risk and
contributes to the management of interest rate risk. The portfolio is comprised
primarily of U.S. Government agency obligations, obligations collateralized by
U.S. Government sponsored agencies, mainly in the form of mortgage-backed
securities, and collateralized mortgage obligations. The maturity structure of
the securities portfolio is generally short-term in nature or indexed to
variable rates. The Company's equity securities portfolio consists primarily of
Federal Home Loan Bank stock.
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at September 30, 2000:
Securities Available for Sale
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury and Government agency securities............. $ 34,407 $ - $ 772 $ 33,635
Collateralized mortgage obligations........................ 60,626 - 1,763 58,863
Interest-only certificates................................. 69 - - 69
Mortgage-backed securities................................. 16,048 - 512 15,536
Municipal and other securities............................. 3,144 67 - 3,211
--------- ----- ------- --------
Total debt securities.................................... 114,294 67 3,047 111,314
Equity securities and investment in FHLB...................... 76,737 - - 76,737
--------- ----- ------- --------
Total securities available for sale...................... $ 191,031 $ 67 $ 3,047 $188,051
========= ===== ======= ========
Certain securities having a carrying value of approximately $108.3 million and
$25.3 million at September 30, 2000 and December 31, 1999, respectively, were
pledged to secure FHLB advances and public deposits as required by law.
Mortgage Loans Held for Sale
- ----------------------------
Mortgage loans held for sale were $400.7 million at September 30, 2000 compared
to $459.1 million at December 31, 1999. The decrease was caused by a decrease in
residential mortgage loan closings during the third quarter of 2000 over the
fourth quarter of 1999 (loans closed generally remain in loans held for sale for
30 to 60 days after closing).
15
Portfolio Loans
- ---------------
Total portfolio loans were $3.74 billion at September 30, 2000, an increase of
$364.9 million, or 11%, from $3.37 billion at December 31, 1999. This increase
resulted from increases in the commercial and residential real estate mortgage
loan portfolios. The residential mortgage portfolio loan balance increased
$197.6 million, or 11%, since year-end 1999 to $1.97 billion at September 30,
2000. The increase in residential mortgage loans resulted from the Company
holding a higher percentage of variable rate residential loan closings in its
portfolio.
The commercial portfolio loan balance increased $198.8 million during the first
nine months of 2000, for an annualized growth rate of 30%, reflecting continued
strong demand for real estate-secured lending in markets served by the Company.
During the nine months ended September 30, 2000 and 1999, the Company closed
$25.2 million and $36.2 million in Small Business Administration (SBA) loans,
respectively. The Company sold $10.3 million and $7.1 million of the guaranteed
portion of SBA loans in the first nine months of 2000 and 1999, respectively,
resulting in corresponding gains of $403,000 and $492,000, respectively.
The installment loan portfolio decreased $31.5 million during the first nine
months of 2000 due primarily to loan sales and runoff from the indirect consumer
loan portfolio. During the third quarter, the Company sold $56.4 million of
indirect marine and RV loans. There was no material gain on the sale. The direct
consumer loan portfolio has grown $70.7 million, or 19%, from December 31, 1999.
The following table provides further information regarding the Company's loan
portfolio:
September 30, 2000 December 31, 1999
----------------------------- ------------------------------
(Dollars in thousands) Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and industrial......................... $ 80,987 2.2% $ 88,370 2.6%
Commercial real estate mortgage .................. 1,006,339 26.9 800,122 23.7
----------- ----- ----------- -----
Total commercial loans....................... 1,087,326 29.1 888,492 26.3
Residential real estate mortgages.................... 1,971,412 52.7 1,773,795 52.6
Installment loans:
Consumer direct................................. 438,748 11.7 368,095 10.9
Consumer indirect............................... 240,875 6.5 343,043 10.2
----------- ----- ----------- -----
Total installment loans..................... 679,623 18.2 711,138 21.1
----------- ----- ----------- -----
Total portfolio loans......................... $ 3,738,361 100.0% $ 3,373,425 100.0%
=========== ===== =========== =====
Credit Quality
- --------------
The Company attempts to minimize credit risk in the loan portfolio by focusing
primarily on real estate-secured lending (i.e., commercial real estate mortgage
loans, commercial real estate construction loans, residential real estate
mortgage loans, residential real estate construction loans, and home equity
loans). As of September 30, 2000, such loans comprised approximately 87% 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 75% 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 Freddie Mac, 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 D&N
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.
16
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. Commercial loans, residential real estate
mortgage loans and installment loans are generally placed on non-accrual status
when principal or interest is 90 days or more past due, unless the loans are
well-secured and in the process of collection. In all cases, loans may be placed
on non-accrual status earlier when, in the opinion of management, reasonable
doubt exists as to the full, timely collection of interest or principal.
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
September 30, December 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans:
Commercial.............................................. $ 8,684 $ 4,651
Residential real estate mortgages....................... 11,768 10,449
Installment............................................... 2,113 2,419
-------- --------
Total non-performing loans............................ 22,565 17,519
Other real estate owned................................... 3,550 4,743
-------- --------
Total non-performing assets........................... $ 26,115 $ 22,262
======== ========
Non-performing assets as a percentage of:
Portfolio loans and OREO............................. .70% .66%
Portfolio loans, mortgage loans held for
sale and OREO .................................... .63% .58%
Total assets............................................ .57% .52%
Loans past due 90 days or more and still accruing interest:
Commercial................................................ $ - $ 100
Residential real estate................................... - -
Installment............................................... - -
-------- --------
Total loans past due 90 days or more.................. $ - $ 100
======== ========
At September 30, 2000, approximately $32.3 million, or .78% of total loans were
30-89 days delinquent, compared to $34.5 million, or .90%, at December 31, 1999.
Provision and Allowance for Loan Losses
- ---------------------------------------
The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the loan portfolio that have been
incurred as of the balance sheet date. The allowance for loan losses is
maintained at an adequate level through additions to the provision for loan
losses. An appropriate level of the general allowance is determined based on the
application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. Management also considers other factors when
determining the unallocated allowance, including loan quality, changes in the
size and character of the loan portfolio, consultation with regulatory
authorities, amount of nonperforming loans, delinquency trends and economic
conditions and industry trends.
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by
SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with
17
the contractual terms of the original loan agreement. Consistent with this
definition, all non-accrual and restructured loans (with the exception of
residential mortgage and consumer installment loans) are impaired. An impaired
loan for which it is deemed necessary to record a specific allowance is,
typically, written down to the fair value of the underlying collateral at the
time it is placed in non-accrual status via a direct charge-off against the
allowance for loan losses. Consequently, those impaired loans not requiring a
specific allowance represent loans for which the fair value of the underlying
collateral equaled or exceeded the recorded investment in the loan. All impaired
loans were evaluated using the fair value of the underlying collateral as the
measurement method.
It must be understood, however, that inherent risks and uncertainties related to
the operation of a financial institution require management to depend on
estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial prospects
of borrowers may result in abrupt changes to the estimates, appraisals or
evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Gross loan charge-offs decreased $1.9 million to $4.6 million for the nine
months ended September 30, 2000 compared to $6.4 million for the same period of
1999. The decrease is primarily related to charge-offs of certain commercial
loans during the second quarter of 1999. The Company recorded provision for loan
losses of $4.8 million for the nine months ended September 30, 2000 compared to
$9.7 million for 1999, reflecting an increase in the provision for loan losses
recorded in the second quarter of 1999 as a result the increase in charge-offs.
The following table provides an analysis of the allowance for loan losses:
Nine Months Ended
September 30,
-----------------------------
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at January 1.....................................................$ 27,128 $ 21,446
Loans charged off..................................................... (4,565) (6,420)
Recoveries of loans previously charged off............................ 1,016 1,167
--------- ---------
Net charge-offs..................................................... (3,549) (5,253)
Provision charged to expense.......................................... 4,800 9,675
--------- ---------
Balance at September 30..................................................$ 28,379 $ 25,868
========= =========
Annualized net charge-offs as a percentage of average loans
(including loans held for sale) .................................... .12% .21%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end........................................... .76 .79
Allowance for loan losses as a percentage of non-performing
loans............................................................... 125.77 131.68
Off-Balance Sheet Instruments
- -----------------------------
At September 30, 2000, the Company had outstanding $261.6 million of commitments
to fund residential real estate loan applications with agreed-upon rates.
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 from application to when the
loan is sold to the 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.
18
At September 30, 2000, the Company had outstanding mandatory forward commitments
to sell $572.0 million of residential mortgage loans, of which $347.6 million
covered mortgage loans held for sale and $224.4 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 fourth quarter of 2000 without producing any material gains or losses. At
September 30, 2000, the mortgage loans held for sale balance included $53.1
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 $38.6 million, or 73%, of these loans were loans that
had been committed for bulk sale to third parties prior to September 30, 2000 or
were floating rate residential loans.
LIABILITIES
- -----------
Total liabilities were $4.2 billion at September 30, 2000, a $229 million, or 6%
increase from $4.0 billion at December 31, 1999. This increase was primarily due
to an increase in deposits and FHLB advances corresponding to the increase in
total loans.
Deposits
- --------
Total deposits increased $35.5 million, or 1.4%, to $2.65 billion at September
30, 2000 from $2.61 billion at December 31, 1999.
Short-Term Borrowings
- ---------------------
Short-term borrowings with maturities of less than one year, along with the
related average balances and interest rates for the nine months ended September
30, 2000 and the year ended December 31, 1999, were as follows:
September 30, 2000 December 31, 1999
--------------------------------- --------------------------------
Average
Ending Average Rate During Ending Average Rate During
(Dollars in thousands) Balance Balance Period Balance Balance Period
- -----------------------------------------------------------------------------------------------------------------
Federal funds purchased................ $ - $59,805 6.21% $54,700 $61,320 5.41%
Other short-term borrowings............ 2,153 1,383 6.17 2,543 1,838 5.06
------ ------- ---- ------- ------- ----
Total short-term borrowings......... $2,153 $61,188 6.20% $57,243 $63,158 5.40%
====== ======= ==== ======= ======= ====
At September 30, 2000 and December 31, 1999, other short-term borrowings
consisted of treasury, tax and loan (TT&L) demand notes.
FHLB Advances
- -------------
Republic Bank and D&N 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 September 30, 2000 and December 31, 1999, were as
follows:
September 30, 2000 December 31, 1999
-------------------- ---------------------
Average Average
Ending Rate At Ending Rate At
(Dollars in thousands) Balance Period-End Balance Period-End
- ----------------------------------------------------------------------
Short-term FHLB advances.. $ 629,000 6.70% $ 757,000 5.52%,
Long-term FHLB advances.... 773,114 5.91 415,211 5.69
---------- ---- ---------- ----
Total................. $1,402,114 6.26% $1,172,211 5.58%
========== ==== ========== ====
The long-term FHLB advances have original maturities ranging from October 2000
to August 2010.
19
Long-Term Debt Obligations with original maturities of more than
one year consisted of the following:
September 30, December 31,
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------
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 $287.5 million at September 30, 2000, a $21.0 million,
or 8%, increase from $266.4 million at December 31, 1999. This increase
primarily resulted from the retention of $23.2 million in earnings after the
payment of dividends and the repurchase of 667,000 shares of common stock during
the first nine months of 2000.
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 September 30, 2000, 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:
September 30, December 31,
2000 1999
------------- -------------
Total capital to risk-weighted assets (1)........ 10.39% 10.60%
Tier 1 capital to risk-weighted assets (1)....... 9.49 9.67
Tier 1 capital to average assets (1)............. 6.56 6.59
(1) As defined by the regulations.
As of September 30, 2000, the Company's total risk-based capital was $328.9
million and Tier 1 risk-based capital was $300.5 million, an excess of $12.3
million and $110.6 million, respectively, over the minimum guidelines prescribed
by regulatory agencies for a well-capitalized institution. In addition, Republic
Bank and D&N Bank had regulatory capital ratios in excess of the minimum levels
established for well-capitalized institutions.
Forward-Looking Statements
- --------------------------
The section that follows entitled "Market Risk Management" contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve certain
risks, uncertainties, estimates and assumptions by management, which may cause
actual results to differ materially from those contemplated by such statements.
20
MARKET RISK MANAGEMENT
- ----------------------
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, foreign exchange
rates and equity prices. The Company's market risk exposure is composed entirely
of interest rate risk. Interest rate risk arises in the normal course of
business to the extent that there is a difference between the amount of the
Company's interest-earning assets and interest-bearing liabilities that are
prepaid/withdrawn, reprice or mature in specified periods.
The primary objective of asset and liability management is to maintain stability
in the level of net interest income by producing the optimal yield and maturity
mix of assets and liabilities within the interest rate risk limits set by the
Company's Asset and Liability Management Committee (ALCO) and consistent with
projected liquidity needs and capital adequacy requirements.
The Company's ALCO, which meets weekly, is responsible for reviewing the
interest rate sensitivity position of the Company and establishing policies to
monitor and limit exposure to interest rate risk. Senior management at each of
the Company's subsidiaries is responsible for ensuring that the subsidiary asset
and liability management procedures adhere to corporate policies and risk limits
established by its respective board of directors.
The Company utilizes two complementary quantitative tools to measure and monitor
interest rate risk: static gap analysis and earnings simulation modeling. Each
of these interest rate risk measurements has limitations, but when evaluated
together, they provide a reasonably comprehensive view of the exposure the
Company has to interest rate risk.
Static Gap Analysis: Static gap analysis is utilized at the end of each month to
measure the amount of interest rate risk embedded in the balance sheet as of a
point in time. It does this by comparing the differences in the repricing
characteristics of interest-earning assets and interest-bearing liabilities. A
gap is defined as the difference between the principal amount of
interest-earning assets and interest-bearing liabilities that reprice within a
specified time period. This gap provides a general indication of the sensitivity
of the Company's net interest income to interest rate changes. Consequently, if
more assets than liabilities reprice or mature in a given period, resulting in
an asset sensitive position or positive gap, increases in market interest rates
will generally benefit net interest income because earning asset rates will
reflect the changes more quickly. Alternatively, where interest-bearing
liabilities reprice more quickly than interest-earning assets, resulting in a
liability sensitive position or negative gap, increases in market interest rates
will generally have an adverse impact on net interest income. At September 30,
2000, the Company's cumulative one-year gap was a negative 8.95% of total
earning assets.
The Company's current policy is to maintain a mix of asset and liabilities with
repricing and maturity characteristics that permit a moderate amount of
short-term interest rate risk based on current interest rate projections,
customer credit demands and deposit preferences. The Company generally operates
in a range of plus or minus 15% of total earning assets for the cumulative
one-year gap. Management believes that this range reduces the vulnerability of
net interest income to large shifts in market interest rates while allowing the
Company to take advantage of fluctuations in current short-term rates.
Earnings Simulation Modeling: On a quarterly basis, the earnings simulation
model is used to quantify the effects of various hypothetical changes in
interest rates on the Company's projected net interest income over the ensuing
twelve-month period. The model permits management to evaluate the effects of
various parallel shifts of the U.S. Treasury yield curve, upward and downward,
on net interest income expected in a stable interest rate environment (i.e.,
base net interest income).
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As of September 30, 2000, the earnings simulation model projects net interest
income would decrease by 9.6% of base net interest income, assuming an immediate
parallel shift upward in market interest rates by 200 basis points. If market
interest rates fall by 200 basis points, the model projects net interest income
would increase by 9.6%. These projected levels are well within the Company's
policy limits. These results portray the Company's interest rate risk position
as liability-sensitive for the one-year horizon. The earnings simulation model
assumes that current balance sheet totals remain constant and all maturities and
prepayments of interest-earning assets and interest-bearing liabilities are
reinvested at current market rates.
Accounting Developments
- -----------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which was
amended in June 1999 by Statement No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, and is required to be adopted by the Company in years beginning after June
15, 2000. The Statement will require the Company to recognize all derivatives on
the balance sheet 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 other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has determined that, as of today, the statement will only be
applicable to its mandatory forward commitments to sell residential mortgage
loans and based on the Company's current level of activity, the adoption of
Statement 133 is not expected to be material.
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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 August 17, 2000, the Board of Directors declared a quarterly
cash dividend of $0.085 per share of common stock, payable on
October 9, 2000 to shareholders of record September 8, 2000.
On October 19, 2000, the Board of Directors declared a 10% stock
dividend to shareholders of record November 10, 2000 and payable
December 1, 2000.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(10) Management Retention Agreement
(27) Financial Data Schedule
(b) Reports on Form 8-K
On October 5, 2000, the Company filed a report on Form 8-K
announcing plans for a third quarter earnings conference call.
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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: November 14, 2000 BY: /s/ Thomas F. Menacher
-------------------------------------
Thomas F. Menacher
Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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