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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From __________ to ___________
Commission File Number: 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2604669
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 725-7337
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's common stock held by non-
affiliates, based on the closing price on March 15, 2001 of $12.188, was $555.7
million.
Number of shares of Registrant's common stock outstanding as of March 7, 2001:
49,544,508.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Registrant's definitive proxy statement for its 2001 Annual
Meeting of Stockholders.
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FORM 10-K TABLE OF CONTENTS
Page
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Part I
Item 1 - Business..................................................................... 2
General Description....................................................... 2
Business Segments......................................................... 3
Competition............................................................... 4
Employees................................................................. 5
Principal Sources of Revenue.............................................. 5
Monetary Policy and Economic Controls..................................... 5
Supervision and Regulation................................................ 5
Forward-Looking Statements................................................ 9
Executive Officers of the Registrant...................................... 10
Item 2 - Properties................................................................... 10
Item 3 - Legal Proceedings............................................................ 10
Item 4 - Submission of Matters to a Vote of Security Holders.......................... 10
Part II
Item 5 - Market for Registrant's Common Stock and Related Stockholder Matters......... 11
Item 6 - Selected Financial Data...................................................... 12
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 13
Item 7A- Quantitative and Qualitative Disclosures about Market Risk.................. 33
Item 8 - Financial Statements and Supplementary Data.................................. 34
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 66
Part III
Item 10 - Directors and Executive Officers of the Registrant........................... 67
Item 11 - Executive Compensation....................................................... 67
Item 12 - Security Ownership of Certain Beneficial Owners and Management............... 67
Item 13 - Certain Relationships and Related Transactions............................... 67
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 68
Signatures.............................................................................. 72
1
PART I
ITEM 1. BUSINESS
General Description
Republic Bancorp Inc. (the "Company") is a bank holding company incorporated
under the laws of the State of Michigan in 1986. The Company's principal office
is located in Ann Arbor, Michigan. Currently, the Company has 146 banking and
mortgage banking offices in 15 states.
On May 17, 1999, the company merged with D&N Financial Corporation ("D&N
Financial"). Under terms of the merger agreement, D&N Financial shareholders
received 1.82 shares of Republic Bancorp Inc. common stock for each D&N
Financial share owned. The merger was accounted for as a pooling of interests,
therefore, all prior period data presented have been restated to include the
results of operations and financial position of D&N Financial. On December 1,
2000, D&N Bank merged into Republic Bank to enhance customer service throughout
Michigan and improve operating efficiencies.
On December 31, 2000, Republic Banc Mortgage Corporation, a wholly-owned
mortgage banking subsidiary of Republic Bank, also merged into Republic Bank to
create additional cross-sell opportunities for products and improve operating
efficiencies.
Through its wholly-owned banking subsidiary, Republic Bank, a state-chartered
banking corporation, the Company provides retail, commercial and mortgage
banking products and services. Republic Bank is headquartered in Lansing,
Michigan. Republic Bank exercises the power of a full-service bank and operates
90 offices and 130 ATM's in 7 market areas in Michigan, in the greater
Cleveland, Ohio area, as well as Indianapolis, Indiana. Republic Bank and its
subsidiary Market Street Mortgage Corporation also offer mortgage products
through 56 additional offices in 12 states. Market Street Mortgage Corporation
("Market Street Mortgage") is an 80% majority-owned mortgage banking subsidiary
of Republic Bank with headquarters in Clearwater, Florida. At December 31,
2000, Republic Bank had $4.6 billion in assets and $2.7 billion in deposits.
Republic Bank also provides investment and insurance services through a
wholly-owned subsidiary, Quincy Investment Services, Inc., a licensed insurance
agency, headquartered in Hancock, Michigan. Republic Bank has a wholly-owned
subsidiary, D&N Capital Corporation ("D&N Capital"), that was created for the
purpose of acquiring and holding real estate assets and is a real estate
investment trust ("REIT"). In 1997, D&N Capital issued 9.0% noncumulative
preferred stock, Series A, $25 par value, which is traded on The Nasdaq Stock
Market under the symbol "DNFCP". The preferred stock is treated as Tier-1
capital by the Company.
At December 31, 2000, Republic Bancorp Inc. had consolidated total assets of
$4.6 billion, total deposits of $2.7 billion and shareholders' equity of $294.9
million. For the year ended December 31, 2000, the Company reported net income
of $45.7 million compared to $14.9 million for 1999. The year ending December
31, 1999 included the one-time after tax charge of $30.2 million related to the
merger with D&N Financial, while the year ending December 31, 2000 included an
after tax merger integration and restructuring credit of $2.6 million recorded
upon the completion of the integration and restructuring plan associated with
the merger. Residential mortgage loan closings totaled $3.9 billion in 2000,
compared to $5.2 billion in 1999. Commercial loan closings totaled $531 million
in 2000 versus $461 million in 1999. Small Business Administration (SBA) loan
closings totaled $32 million in 2000, compared to $44 million in 1999. At
December 31, 2000, the Company's mortgage loan servicing portfolio was $2.2
billion, compared to $3.1 billion at year-end 1999.
2
Business Segments
The Company engages in two lines of business--Commercial and Retail Banking
and Mortgage Banking. See Note 21 to the Consolidated Financial Statements.
Commercial and Retail Banking
- -----------------------------
Commercial and retail banking is conducted at 90 branches of Republic Bank by
providing traditional commercial and retail banking products and services to
consumers and small- to medium-size businesses. Products and services offered
include commercial loans; small business loans; mortgage loans; home equity
loans and lines of credit; other types of installment loans; and demand, savings
and time deposit accounts. Lending activity at Republic Bank is primarily
focused on real estate-secured lending to minimize credit risk (e.g., fixed rate
and variable rate residential mortgage loans; residential construction loans;
commercial real estate mortgage loans; and commercial real estate construction
loans). In addition, emphasis is placed on loans that are government guaranteed
or insured, such as SBA loans, United States Department of Agriculture (USDA)
loans, and FHA/VA loans. Commercial and industrial loans are made to a lesser
extent and are typically secured by the customer's assets at a 75% or less loan-
to-value ratio and by personal guarantees.
The marketing effort of the Company's bank subsidiary targets a particular
segment of the consumer population that is interested in receiving personalized
banking service and attention when handling transactions related to their
deposit accounts. The Company's deposit base consists primarily of retail
deposits gathered from within local markets served. At December 31, 2000,
retail deposits comprised 81% of total deposits.
Mortgage Banking
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Mortgage banking activities encompass two areas: mortgage loan production and
mortgage loan servicing for others. Mortgage loan production involves the
origination and sale of single-family residential mortgage loans and is
conducted by Republic Bank and Market Street Mortgage. All mortgage loan
originations are funded by Republic Bank.
The Company's current operating strategy for the mortgage banking segment is
to continue growing mortgage banking revenue and related interest income while
managing interest rate and liquidity risks as well as operating costs. To help
accomplish this objective, the Company merged its mortgage banking subsidiary,
Republic Banc Mortgage Corporation, into Republic Bank, thereby enhancing the
opportunity to cross-sell products using a shared customer base and eliminating
duplicate functions. The Company also expedited the mortgage approval processes
with the implementation of an automated underwriting system during 2000.
Mortgage Loan Production
- -------------------------
Retail residential mortgage loans are originated by the Company's own sales
staff at retail mortgage loan production offices and retail banking offices
located in Michigan, Ohio and Indiana and mortgage loan production offices
located in Alabama, Colorado, Connecticut, Florida, Georgia, Illinois, Maryland,
Massachusetts, Missouri, North Carolina, Pennsylvania and Virginia. Retail loan
production offices are responsible for processing loan applications received and
preparing loan documentation. Loan applications are then evaluated by the
underwriting departments for compliance with the Company's underwriting
criteria, including loan-to-value ratios, borrower qualifications and required
insurance.
The Company originates primarily conventional mortgage loans secured by
residential properties which conform to the underwriting guidelines for sale to
the Federal National Mortgage Association (FNMA) and Freddie Mac. Loans
guaranteed by the Department of Veterans Affairs (VA) and insured through the
Federal Housing Administration (FHA) are originated in compliance with their
underwriting guidelines permitting conversion of such loans into mortgage-backed
securities issued by the Government National Mortgage Association (GNMA).
3
The Company's residential mortgage origination business during 2000 was funded
primarily with Republic Bank's retail deposits and short-term borrowings,
including federal funds purchased and Federal Home Loan Bank (FHLB) advances.
The majority of all mortgage loans originated are held for a short period of
time (generally less than 60 days) with the intent of selling them to investors
in the secondary market. These loans are classified as mortgage loans held for
sale. Mortgage loans held for sale consist of loans that will be sold directly
to secondary market investors or loans that are being prepared for
securitization into mortgage-backed securities; however, the mortgage-backed
security has not yet been formed and issued. These mortgage loans are
typically sold without recourse by the Company in the event of default by the
borrowers. To minimize interest rate risk, the Company obtains mandatory
purchase commitments from investors prior to funding the loans.
Consistent with the Company's strategy of managing interest rate risk,
substantially all long-term fixed rate mortgages originated are typically
securitized and sold or sold directly to secondary market investors. The
majority of short-term fixed rate mortgages and variable rate mortgages are
typically securitized and sold or sold directly to secondary market investors,
although a portion of the variable rate mortgages may be retained in the loan
portfolio of Republic Bank. Portfolio loans may be securitized at a later date
and either sold or held as securities available for sale.
Mortgage Loan Servicing for Others
- ----------------------------------
When the Company sells originated residential mortgage loans to investors, it
makes a determination to either retain or sell the rights to service those
loans. While there is an active market for selling servicing rights (which are
generally valued in relation to the present value of the anticipated cash flow
generated by the servicing rights), the aggregation of a servicing portfolio
creates a substantial continuing source of income and enables the Company to
reduce the sensitivity of its earnings to increases in interest rates.
Over 90% of mortgage loan servicing for others is conducted by Market Street
Mortgage, which receives servicing fees ranging from 25 to 45 basis points per
annum on its servicing portfolio. The mortgage loan servicing function involves
the administration of loans; collection and remittance of loan payments; receipt
of escrow funds for payment of taxes and insurance; counseling of delinquent
mortgagors and supervision of foreclosures and property dispositions in the
event of unremedied defaults.
Competition
Commercial and Retail Banking and Mortgage Banking are highly competitive
businesses in which the Company faces numerous banking and non-banking
institutions as competitors. By reason of changes in Federal law (which became
effective on September 29, 1995 and March 11, 2000, respectively) and Michigan
law (which became effective on November 29, 1995) the number and types of
potential depository institution competitors have substantially increased. (See
Interstate Banking and Branching and Gramm-Leach-Bliley on page 6.)
In addition to competition from other banks, the Company continues to face
increased competition from other types of financial services organizations.
Competition from finance companies and credit unions has increased in the areas
of consumer lending and deposit gathering. The Company's mortgage banking
business line also faces significant competition from numerous bank and non-bank
companies in the area of mortgage lending. Other financial institutions may
have greater resources to use in making acquisitions and higher lending limits
than those of the Company's bank subsidiary or any banking institution that the
Company could acquire. Such institutions may also provide certain non-
traditional financial products and services to their customers which the
Company's bank subsidiary currently does not offer.
The principal factors of competition in the markets for deposits and loans are
price (interest rates paid and/or fees charged) and customer service. The
Company's bank subsidiary competes for deposits by offering depositors a variety
of checking and savings accounts, time deposits, convenient office locations and
personalized customer services. The Company competes for loans through the
efficiency and quality of the services it provides to borrowers, real estate
brokers and home builders. The Company seeks to compete for loans primarily on
the basis of customer service, including prompt underwriting decisions and
funding of loans, and by offering a variety of loan programs as well as
competitive interest rates.
4
Employees
As of December 31, 2000, the Company and its subsidiaries had 1,678 full-time
equivalent employees.
Principal Sources of Revenue
The principal sources of revenue for the Company are interest income from
interest and fees on loans and mortgage banking revenue. Interest and fees on
loans totaled $333.7 million in 2000, an increase of 24% from $268.6 million in
1999 and up 35% from $247.3 million in 1998. In 2000, interest and fees on
loans accounted for 80% of total revenues, compared to 68% and 64% of total
revenues in 1999 and 1998, respectively. Mortgage banking revenue includes
mortgage loan production revenue and net mortgage servicing revenue. Mortgage
banking revenue, the largest component of noninterest income, totaled $59.2
million in 2000, a decrease of 32% from $86.5 million in 1999 and down 31% from
$85.3 million in 1998. Mortgage loan banking revenue represented 14% of total
revenues in 2000, compared to 22% in both 1999 and 1998.
Monetary Policy and Economic Controls
The earnings of the bank subsidiary, and, therefore, the earnings of the
Company, are affected by the policies of regulatory authorities, including the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
An important function of the Federal Reserve Board is to promote orderly
economic growth by influencing interest rates and the supply of money and
credit. Among the methods that have been used to achieve this objective are
open market operations in U.S. government securities, changes in the discount
rate on member bank borrowings, and changes in reserve requirements against bank
deposits. These methods are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, interest rates
on loans and securities, and rates paid for deposits.
The Federal Reserve Board's monetary policies strongly influence the behavior
of interest rates and can have a significant effect on the operating results of
commercial banks and mortgage banking companies. The continued strong growth of
the U.S. economy in 2000 contributed to the decision of the Federal Reserve
Board to increase short-term interest rates. The effects of the various Federal
Reserve Board policies on the future business and earnings of the Company cannot
be predicted. Other economic controls also have affected the Company's
operations in the past. The Company cannot predict the nature or extent of any
effects that possible future governmental controls or legislation may have on
its business and earnings.
Supervision and Regulation
General
- -------
Bank holding companies and banks are highly regulated at both the state and
federal level. As a bank holding company, the Company is subject to supervision
and regulation by the Federal Reserve Board under the Bank Holding Company Act
of 1956, as amended (the "BHC Act"). Under the BHC Act, the Company is
prohibited from engaging in activities other than those of banking or of
managing or controlling banks and from acquiring or retaining direct or indirect
ownership or control of voting shares of any company which is not a bank or bank
holding company, unless the activities engaged in by the Company or the company
whose voting shares are acquired by the Company are activities which the Federal
Reserve Board determines to be so closely related to the business of banking as
to be a proper incident thereto. Subject to the provisions of Gramm-Leach-
Bliley, a bank holding company may elect to become a financial holding company
and thereby engage in a broader range of financially oriented products and
services (see Gramm-Leach-Bliley on page 6).
Republic Bank is chartered by the State of Michigan and supervised and
regulated by the Michigan Office of Financial and Insurance Services (the
"OFIS"). As an insured bank chartered by state regulatory authorities, Republic
Bank is also regulated by the Federal Deposit Insurance Company ("FDIC").
The Company is a legal entity separate and distinct from its bank subsidiary.
Most of the Company's revenues result from interest earned on deposits
maintained at its subsidiary bank and from dividends paid to it by its bank
subsidiary. There are statutory and regulatory requirements applicable to the
payment of dividends by the subsidiary bank to the Company as well as by the
Company to its shareholders.
5
Under Federal Reserve Board policy, the Company is expected to act as a source
of financial and managerial strength to Republic Bank and to commit resources to
support it. This support may be required at times when, in the absence of such
Federal Reserve Board policy, the Company would not otherwise be required to
provide it.
Interstate Banking and Branching
- --------------------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act"), among other things: (i) permits bank holding companies to
acquire control of banks in any state, subject to (a) specified maximum national
state deposit concentration limits; (b) any applicable state law provisions
requiring the acquired bank to be in existence for a specified period of up to
five years; (c) any applicable nondiscriminatory state provisions that make an
acquisition of a bank contingent upon a requirement to hold a portion of such
bank's assets available for call by a state sponsored housing entity; and (d)
applicable anti-trust laws; (ii) authorizes interstate mergers by banks in
different states (and retention of interstate branches resulting from such
mergers, subject to the provisions noted above in (i) and to any state laws that
"opt-out" of the provision entirely, and (iii) authorizes states to enact
legislation permitting interstate de novo branching.
The Michigan Banking Code permits, in appropriate circumstances and with
notice to, or the approval of the Commissioner of the OFIS, (i) acquisition of
Michigan-chartered banks (such as Republic Bank) by FDIC-insured banks, savings
banks or savings and loan associations located in other states, (ii) the sale by
a Michigan-chartered bank of one or more of its branches (not comprising all or
substantially all of its assets) to an FDIC-insured bank, savings bank or
savings and loan association located in a state in which a Michigan-chartered
bank could purchase one or more branches of the purchasing entity, (iii) the
acquisition by a Michigan-chartered bank of an FDIC-insured bank, savings bank
or savings and loan association located in another state, (iv) the acquisition
by a Michigan-chartered bank of one or more branches (not comprising all or
substantially all of the assets) of an FDIC-insured bank, savings bank or
savings and loan association located in another state, (v) the consolidation of
one or more Michigan-chartered banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states with the resulting
organization chartered either by Michigan or one of such other states, (vi) the
establishment by Michigan-chartered banks of branches located in other states,
the District of Columbia, or U.S. territories or protectorates, (vii) the
establishment of branches in Michigan by FDIC-insured banks located in other
states, the District of Columbia, or U.S. territories or protectorates having
laws permitting a Michigan-chartered bank to establish a branch in such
jurisdiction, and (viii) the establishment by foreign banks of branches located
in Michigan.
Dividends
- ---------
Michigan law places specific limits on the source and amount of dividends
which may be paid by Republic Bank. The payment of dividends by the Company and
its bank subsidiary are also affected by various regulatory requirements and
policies, such as the requirement to maintain adequate capital above regulatory
guidelines. The "prompt corrective action" provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") impose further
restrictions on the payment of dividends by insured banks which fail to meet
specified capital levels and, in some cases, their parent bank holding
companies. FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized.
The FDIC may prevent an insured bank from paying dividends if the bank is in
default of payment of any assessment due to the FDIC. In addition, payment of
dividends by a bank may be prevented by the applicable federal regulatory
authority if such payment is determined, by reason of the financial condition of
such bank, to be an unsafe and unsound banking practice. The Federal Reserve
Board has issued a policy statement providing that bank holding companies and
insured banks should generally only pay dividends out of current operating
earnings.
These regulations and restrictions may limit the Company's ability to obtain
funds from its subsidiary for its cash needs, including funds for acquisitions,
payment of dividends and interest and the payment of operating expenses.
Gramm-Leach-Bliley
- ------------------
Enacted late in 1999, the Gramm-Leach-Bliley Act ("Gramm-Leach-Bliley"),
provides some new consumer protections with respect to privacy issues and ATM
usage fees, and broadens the scope of financial services that banks may offer to
consumers, essentially removing the barriers erected during the Depression that
separated banks and securities firms. Gramm-Leach-Bliley permits affiliations
between banks, securities firms and insurance companies. A bank holding company
may qualify as a financial holding company and thereby offer an expanded
6
range of financial oriented products and services. To qualify as a financial
holding company, a bank holding company's subsidiary depository institutions
must be well-managed, well-capitalized and have received a "satisfactory" rating
on its latest examination under the Community Reinvestment Act. Gramm-Leach-
Bliley provides for some regulatory oversight by the Securities and Exchange
Commission for bank holding companies engaged in certain activities, and
reaffirms that insurance activities are not to be regulated on the state level.
States, however, may not prevent depository institutions and their affiliates
from engaging in insurance activities. Commercial enterprises are no longer able
to establish or acquire a thrift institution and thereby become a unitary thrift
holding company. Thrift institutions may only be established or acquired by
nonfinancial organizations. Gramm-Leach-Bliley provides new consumer protections
with respect to the transfer and use of their nonpublic personal information and
generally enables financial institution customers to "opt-out" of the
dissemination of their personal financial information to unaffiliated third
parties. ATM operators who charge a fee to noncustomers for use of its ATMs must
disclose the fee on a sign placed on the ATM and before the transaction is made
as part of the on-screen display or by paper notice issued by the machine. The
Company currently does not intend to apply for financial bank holding company
status.
FIRREA
- ------
Banking legislation, including the Financial Institutions Reform and Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA, has broadened the regulatory
powers of the federal bank regulatory agencies. Under FIRREA, a depository
institution insured by the FDIC shall be liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (i) the
default of a commonly controlled FDIC-insured depository institution, or (ii)
any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver and "in danger of default" is
defined as the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance.
FDICIA
- ------
In December 1991, FDICIA was enacted, substantially revising the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and
making revisions to several other federal banking statutes. Among other things,
FDICIA requires the federal banking agencies to take "prompt corrective action"
in respect of depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well-capitalized,"
"adequately capitalized," "undercapitalized," "significantly under capitalized"
and "critically undercapitalized." A depository institution's capital tier will
depend upon where its capital levels are in relation to various relevant capital
measures, which will include a risk-based capital measure and a leverage ratio
capital measure, and certain other factors.
Regulations establishing the specific capital tiers provide that, for an
institution to be well capitalized it must have a total risk-based capital ratio
of at least 10 percent, a Tier 1 risk-based capital ratio of at least 6 percent,
a Tier 1 leverage ratio of at least 5 percent, and not be subject to any
specific capital order or directive. For an institution to be adequately
capitalized it must have a total risk-based capital ratio of at least 8 percent,
a Tier 1 risk-based capital ratio of at least 4 percent, and a Tier 1 leverage
ratio of at least 4 percent (and in some cases 3 percent). Under these
regulations, the Company and its bank subsidiary are considered to be well
capitalized as of December 31, 2000.
FDICIA directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, asset quality, earnings, stock valuation and other standards as
they deem appropriate. Such standards were issued jointly by the agencies on
August 9, 1995, in guideline form.
FDICIA also contains a variety of other provisions that may affect the
operations of depository institutions including new reporting requirements,
regulatory standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch and a prohibition on the
acceptance or renewal of brokered deposits by depository institutions that are
not well capitalized or are adequately capitalized and have not received a
waiver from the FDIC. Under regulations relating to the brokered deposit
prohibition, the Company's subsidiary bank is well-capitalized and may accept
brokered deposits without restriction.
7
FDIC Insurance Assessments
- --------------------------
Republic Bank is generally subject to FDIC deposit insurance assessments paid
to the Bank Insurance Fund ("BIF"). Republic Bank is also subject to FDIC
deposit insurance assessments paid to the Savings Association Insurance Fund
with respect to deposits acquired from thrift institutions, including those
deposits held by Republic Savings Bank prior to the January 1, 1999 merger of
Republic Savings Bank with and into Republic Bank, and those deposits held by
D&N Bank prior to the December 1, 2000 merger of D&N Bank with and into Republic
Bank. 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 assessment
rate applicable to the Company's bank subsidiary depends in part upon the risk
assessment classification assigned to the Bank by the FDIC and in part on the
BIF and SAIF assessment schedules adopted by the FDIC. FDIC regulations
currently provide that premiums related to deposits assessed by the BIF and SAIF
are to be assessed at a rate of between 0 cents and 27 cents per $100 of
deposits.
Under the Deposit Insurance Funds Act of 1996, effective January 1, 1997, the
bank subsidiary is required to pay, in addition to the BIF and SAIF deposit
insurance assessments, if any, the Financing Corporation ("FICO") assessment to
service the interest on FICO bond obligations. FICO assessment rates may be
adjusted quarterly to reflect a change in assessment bases for the BIF and SAIF.
The current FICO annual assessment rate for BIF and SAIF is $1.96 per $100 of
deposits.
Mortgage Banking Affiliate
- --------------------------
The Company's banking subsidiary, Republic Bank and its non-depository
mortgage banking subsidiary Market Street Mortgage, is engaged in the business
of originating, selling and servicing mortgage loans secured by residential real
estate. In the origination of mortgage loans, the Company's banking subsidiary
and its mortgage banking subsidiary 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.
As sellers and servicers of mortgage loans, the Company's banking subsidiary
and mortgage affiliate are participants in the secondary mortgage market with
some or all of the following: private institutional investors, FNMA, GNMA,
Freddie Mac, VA and FHA. In their dealings with these agencies, the Company's
banking subsidiary and its mortgage subsidiary 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 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, Freddie Mac, GNMA, VA and FHA, the Company's banking subsidiary
and its mortgage banking subsidiary represent and warrant that all such mortgage
loans sold by them conform to their requirements. If the mortgage loans sold
are found to be non-conforming mortgage loans, such agency may require the
seller (i.e., Republic Bank or Market Street Mortgage) to repurchase the non-
conforming mortgage loans. Additionally, FNMA, Freddie Mac, GNMA, VA and FHA
may require the Company's banking subsidiary and its mortgage banking subsidiary
to indemnify them against all losses arising from their failure to perform their
contractual obligations under the applicable selling or servicing contract.
Certain provisions of the Housing and Community Development Act of 1992, and
regulations adopted thereunder may affect the operations and programs of FNMA
and Freddie Mac.
Regulation of Proposed Acquisitions
- -----------------------------------
In general, any direct or indirect acquisition by the Company of any voting
shares of any bank which would result in the Company's direct or indirect
ownership or control of more than 5% of any class of voting shares of such bank,
and any merger or consolidation of the Company with another bank holding
company, will require the prior written approval of the Federal Reserve Board
under the BHC Act. In acting on such applications, the Federal Reserve Board
must consider various statutory factors, including among others, the effect of
the proposed transaction on competition in relevant geographic and product
markets, and each party's financial condition, managerial resources, and record
of performance under the Community Reinvestment Act.
8
The merger or consolidation of an existing bank subsidiary of the Company with
another bank, or the acquisition by such a subsidiary of assets of another bank,
or the assumption of liability by such a subsidiary to pay any deposits in
another bank, will require the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHC Act. In addition, an application to, and the prior approval of, the
Federal Reserve Board may be required under the BHC Act, in certain such cases.
Each of the foregoing types of applications is subject to public notice and
comment procedures, and, in many cases, to prior notice and/or approval of
Federal and State bank regulatory authorities. Adverse public comments
received, or adverse considerations raised by the regulatory agencies, may delay
or prevent consummation of the proposed transaction.
Community Reinvestment Act
- --------------------------
Under the Community Reinvestment Act of 1977, as amended (the "CRA"), a
financial institution is required to help meet the credit needs of its entire
community, including low-income and moderate-income areas. The Bank's CRA
rating is determined by evaluation of its lending, service and investment
performance. The Federal banking agencies may take CRA compliance into account
in an agency's review of applications for mergers, acquisitions, and to
establish branches or facilities.
Forward-Looking Statements
From time to time, we may publish forward-looking statements relating to such
matters as possible or assumed future results of our operations, anticipated
financial performance, business prospects, new products, and similar matters.
These forward-looking statements are subject to risks and uncertainties. Also,
when we use any of the words "believes," "expects," "plans," "anticipates,"
"estimates" or similar expressions we are making forward-looking statements.
We claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for all of our
forward-looking statements. We believe that our forward-looking statements are
reasonable. You should not place undue reliance on any such forward-looking
statements, which speak only as of the date made. You should understand that
the following important factors, in addition to those discussed elsewhere in
this Annual Report on Form 10-K, in our press releases, and in our public
documents to which we refer, could affect our future results and performance.
This could cause those results to differ materially from those expressed in our
forward-looking statements. Factors that might cause such a difference include
the following:
. significantly increased competition among depository and other
financial institutions;
. inflation and changes in the interest rate environment that reduce
our margins or reduce the fair value of financial instruments;
. general economic conditions, either nationally or in our market
areas, that are worse than expected;
. adverse changes in the securities markets;
. legislative or regulatory changes that adversely affect our business;
. the ability to enter new markets successfully and capitalize on
growth opportunities;
. effects of and changes in trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
. timely development of and acceptance of new products and services;
. changes in consumer spending, borrowing and savings habits;
. effect of changes in accounting policies and practices, as may be
adopted by the bank regulatory agencies and the Financial Accounting
Standards Board;
. changes in our organization, compensation and benefit plans;
. costs and effects of litigation and unexpected or adverse outcomes in
such litigation; and
. our success and managing risks involved in the foregoing.
The Company undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made to reflect the occurrence of unanticipated events.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all the executive officers (5) of the Company as of
December 31, 2000. All of these officers are elected annually by the Board of
Directors. Excluding Mr. Parker, each of the executive officers has served as
an officer of the Company for more than five years. Prior to joining the
Company in 1997, Mr. Parker was a principal in the law firm of Miller, Canfield,
Paddock & Stone, PLC, Detroit, Michigan, for more than twenty-five years. Mr.
Parker retired from the Company on March 1, 2001. There are no family
relationships among any of the executive officers.
Name Age Position
- ---- --- --------
Jerry D. Campbell............................. 60 Chairman of the Board (Since 1985)
Dana M. Cluckey, CPA.......................... 40 President and Chief Executive Officer (Since 1986)
Barry J. Eckhold.............................. 54 Senior Vice President and Chief Credit Officer (Since 1990)
Thomas F. Menacher, CPA....................... 44 Executive Vice President, Treasurer , Chief Financial
Officer and Corporate Secretary (Since 1992)
George E. Parker III.......................... 66 General Counsel and Corporate Secretary (Since 1997)
ITEM 2. PROPERTIES
The Company's executive offices are located at 1070 East Main Street, Owosso,
Michigan 48867. At December 31, 2000, the Company had 103 retail, commercial
and mortgage banking offices in Michigan, Ohio and Indiana, of which 20 were
owned and 83 were leased. Additionally, the Company has 43 additional mortgage
banking offices in 12 states, all of which were leased. All of these offices
are considered by management to be well maintained and adequate for the purpose
intended. See Note 8 to the Consolidated Financial Statements included under
Item 8 of this document for further information on properties.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is set forth in Note 19 to the
Consolidated Financial Statements included under Item 8 of this document and is
expressly incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Quarterly Dividends and Market Price Summary
- --------------------------------------------------------------------------------
Dividends Common Stock
Declared Price Range/(1)/
----------------
Per Share/(1)/ High Low
- --------------------------------------------------------------------------------
2000
Fourth quarter................... $0.085 $11.500 $7.719
Third quarter.................... 0.077 8.863 7.387
Second quarter................... 0.077 9.715 6.875
First quarter.................... 0.078 10.797 7.102
------
Year.......................... $0.317 $11.500 $6.875
======
1999
Fourth quarter................... $0.077 $12.074 $9.504
Third quarter.................... 0.074 12.398 9.402
Second quarter................... 0.074 12.551 9.918
First quarter.................... 0.075 11.672 9.867
------
Year.......................... $0.300 $12.074 $9.504
======
- --------------------------------------------------------------------------------
/(1)/ Dividends and market price data have been restated to reflect the
issuance of stock dividends.
The Company's common stock is traded on The Nasdaq Stock Market(R) under
the symbol RBNC. There were approximately 20,000 shareholders of record of the
Company's common stock as of March 7, 2001.
11
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings Summary (in thousands)
Interest income $348,328 $299,662 $285,979 $244,545 $203,456
Interest expense 213,680 171,396 173,649 148,666 123,973
Net interest income 134,648 128,266 112,330 95,879 79,483
Provision for loan losses 6,500 11,650/(2)/ 6,500 4,381 1,390
Mortgage banking revenue 59,159 86,469 85,258 67,632 68,326
Other noninterest income 11,679 6,214/(2)/ 13,290 15,067 8,748
Noninterest expense 127,641/(2)/ 180,920/(2)/ 142,076 122,229 123,039/(2)/
Income before preferred stock and extraordinary item 48,400 17,634 41,675 34,332 24,061
Income before extraordinary item 45,677 14,911 38,952 33,114 24,061
Net income 45,677 14,911 38,952 33,114 23,673
- ---------------------------------------------------------------------------------------------------------------------------------
Per Common Share/(1)/
Basic earnings $ .92 $ .30 $ .80 $ .68 $ .50
Diluted earnings .92 .30 .78 .67 .49
Operating diluted earnings .92 .90/(3)/ .78 .67 .49
Cash dividends declared .32 .30 .26 .25 .22
Book value (year-end) 5.97 5.35 5.40 5.31 5.15
Closing price of common stock (year-end) 10.81 11.04 11.26 14.14 6.99
Dividend payout ratio 35% 33% 33% 37% 46%
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Data (in millions)
Loan closings:
Residential mortgage loans $ 3,852 $ 5,200 $ 6,614 $ 4,225 $ 3,924
Commercial loans 531 462 410 267 167
SBA loans 32 44 39 28 24
Direct consumer loans 314 291 109 152 234
Indirect consumer loans 65 191 206 172 38
Mortgage loan servicing portfolio (year-end) 2,229 3,089 3,517 3,632 3,121
- ---------------------------------------------------------------------------------------------------------------------------------
Year-End Balances (in millions)
Total assets $ 4,611 $ 4,302 $ 4,214 $ 3,688 $ 2,963
Total earning assets 4,375 4,052 3,999 3,530 2,662
Mortgage loans held for sale 385 459 770 519 334
Total portfolio loans 3,772 3,373 2,544 2,402 1,846
Total deposits 2,729 2,613 2,643 2,220 1,978
Total short-term borrowings and FHLB advances 1,385 1,229 1,084 1,038 651
Long-term debt 48 48 52 54 57
Shareholders' equity 295 266 266 229 208
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.02% 1.10%/(3)/ 1.00% 1.02% .86%
Return on average equity 16.28 17.07/(3)/ 15.73 15.37 11.81
Net interest margin/(4)/ 3.14 3.29 3.05 3.11 3.04
Net loan charge-offs to average total loans/(5)/ .13 .17 .09 .09 .04
Allowance for loan losses as a percentage
of year-end portfolio loans .75 .80 .84 .74 .85
Non-performing assets as a percentage
of year-end total assets .56 .52 .61 .48 .50
Operating efficiency ratio 64.10 65.44 68.19 70.21 79.07
Net interest income to operating expenses 105.49 70.90 74.13 83.04 79.58
Average shareholders' equity to average assets 6.26 6.46 6.37 6.64 7.19
Tier 1 risk-based capital 9.50 9.67 9.80 10.35 11.00
Total risk-based capital 10.38 10.60 10.55 11.12 11.89
Tier 1 leverage 6.81 6.59 6.54 6.56 6.59
- ---------------------------------------------------------------------------------------------------------------------------------
/(1)/ All per share amounts presented have been adjusted to reflect the issuance
of stock dividends or stock splits effected in the form of stock
dividends.
/(2)/ Amounts for 2000 included a pre-tax credit of $4 million associated with
the completion of the D&N Financial merger integration and restructuring
plan. Amount for 1999 includes a one-time pre-tax charge of $31.5 million
of merger integration and restructuring charges related to the merger with
D&N Financial, a $7.6 million pre-tax loss on the sale of low-yielding
fixed rate securities, and an additional $5.0 million pre-tax provision
for loan losses. Amount for 1996 includes a one-time pre-tax assessment of
$7.0 million ($4.5 million after tax) for the recapitalization of the
SAIF.
/(3)/ Amounts for 1999 exclude the after tax impact of a $22.0 million one-time
merger integration and restructuring charge related to the merger with D&N
Financial, a $4.9 million after tax loss on the sale of low-yielding fixed
rate securities, and an additional $3.3 million after tax provision for
loan losses. Including the charges, return on average assets was .36% and
return on average equity was 5.64% in 1999.
/(4)/ Net interest income (FTE) expressed as a percentage of average interest-
earnings assets.
/(5)/ Includes mortgage loans held for sale.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Net income for 2000 was $45.7 million compared to net income of $14.9
million in 1999. Diluted earnings per share were $.92 in 2000 compared to $.30
in 1999. The results for 1999 include one-time after tax charges relating to the
merger with D&N Financial Corporation. These one-time charges include a $22.0
million after tax merger integration and restructuring charge, a $4.9 million
after tax loss on the sale of low yielding fixed rate securities, and an
additional $3.3 million after tax provision for loan losses. Excluding these
charges, the Company reported net operating income of $45.1 million in 1999, a
16% increase over the $39.0 million earned in 1998. The results for 2000 include
an after tax credit of $2.6 million associated with the completion of the D&N
Financial Corporation merger integration and restructuring plan. Diluted
operating earnings per share rose 15% during 1999 to $.90 from $.78 in 1998. Net
income for 2000 generated return on average assets of 1.02% and return on equity
of 16.28%. These compare with return on average assets of 1.10% in 1999 and
1.00% in 1998 and return on average equity of 17.07% in 1999 and 15.73% in 1998.
In order to properly reflect the comparable 1999 results of operations for
the Company against 2000 and 1998, the remaining Management's Discussion and
Analysis of Financial Condition and Results of Operations is based upon the net
operating earnings reported for 1999, which excludes the merger integration and
restructuring charge. The following table summarizes the effect of the merger
integration and restructuring charge.
Table 1
Operating Results
- --------------------------------------------------------------------------------
Effect of
Year Ended December 31, 1999 Operating One-Time Reported
(In thousands, except per share amounts) Results Charge Amount
- --------------------------------------------------------------------------------
Provision for loan losses $ 6,650 $ 5,000 $ 11,650
Investment securities gains (losses) 207 (7,552) (7,345)
Noninterest expense 149,399 31,521 180,920
Income before taxes 72,452 (44,073) 28,379
Income tax expense 24,621 (13,876) 10,745
Net income 45,109 (30,198) 14,911
Basic earnings per share $ .91 $ (.61) $ .30
Diluted earnings per share $ .90 $ (.60) $ .30
- --------------------------------------------------------------------------------
The Company's 2000 results of operations reflected the following trends in
earnings:
. Net interest income increased 5% during 2000 following an increase of
14% in 1999. Increasing average earning asset balances during these
periods contributed to the growth in net interest income.
. The net interest margin totaled 3.14% in 2000, compared to 3.29% in
1999 and 3.05% in 1998. An increase in the cost of funds over the past
year, offset by a shift in average earning assets away from low-
yielding fixed-rate investment securities and toward higher-yielding
commercial real estate and residential mortgage loans, reduced the net
interest margin.
. The commercial loan portfolio balance increased 27% in 2000 to $1.1
billion after increasing 40% in 1999, reflecting continued strong
demand for commercial real estate lending in the Company's markets.
. Mortgage loan production revenue decreased $24.6 million during 2000,
or 31% due to a 25% decrease in residential mortgage loan closings as
compared to 1999.
Shareholders' equity totaled $294.9 million at December 31, 2000. Market
capitalization, which is computed by multiplying the number of shares
outstanding by the closing price of the Company's common stock at year-end, was
$534.3 million at December 31, 2000. Capital ratios, by all measures, remain in
excess of regulatory requirements for a well-capitalized financial institution.
13
Acquisitions
On May 17, 1999, the Company merged with D&N Financial Corporation ("D&N
Financial"), headquartered in Troy and Hancock, Michigan, whereby each share of
D&N Financial common stock was converted into 1.82 shares of the Company's
common stock. D&N Financial was a financial services holding company with
approximately $2.0 billion in assets and $119.8 million in stockholders' equity
at May 17, 1999. The merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests.
In connection with the merger, the Company recorded $31.5 million ($22.0
million after tax) in merger integration and restructuring charges in 1999.
Actions incorporated in the business combination and restructuring plan were
targeted for implementation over a 12 - 18 month period following the merger.
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 represented 13% of the combined workforce of Republic Bank and
D&N Bank. As of December 31, 2000 and 1999, 200 and 51 positions, respectively,
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 6
offices and the divestiture of identified banking 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 from the integration of the
two banking systems which was completed in the fourth quarter of 2000. Other
merger-related costs include various transaction costs.
During the fourth quarter of 2000, the Company completed its integration
and restructuring plan when Republic Bank and D&N Bank combined charters and
converted to a common computer system. The total integration and restructuring
costs incurred were $4 million less than the previously estimated costs.
Therefore, the Company recorded a merger integration and restructuring credit of
$4 million in the fourth quarter of 2000. Total severance and employee benefits,
branch closings and real estate transactions, and system costs incurred were
$1.2 million, $1.8 million and $1.0 million, respectively, less than estimated
when establishing the initial merger integration and restructuring reserves.
Severance and employee benefits costs were less as a result of employees leaving
prior to the date severance payments were required and benefit costs being less
than anticipated. Branch closings and real estate transactions were less as a
result of closing only 3 offices from the original estimate of 6 due to the re-
evaluation of retail bank locations and revised appraisals on the value of
impaired assets as a result of a change in circumstances. System charges were
less than anticipated as a result of efficiencies associated with combining D&N
Bank and Republic Bank to a common banking system resulting in actual costs
being less than the initial reserve.
The following table provides details of the pre-tax merger integration and
restructuring charge by type of cost recorded in 2000 and 1999 and the reserve
balance remaining at December 31, 2000 and 1999:
Table 2
Merger Integration and Restructuring Charge
- -------------------------------------------------------------------------------------------------
Amount Reserve Amount Amount Reserve
Initial Utilized Balance Utilized Reversed Balance
(In thousands) Reserve in 1999 12/31/99 in 2000 in 2000 12/31/00
- -------------------------------------------------------------------------------------------------
Type of Costs:
Severance and employee benefit
accruals $10,446 $ 7,986 $ 2,460 $ 1,274 $(1,186) $ -
Professional fees 5,133 4,963 170 170 - -
Branch closings and real estate
transactions 8,652 6,140 2,512 728 (1,784) -
Systems 2,201 26 2,175 1,145 (1,030) -
Other 5,089 5,089 - - - -
------- ------- -------- ------- ------- --------
Total merger integration and
restructuring charge $31,521 $24,204 $ 7,317 $ 3,317 $(4,000) $ -
======= ======= ======== ======= ======= ========
- -------------------------------------------------------------------------------------------------
14
Business Segments
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; installment lending; and
the deposit-gathering function. Deposits and loan products are offered through
the 90 retail branch offices of Republic Bank, which are staffed by personal
bankers and loan originators.
The Mortgage Banking segment is comprised of mortgage loan production and
mortgage loan servicing for others. Mortgage loan production is conducted in 43
offices of Republic Bank and Market Street Mortgage. Over 90% of the Company's
mortgage loan servicing is performed by Market Street Mortgage. See Note 21 to
the Consolidated Financial Statements for further discussion of business
segments.
Mortgage Banking
The Mortgage Banking segment is comprised of mortgage loan production and
mortgage loan servicing for others.
Table 3
Residential Mortgage Loan Closings
- --------------------------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Total closings $3,851,767 $5,200,051 $6,614,183
Retail loans percentage 100% 96% 94%
Wholesale loans percentage - 4 6
- --------------------------------------------------------------------------------
The Company's total closings of single-family residential mortgage loans
decreased $1.3 billion, or 26%, to $3.9 billion in 2000. The decrease in
origination volumes in 2000 was primarily the result of an increasing interest
rate environment during 2000 which resulted in a lower level of refinance
activity and the closing of 44 unprofitable mortgage loan production offices.
Refinances totaled $483 million, or 13% of total closings in 2000, compared to
$1.2 billion, or 23% of total closings in 1999. In 1999, total mortgage loan
closings decreased $1.4 billion, or 21%, to $5.2 billion compared to $6.6
billion in 1998, reflecting an increasing interest rate environment during 1999,
which resulted in a lower level of refinance activity and due to the Company
exiting the wholesale lending business in 1999. The Company's pipeline of
mortgage loan applications in process was $821 million at December 31, 2000,
compared to $1.1 billion at December 31, 1999.
Table 4
Mortgage Banking Revenue
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Mortgage loan production revenue/(1)/ $55,720 $80,368 $85,322
Net mortgage loan servicing revenue (expense)/(2)/ 1,179 6,101 (299)
Gain on bulk sales of mortgage servicing rights 2,260 - 235
------- ------- -------
Total mortgage banking revenue $59,159 $86,469 $85,258
======= ======= =======
- --------------------------------------------------------------------------------
/(1)/ Includes fee revenue derived from the loan origination process (i.e.,
points collected), gains on the sale of mortgage loans and the related
mortgage servicing rights released concurrently with the underlying loans,
sold net of commissions and incentives paid of $28.8 million, $42.6
million and $46.7 million for 2000, 1999 and 1998.
/(2)/ Includes servicing fees, late fees and other ancillary charges, net of
amortization and charges for impairment of mortgage servicing rights, if
any.
Mortgage banking revenue, the largest component of total noninterest
income, decreased $27.3 million, or 32%, to $59.2 million in 2000, after
increasing 1%, to $86.5 million in 1999. The decrease in 2000 was the result of
a decrease in mortgage loan production revenue and a decrease in net mortgage
loan servicing revenue. The increase in 1999 resulted from an increase in net
mortgage loan servicing revenue partially offset by a decrease in mortgage loan
production revenue.
15
Mortgage loan production revenue decreased $24.6 million, or 31%, in 2000.
This decrease resulted from the $1.3 billion decrease in mortgage loan volume.
The Company sold $3.6 billion of single-family residential mortgages in 2000,
compared to $4.6 billion and $5.6 billion in 1999 and 1998, respectively. The
ratio of mortgage production revenue to mortgage loans sold was 1.57% in 2000,
compared to 1.70% in 1999 and 1.61% in 1998.
Net mortgage loan servicing revenue was $1.2 million in 2000, compared to
$6.1 million in 1999. The decrease in 2000 was primarily the result of an
increase of $1.8 million in amortization expense and reserves for impairment of
mortgage servicing rights and a decrease in the average loans serviced compared
to 1999. In 1999, the Company reported $6.1 million in net servicing revenue
compared to $299,000 of net servicing expense in 1998. The increase in 1999 was
primarily the result of a decrease of $5.9 million in amortization expense and
reserves for impairment of mortgage servicing rights. Loans serviced for others
averaged $2.7 billion in 2000, a 19% decrease from a year earlier. In 1999,
average loans serviced for others totaled $3.3 billion, which was 5% decrease
from the 1998 average.
Amortization of mortgage servicing rights, including impairment reserves,
totaled $14.0 million in 2000, compared to $12.2 million in 1999 and $18.0
million in 1998. The Company evaluates its mortgage servicing rights for
impairment on a quarterly basis. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, the Company's impairment
reserve as of December 31, 2000 was $6.6 million compared to $2.4 million and
$2.5 million at December 31, 1999 and 1998, respectively. One of the most
significant assumptions used in the valuation of the mortgage servicing rights
is the change in the prepayment speed assumption (PSA). An increase or a
decrease in the PSA will result in a shorter or longer expected life in mortgage
servicing rights and accordingly affect the fair value of the mortgage servicing
rights. At December 31, 2000, the weighted average PSA was 217, or a 31%
increase from the 1999 weighted average PSA of 166, which was 19% lower compared
to 205 at December 31, 1998. The increase in the PSA was a result of the
increase in residential mortgage loan refinance activity at the end of 2000
compared to 1999. Therefore, the Company increased its valuation allowance of
mortgage servicing rights $4.2 million in 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. In 2000, bulk sales of mortgage servicing rights for loans with a
principal balance of $796.9 million resulted in a gain of $2.3 million. In 1999,
the Company did not have any bulk sales of mortgage servicing rights. In 1998,
bulk sales of mortgage servicing rights for loans with a principal balance of
$492.6 million resulted in a gain of $235,000.
Commercial and Retail Banking
The remaining disclosures and analyses within this Management's Discussion
and Analysis of the Company's financial condition and results of operations
relate principally to the commercial and retail banking segment.
Results of Operations
Net Interest Income
Net interest income is defined as the difference between total interest
income generated by earning assets and the cost of funding those assets. To
permit the comparable analysis of tax-exempt and fully taxable income, net
interest income is stated on a fully taxable equivalent (FTE) basis, reflecting
adjustments based on a 35% tax rate made to the yields of tax-exempt investment
securities included in earning assets. The net interest margin is net interest
income (FTE) expressed as a percentage of average earning assets and measures
how effectively the Company utilizes its earning assets in relationship to the
interest cost of funding them.
Net interest income (FTE) rose 5% to $134.7 million in 2000, compared to
$128.3 million in 1999, primarily due to growth in average earning assets and an
improved mix of earning assets, offset by an increase in the Company's cost of
funds. Average earning assets rose $376.8 million, or 10%, to $4.3 billion in
2000, as the increase in average portfolio loans more than offset a reduction in
average investment securities and mortgage loans held for sale. Net interest
income growth also benefited as the mix of earning assets continued to favor
higher-yielding commercial, residential and installment loan balances rather
than lower-yielding investment securities. Partially offsetting the increase in
net interest income was the incremental interest expense associated with a
$369.8 million, or 10%, increase in interest-bearing liabilities.
16
Table 5
Analysis of Net Interest Income (FTE)
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(Dollar amounts in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Average Avg. Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments $ 2,904 $ 170 5.85% $ 12,039 $ 661 5.49% $ 22,673 $ 1,151 5.08%
Mortgage loans held for
sale 425,956 34,535 8.11 508,415 37,106 7.30 603,126 43,940 7.29
Investment securities 195,364 14,571 7.46 463,828 30,521 6.58 570,178 37,588 6.59
Portfolio loans: (1)
Commercial loans 1,018,415 92,578 9.09 729,729 64,051 8.78 552,351 50,713 9.18
Real estate mortgage loans 1,905,915 141,237 7.41 1,527,618 109,922 7.20 1,350,188 100,311 7.43
Installment loans 735,429 65,317 8.88 665,591 57,473 8.63 589,731 52,350 8.88
---------- -------- ---- ---------- -------- ----- ---------- -------- -----
Total loans, net of
unearned income 3,659,759 299,132 8.17 2,922,938 231,446 7.92 2,492,270 203,374 8.16
---------- -------- ---- ---------- -------- ----- ---------- -------- -----
Total interest-earning
assets 4,283,983 348,408 8.13 3,907,220 299,734 7.67 3,688,247 286,053 7.76
Allowance for loan losses (28,319) (23,988) (19,967)
Cash and due from banks 60,022 43,867 38,864
Other assets 169,674 165,832 178,518
---------- ---------- ----------
Total assets $4,485,360 $4,092,931 $3,885,662
========== ========== ==========
Average Liabilities and
Shareholders' Equity:
Interest-bearing demand
deposits $ 102,233 1,708 1.67 $ 98,117 1,722 1.76 $ 101,717 1,702 1.67
Savings deposits 723,153 22,625 3.13 776,648 22,701 2.92 731,901 25,283 3.45
Time deposits 1,634,479 98,829 6.05 1,517,590 82,150 5.41 1,435,331 83,315 5.81
---------- -------- ---- ---------- -------- ----- ---------- -------- -----
Total interest bearing
deposits 2,459,865 123,162 5.01 2,392,355 106,573 4.45 2,268,949 110,300 4.86
Short-term borrowings 55,047 3,532 6.42 63,158 3,462 5.40 124,566 6,984 5.57
FHLB advances 1,339,009 83,552 6.24 1,024,004 57,616 5.63 903,045 52,370 5.79
Long-term debt 47,500 3,434 7.23 52,121 3,745 7.19 54,053 3,995 7.51
---------- -------- ---- ---------- -------- ----- ---------- -------- -----
Total interest bearing
liabilities 3,901,421 213,680 5.48 3,531,638 171,396 4.85 3,350,613 173,649 5.18
Noninterest-bearing
deposits 188,602 176,789 153,121
Other liabilities 85,981 91,511 105,652
---------- ---------- ----------
Total liabilities 4,176,004 3,799,938 3,609,386
Preferred stock in
subsidiary 28,719 28,719 28,719
Shareholders' equity 280,637 264,274 247,557
---------- ---------- ----------
Total liabilities and
shareholders' equity $4,485,360 $4,092,931 $3,885,662
========== ========== ==========
Net interest income/
Rate spread (FTE) $134,728 2.65% $128,338 2.82% $112,404 2.58%
======== ======== ========
FTE adjustment $ 80 $ 72 $ 74
======== ======== ========
Impact of net noninterest-
bearing sources of funds .49 .47 .47
---- ----- -----
Net interest margin (FTE) 3.14% 3.29% 3.05%
==== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------------
/(1)/Non-accrual loans and overdrafts are included in average balances.
17
Table 6
Rate/Volume Analysis (FTE)
- -----------------------------------------------------------------------------------------------------------------
2000/1999 1999/1998
- -----------------------------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Change in: Due to Change in:
- -----------------------------------------------------------------------------------------------------------------
Average Average Net Average Average Net
(In thousands) Balance/(1)/ Rate/(1)/ Change Balance/(1)/ Rate/(1)/ Change
- -----------------------------------------------------------------------------------------------------------------
Interest Income:
Short-term investments $ (531) $ 40 $ (491) $ (577) $ 87 $ (490)
Mortgage loans held for sale (6,417) 3,846 (2,571) (6,894) 60 (6,834)
Investment securities (19,588) 3,638 (15,950) (7,010) (57) (7,067)
Loans, net of unearned income/(2)/ 60,352 7,334 67,686 35,062 (6,990) 28,072
-------- ------- -------- ------- -------- -------
Total interest income 33,816 14,858 48,674 20,581 (6,900) 13,681
Interest Expense:
Interest-bearing demand deposits 73 (87) (14) (65) 85 20
Savings deposits (1,633) 1,557 (76) 1,474 (4,056) (2,582)
Time deposits 6,577 10,102 16,679 4,687 (5,852) (1,165)
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits 5,017 11,572 16,589 6,096 (9,823) 3,727
Short-term borrowings (493) 563 70 (3,364) (158) (3,522)
FHLB advances 19,181 6,755 25,936 6,745 (1,499) 5,246
Long-term debt (332) 21 (311) (114) (136) (250)
-------- ------- -------- ------- -------- -------
Total interest expense 23,373 18,911 42,284 9,363 (11,616) (2,253)
-------- ------- -------- ------- -------- -------
Net interest income (FTE) $ 10,443 $(4,053) $ 6,390 $11,218 $ 4,716 $15,934
======== ======= ======== ======= ======== =======
- -----------------------------------------------------------------------------------------------------------------
/(1)/ Variances attributable jointly to volume and rate changes are allocated to
volume and rate in proportion to the relationship of the absolute dollar
amount of the change in each.
/(2)/ Non-accrual loans and overdrafts are included in average balances.
The net interest margin decreased by 15 basis points to 3.14% in 2000,
compared to 3.29% in 1999. The decrease in the margin was due to an increase in
the Company's cost of funds during 2000 more than offsetting the improved mix in
earning assets. The increase in the Company's cost of funds was a result of an
increase in rates paid on short-term borrowings, FHLB advances, certificates of
deposit and savings accounts.
In 1999, net interest income (FTE) increased 14% to $128.3 million from
$112.4 million in 1998, primarily due to growth in average earning assets,
improved mix of earning assets and a decline in the Company's cost of funds.
Average earning assets rose $219.0 million, or 6%, to $3.9 billion in 1999, as
the increase in average portfolio loans more than offset a reduction in average
investment securities and mortgage loans held for sale. Net interest income
growth also benefited from the Company's sale of $400 million of low-yielding
fixed rate securities with proceeds redeployed into higher-yielding commercial,
residential and installment loan balances rather than lower-yielding investment
securities. Partially offsetting the increase in net interest income was the
incremental interest expense associated with a $181.0 million, or 5%, increase
in interest-bearing liabilities in 1999 compared to 1998. Net interest margin
increased 24 basis points in 1999 compared to 1998 primarily reflecting a better
mix of earning assets and a 33 basis point decrease in the Company's cost of
funds as a result of a decrease in rates paid on short-term borrowings, FHLB
advances, certificates of deposits and savings accounts.
Noninterest Income
Noninterest income is a significant source of revenue for the Company,
contributing 17% of total revenues in 2000, compared to 24% in 1999 and 26% in
1998. Details of the largest component of noninterest income are presented in
the "Mortgage Banking" section. Exclusive of mortgage banking revenue,
noninterest income increased to $11.7 million in 2000 from $6.2 million in 1999,
primarily due to the $7.6 million loss on the sale of low-yielding fixed-rate
investment securities during 1999.
18
During 2000, the Company sold $41.3 million of investment securities for a
net gain of $109,000. During 1999, the Company sold low-yielding fixed rate
investment securities with the proceeds redeployed into higher yielding
portfolio loans. The Company sold a total of $498.1 million of investment
securities for a net loss of $7.3 million compared to sales of $171.2 million of
investment securities in 1998.
The guaranteed portion of Small Business Administration (SBA) loans are
regularly sold to investors. In 2000, the Company sold $14.1 million of the
guaranteed portion of SBA loans, compared to $17.4 million in 1999 and $28.1
million in 1998, resulting in gains of $576,000, $750,000 and $2.1 million,
respectively, which are included in other noninterest income.
Table 7
Noninterest Income
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Mortgage loan production revenue $55,720 $80,368 $85,322
Net mortgage servicing revenue 3,439 6,101 (64)
Service charges 7,819 7,327 5,902
Investment securities gains (losses) 109 (7,345) 2,525
Other noninterest income 3,751 6,232 4,863
------- ------- -------
Total noninterest income $70,838 $92,683 $98,548
======= ======= =======
- --------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense decreased 29% in 2000 to $127.6 million, after rising
27% in 1999. Noninterest expense includes a one-time pre-tax merger integration
and restructuring charge recorded in the second quarter of 1999 related to the
merger with D&N Financial Corporation as discussed on page 12. In the fourth
quarter of 2000, the Company completed its integration and restructuring plan
when its two bank subsidiaries combined charters and converted to a common
computer system. The total integration and restructuring costs incurred were $4
million less than the previously estimated costs; therefore, the Company
recorded a merger integration and restructuring credit of $4 million in 2000.
Excluding the merger integration and restructuring charge and credit,
noninterest expense would have decreased $17.8 million, or 12%, compared to
1999. Salaries and employee benefits expense decreased $10.6 million, or 13%, in
2000, following an increase of $3.1 million, or 4%, in 1999. The decrease in
salaries and employee benefits expense in 2000 reflects the decrease in the
average number of hourly and salaried employees, offset by normal wage
increases. The increase in 1999 reflects an increase in the average number of
hourly and salaried employees and normal wage increases.
Table 8
Noninterest Expense
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Salaries and employee benefits $ 72,538 $ 83,161 $ 80,015
Net occupancy expense of premises 13,467 13,594 11,612
Equipment expense 9,090 7,809 7,192
Other noninterest expense 36,546 44,835 43,257
Merger integration and restructuring (credit) (4,000) 31,521 -
-------- -------- --------
Total noninterest expense $127,641 $180,920 $142,076
======== ======== ========
- --------------------------------------------------------------------------------
Net occupancy expense remained flat in 2000 compared to 1999, following a
17% increase in 1999, due to the addition of 21 offices during g 1999. Equipment
expense increased 16% in 2000, following a 9% increase in 1999. The increase in
2000 reflects additional depreciation expense associated with equipment needed
for the conversion of D&N Bank's computer system to Republic Bank and for the
implementation of an automated underwriting mortgage system. The increase in
1999 reflects an increased level of expenses related to the expansion of the
Company's retail bank and mortgage loan production offices during 1999.
19
Income Taxes
The provision for income taxes was $22.9 million in 2000, compared to $10.7
million in 1999 and $20.6 million in 1998. The effective tax rate, computed by
dividing the provision for income taxes by income before taxes less the
dividends on preferred stock, was 33.4% for 2000, compared to 41.9% for 1999 and
34.6% for 1998. The effective tax rate in 1999 increased primarily as a result
of $4.4 million of non-deductible professional fees included in the merger
integration and restructuring charge.
Financial Condition
Total assets were $4.6 billion at December 31, 2000 and $4.3 billion at
December 31, 1999. Average total assets rose $392.4 million, or 10%, to $4.5
billion during the year. The increase in total assets primarily reflects the
growth in portfolio loans, which was funded primarily by increases in deposits
and FHLB advances.
Assets
- ------
Portfolio Loans
The Company's loan portfolio is comprised of domestic loans to businesses
and consumers. At December 31, 2000 and 1999, there were no loans to foreign
debtors outstanding and the amount of agribusiness loans outstanding were
insignificant. Loans to businesses are classified as commercial loans and are
further segregated as commercial and industrial loans and commercial real estate
loans. Commercial and industrial loans are made to local small- and medium-sized
corporations primarily to finance working capital and equipment purchases.
Commercial real estate loans represent loans secured by real estate and
consist of real estate construction loans and commercial real estate mortgage
loans. Real estate construction loans are made to builders or developers of real
estate properties and are typically refinanced at completion, becoming either
income-producing or owner-occupied properties. Commercial real estate mortgage
loans are secured by owner-occupied or income-producing properties. For owner-
occupied property loans, the primary source of repayment is the cash flow of the
owner with the real estate serving as a secondary repayment source. Income-
producing property loans are made to entities or individuals engaged in real
estate investment, and the primary source of repayment is derived from the
rental or sale of the property.
Loans to consumers include residential real estate mortgage loans and
installment loans. Installment loans are made for various purposes, primarily
home equity loans and automobile purchases.
Table 9
Loan Portfolio Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and
industrial $ 79,544 2.1% $ 88,370 2.6% $ 83,089 3.3% $ 79,497 3.3% $ 41,828 2.2%
Real estate
construction 211,754 5.6 149,480 4.4 112,588 4.4 75,416 3.1 53,235 2.9
Commercial real
estate mortgages 840,994 22.3 650,642 19.3 437,014 17.2 314,329 13.1 217,492 11.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total commercial
loans 1,132,292 30.0 888,492 26.3 632,691 24.9 469,242 19.5 312,555 16.9
Residential real
estate mortgages 1,964,394 52.1 1,773,795 52.6 1,295,484 50.9 1,378,312 57.4 1,111,288 60.2
Installment loans:
Consumer direct 459,359 12.2 368,095 10.9 308,092 12.1 319,273 13.3 281,010 15.2
Consumer indirect 215,631 5.7 343,043 10.2 307,505 12.1 235,150 9.8 141,437 7.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total installment
loans 674,990 17.9 711,138 21.1 615,597 24.2 554,423 23.1 422,447 22.9
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total portfolio
Loans $3,771,676 100.0% $3,373,425 100.0 $2,543,772 100.0% $2,401,977 100.0% $1,846,290 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
- ------------------------------------------------------------------------------------------------------------------------------------
20
The total portfolio loans balance grew $398.3 million, or 12%, to $3.8
billion at December 31, 2000, after increasing 33% in 1999. Lending remained
strong across all major categories in 2000. Commercial real estate growth was
strong in local markets served by the Company and marketing efforts directed at
existing customers increased home equity loans. The overall growth of the loan
portfolio stems from the Company's efforts to enhance long-term profitability by
improving the mix of earning assets on the balance sheet.
Commercial loans increased $243.8 million, or 27%, to $1.1 billion at
December 31, 2000, after climbing 40% in 1999. This growth, which was
concentrated primarily in commercial real estate loans, reflects the Company's
efforts to complement traditional residential mortgage lending with commercial
real estate lending. Residential real estate mortgage loans increased $190.6
million, or 11%, to $2.0 billion at December 31, 2000, after increasing 37% a
year earlier. The Company retained a higher percentage of adjustable rate
mortgages in its portfolio during 2000 rather than selling the loans in the
secondary market. During 1999, the Company redeployed proceeds from the sales of
low-yielding fixed rate investment securities into higher yielding residential
mortgage loans. Consumer direct installment loans increased $91.3 million, or
25%, to $459.4 million at December 31, 2000, after rising 19% a year ago,
reflecting the continued success of specifically targeted sales and marketing
efforts in home equity lending. Consumer indirect installment loans decreased
$127.4 million, or 37%, to $215.6 million at December 31, 2000, after increasing
12% in 1999. During the first quarter of 2000, the Company discontinued its
indirect lending line of business. The decrease in indirect loan balances was a
result of loan sales and payoffs during the year.
Table 10
Maturity Distribution and Interest Rate Sensitivity of Commercial Loans
- ----------------------------------------------------------------------------------------------
After One
December 31, 2000 Within But Within After
(In thousands) One Year Five Years Five Years Total
- ----------------------------------------------------------------------------------------------
Commercial loans:
Commercial and industrial $ 27,712 $ 36,838 $ 14,994 $ 79,544
Real estate construction 114,080 37,348 60,326 211,754
Commercial real estate mortgages 52,531 462,478 325,985 840,994
-------- -------- -------- ----------
Total commercial loans $194,323 $536,664 $401,305 $1,132,292
======== ======== ======== ==========
Commercial Loans Maturing After One Year With:
Predetermined rates $316,686 $ 54,090
Floating or adjustable rates 219,978 347,215
-------- --------
Total $536,664 $401,305
======== ========
- ----------------------------------------------------------------------------------------------
The commercial loan portfolio contained no aggregate loans to any one
industry that exceeded 10% of total portfolio loans outstanding at December 31,
2000. The Company's total loan portfolio is geographically concentrated
primarily in Michigan and Ohio as shown in the following table.
Table 11
Geographic Distribution of Loan Portfolio
- --------------------------------------------------------------------------------
Percent
December 31, 2000 of
(Dollars in thousands) Amount Total
- --------------------------------------------------------------------------------
Michigan $2,665,988 71%
Ohio 666,546 18
Indiana 132,309 3
Other states 306,833 8
---------- ---
Total $3,771,676 100%
========== ---
- --------------------------------------------------------------------------------
Mortgage Loans Held for Sale
Mortgage loans held for sale decreased $73.9 million, or 16%, to $385.2
million at December 31, 2000, after decreasing 40% to $459.1 million at December
31, 1999. The decreases were due to an increase in interest rates which
resulted in a decreased level of mortgage origination volumes in the fourth
quarters compared to prior years. The average mortgage loans held for sale
balance in 2000 decreased 16% compared to 1999 reflecting the Company's
decreased level of mortgage loan production volumes during 2000.
21
Credit Risk Management
Extending credit to businesses and consumers exposes the Company to credit
risk. Credit risk is the risk that the principal balance of a loan and any
related interest will not be collected due to the inability of the borrower to
repay the loan. The Company manages credit risk in the loan portfolio through
adherence to consistent standards, guidelines and limitations established by
senior management. Written loan policies establish underwriting standards,
lending limits and other standards or limits as deemed necessary and prudent.
Various approval levels, based on the amount of the loan and whether the loan is
secured or unsecured, have also been established. Loan approval authority ranges
from the individual loan officer to the Board of Directors' Loan Committee.
Republic Bank has an established Loan Review group to conduct ongoing,
independent reviews of the lending process. This group ensures adherence to
established policies and procedures, monitors compliance with applicable laws
and regulations, provides objective measurement of the risks inherent in the
loan portfolio, and ensures that proper documentation exists.
The following discussion summarizes the underwriting policies and
procedures for the major categories within the loan portfolio and addresses the
Company's strategies for managing the related credit risk.
Commercial Loans
Credit risk associated with commercial loans is primarily influenced by
prevailing economic conditions and the level of underwriting risk the Company is
willing to assume. To manage credit risk when extending commercial credit, the
Company focuses on adequately assessing the borrower's ability to repay and on
obtaining sufficient collateral. To minimize credit risk, the Company
concentrates its commercial lending efforts on commercial real estate loans. At
December 31, 2000 and 1999, commercial real estate loans accounted for 93% and
90%, respectively, of total commercial loans. Emphasis is also placed on loans
that are government guaranteed, such as SBA loans. Commercial and industrial
loans are generally secured by the company's assets at a 75% or less loan-to-
value ratio and by personal guarantees. Management closely monitors the
composition and quality of the total commercial loan portfolio to ensure that
significant credit concentrations by borrower or industry do not exist.
Residential Real Estate Mortgage Loans
The Company originates fixed rate and variable rate residential mortgage
loans which are secured by the underlying 1-4 family residential property. At
December 31, 2000 and 1999, these loans accounted for 52% and 53%, respectively,
of total portfolio loans. Credit risk exposure in this area of lending is
minimized by the assessment of the creditworthiness of the borrower, including
debt to equity ratios and adherence to underwriting policies that emphasize
conservative loan-to-value ratios of generally no more than 80%. Residential
mortgage loans granted in excess of the 80% loan-to-value ratio criterion are
generally insured by private mortgage insurance, unless otherwise guaranteed or
insured by the Federal or state government. Credit risk is further reduced since
the majority of the Company's fixed rate mortgage loan production is sold to
investors in the secondary market without recourse.
Installment Loans
Credit risk in the installment loan portfolio is controlled through
consistent adherence to conservative underwriting standards that consider debt
to income levels, the creditworthiness of the borrower, and Fair Isaac Company
scores. For home equity lending, loan-to-value ratios generally are limited to
80% of collateral value.
Asset Quality
Non-Performing Assets
Non-performing assets consist of non-accrual loans, restructured loans and
other real estate owned (OREO). OREO represents real estate properties acquired
by the Company through foreclosure or by deed in lieu of foreclosure. Commercial
loans, residential real estate mortgage loans and installment loans are
generally placed on non-accrual status when principal or interest is 90 days or
more past due, unless the loans are well-secured and in the process of
collection. In all cases, loans may be placed on non-accrual status earlier
when, in the opinion of management, reasonable doubt exists as to the full,
timely collection of interest or principal. When a loan is placed on non-accrual
status, interest accruals cease and any uncollected interest is charged against
current income. Interest subsequently received on non-accrual loans is applied
against the principal balance.
22
Table 12
Non-Performing Assets
- ------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------
Non-accrual loans:
Commercial $ 5,499 $ 4,651 $ 6,141 $ 1,705 $ 4,045
Residential real estate mortgages 13,429 10,449 12,011 11,327 7,016
Installment 2,167 2,419 1,826 1,111 707
------- ------- ------- ------- -------
Total non-accrual loans 21,095 17,519 19,978 14,143 11,768
Other real estate owned 4,906 4,743 5,648 3,535 2,912
------- ------- ------- ------- -------
Total non-performing assets $26,001 $22,262 $25,626 $17,678 $14,680
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------
Non-performing assets as a percentage of:
Portfolio loans and OREO .69% .66% 1.01% .73% .79%
Portfolio loans, mortgage loans held
for sale and OREO .62 .58 .77 .60 .67
Total assets .56 .52 .61 .48 .50
- ------------------------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing interest:
Commercial $ 209 $ 100 $ 74 $ 274 $ -
Residential real estate mortgages - - - 228 548
Installment - - - 6 22
------- ------- ------- ------- -------
Total loans past due 90 days or more $ 209 $ 100 $ 74 $ 508 $ 570
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------
Non-performing assets totaled $26.0 million at December 31, 2000, an
increase of $3.7 million compared to $22.3 million at December 31, 1999. The
overall increase in total non-performing assets is primarily attributable to
increases in non-accrual residential real estate mortgage loans. Historically,
credit losses on loans secured by residential property have been minimal as
demonstrated by the Company's low level of net loan charge-offs. The Company's
actual losses have, generally, been limited to forgone interest and costs
related to the foreclosure process, which may take several months to complete.
Approximately $45.2 million, or 1.09%, of the loans in the loan portfolio
at December 31, 2000, were 30 to 89 days delinquent, compared to $34.5 million,
or 1.02% of portfolio loans, at December 31, 1999. The Company also maintains a
watch list for loans identified as requiring a higher level of monitoring by
management because of one or more characteristics, such as economic conditions,
industry trends, nature of collateral, collateral margin, payment history or
other factors. As of December 31, 2000, total loans on the watch list, excluding
those categorized as non-accrual loans and loans past due 90 days and still
accruing interest, were $39.0 million, or 1.0% of total portfolio loans,
compared to $20.4 million, or .6% of total portfolio loans, at December 31,
1999.
The following table presents the amount of interest income that would have
been earned on non-performing loans outstanding at December 31, 2000, 1999 and
1998 had those loans been accruing interest in accordance with the original
terms of the loan agreement, as well as the amount of interest income earned and
included in net interest income for each of those years.
23
Table 13
Forgone Interest on Non-Performing Loans
- ------------------------------------------------------------------------------------------------------------
For the Year Ended December 31
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Non-Accrual Restructured Non-Accrual Restructured Non-Accrual Restructured
- ------------------------------------------------------------------------------------------------------------
Pro forma interest income $ 1,513 $ - $ 1,326 $ - $ 1,182 $ -
Interest income earned 600 - 249 - 247 -
-------- ------- -------- -------- -------- --------
Forgone interest income $ 913 $ - $ 1,077 $ - $ 935 $ -
======== ======= ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------
Impaired Loans
At December 31, 2000 and 1999, the gross recorded investment in impaired
loans totaled $5.5 million and $4.7 million, respectively. Similar to non-
accrual loans, interest payments subsequently received on impaired loans (with
the exception of residential mortgage and consumer installment loans) are
applied against the principal balance. See Note 6 to the Consolidated Financial
Statements for further discussion of impaired loans.
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 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 on non-
accrual status via a direct charge-off against the allowance for loan losses.
Consequently, those impaired loans not requiring a specific allowance represent
loans for which the fair value of the underlying collateral equaled or exceeded
the recorded investment in the loan. All impaired loans were evaluated using the
fair value of the underlying collateral as the measurement method.
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 $870,000 to $6.5 million in 2000, compared
to $7.4 million in 1999 and $3.5 million in 1998. The decrease in 2000 was
primarily due to a reduction in commercial loan charge-offs compared to 1999,
which included additional charge-offs on certain commercial loans of D&N Bank at
the time of the Company's merger with D&N Financial. The ratio of net loan
charge-offs to average loans, including loans held for sale, was .13% in 2000,
compared to .17% for 1999 and .09% for 1998. Commercial loan net charge-offs as
a percentage of average commercial loans was .14% for 2000, compared to .38% for
1999 and .04% for 1998. Residential real estate mortgage loan net charge-offs as
a percentage of average residential mortgage loans, including loans held for
sale, was .02% for 2000 compared to .03% in both 1999 and 1998. Installment loan
net charge-offs as a percentage of average installment loans was .44% for 2000,
compared to .40% for 1999 and .35% for 1998.
24
Table 14
Analysis of the Allowance for Loan Losses
- ---------------------------------------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Balance at beginning of year $27,128 $21,446 $17,883 $15,751 $15,083
Loan charge-offs:
Commercial loans 1,884 3,452 302 745 494
Residential real estate mortgage loans 724 572 678 303 325
Installment loans 3,922 3,376 2,539 1,743 1,469
------- ------- ------- ------- -------
Total loan charge-offs 6,530 7,400 3,519 2,791 2,288
Recoveries:
Commercial loans 452 691 83 115 1,210
Residential real estate mortgage loans 178 27 52 20 5
Installment loans 722 714 447 407 351
------- ------- ------- ------- -------
Total recoveries 1,352 1,432 582 542 1,566
------- ------- ------- ------- -------
Net loan charge-offs 5,178 5,968 2,937 2,249 722
Provision charged to expense 6,500 11,650 6,500 4,381 1,390
------- ------- ------- ------- -------
Balance at end of year $28,450 $27,128 $21,446 $17,883 $15,751
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of
year-end portfolio loans .75% .80% .84% .74% .85%
Allowance for loan losses as a percentage of
year-end non-performing loans 134.87 154.85 107.35 126.44 133.85
Net charge-offs as a percentage of average
total loans (including loans held for sale) .13 .17 .09 .09 .04 .
- ---------------------------------------------------------------------------------------------
The Company's policy for charging off loans varies with respect to the
category of and specific circumstances surrounding each loan under
consideration. If management determines a loan to be under secured, then a
charge-off will generally be recommended no later than the month in which the
loan becomes 120 days past due. Open-end installment loans (home equity lines of
credit) are generally charged off when they become 180 days past due.
The following table summarizes the Company's allocation of the allowance
for loan losses for general, specific and unallocated allowances by loan type
and the percentage of each loan type of total portfolio loans. The entire
allowance, however, is available for use against any type of loan loss deemed
necessary.
25
Table 15
Allocation of the Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
- -------------------------------------------------------------------------------------------------------------------------
General allowances:
Commercial loans $ 7,109 30% $ 4,705 26% $ 2,339 25% $ 2,940 20% $ 3,170 17%
Residential real estate
mortgage loans 4,009 52 5,643 53 4,489 51 3,795 57 1,536 60
Installment loans 8,089 18 8,717 21 4,616 24 3,735 23 2,988 23
------- ------- ------- ------- -------
Total general
allowances 19,207 19,065 11,444 10,470 7,694
Specific allowances:
Commercial loans - - - - 1,145 - 145 - 463 -
Residential real estate
mortgage loans - - - - - - - - 18 -
Installment loans - - - - - - - - - -
------- --- ------- --- ------- --- ------- --- ------- ---
Total specific
allowances - - - - 1,145 - 145 - 481 -
Unallocated allowances 9,243 - 8,063 - 8,857 - 7,268 - 7,576 -
------- --- ------- --- ------- --- ------- --- ------- ---
Total allowance for
loan losses $28,450 100% $27,128 100% $21,446 100% $17,883 100% $15,751 100%
======= === ======= === ======= === ======= === ======= ===
- -------------------------------------------------------------------------------------------------------------------------
The following table summarizes the graded loan categories used by the
Company to determine the adequacy of the general allowance for loan losses at
December 31, 2000, 1999 and 1998.
Table 16
Graded Loan Categories Used in the
Allocation of the Allowance for Loan Losses
- -----------------------------------------------------------------------------------------------------
December 31
(Dollar amounts in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Loan Loan Loan
Amount/(1)/ Amount/(1)/ Amount/(1)/
- -----------------------------------------------------------------------------------------------------
Graded loan categories:
Pass (Superior, High and Satisfactory) $4,641,892 $4,127,646 $3,522,970
Special mention 35,054 25,934 16,238
Substandard 27,989 24,482 29,196
Doubtful - 72 73
Loss - 2 1,145
---------- ---------- ----------
Total loans $4,704,915 $4,178,136 $3,569,622
========== ========== ==========
- -----------------------------------------------------------------------------------------------------
/(1)/Loan amounts include mortgage loans held for sale and unfunded commitments
totaling $548 million, $346 million and $256 million at December 31, 2000,
1999 and 1998, respectively.
Each element of the general allowance for December 31, 2000, 1999 and 1998
was determined by applying the following risk percentages to each grade of loan:
Pass - .10% to 1.25%, depending on category of loans classified as Superior,
High and Satisfactory; Special mention - 2.5% to 5%; Substandard - 5% to 20%;
Doubtful - 50%; and Loss - 100%. The risk percentages are developed by the
Company in consultation with regulatory authorities, actual loss experience,
peer group loss experience and are adjusted for current economic conditions. The
risk percentages are considered a prudent measurement of the risk of the
Company's loan portfolio. Such risk percentages are applied to individual loans
based on loan type.
26
The Company reviews each delinquent commercial loan on a bi-weekly basis
and assigns a grade based on loan type, collateral value, financial condition of
the borrower and payment history. Delinquent mortgage and installment loans are
reviewed monthly and assigned a rating based on their payment history, financial
condition of the borrower and collateral values. Specific mortgage and
installment loans are also reviewed in conjunction with the previously described
review of any related commercial loan.
Based upon these reviews, the Company determines the grades for its loan
portfolio on a monthly basis and computes the allowance for loan losses. This
review provides a mechanism that results in loans being graded in the proper
category and accordingly, assigned the proper risk loss percentage in computing
the general or specific reserve.
The unallocated allowance for loan losses increased to $9.2 million at
December 31, 2000 from $8.1 million at December 31, 1999. The increase is
primarily a result of the provision for loan losses exceeded net charge-offs by
$1.3 million while the general allowance remained fairly consistent with 1999.
The provision for loan losses decreased to $6.5 million during 2000 from
$11.7 million in 1999. Excluding the $5.0 million additional charge recorded in
1999 in conjunction with the merger of D&N Financial Corporation, the provision
remained consistent with the prior year. General provisions were necessary as a
result of the increase in the commercial loan portfolio, the increase in non-
accrual loans and the increase in loans 30 to 89 days delinquent in 2000. In
1999, the provision for loan losses increased to $11.7 million from $6.5 million
in 1998. General provisions were necessary as a result of the $3.9 million
increase in charge-offs, the increase in the commercial loan portfolio and the
increase in loans 30 to 89 days delinquent in 1999. Non-accrual loans are
included in the "substandard" classification in the Company's risk rating
methodology. There have been no changes in the Company's estimation methods
since 1996.
Securities Available for Sale
The Company's investment securities portfolio, while serving as a secondary
source of earnings, carries relatively minimal principal risk and contributes to
the management of interest rate risk and liquidity risk. The portfolio is
comprised principally of U.S. Government agency obligations, obligations
collateralized by U.S. Government-sponsored agencies, mainly in the form of
collateralized mortgage obligations and mortgage-backed securities. The maturity
structure of the portfolio is generally short-term in nature or indexed to
variable rates. At December 31, 2000, fixed rate investment securities within
the portfolio, excluding municipal securities, totaled $73.3 million compared to
$122.9 million at December 31, 1999.
Investment securities available for sale totaled $211.9 million at December
31, 2000, a $5.4 million increase from $206.5 million at December 31, 1999.
Investment securities available for sale totaled $601.4 million at December 31,
1998. The $394.9 million decrease from 1999 reflected sales and maturities of
low-yielding fixed-rate securities primarily to fund growth in higher-yielding
portfolio loans. The investment securities portfolio constituted 4.6% of the
Company's assets at December 31, 2000, compared to 4.8% a year earlier.
The following table summarizes the composition of the Company's investment
securities portfolio at December 31, 2000, 1999 and 1998.
Table 17
Securities Available For Sale Portfolio
- ------------------------------------------------------------------------------
December 31
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------
U.S. Treasury and Government agency securities $ 12,494 $ 44,548 $ 15,334
Commercial paper - - 89,851
Collateralized mortgage obligations 88,249 65,903 356,075
Mortgage-backed securities 19,869 16,152 103,822
Municipal and other securities 14,512 3,289 5,109
Investment in FHLB 76,736 76,567 31,238
-------- -------- --------
Total securities available for sale $211,860 $206,459 $601,429
======== ======== ========
- ------------------------------------------------------------------------------
The maturity distribution of and average yield information for investment
securities held as of December 31, 2000 is provided in the following table.
27
Table 18
Maturity Distribution of Securities Available for Sale Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 Due Within One to Five to After
(Dollars in thousands) One Year Five Years Ten Years Ten Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated Estimated Estimated
Market Avg. Market Avg. Market Avg. Market Avg. Market Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and
Government agency
securities $ - -% $ - -% $ 389 7.66% $ 12,105 7.54% $ 12,494 7.54%
Collateralized mortgage
obligations /(2)(3)/ - - - - - - 88,249 6.78 88,249 6.78
Mortgage-backed
securities /(2)(3)/ 7 7.36% - - - - 19,862 7.05 19,869 7.05
Municipal and other
securities /(1)/ 113 9.53 56 9.30 1,989 7.34 12,354 8.02 14,512 7.93
Investment in FHLB 76,736 7.98 - - - - - - 76,736 7.98
------- ----- ----- ----- ------- ----- --------- ----- -------- -----
Total securities
available for sale $76,856 7.97% $ 56 9.30% $ 2,378 7.39% $132,570 7.01% $211,860 7.36%
======= ===== ===== ===== ======= ===== ======== ===== ======== =====
- -----------------------------------------------------------------------------------------------------------------------------------
/(1)/ Average yields on tax-exempt obligations have been computed on a tax
equivalent basis, based on a 35% federal tax rate.
/(2)/ Collateral guaranteed by U.S. Government agencies.
/(3)/ All maturities beyond ten years have estimated average lives of less than
6 years. The average yield presented represents the current yield on these
securities.
Liabilities
- -----------
Deposits
Total deposits, the Company's primary source of funding, increased 4% to
$2.73 billion at December 31, 2000, after decreasing 1% a year earlier. The
Company's core deposits represent the largest and most stable component of total
deposits and consist of demand deposits, NOW accounts, regular savings accounts,
money market accounts, Individual Retirement Accounts (IRAs) and retail
certificates of deposit. At year-end 2000, core deposits totaled $2.20 billion,
a slight decrease when compared to $2.21 billion at year-end 1999.
Table 19
Maturity Distribution of Certificates of Deposit of $100,000 or More
- --------------------------------------------------------------------------------
December 31
(In thousands) 2000
- --------------------------------------------------------------------------------
Three months or less $367,466
Over three months through six months 251,707
Over six months through twelve months 104,797
Over twelve months 79,980
--------
Total $803,950
========
- --------------------------------------------------------------------------------
The Company also funds its loans with brokered certificates of deposit and
municipal certificates of deposit. At December 31, 2000, these deposits totaled
$105.4 million and $422.7 million, respectively, and represented 19% of total
deposits on a combined basis. At December 31, 1999, brokered certificates of
deposit totaled $72.9 million and municipal certificates of deposit totaled
$325.7 million, representing 15% of total deposits on a combined basis.
Short-Term Borrowings
Short-term borrowings decreased $55.5 million, or 97%, to $1.7 million at
December 31, 2000, following a 41% decline to $57.2 million a year earlier.
Short-term borrowings at year-end 2000 were treasury, tax and loan demand notes.
At year-end 1999, the short-term borrowings balance also included federal funds
purchased. The amount provided by these funding sources has declined over the
past two years due to increases in short- and long-term FHLB advances and total
deposits. See Note 9 to the Consolidated Financial Statements for further
information regarding short-term borrowings.
28
FHLB Advances
The Company's bank subsidiary routinely utilizes FHLB advances, both on a
short-term and long-term basis, to provide funding for mortgage loan production
and to minimize the interest rate risk associated with certain fixed rate
commercial and residential mortgage portfolio loans. These advances are
generally secured under a blanket security agreement by first mortgage loans and
investment securities with an aggregate book value equal to at least 150% of the
total advances. Total FHLB advances were $1.38 billion at December 31, 2000
compared to $1.17 billion at December 31, 1999, representing an 18% increase.
This increase was primarily attributable to the utilization of FHLB advances to
fund mortgage loan originations. See Note 10 to the Consolidated Financial
Statements for further information regarding FHLB advances.
Long-Term Debt
Long-term debt totaled $47.5 million at December 31, 2000 and 1999. See
Note 11 to the Consolidated Financial Statements for further information
regarding long-term debt.
Capital
- -------
Shareholders' equity increased $28.4 million, or 11%, to $294.9 million at
December 31, 2000, after increasing slightly to $266.4 million a year earlier.
The increase in shareholders' equity during 2000 resulted primarily from net
income of $45.7 million being offset by $15.7 million in cash dividends to
shareholders in 2000. The total cash dividend paid in 2000 represented a 12%
increase over the amount declared in 1999, reflecting the increase in the shares
outstanding that resulted from the Company's 10% stock dividend and an increase
in the cash dividend paid to $.32 per share from $.30 per share in 1999.
On November 18, 1999, the Board of Directors approved a stock repurchase
plan allowing for the repurchase of up to 1,100,000 shares of the Company's
outstanding common stock. On February 15, 2001, the Board of Directors approved
a 2001 Stock Repurchase Program authorizing the repurchase of up to 1,000,000
additional shares. The 2001 Stock Repurchase Program will commence at the
conclusion of the 1999 Stock Repurchase Program. Repurchases are made from time
to time as market and business conditions warrant, in the open market,
negotiated, or block transactions, and are funded from available working capital
and cash flow from operations. Repurchased shares will be used for employee
benefit plans, stock dividends and other general business purposes, including
potential acquisitions. The Company repurchased 922,000 and 95,500 shares under
this program during 2000 and 1999, respectively.
The Company is subject to risk-based capital adequacy guidelines that
measure capital relative to risk-weighted assets and off-balance sheet financial
instruments. Capital adequacy guidelines issued by the Federal Reserve Board
require bank holding companies to have a minimum total risk-based capital ratio
of 8.00%, with at least half of total capital in the form of Tier 1, or core
capital. The Company's total risk-based capital ratio was 10.38% at December 31,
2000, compared to 10.60% a year ago. For further information regarding
regulatory capital requirements, see Note 24 to the Consolidated Financial
Statements.
Liquidity Management
The objective of liquidity management is to provide funds at an acceptable
cost to meet mortgage and commercial loan demand and deposit withdrawals and to
service other liabilities as they become due. Managing liquidity also enables
the Company to take advantage of opportunities for business expansion. Funds are
available from a number of sources, including, but not limited to, cash and
money market investments, the investment securities portfolio, mortgage loans
held for sale and portfolio loan repayments and maturities.
Short-term liquidity is available from federal funds purchased, securities
sold under agreement to repurchase, core deposit growth, brokered and municipal
certificates of deposit and FHLB advances. Long-term liquidity is generated from
securities sold under agreement to repurchase, deposit growth, the maturity
structure of time deposits, brokered certificates of deposit and FHLB advances.
As of December 31, 2000, the Company's balance of certificates of deposit
maturing within the next twelve months was $1.44 billion. The Company expects
that a significant portion of these certificates of deposit will be renewed
based on the Company's success at establishing long lasting customer
relationships. However, the Company will use its other available funding sources
to replace those deposits which are not renewed.
At December 31, 2000, Republic Bank had available $127.5 million in unused
lines of credit with third parties for federal funds purchased and $109.9
million available in unused borrowings with the FHLB.
29
Republic Bancorp Inc. has two major funding sources to meet its liquidity
requirements: dividends from its subsidiary and access to the capital markets.
On December 31, 2000, $183.4 million was available from Republic Bank for
payment of dividends to the parent company without prior regulatory approval,
compared to $158.2 million at December 31, 1999. Also, at December 31, 2000, the
parent company had interest-earning deposits of $16.7 million at Republic Bank
to meet any liquidity requirements. In December 2000, the Company entered into a
$30 million revolving credit agreement with a third party with a floating
interest rate based on LIBOR. There were no advances outstanding under the
agreement at December 31, 2000.
As discussed in Item 1 of the Company's 2000 Annual Report on Form 10-K,
Republic Bank is subject to statutory and regulatory requirements and, among
other things, may be limited in their ability to pay dividends to the parent
company. These statutory and regulatory restrictions have not had, and are not
expected to have, a material effect on the Company's ability to meet its cash
obligations.
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.
For a discussion of certain factors that may cause such forward-looking
statements to differ materially from actual results, see Item 1 of the Company's
2000 Annual Report on Form 10-K.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, foreign
exchange rates and equity prices. The Company's market risk exposure is composed
entirely of interest rate risk. Interest rate risk arises in the normal course
of business to the extent that there is a difference between the amount of the
Company's interest-earning assets and the amount of interest-bearing liabilities
that are prepaid/withdrawn, reprice or mature in specified periods.
Asset and Liability Management
The primary objective of asset and liability management is to maintain
stability in the level of net interest income by producing the optimal yield and
maturity mix of assets and liabilities within the interest rate risk limits set
by the Company's Asset and Liability Management Committee (ALCO) and consistent
with projected liquidity needs and capital adequacy requirements.
Interest Rate Risk Management
- -----------------------------
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 the
Company's subsidiary bank 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.
During 2000, short-term interest rates increased fairly significantly while
long-term interest rates decreased. The three-month treasury-bill increased 57
basis points from December 31, 1999 to December 31, 2000, while the 30-year
treasury bond decreased 102 basis points and the prime lending rate increased
100 basis points during 2000. As a result of the long-term interest rates
beginning the year at a higher level than in recent years and a significant
portion of the decrease not occurring until the fourth quarter of 2000, the
demand for residential loans decreased during 2000. Despite the increase in the
prime lending rate, commercial lending increased due to the successful efforts
by our team of commercial lenders. Portfolio loan growth was funded primarily
with deposit growth and FHLB borrowings. The Company's net interest margin
decreased 15 basis points to 3.14% during 2000 due to the increase in the
Company's cost of funds, which was offset by an improved the mix of its average
earning assets.
The mortgage loans held for sale balance is the Company's most interest
rate sensitive asset. It is also short-term in nature as the majority of loans
in this balance are sold within 60 days. By funding this balance with primarily
short-term borrowings, the Company is able to both closely match its liquidity
needs as this balance will generally increase in a declining interest rate
environment and decrease in a rising interest rate environment, and maintain a
consistent interest rate spread when the yield curve moves in parallel shifts.
As is discussed in Note 22 to the Consolidated Financial Statements, committing
to fund residential real estate loan applications at specified
30
rates and holding residential mortgage loans for sale to the secondary market
exposes the Company to market risk during the period after the loans close but
before they are sold to investors. To minimize this exposure to market risk, the
Company enters into firm commitments to sell such mortgage loans at specified
future dates to various third parties.
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 December 31,
2000, the cumulative one-year gap was a negative 3.36% of total earning assets.
At December 31, 1999, the cumulative one-year gap was a negative 7.32% of total
earning assets.
The Company's current policy is to maintain a mix of asset and liabilities
with repricing and maturity characteristics that permit a moderate amount of
short-term interest rate risk based on current interest rate projections,
customer credit demands and deposit preferences. The Company generally operates
in a range of plus or minus 10% of total earning assets for the cumulative one-
year gap. Management believes that this range reduces the vulnerability of net
interest income to large shifts in market interest rates while allowing the
Company to take advantage of fluctuations in current short-term rates.
Earnings Simulation: On a monthly basis, the earnings simulation model is used
to quantify the effects of various hypothetical changes in interest rates on the
Company's projected net interest income over the ensuing twelve-month period.
The model permits management to evaluate the effects of various parallel shifts
of the U.S. Treasury yield curve, upward and downward, on net interest income
expected in a stable interest rate environment (i.e., base net interest income).
As of December 31, 2000, the earnings simulation model projects net
interest income would decrease by 11% of base net interest income for 2001,
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%. 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.
31
Table 20
Static Gap Analysis/(1)/
- ---------------------------------------------------------------------------------------------------------------------------
Within 4 Months 1 to 5 Years
(Dollars in thousands) 3 Months to 1 Year 5 Years or Over Total
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 2000
Interest-Earning Assets:
Federal funds sold and other money market
investments $ 5,819 $ - $ - $ - $ 5,819
Mortgage loans held for sale 344,232 40,975 - - 385,207
Securities available for sale 121,997 14,480 39,356 36,027 211,860
Loans, net of unearned income 836,903 695,158 1,697,884 541,731 3,771,676
---------- --------- ---------- ---------- ----------
Total interest-earning assets $1,308,951 $ 750,613 $1,737,240 $ 577,758 $4,374,562
========== ========= ========== ========== ==========
Interest-Bearing Liabilities:
Deposits:
Savings and NOW accounts $ - $ - $ 476,541 $ 114,957 $ 591,498
Money market accounts - 74,517 74,517 - 149,034
Certificates of deposit:
Under $100,000 250,733 393,950 253,972 17,880 916,535
$100,000 or more 367,466 356,505 79,448 531 803,950
---------- --------- ---------- ---------- ----------
Total certificates of deposit 618,199 750,455 333,420 18,411 1,720,485
---------- --------- ---------- ---------- ----------
Total interest-bearing deposits 618,199 824,972 884,478 133,368 2,461,017
Short-term borrowings/(2)/ 1,729 - - - 1,729
FHLB advances 640,751 87,000 33,503 622,259 1,383,513
Long-term debt 9,000 25,000 13,500 - 47,500
---------- --------- ---------- ---------- ----------
Total interest-bearing liabilities $1,269,679 $ 936,972 $ 931,481 $ 755,627 $3,893,759
========== ========= ========== ========== ==========
Interest rate sensitivity gap $ 39,272 $(186,359) $ 805,759 $ (177,869) $ 480,803
As a percentage of total interest-earning assets .90% (4.26)% 18.42% (4.07)% 10.99%
Cumulative interest rate sensitivity gap $ 39,272 $(147,087) $ 658,672 $ 480,803
As a percentage of total interest-earning assets .90% (3.36)% 15.06% 10.99%
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1999
Interest-Earning Assets:
Federal funds sold and other money market
investments $ 9,338 $ - $ - $ - $ 9,338
Mortgage loans held for sale 459,059 - - - 459,059
Securities available for sale 92,283 19,345 50,015 48,742 210,385
Loans, net of unearned income 937,242 623,306 1,328,569 484,308 3,373,425
---------- --------- ---------- ---------- ----------
Total interest-earning assets $1,497,922 $ 642,651 $1,378,584 $ 533,050 $4,052,207
========== ========= ========== ========== ==========
Interest-Bearing Liabilities:
Deposits:
Savings and NOW accounts $ - $ - $ 457,775 $ 124,935 $ 582,710
Money market accounts - 86,444 86,444 - 172,888
Certificates of deposit:
Under $100,000 272,852 401,760 201,675 18,139 894,426
$100,000 or more 366,734 273,104 73,008 1,215 714,061
---------- --------- ---------- ---------- ----------
Total certificates of deposit 639,586 674,864 274,683 19,354 1,608,487
---------- --------- ---------- ---------- ----------
Total interest-bearing deposits 639,586 761,308 818,902 144,289 2,364,085
Short-term borrowings/(2)/ 57,243 - - - 57,243
FHLB advances 874,000 105,000 187,808 5,403 1,172,211
Long-term debt - - 47,500 - 47,500
---------- --------- ---------- ---------- ----------
Total interest-bearing liabilities $1,570,829 $ 866,308 $1,054,210 $ 149,692 $3,641,039
========== ========= ========== ========== ==========
Interest rate sensitivity gap $ (72,907) $(223,657) $ 324,374 $ 383,358 $ 411,168
As a percentage of total interest-earning assets (1.80)% (5.52)% 8.00% 9.46% 10.15%
Cumulative interest rate sensitivity gap (72,907) $(296,564) $ 27,810 $ 411,168
As a percentage of total interest-earning assets (1.80)% (7.32)% .69% 10.15%
- ---------------------------------------------------------------------------------------------------------------------------
/(1)/ Actual maturity or repricing dates are used for investment securities,
certificates of deposit and short-term borrowings. Assumptions and
estimates have been made for NOW accounts, savings, and money market
accounts to more accurately reflect repricing and retention.
/(2)/ Includes federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings.
32
Impact of Interest Rate Fluctuations and Inflation on Earnings
Unlike most industrial companies, substantially all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rate fluctuations generally have a more significant and direct impact
on a financial institution's performance than do the effects of inflation. To
the extent inflation affects interest rates, real estate values and other costs,
the Company's lending activities may be adversely impacted. Significant
increases in interest rates make it more difficult for potential borrowers to
purchase residential property and to qualify for mortgage loans. As a result,
the Company's volume of loans originated may be reduced and the potential
reduction in the related interest income and fee income may be much larger than
would implied by a simple linear extrapolation of the results generated by the
earnings simulation model. The Company's fair value of its mortgage servicing
portfolio does increase, however, in a rising interest rate environment.
Significant decreases in interest rates typically result in higher loan
prepayment activity, which reduces interest income and causes the Company's
mortgage servicing rights to decrease in value. However, a lower interest rate
environment would enable more potential borrowers to reduce their mortgage
interest rate and qualify for relatively higher mortgage loan balances,
therefore resulting in higher mortgage loan production activity as well as
interest income.
Accounting and Financial Reporting Developments
In June 1998, the Financial Accounting Standards Board 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 in June 2000 by Statement No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities and is required to be adopted by the
Company in years beginning after June 15, 2000. The Statement requires 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 implemented FAS 133 effective January 1, 2001. The transition
adjustments resulting from adopting this Statement 133 are immaterial. The
Company believes that its hedging policies using mandatory forward commitments,
as they relate to Interest Rate Lock Commitments and mortgage loans held for
sale, are highly effective. Therefore, the Company does not expect FAS 133 to
have a significant impact on net income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section entitled
"Market Risk Management" included under Item 7 of this document and is
incorporated herein by reference.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Republic Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------
December 31
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------
Assets
Cash and due from banks $ 76,558 $ 74,423
Interest-earning deposits with banks 5,819 9,338
---------- ----------
Cash and cash equivalents 82,377 83,761
Mortgage loans held for sale 385,207 459,059
Securities available for sale 211,860 206,459
Loans, net of unearned income 3,771,676 3,373,425
Less allowance for loan losses (28,450) (27,128)
---------- ----------
Net loans 3,743,226 3,346,297
Premises and equipment 36,094 40,025
Mortgage servicing rights 51,796 67,290
Other assets 100,081 98,724
---------- ----------
Total assets $4,610,641 $4,301,615
========== ==========
Liabilities
Noninterest-bearing deposits $ 267,509 $ 248,965
Interest bearing deposits:
NOW accounts 150,476 142,536
Savings and money market accounts 590,056 613,062
Certificates of deposit 1,720,485 1,608,487
---------- ----------
Total interest-bearing deposits 2,461,017 2,364,085
---------- ----------
Total deposits 2,728,526 2,613,050
Federal funds purchased and
other short-term borrowings 1,729 57,243
FHLB advances 1,383,513 1,172,211
Accrued expenses and other liabilities 125,790 116,451
Long-term debt 47,500 47,500
---------- ----------
Total liabilities 4,287,058 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; 49,424,000 and 49,814,000 shares
issued and outstanding in 2000 and 1999, respectively 247,119 226,429
Capital surplus 44,961 39,163
Retained earnings 2,994 3,401
Accumulated other comprehensive loss (210) (2,552)
---------- ----------
Total shareholders' equity 294,864 266,441
---------- ----------
Total liabilities and shareholders' equity $4,610,641 $4,301,615
========== ==========
--------------------------------------------------------------------------------
See accompanying notes.
34
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Income
- -------------------------------------------------------------------------------------------
Years Ended December 31
(Dollars in thousands, except per share data) 2000 1999 1998
- -------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans $333,667 $268,552 $247,314
Interest on investment securities 14,661 31,110 38,665
-------- -------- --------
Total interest income 348,328 299,662 285,979
-------- -------- --------
Interest Expense
Interest on deposits:
NOW accounts 1,708 1,722 1,702
Savings and money market accounts 22,625 22,701 25,283
Certificates of deposits 98,829 82,150 83,315
-------- -------- --------
Total interest expense on deposits 123,162 106,573 110,300
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 3,532 3,462 6,984
Interest on FHLB advances 83,552 57,616 52,370
Interest on long-term debt 3,434 3,745 3,995
-------- -------- --------
Total interest expense 213,680 171,396 173,649
-------- -------- --------
Net interest income 134,648 128,266 112,330
Provision for loan losses 6,500 11,650 6,500
-------- -------- --------
Net interest income after provision for loan losses 128,148 116,616 105,830
-------- -------- --------
Noninterest Income
Mortgage loan production revenue 55,720 80,368 85,322
Net mortgage servicing revenue 3,439 6,101 (64)
Service charges 7,819 7,327 5,902
Investment securities gains (losses) 109 (7,345) 2,525
Other noninterest income 3,751 6,232 4,863
-------- -------- --------
Total noninterest income 70,838 92,683 98,548
-------- -------- --------
Noninterest Expense
Salaries and employee benefits 72,538 83,161 80,015
Occupancy expense of premises 13,467 13,594 11,612
Equipment expense 9,090 7,809 7,192
Other noninterest expenses 36,546 44,835 43,257
Merger integration and restructuring (credit) (4,000) 31,521 -
-------- -------- --------
Total noninterest expense 127,641 180,920 142,076
-------- -------- --------
Income before income taxes 71,345 28,379 62,302
Provision for income taxes 22,945 10,745 20,627
-------- -------- --------
Income before preferred stock dividends 48,400 17,634 41,675
Dividends on preferred stock 2,723 2,723 2,723
-------- -------- --------
Net Income $ 45,677 $ 14,911 $ 38,952
======== ======== ========
Basic earnings per share $ .92 $ .30 $ .80
======== ======== ========
Diluted earnings per share $ .92 $ .30 $ .78
======== ======== ========
- -------------------------------------------------------------------------------------------
See accompanying notes.
35
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
Accumulated
Number of Other Total
(In thousands, except per Common Common Capital Treasury Retained Comprehensive Shareholder'
share data) Shares Stock Surplus Stock Earnings Income (loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1998 35,417 $177,085 $ 30,644 $ (1,581) $ 22,316 $ 706 $229,170
Comprehensive Income:
Net Income 38,952 38,952
Unrealized holding gains
on securities,
net of $461 income tax benefit 2,425 2,425
Reclassification adjustment for gains
included in net income, net of $884
income tax expense (1,641) (1,641)
--------- ----------
Net unrealized gains on
securities, net of tax 784 784
----------
Comprehensive income 39,736
Cash dividends declared
($.26 per share) (9,388) (9,388)
Awards of common stock under
Incentive Stock Plan (1,640) (1,640)
Amortization of restricted stock 979 979
5 for 4 stock split 4,737 23,685 (10,538) (13,183) (36)
Issuance of common shares:
Through exercise of stock options 337 1,685 2,569 4,254
Through exercise of stock warrants 135 673 (215) 458
Through employee stock awards 163 818 2,255 3,073
Tax benefit relating to
exercise of stock options 873 873
Reissuance of treasury shares (1,964) 1,964 -
Repurchase of common shares (77) (386) (833) (383) (1,602)
------ --------- --------- ------- -------- --------- ----------
Balances at December 31, 1998 40,712 203,560 22,130 - 38,697 1,490 265,877
Comprehensive Income:
Net Income 14,911 14,911
Unrealized holding losses on securities,
net of $4,747 income tax benefit (8,816) (8,816)
Reclassification adjustment for losses
included in net income, net of $2,571
income tax benefit 4,774 4,774
--------- ----------
Net unrealized gains on
securities, net of tax (4,042) (4,042)
----------
Comprehensive income 10,869
Cash dividends declared
($.30 per share) (13,876) (13,876)
Awards of common stock
under Incentive Stock Plan (545) (545)
Amortization of restricted
stock 1,012 1,012
10% common share dividend 4,121 20,605 15,703 (36,331) (23)
Issuance of common shares:
Through exercise of stock options 470 2,347 564 2,911
Through exercise of stock warrants 30 152 (71) 81
Through employee stock awards 193 965 1,495 2,460
Tax benefit relating to exercise of stock
options and warrants and vesting
of restricted stock 723 723
Repurchase of common shares (240) (1,200) (1,848) (3,048)
------ --------- --------- ------- -------- --------- ----------
Balances at December 31, 1999 45,286 226,429 39,163 - 3,401 (2,552) 266,441
- ------------------------------------ ---------------------------------------------------------------------------------------
See accompanying notes.
36
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Continued)
- --------------------------------------------------------------------------------
Accumulated
Number of Other Total
Common Common Capital Treasury Retained Comprehensive Shareholders'
(In thousands, except per share data Shares Stock Surplus Stock Earnings Income (loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 45,286 $226,429 $39,163 - $ 3,401 $(2,552) $266,441
Comprehensive Income:
Net Income 45,677 45,677
Unrealized holding gains on
securities, net of $1,299
income tax expense 2,413 2,413
Reclassification adjustment for
gains included in net income,
net of $38 income tax expense (71) (71)
------- --------
Net unrealized losses on securities,
net of tax 2,342 2,342
--------
Comprehensive income 48,019
Cash dividends declared ($.32 per share) (15,726) (15,726)
Awards of common stock under
Incentive Stock Plan (566) (566)
Amortization of restricted stock 1,133 1,133
10% common share dividend 4,507 22,535 7,823 (30,358) -
Issuance of common shares:
Through exercise of stock options 331 1,654 (683) 971
Through exercise of stock warrants 21 104 46 150
Through employee stock awards 201 1,005 970 1,975
Tax benefit relating to exercise
of stock options and warrants and
vesting of restricted stock 521 521
Repurchase of common shares (922) (4,608) (3,446) (8,054)
------ -------- ------- --------- -------- -------- --------
Balances at December 31, 2000 49,424 $247,119 $44,961 - $ 2,994 $ (210) $294,864
====== ======== ======= --------- ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
37
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 45,677 $ 14,911 $ 38,952
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,406 9,302 7,405
Amortization and impairment of mortgage servicing rights 13,974 12,157 18,038
Net gains on sale of mortgage servicing rights (28,445) (37,158) (37,779)
Net (gains) losses on sale of securities available for sale (109) 7,345 (2,525)
Net gains on sale of loans (1,112) (3,883) (5,602)
Proceeds from sale of mortgage loans held for sale 3,509,017 4,643,117 5,620,400
Origination of mortgage loans held for sale (3,435,165) (4,332,148) (5,743,164)
Decrease (increase) in other assets 3,858 (1,473) (35,123)
Increase (decrease) in other liabilities 9,339 (24,353) 14,947
Other, net (7,811) (4,369) (4,055)
----------- --------------- ----------
Total adjustments 73,952 268,537 (167,458)
----------- --------------- ----------
Net cash provided by (used in) operating activities 119,629 283,448 (128,506)
Cash Flows From Investing Activities:
Proceeds from sale of mortgage servicing rights 63,887 75,953 65,419
Additions to mortgage servicing rights (40,647) (53,975) (49,396)
Proceeds from sale of securities available for sale 41,373 498,089 171,201
Proceeds from maturities/principal payments of
securities available for sale 24,651 325,183 197,062
Proceeds from maturities/principal payments of
securities held to maturity - - 231,353
Purchase of securities available for sale (67,838) (251,959) (345,122)
Purchase of securities held to maturity - (121,561) (259,044)
Proceeds from sale of loans 171,941 174,249 260,316
Net increase in loans made to customers (566,961) (995,420) (609,147)
Proceeds from sale of fixed assets 1,672 82 208
----------- ---------------- ----------
Net cash used in investing activities (371,922) (349,359) (337,150)
Cash Flows From Financing Activities:
Net increase (decrease) in total deposits $ 115,476 $ (29,781) $ 350,890
Purchase of bank branch deposits - - 71,888
Net decrease in short-term borrowings (55,514) (39,695) (110,566)
Net (decrease) increase in short-term FHLB advances (202,000) 549,000 12,000
Proceeds from long-term FHLB advances 635,302 35,000 350,000
Payments on long-term FHLB advances (222,000) (398,360) (206,064)
Payments on long-term debt - (4,694) (1,734)
Net proceeds from issuance of common shares 3,096 5,452 7,785
Repurchase of common shares (8,054) (3,048) (1,602)
Dividends paid (15,397) (11,914) (9,394)
----------- ---------------- ----------
Net cash provided by financing activities 250,909 101,960 463,203
----------- ---------------- ----------
Net (decrease) increase in cash and cash equivalents (1,384) 36,049 (2,453)
Cash and cash equivalents at beginning of year 83,761 47,712 50,165
----------- ---------------- -----------
Cash and cash equivalents at end of year $ 82,377 83,761 $ 47,712
=========== ================ ===========
- -----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 210,304 $ 169,692 $ 172,294
Income taxes $ 22,273 $ 13,607 $ 13,482
Supplemental Schedule of Non-Cash Investing Activities:
Portfolio loan charge-offs $ 6,530 $ 7,400 $ 3,519
Securitization of loans into mortgage-backed securities $ - $ - $ 82,856
Transfer of securities held to maturity to securities
available for sale $ - $ 58,476 $ -
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes.
38
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Republic Bancorp Inc. and Subsidiary (the "Company") is a bank holding company
headquartered in Ann Arbor, Michigan. The Company has two primary lines of
business: (1) commercial and retail banking and (2) mortgage banking. Financial
products are offered to consumers and businesses through the 90 retail bank
branches of its bank subsidiary located in Michigan, Ohio and Indiana. The
Company also maintains a nationwide mortgage banking network of 56 offices
located in 16 states. In addition, the Company performs residential mortgage
loan servicing for the benefit of others with responsibilities ranging from
collecting and remitting loan payments to supervising foreclosure proceedings.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and include the
accounts of Republic Bancorp Inc.; its wholly-owned bank subsidiary, Republic
Bank (including its subsidiaries, D&N Capital Corporation, Quincy Investment
Services, Inc. and Market Street Mortgage Corporation.). D&N Capital Corporation
and Quincy Investment Services, Inc. are wholly-owned subsidiaries and Market
Street Mortgage Corporation, is an 80% majority-owned mortgage company
subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to current year
presentations. The primary reclassification from prior year is the deduction of
mortgage loan commission expense against mortgage loan production revenue for
1999 and 1998.
Use of Estimates
Management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and accompanying notes, as well as the
amounts of revenues and expenses reported during the periods covered by those
financial statements and accompanying notes. Actual results could differ from
these estimates.
Securities Available for Sale
The Company's investment securities classified as available for sale are
stated at fair market value with unrealized gains and losses, net of income
taxes, reported as a component of shareholders' equity. Gains and losses on
sales of securities are computed based on specific identification of the
adjusted cost of each security and included in investment securities gains
(losses).
For mortgage portfolio loans securitized and retained as investment
securities, the remaining net deferred fees or costs are treated as a discount
or premium and recognized as an adjustment to the yield over the life of the
security using the effective interest method. If the security is subsequently
sold, any remaining net deferred fees or costs are treated as part of the cost
basis in determining the gain or loss on sale of the security.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. The cost basis of mortgage loans held for sale is adjusted by any gains
or losses generated from corresponding forward commitments to sell the loans to
investors in the secondary market. Such commitments are generally entered into
at the time when applications are taken to protect the value of the mortgage
loans from increases in interest rates during the period held. Mortgage loans
originated are generally sold within a period of 30 to 60 days after closing,
therefore, the related fees and costs are not amortized during that period.
39
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Loans
Loans are stated at the principal amount outstanding, net of unearned income.
Interest income earned on all loans is accrued daily. Loans for which the
accrual of interest has been discontinued are designated as non-accrual loans.
Commercial loans, residential real estate mortgage loans and installment loans
are placed on non-accrual status at the time the loan is 90 days past due,
unless the loan is well-secured and in the process of collection. In all cases,
loans may be placed on non-accrual status when, in the opinion of management,
reasonable doubt exists as to the full, timely collection of interest or
principal. All interest accrued but not collected for loans that are placed on
non-accrual status is reversed and charged against current income. Any interest
payments subsequently received on non-accrual loans are applied against the
principal balance. Loans are considered restructured when the Company makes
certain concessions to a financially troubled debtor that would not normally be
considered. Loan origination and commitment fees and certain direct loan
origination costs are deferred and recognized over the life of the related loan
as an adjustment to the yield on the loan.
Allowance for Loan Losses
The allowance for loan losses 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 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 on non-
accrual status via a direct charge-off against the allowance for loan losses.
Consequently, those impaired loans not requiring a specific allowance represent
loans for which the fair value of the underlying collateral equaled or exceeded
the recorded investment in the loan. All impaired loans were evaluated using
the fair value of the underlying collateral as the measurement method.
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.
Each element of the general allowance for December 31, 2000, 1999 and 1998 was
determined by applying the following risk percentages to each grade of loan:
Pass - .10% to 1.25%, depending on category of loans classified as Superior,
High and Satisfactory; Special mention - 2.5% to 5%; Substandard - 5% to 20%;
Doubtful - 50%; and Loss - 100%. The risk percentages are developed by the
Company in consultation with regulatory authorities, actual loss experience,
peer group loss experience and are adjusted for current economic conditions.
The risk percentages are considered a prudent measurement of the risk of the
Company's loan portfolio. Such risk percentages are applied to individual loans
based on loan type.
The Company reviews each delinquent commercial loan on a bi-weekly basis and
assigns a grade based on loan type, collateral value, financial condition of the
borrower and payment history. Delinquent mortgage and installment loans are
reviewed monthly and assigned a rating based on their payment history, financial
condition of the borrower and collateral values. Specific mortgage and
installment loans are also reviewed in conjunction with the previously described
review of any related commercial loan.
40
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Based upon these reviews, the Company determines the grade for its loan
portfolio on a monthly basis and computes the allowance for loan losses. This
review provides a mechanism that results in loans being graded in the proper
category and accordingly, assigned the proper risk loss percentage in computing
the general or specific reserve.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed on a straight-line basis over the shorter of the
estimated useful lives of the related assets or the remaining lease terms.
Long-lived assets held for use, held for disposal and goodwill are measured for
impairment and are accounted for under the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of.
Mortgage Servicing Rights
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan and the mortgage servicing rights ("MSRs") based on
their relative fair values at the date of origination. The capitalized cost of
MSRs is amortized in proportion to and over the period of the estimated future
net servicing income. Mortgage servicing rights are periodically evaluated for
impairment, which represents the excess of cost of an individual MSR stratum
over its fair value. Impairment is recognized through a valuation allowance.
For purposes of measuring impairment, MSRs are stratified on the basis of loan
type (e.g., fixed, balloon or adjustable) and interest rate.
Fair values for individual stratum are based on the present value of estimated
future cash flows using a discount rate commensurate with the risks involved.
Estimates of fair value include assumptions about prepayment speeds, default and
interest rates, and other factors which are subject to change over time.
Changes in these underlying assumptions could cause the fair value of MSRs, and
the related valuation allowance, to change significantly in the future.
Goodwill
The excess of cost over the fair value of net assets acquired is included in
other assets and is amortized using the straight-line method over a period of
15 years. Core deposit intangible assets are amortized on a straight-line basis
over a period of 10 to 15 years.
Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to temporary differences between the tax and financial statement
basis of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is established to the extent current available
evidence about future events raise doubt about the future realization of a
deferred tax asset. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enacted date.
Earnings Per Share
Basic earnings per share is calculated by dividing income available to common
shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share include any dilutive effects of options and warrants.
41
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Stock-Based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation. As permitted by the Statement, the Company continues
to use the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion No. 25 when accounting for its employee stock compensation plans.
Therefore, no compensation costs are charged against income for stock option
grants. Accordingly, the Company is required to disclose pro forma net income
and earnings per share information as if compensation expense had been
recognized for stock options granted based on the fair value method prescribed
by SFAS No. 123. See Note 15 to the Consolidated Financial Statements.
The Company continues to recognize compensation expense for restricted stock
over the vesting period in accordance with APB Opinion No. 25. Such expense is
included in salaries and employee benefits expense on the consolidated
statements of income. The unamortized portion of restricted stock is included
as a component of shareholders' equity.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, interest-earning deposits with banks, federal
funds sold and other short-term investments with maturities less than 90 days.
Note 2. Acquisitions
The Company completed the following acquisitions in the years indicated.
During 1999:
On May 17, 1999, the Company merged with D&N Financial Corporation ("D&N
Financial"), headquartered in Troy and Hancock, Michigan, whereby each share of
D&N Financial common stock was converted into 1.82 shares of the Company's
common stock. D&N Financial was a financial services holding company with
approximately $2.0 billion in assets and $119.8 million in stockholders' equity
at May 17, 1999. The merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests.
42
Notes to Consolidated Financial Statements
Note 2. Acquisitions (Continued)
The effect on the results of operations for the periods prior to the
combination is as follows:
Three Months Year
Ended Ended
March 31, December 31,
(In thousands) 1999 1998
- --------------------------------- ------------- ------------
(Unaudited)
Total Revenue:
Republic Bancorp Inc. $60,052 $230,733
D&N Financial Corporation 39,312 153,794
------- --------
Total $99,364 $384,527
======= ========
Net Income:
Republic Bancorp Inc. $ 6,136 $ 22,890
D&N Financial Corporation 4,019 16,062
------- --------
Total $10,155 $ 38,952
======= ========
Basic earnings per share:/(1)/
Republic Bancorp Inc. $ .21 $ .80
D&N Financial Corporation .43 1.75
Diluted earnings per share:/(1)/
Republic Bancorp Inc. $ .21 $ .78
D&N Financial Corporation .42 1.69
- --------------------------------------------------------------------------------
/(1)/ All per share amounts presented have been adjusted to reflect the
issuance of stock dividends or splits effected in the form of stock
dividends.
Note 3. Merger Integration and Restructuring Charge
Prior to the merger with D&N Financial Corporation on May 17, 1999, the
Company formulated a merger integration and restructuring plan. In connection
with this plan, the Company recorded $31.5 million ($22.0 million after tax) in
merger integration and restructuring charges. Actions incorporated in the
business combination and restructuring plan were targeted for implementation
over a 12 - 18 month period following the merger. 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 represented 13% of the combined workforce of Republic Bank and
D&N Bank. As of December 31, 2000 and 1999, 200 and 51 positions, respectively,
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 6
offices and the divestiture of identified banking 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 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.
During the fourth quarter of 2000, the Company completed its integration and
restructuring plan when Republic Bank and D&N Bank combined charters and
converted to a common computer system. The total integration and restructuring
costs incurred were $4 million less than the previously estimated costs.
Therefore, the Company recorded a merger integration and restructuring credit of
$4 million in the fourth quarter of 2000. Total severance and employee
benefits, branch closings and real estate transactions, and system costs
incurred were $1.2 million, $1.8 million and $1.0 million, respectively, less
than estimated when establishing the initial merger integration and
restructuring reserves. Severance and employee benefits costs were less as a
result of employees leaving prior to the date severance payments were required
and benefit costs being less than anticipated. Branch closings and real estate
43
Notes to Consolidated Financial Statements
Note 3. Merger Integration and Restructuring Charge (Continued)
transactions were less as a result of closing only 3 offices from the original
estimate of 6 due to the re-evaluation of retail bank locations and revised
appraisals on the value of impaired assets as a result of a change in
circumstances. System charges were less than anticipated as a result of
efficiencies associated with combining D&N Bank and Republic Bank to a common
banking system resulting in actual costs being less than the initial reserve.
The following table provides details of the pre-tax merger integration and
restructuring charge by type of cost recorded in 2000 and 1999 and the reserve
balance remaining at December 31, 2000 and 1999:
- ------------------------------------------------------------------------------------------------
Amount Reserve Amount Amount Reserve
Initial Utilized Balance Utilized Reversed Balance
(In thousands) Reserve in 1999 12/31/99 in 2000 in 2000 12/31/00
- -------------------------------------------------------------------------------------------------
Type of Costs:
Severance and employee benefit
accruals $10,446 $ 7,986 $ 2,460 $1,274 $(1,186) $ -
Professional fees 5,133 4,963 170 170 - -
Branch closings and real estate
transactions 8,652 6,140 2,512 728 (1,784) -
Systems 2,201 26 2,175 1,145 (1,030) -
Other 5,089 5,089 - - - -
------- ------- --------- ------ ------- ---------
Total merger integration and
restructuring charge $31,521 $24,204 $ 7,317 $3,317 $(4,000) $ -
======= ======= ========= ====== ======= =========
- -------------------------------------------------------------------------------------------------
Note 4. Securities Available for Sale
Information regarding the Company's securities available for sale portfolio
follows:
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
December 31, 2000:
U.S. Treasury and Government agency securities $ 12,516 $ 65 $ 87 $ 12,494
Collateralized mortgage obligations 88,727 4 482 88,249
Mortgage-backed securities 19,941 10 82 19,869
Municipal and other securities 14,263 249 - 14,512
-------- ---- ------ --------
Total debt securities 135,447 328 651 135,124
Investment in FHLB 76,736 - - 76,736
-------- ---- ------ --------
Total securities available for sale $212,183 $328 $ 651 $211,860
======== ==== ====== ========
December 31, 1999:
U.S. Treasury and Government agency securities $ 45,607 $ - $1,059 $ 44,548
Collateralized mortgage obligations 68,150 - 2,247 65,903
Mortgage-backed securities 16,792 - 640 16,152
Municipal and other securities 3,274 34 19 3,289
-------- ---- ------ --------
Total debt securities 133,823 34 3,965 129,892
Investment in FHLB 76,562 5 - 76,567
-------- ---- ------ --------
Total securities available for sale $210,385 $ 39 $3,965 $206,459
======== ==== ====== ========
- -----------------------------------------------------------------------------------------------
The amortized cost and estimated market value of securities available for sale
at December 31, 2000, by contractual maturity, are shown on the following table.
Expected maturities for mortgage-backed securities and collateralized mortgage
obligations will differ from contractual maturities because borrowers may have
the right to call or prepay obligations. Based upon prepayment assumptions,
estimated lives of fixed rate mortgage-backed securities and fixed rate
collateralized mortgage obligations are approximately 3.7 years. Collateral for
all mortgage-backed securities and collateralized mortgage obligations is
guaranteed by U.S. Government agencies.
44
Notes to Consolidated Financial Statements
Note 4. Securities Available for Sale (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 Due Within One to Five to After
(Dollars in thousands) One Year Five Years Ten Years Ten Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and
Government agency
securities $ - $ - $ - $ - $ 389 $ 389 $ 12,127 $ 12,105 $ 12,516 $ 12,494
Collateralized mortgage
obligations - - - - - - 88,727 88,249 88,727 88,249
Mortgage-backed
securities 7 7 - - - - 19,934 19,862 19,941 19,869
Municipal and other
securities 112 113 55 56 1,934 1,989 12,162 12,354 14,263 14,512
Investment in FHLB 76,736 76,736 - - - - - - 76,736 76,736
--------- --------- --------- --------- --------- --------- -------- -------- -------- --------
Total securities
available for sale $ 76,855 $ 76,856 $ 55 $ 56 $ 2,323 $ 2,378 $132,950 $132,570 $212,183 $211,860
========= ========= ========= ========= ========= ========= ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Sales of investment securities resulted in the following realized gains and
losses:
- ----------------------------------------------------------------
Year Ended December 31
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------
Proceeds from sales $41,373 $498,089 $171,201
Realized gains (losses):
Securities gains $ 119 $ 2,420 $ 3,220
Securities losses (10) (9,765) (695)
------- -------- --------
Net securities gains (losses) $ 109 $ (7,345) $ 2,525
======= ======== ========
- ----------------------------------------------------------------
Securities with a carrying value of approximately $58.7 million and $25.3
million at December 31, 2000 and 1999, respectively, were pledged to secure
certain securities sold under agreements to repurchase and public deposits as
required by law.
Note 5. Loans
Information regarding the Company's loan portfolio follows:
- ---------------------------------------------------------------
December 31
(In thousands) 2000 1999
- ---------------------------------------------------------------
Commercial:
Commercial and industrial $ 79,544 $ 88,370
Real estate construction 211,754 149,480
Commercial real estate mortgages 840,994 650,642
---------- ----------
Total commercial loans 1,132,292 888,492
Residential real estate mortgages 1,964,394 1,773,795
Installment loans 674,990 711,138
---------- ----------
Total loans, net of unearned income $3,771,676 $3,373,425
========== ==========
- ---------------------------------------------------------------
A geographic concentration exists within the Company's loan portfolio since
most portfolio lending activity is conducted in Michigan and Ohio. At December
31, 2000, approximately 71% of outstanding portfolio loans were concentrated in
Michigan and 18% in Ohio. At December 31, 2000, there were no aggregate loan
concentrations of 10% or more of total portfolio loans to any particular
industry.
45
Notes to Consolidated Financial Statements
Note 6. Allowance for Loan Losses and Impaired Loans
An analysis of changes in the allowance for loan losses follows:
- -------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2000 1999 1998
- -------------------------------------------------------------------------
Balance at beginning of year $27,128 $21,446 $17,883
Loans charged off (6,530) (7,400) (3,519)
Recoveries on loans previously charged off 1,352 1,432 582
------- ------- -------
Net loans charged off (5,178) (5,968) (2,937)
Provision for loan losses 6,500 11,650 6,500
------- ------- -------
Balance at end of year $28,450 $27,128 $21,446
======= ======= =======
Amount of balance at end of year:
Related to impaired loans $ - $ - $ 1,145
Related to all other loans $28,450 $27,128 $20,301
- -------------------------------------------------------------------------
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by
SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the contractual
terms of the original loan agreement. Consistent with this definition, all non-
accrual and restructured loans (with the exception of residential mortgage and
consumer installment loans) are impaired.
The following impaired loans were included in non-performing loans, which
totaled $21.1 million and $17.5 million at December 31, 2000 and 1999,
respectively:
- ----------------------------------------------------------------------------------------
December 31
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------
Average recorded investment in impaired loans for the year $6,487 $4,378 $6,368
Gross recorded investment in impaired loans (year-end) $5,499 $4,651 $6,141
Impaired loans requiring a specific allowance - - 3,541
Impairment allowance - - 1,145
Interest income recognized on impaired loans $ 295 $ 249 $ 18
- ----------------------------------------------------------------------------------------
An impaired loan for which it is deemed necessary to record a specific
allowance is, typically, written down to the fair value of the underlying
collateral at the time it is placed on non-accrual status via a direct charge-
off against the allowance for loan losses. Consequently, those impaired loans
not requiring a specific allowance represent loans for which the fair value of
the underlying collateral equaled or exceeded the recorded investment in the
loan. All impaired loans were evaluated using the fair value of the underlying
collateral as the measurement method.
Note 7. Mortgage Servicing Rights
Activity related to the Company's mortgage servicing rights is as follows:
- ----------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------
Balance at beginning of year $ 67,290 $ 64,267 $ 60,549
Additions 40,647 53,975 49,396
Sales (42,167) (38,795) (27,640)
Amortization expense (9,774) (12,245) (16,046)
Impairment reserve (4,200) 88 (1,992)
-------- -------- --------
Balance at end of year $ 51,796 $ 67,290 $ 64,267
======== ======== ========
Estimated fair value at end of year $ 51,796 $ 70,783 $ 64,342
======== ======== ========
- ----------------------------------------------------------------------------------------
46
Notes to Consolidated Financial Statements
Note 7. Mortgage Servicing Rights (Continued)
Mortgage Servicing Activity
Mortgage loans secured principally by single-family residential properties are
originated and sold to investors without recourse. The Company retains the
servicing rights to certain loans sold. As a loan servicer, the Company is
responsible for collecting and remitting monthly principal and interest
payments, performing certain escrow services and conducting other duties related
to the administration of the loans within the servicing portfolio. The
Company's mortgage servicing portfolio totaled $2.2 billion at December 31, 2000
and consisted of approximately 26,000 loans. At December 31, 1999, the mortgage
servicing portfolio was $3.1 billion and consisted of approximately 40,000
loans.
Amortization of mortgage servicing rights including impairment reserves,
totaled $14.0 million in 2000, compared to $12.2 million in 1999 and $18.0
million in 1998. The Company evaluates its mortgage servicing rights for
impairment on a quarterly basis. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, the Company's impairment
reserve as of December 31, 2000 was $6.6 million compared to $2.4 million and
$2.5 million at December 31, 1999 and 1998, respectively. One of the most
significant assumptions used in the valuation of the mortgage servicing rights
is the change in the prepayment speed assumption (PSA). An increase or a
decrease in the PSA will result in a shorter or longer expected life in mortgage
servicing rights and accordingly affect the fair value of the mortgage servicing
rights. At December 31, 2000, the weighted average PSA was 217, or a 31%
increase from the 1999 weighted average PSA of 166, which was 19% lower compared
to 205 at December 31, 1998. The increase in the PSA was a result of the
increase in residential mortgage loan refinance activity at the end of 2000
compared to 1999. Therefore, the Company increased its valuation allowance of
mortgage servicing rights $4.2 million in 2000.
At December 31, 2000 and 1999, the Company was responsible for $76.4 million
and $69.1 million, respectively, of escrow funds on behalf of mortgagors.
Escrow funds are generally held in custody at Republic Bank and are included in
noninterest-bearing deposits on the consolidated balance sheets.
Note 8. Premises and Equipment
Premises and equipment consisted of the following:
- ---------------------------------------------------------------------
December 31
(In thousands) 2000 1999
- ---------------------------------------------------------------------
Land $ 3,632 $ 4,062
Furniture, fixtures and equipment 52,727 54,181
Buildings and improvements 25,279 30,810
-------- --------
81,638 89,053
Less accumulated amortization and depreciation (45,544) (49,028)
-------- --------
Premises and equipment $ 36,094 $ 40,025
======== ========
- ---------------------------------------------------------------------
The Company leases certain office facilities under lease agreements that
expire at various dates. In some cases, these leases offer renewal options and
require that the Company pay for insurance, maintenance and taxes. Rental
expense under all operating leases charged to operations during the years ended
December 31, 2000, 1999 and 1998 totaled $8.6 million, $9.9 million and $8.3
million, respectively.
47
Notes to Consolidated Financial Statements
Note 8. Premises and Equipment (Continued)
As of December 31, 2000, the future aggregate minimum lease payments required
under noncancellable operating leases are as follows:
- ---------------------------------------------------------
Operating
Year Ending Lease Payments
- ---------------------------------------------------------
2001 $ 5,369
2002 4,421
2003 3,407
2004 2,103
2005 1,567
2006 and thereafter 4,496
-------
Total minimum lease payments required $21,363
=======
- ---------------------------------------------------------
Note 9. Short-Term Borrowings
Short-term borrowings were as follows:
- --------------------------------------------------------------------------------------
Average Average Maximum
Ending Rate Average Rate Month-End
(Dollars in thousands) Balance At Year-End Balance During Year Balance
- --------------------------------------------------------------------------------------
December 31, 2000
Federal funds purchased $ - -% $53,687 6.44% $95,000
Other short-term borrowings 1,729 6.25 1,360 5.59 1,729
------- ---- ------- ---- -------
Total short-term borrowings $ 1,729 6.25% $55,047 6.42% $96,729
======= ==== ======= ==== =======
December 31, 1999
Federal funds purchased $54,700 5.87% $61,320 5.41% $75,600
Other short-term borrowings 2,543 5.16 1,838 5.06 5,353
------- ---- ------- ---- -------
Total short-term borrowings $57,243 5.84% $63,158 5.40% $80,953
======= ==== ======= ==== =======
- --------------------------------------------------------------------------------------
Federal funds purchased mature within one day following the transaction date
and securities sold under agreements to repurchase generally mature within
ninety days from the transaction date. At December 31, 2000, the Company's bank
subsidiary had $127.5 million of unused lines of credit available with third
parties for federal funds purchased. Other short-term borrowings at December
31, 2000 and 1999 were comprised of treasury, tax and loan demand notes.
In December 2000, the Company entered into a $30 million revolving credit
agreement with a third party with a floating interest rate based on LIBOR.
There were no advances outstanding under the agreement at December 31, 2000.
Note 10. FHLB Advances
FHLB advances outstanding as of December 31, 2000 and 1999 are presented
below. Classifications are based on original maturities.
- ------------------------------------------------------------------------
December 31
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------
Average Average
Ending Rate at Ending Rate at
Balance Year-End Balance Year-End
- ------------------------------------------------------------------------
Short-term FHLB advances $ 555,000 6.08% $ 757,000 5.52%
Long-term FHLB advances 828,513 5.82 415,211 5.69
---------- ---- ---------- ------
Total FHLB advances $1,383,513 5.92% $1,172,211 5.58%
========== ==== ========== ======
- ------------------------------------------------------------------------
48
Notes to Consolidated Financial Statements
Note 10. FHLB Advances (Continued)
Republic Bank routinely borrows short-term and long-term advances from the
Federal Home Loan Bank (FHLB) to fund mortgage loan originations and to minimize
the interest rate risk associated with certain fixed rate commercial and
residential mortgage portfolio loans. These advances are generally secured
under a blanket security agreement by first mortgage loans and investment
securities with an aggregate book value equal to at least 150% of the advances.
Republic Bank had $109.9 million available in unused borrowings with the Federal
Home Loan Bank at December 31, 2000.
The principal maturities of long-term FHLB advances outstanding at December
31, 2000 are as follows:
- --------------------------------------------------------------------------------
(In thousands) Amount
================================================================================
2001 $ 172,752
2002 -
2003 5,000
2004 -
2005 3,503
2006 and thereafter 647,258
---------
Total $ 828,513
=========
- --------------------------------------------------------------------------------
Note 11. Long-Term Debt
Obligations with original maturities of more than one year consisted of the
following:
- --------------------------------------------------------------------------------
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
======== ========
- --------------------------------------------------------------------------------
7.17% Senior Debentures Due 2001
These senior debentures were issued through a private offering in March
1994 and mature April 1, 2001. Interest is payable at a stated rate semi-
annually on April 1 and October 1 of each year.
6.75% and 6.95% Senior Debentures Due 2001 and 2003
In January 1996, the Company completed a private offering of $22.5 million
of Senior Debentures with $9.0 million maturing on January 15, 2001 and $13.5
million maturing on January 15, 2003. Interest is payable at the stated rate
semi-annually on April 1 and October 1 of each year.
The principal maturities of long-term debt outstanding at December 31, 2000
are as follows:
- --------------------------------------------------------------------------------
(In thousands) Amount
- --------------------------------------------------------------------------------
2001 $ 34,000
2002 -
2003 13,500
2004 and thereafter -
--------
Total $ 47,500
========
- --------------------------------------------------------------------------------
49
Notes to Consolidated Financial Statements
Note 12. Preferred Stock of Subsidiary
D&N Capital Corporation, a subsidiary of Republic Bank, is a Delaware
corporation incorporated on March 18, 1997 for the purpose of acquiring and
holding real estate assets and is a Real Estate Investment Trust. Republic Bank
owns all shares of common stock of D&N Capital Corporation. On July 17, 1997,
D&N Capital Corporation sold 1.21 million shares of its 9.0% noncumulative
preferred stock, Series A with a liquidation preference of $25.00 per share. The
Series A preferred shares are generally not redeemable prior to July 21, 2002.
On or after July 21, 2002, the Series A preferred shares may be redeemed for
cash at the option of the Company, in whole or in part, at a redemption price of
$25.00 per share. The preferred shares are treated as Tier 1 Capital by the
Company and are traded on The Nasdaq Stock Market under the symbol DNFCP. During
both 2000 and 1999, D&N Capital Corporation declared and paid preferred
dividends totaling $2.72 million.
Note 13. Shareholders' Equity
On October 19, 2000, the Board of Directors declared a 10% stock dividend
distributed on December 1, 2000 to shareholders of record on November 10, 2000.
On November 18, 1999 the Board of Directors declared a 10% stock dividend
distributed on January 7, 2000 to shareholders of record December 3, 1999. On
July 17, 1998, the Board of Directors declared a 5 for 4 stock split (in the
form of a stock dividend) distributed on September 11, 1998 to shareholders of
record on August 14, 1998.
The Company repurchased 922,000, 240,000, and 77,000 shares of common stock
in 2000, 1999 and 1998, respectively.
On November 18, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to 1,100,000 shares of the Company's
outstanding common shares.
Note 14. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(Dollars in thousands, except per share data) 2000/(1)/ 1999/(1)/ 1998/(1)/
====================================================================================================================================
Numerator for basic and diluted earnings per share:
Net income $ 45,677 $ 14,911 $ 38,952
=========== =========== ===========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 49,587,331 49,674,194 48,705,561
Effect of dilutive securities:
Employee stock options 292,023 612,405 1,023,854
Warrants 20,460 49,172 118,744
----------- ----------- -----------
Dilutive potential common shares 312,483 661,577 1,142,598
Denominator for diluted earnings per share-
adjusted weighted-average shares for
assumed conversions 49,899,814 50,335,771 49,848,159
=========== =========== ===========
Basic earnings per share $ .92 $ .30 $ .80
=========== =========== ===========
Diluted earnings per share $ .92 $ .30 $ .78
=========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
/(1)/ Share amounts for all periods presented have been adjusted to reflect the
issuance of stock dividends.
50
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation
The Company maintains various stock-based compensation plans that provide
for its ability to grant stock options, stock warrants and restricted shares to
selected employees and directors. See Note 1 for the Company's accounting
policies relating to stock-based compensation.
Stock Options
The Company awards stock options to officers and key employees under the
1998 Stock Option Plan (1998 Plan) and the 1997 Stock Option Plan (1997 Plan).
The 1998 Plan, which was adopted effective February 19, 1998, and amended April
26, 2000, authorizes the issuance of up to 2,612,500 options to purchase common
shares at exercise prices equal to the market value of the Company's common
stock on the date of grant. Of the 2,612,500 options to purchase common shares
under the 1998 Stock Option Plan, up to 1,210,000 options may be issued pursuant
to options which may be granted under the Voluntary Management Stock
Accumulation Program which was also adopted effective February 19, 1998. Options
are exercisable according to a four year vesting schedule whereby 25% vest
annually, based on the one through four year anniversary of the grant date.
Options granted pursuant to the Voluntary Management Stock Accumulation Program
fully vest after the third anniversary date of the option grant date. All
options have a maximum contractual life of ten years from the date of grant. At
December 31, 2000 and 1999, options available for future grant under the 1998
Stock Option Plan totaled 1,137,026 and 306,089, respectively. Options available
for future grant under the 1997 Stock Option Plan totaled 308,178 and 503,009 at
December 31, 2000 and 1999, respectively.
D&N Financial Corporation previously had stock option plans authorizing the
issuance of up to 2,430,428 options to purchase common shares. Options are
generally exercisable according to a two year vesting period from the date of
grant. The term on any option does not exceed ten years from the date of grant.
At the merger consummation date of May 17, 1999, 1,475,732 issued options,
adjusted for the exchange, remained outstanding under the plans. At December 31,
2000 and 1999, there were no options available for future grant as the D&N
Financial Corporation plans were discontinued upon consummation of the merger
with the Company.
The following table presents stock option activity for the years indicated:
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
====================================================================================================================================
Outstanding at beginning of year 3,572,868 $ 8.69 2,862,922 $ 7.35 2,860,372 $ 5.53
Granted 680,147 9.45 1,357,584 10.15 688,089 12.27
Exercised (360,591) 4.08 (568,097) 5.15 (665,095) 4.55
Canceled (293,129) 10.69 (79,541) 10.98 (20,444) 10.28
--------- ------ --------- ------ --------- ------
Outstanding at end of year 3,599,295 $ 9.13 3,572,868 $ 8.69 2,862,922 $ 7.35
========= ====== ========= ====== ========= ======
- ------------------------------------------------------------------------------------------------------------------------------------
51
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation (Continued)
Additional information regarding stock options outstanding and exercisable at
December 31, 2000 is provided in the following table:
- --------------------------------------------------------------------------------------------------------
Options Outstanding and Exercisable
================================================
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Range of Exercise Prices Shares Life (Years) Price
- --------------------------------------------------------------------------------------------------------
$ 3.12 - $ 6.21 530,673 4.0 $ 4.42
$ 6.37 - $ 7.74 520,477 6.2 7.45
$ 7.84 - $ 9.74 599,010 8.8 9.20
$10.02 - $10.12 770,731 8.4 10.12
$10.18 - $10.33 521,315 8.2 10.27
$10.43 - $12.73 647,259 7.2 12.13
$12.89 - $13.64 9,830 7.7 13.35
- --------------------------------------------------------------------------------------------------------
$ 3.12 - $13.64 3,599,295 7.3 $ 9.13
========================================================================================================
Voluntary Management Stock Accumulation Program
Under the Voluntary Management Stock Accumulation Program, which was
adopted by the Company on February 19, 1998, the Company offers to officers and
key employees the right to acquire shares of the Company's common stock at fair
market value; and if shares are so acquired under the Program, the officer or
key employee is granted two tandem stock options, exercisable at the current
fair market value, for every one share purchased. This Program authorizes up to
151,250 common shares per year for sale as program shares, subject to an overall
maximum of 605,000 shares while the Program is in effect. Consequently, an
annual maximum of 302,500 common shares is authorized for tandem stock options
(subject to an overall maximum of 1,210,000 stock option shares). The
participant's purchased shares may not be sold, transferred, encumbered or
otherwise disposed of for a three year period so long as employed by the
Company. Options granted pursuant to the Voluntary Management Stock Accumulation
Program fully vest and are exercisable only after the lapsing of the third
anniversary of the option grant date. All options have a maximum contractual
life of ten years form the date of grant. At December 31, 2000, common shares
and tandem stock options available for future grant totaled 269,089 and 538,178,
respectively. At December 31, 1999, common shares and tandem stock options
available for future grant totaled 376,724 and 753,447, respectively.
Stock Warrants
The Company has a Director Compensation Plan that provides for its ability
to issue 1,500 warrants annually to each of the Company's outside directors.
Stock warrants granted are immediately exercisable and have maximum contractual
lives of ten years. In 2000, 29,700 warrants were issued, compared to 38,115
warrants in 1999 and 29,493 warrants in 1998. At December 31, 2000, 201,761
warrants were outstanding with exercise prices ranging from $4.51 to $14.01.
52
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation (Continued)
Incentive Stock Plan
The Company's Incentive Stock Plan authorizes the grant of restricted
common shares so that the total number of restricted shares that may be
outstanding at any time under the Plan shall not exceed five percent of the
issued and outstanding common stock of the Company. At December 31, 2000, the
maximum number of authorized shares allowed for grant totaled 2,471,192.
Restriction periods for these shares exist for a period of one to four years.
Restricted shares are forfeited if employment is terminated before the
restriction period expires. As of December 31, 2000 and 1999, 366,136 and
352,413 common shares have been awarded and are still subject to restrictions
under the incentive stock plan. Compensation expense is recognized over the
restriction period and included in salaries and employee benefits expense in the
consolidated statements of income. Compensation expense for restricted stock
totaled $968,000 in 2000, $838,000 in 1999 and $982,000 in 1998. The unamortized
portion of restricted stock is included as a component of shareholders' equity
in the consolidated balance sheets. In 2000, 63,730 restricted shares were
issued, compared to 54,264 in 1999 and 130,988 in 1998. The weighted average
grant-date fair value of restricted shares issued in 2000 was $8.88.
Pro Forma Disclosures
For purposes of providing the pro forma disclosures of net income and
earnings per share required by SFAS No. 123, the fair value of stock options and
stock warrants was estimated as of the grant date using the Black-Scholes option
pricing model. The following weighted average assumptions were used in the
option pricing model: an expected volatility factor of 53.8%; an expected
dividend yield of 3.15%; a risk-free interest rate of 5.13%; and an expected
life of the option of 5.9 years. The weighted average grant-date fair value of
stock options and stock warrants granted during each of the years 2000, 1999 and
1998 was $4.04, $1.95 and $2.49, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with SFAS No. 123, net income and earnings per share
would have been as summarized below:
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands, except per share data) 2000 1999 1998
- --------------------------------------------------------------------------------
Net income (as reported) $ 45,677 $ 14,911 $ 38,952
Net income (pro forma) 43,818 13,146 37,173
Basic earnings per share (as reported) $ .92 $ .30 $ .80
Basic earnings per share (pro forma) .88 .26 .76
Diluted earnings per share (as reported) $ .92 $ .30 $ .78
Diluted earnings per share (pro forma) .88 .26 .75
- --------------------------------------------------------------------------------
Note 16. Employee Benefit Plans
The Company maintains a 401(k) plan for its employees. The employer
contributions to the plan are determined annually by the Board of Directors.
Contribution expenses for the 401(k) plan for the years ended December 31, 2000,
1999 and 1998 totaled $2.2 million, $2.3 million, and $2.4 million,
respectively.
53
Notes to Consolidated Financial Statements
Note 17. Other Noninterest Expense
The three largest components of other noninterest expense were as follows:
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2000 1999 1998
================================================================================
Voice and data communications $ 5,215 $ 6,188 $ 4,828
Computer fees 5,857 5,684 5,062
Advertising 2,635 2,811 4,221
- --------------------------------------------------------------------------------
Note 18. Income Taxes
The current and deferred components of the provision for Federal income tax
expense for the years ended December 31, 2000, 1999, and 1998 are as follows.
- --------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
================================================================================
Current income tax expense $ 20,409 $ 19,083 $ 16,833
Deferred income tax expense (benefit) 2,536 (8,338) 3,794
-------- -------- --------
Total income tax expense $ 22,945 $ 10,745 $ 20,627
======== ======== ========
- --------------------------------------------------------------------------------
A deferred tax asset or liability is recognized to reflect the net tax effects
of temporary differences between the carrying amounts of existing assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, as well as operating loss and tax credit carryforwards. Significant
temporary differences that gave rise to the deferred tax assets and liabilities
as of December 31, 2000 and 1999 were as follows:
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) 2000 1999
======================================================================================================================
Deferred Deferred
Asset Liability Asset Liability
======================================================================================================================
Merger integration and restructuring charge accrual $ - $ - $ 5,569 $ -
Allowance for loan losses 10,033 - 8,937 -
Mortgage servicing rights amortization 396 - 449 -
Originated mortgage servicing rights - 9,025 - 10,357
Deferred loan origination fees and costs, net - 7,012 - 5,174
Impairment reserve for mortgage servicing rights 2,183 - 660 -
Deferred compensation contributions and gains 2,493 - 1,802 -
Restricted stock amortization 997 - 605 -
Depreciation/amortization - 1,092 - 500
Stock dividends on FHLB stock - 1,143 - 2,230
Purchase accounting adjustment amortization - 18 - 60
Unrealized loss on securities available for sale 113 - 893 -
Loan mark-to-market adjustment 876 - 1,044 -
Other temporary differences 947 372 1,366 312
------- ------- ------- -------
Total deferred taxes $18,038 $18,662 $21,325 $18,633
======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------
54
Notes to Consolidated Financial Statements
Note 18. Income Taxes (Continued)
Items causing differences between the statutory tax rate and the effective tax
rate are summarized as follows:
- ------------------------------------------------------------------------------------------------------
Year ended December 31
(Dollars in thousands) 2000 1999 1998
======================================================================================================
Amount Rate Amount Rate Amount Rate
======================================================================================================
Statutory tax rate $24,018 35.0% $ 8,980 35.0% $20,853 35.0%
Amortization of goodwill 87 .1 87 .3 88 .1
Net tax exempt interest income (123) (.2) (142) (.6) (200) (.3)
Merger integration and
restructuring charge - - 1,550 6.1 - -
Other, net (1,037) (1.5) 270 1.1 (114) (.2)
------- ---- ------- ---- ------- ----
Provision for income taxes $22,945 33.4% $10,745 41.9% $20,627 34.6%
======= ==== ======= ==== ======= ====
- ------------------------------------------------------------------------------------------------------
Note 19. Contingencies
The Company and its subsidiaries are subject to certain legal actions and
proceedings in the normal course of business. Management believes that the
aggregate liability, if any, resulting from such actions would not have a
material adverse affect on the Company's financial condition.
D&N Bank, a federally insured institution acquired by the Company in May
1999 and merged into Republic Bank in December 2000, is a plaintiff, along with
approximately 120 other institutions, in a currently pending claim in the United
States Court of Federal Claims seeking substantial damages as a result of the
1989 Financial Institutions Reform, Recovery and Enforcement Act's mandatory
phase-out of the regulatory capital treatment of supervisory goodwill. The
ultimate outcome of this matter as it relates to the Company cannot be
determined at this time.
Note 20. Transactions With Related Parties
Republic Bank has, in the normal course of business, made loans to certain
directors and officers and to organizations in which certain directors and
officers have an interest. Other transactions with related parties include
noninterest-bearing and interest-bearing deposits. In the opinion of
management, such loans and other transactions were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated parties and did not involve more
than normal risk of collectibility.
A summary of related loan activity for the years ended December 31, 2000
and 1999 follows:
- --------------------------------------------------------------------------------
(In thousands) 2000 1999
================================================================================
Balance at beginning of the year $ 8,157 $ 2,876
New loans and advances 8,641 5,382
Repayments (2,342) (101)
-------- -------
Balance at end of year $ 14,456 $ 8,157
======== =======
- --------------------------------------------------------------------------------
55
Notes to Consolidated Financial Statements
Note 21. 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. Deposits and loan products are offered through
the 90 retail branch offices of Republic Bank, which are staffed by personal
bankers and loan originators. The Mortgage Banking segment is comprised of
mortgage loan production and mortgage loan servicing for others. Mortgage loan
production is conducted by Republic Bank and Market Street Mortgage. Over 90% of
the Company's mortgage loan servicing is performed by Market Street Mortgage
Corporation. The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes. Business segment performance
is determined based on the Company's management accounting process, in which the
accounting policies of the reportable segments are primarily the same as those
described in the summary of significant accounting policies. The accounting
process assigns revenue, expenses and assets to a business segment using
specific identification and an allocation methodology. Changes in the allocation
methodology may result in changes in allocations and assignments. In that case,
however, results for prior periods would be restated to allow comparability
between periods.
The Company's internal management reporting system allocates interest
income and interest expense items by matching the earning asset with the related
funding source. In addition, Republic Bank provides funding to its mortgage
banking subsidiary by granting operating lines of credit and lines of credit to
fund mortgage loans held for sale. The commercial and retail banking segment
receives interest income on these lines of credit by charging interest rates
based on LIBOR and prime lending rates. Noninterest income and expenses directly
attributable to a business segment's operations are assigned to that business
segment. Expenses supporting more than one business segment are allocated to
each segment based on the number of employees dedicated to the segment's
operations.
The following table presents the financial results of each business segment
for the last three years.
- --------------------------------------------------------------------------------------------------------------------------------
Commercial and
Retail Banking Mortgage Banking Consolidated
================================================================================================================================
(In thousands) 2000/(1)/ 1999/(1)/ 1998 2000/(1)/ 1999/(1)/ 1998 2000/(1)/ 1999/(1)/ 1998
================================================================================================================================
Interest income $ 313,289 $ 261,940 $ 241,812 $ 35,039 $ 37,722 $ 44,167 $ 348,328 $ 299,662 $ 285,979
Interest expense 179,816 140,016 134,869 33,864 31,380 38,780 213,680 171,396 173,649
--------- --------- --------- -------- -------- -------- --------- --------- ---------
Net interest income/(2)/ 133,473 121,924 106,943 1,175 6,342 5,387 134,648 128,266 112,330
Provision for loan losses 6,500 6,650 6,500 - - - 6,500 6,650 6,500
Noninterest income 11,679 13,766 13,290 59,159 86,469 85,258 70,838 100,235 98,548
Noninterest expense/(2)/ 68,249 70,253 67,145 63,392 79,146 74,931 131,641 149,399 142,076
--------- --------- --------- -------- -------- -------- --------- --------- ---------
Operating income
before taxes $ 70,403 $ 58,787 $ 46,588 $ (3,058) $ 13,665 $ 15,714 $ 67,345 $ 72,452 $ 62,302
========= ========= ========= ======== ======== ======== ========= ========= =========
Preferred stock
Dividend $ 2,723 $ 2,723 $ 2,723 $ - $ - $ - $ 2,723 $ 2,723 $ 2,723
Income taxes $ 24,015 $ 19,797 $ 15,186 $ (1,070) $ 4,824 $ 5,441 $ 22,945 $ 24,621 $ 20,627
Depreciation and
amortization $ 6,441 $ 6,015 $ 4,234 $ 17,939 $ 15,444 $ 21,209 $ 24,380 $ 21,459 $ 25,443
Capital expenditures $ 5,521 $ 5,323 $ 10,039 $ 3,613 $ 4,715 $ 4,910 $ 9,134 $ 10,038 $ 14,949
Identifiable assets
(in millions) $ 4,117 $ 3,727 $ 3,328 $ 494 $ 575 $ 886 $ 4,611 $ 4,302 $ 4,214
Efficiency ratio 47.05% 51.85% 57.04 % 105.07% 85.28% 82.66% 64.10% 65.44% 68.19%
- --------------------------------------------------------------------------------------------------------------------------------
/(1)/ Amounts for 2000 exclude $4.0 million of pretax merger integration and
restructuring credits related to the merger with D&N financial
Corporation. Amounts for 1999 exclude $31.5 million of pre-tax merger
integration and restructuring charges related to the merger with D&N
Financial Corporation as discussed in Note 3, 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)/ Net interest income for the mortgage banking segment is generated from the
interest earned on mortgage loans held for sale, less the interest expense
incurred on short-term borrowings used to fund loan production and
servicing acquisitions. 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.
56
Notes to Consolidated Financial Statements
Note 22. Off-Balance Sheet Transactions
In the normal course of business, the Company becomes a party to
transactions involving financial instruments with off-balance sheet risk to meet
the financing needs of its customers and to manage its own exposure to interest
rate risk. These financial instruments include commitments to extend credit,
standby letters of credit and forward commitments to sell mortgage loans that
are not reflected in the consolidated financial statements. The contractual
amounts of these instruments express the extent of the Company's involvement in
these transactions as of the balance sheet date. These instruments involve, to
varying degrees, elements of credit risk, market risk and liquidity risk in
excess of the amount recognized in the consolidated balance sheets. However,
they do not represent unusual risks for the Company and management does not
anticipate any significant losses to arise from these transactions.
Commitments to extend credit are legally binding agreements to lend cash to
a customer as long as there is no breach of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. Commitments to fund loan
applications with agreed-upon rates subject the Company to market risk due to
fluctuations in interest rates. Standby letters of credit guarantee the
performance of a customer to a third party. The Company issues these guarantees
primarily to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions.
The credit risk associated with commitments to extend credit and standby
letters of credit is essentially the same as that involved with direct lending.
Therefore, these instruments are subject to the Company's loan review and
approval procedures and credit policies. Based upon management's credit
evaluation of the counterparty, the Company may require the counterparty to
provide collateral as security for the agreement, including real estate,
accounts receivable, inventories, and investment securities. The maximum credit
risk associated with these instruments equals their contractual amounts and
assumes that the counterparty defaults and the collateral proves to be
worthless. The total contractual amounts of commitments to extend credit and
standby letters of credit do not necessarily represent future cash requirements,
since many of these agreements may expire without being drawn upon.
At December 31, 2000, the Company had outstanding $199.4 million of
commitments to fund residential real estate loan applications with agreed-upon
rates ("Interest Rate Lock Commitments" or "IRLCs").
At December 31, 2000, the Company had outstanding mandatory forward
commitments to sell $517.2 million of residential mortgage loans, of which
$355.6 million covered the mortgage loans held for sale balance and $161.6
million covered IRLCs. These outstanding forward commitments to sell mortgage
loans are expected to settle in the first quarter of 2001 without producing any
material gains or losses. At December 31, 2000, the mortgage loans held for sale
balance included $29.6 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 $22.5 million, or 76%, of these
loans were loans that had been committed for bulk sale to third parties prior to
year-end or were floating rate residential construction loans.
At December 31, 1999, outstanding forward commitments to sell mortgage
loans totaled $603.0 million, of which $374.4 million covered the mortgage loans
held for sale balance and $228.6 million related to commitments to fund
residential real estate loan applications with agreed-upon rates.
In June 1998, the Financial Accounting Standards Board 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 in June 2000 by Statement No. 138, Accounting For Certain Derivative
Instruments and Certain Hedging Activities and is required to be adopted by the
Company in years beginning after June 15, 2000. The Statement requires 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 implemented FAS 133 effective
January 1, 2001. The transition adjustments resulting from adopting this
Statement 133 are immaterial. The Company believes that its hedging policies
using mandatory forward commitments, as they relate to IRLCs and mortgage loans
held for sale, are highly effective. Therefore, the Company does not expect FAS
133 to have a significant impact on net income.
57
Notes to Consolidated Financial Statements
Note 22. Off-Balance Sheet Transactions (Continued)
The following table presents the contractual amounts of the Company's off-
balance sheet financial instruments outstanding at December 31, 2000 and 1999:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31
(In thousands) 2000 1999
====================================================================================================================================
Financial instruments whose contract amounts represent credit risk:
Commitments to fund residential real estate loans $ 801,382 $ 665,154
Commitments to fund commercial real estate loans 285,905 245,660
Other unused commitments to extend credit 196,174 179,572
Standby letters of credit 33,120 7,570
Loans sold with recourse - 790
Financial instruments subject to interest rate risk:
Residential real estate loan applications with agreed-upon rates $ 199,428 $ 373,170
Forward commitments to sell residential real estate mortgage loans 517,173 603,003
- ------------------------------------------------------------------------------------------------------------------------------------
Note 23. Estimated Fair Value of Financial Instruments
Fair value estimates of financial instruments are made at a specific point
in time based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale the Company's entire holdings of a particular
financial instrument. Since no ready market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and value of assets and liabilities that are not considered
financial instruments. Tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value of
financial instruments and have not been considered in these estimates.
The methods and assumptions used to estimate the fair value of each class
of financial instruments for which determination of such an estimate was
practicable are as follows:
Cash and Cash Equivalents:
The carrying amount is a reasonable estimate of fair value for these
instruments.
Mortgage Loans Held for Sale:
The fair value of mortgage loans held for sale, including the fair value of
associated mortgage servicing rights, is estimated based on the present value of
estimated future cash flows of the loan and related servicing rights.
Securities Available for Sale:
The fair value of securities available for sale are estimated based on
quoted market prices or dealer quotes.
Loans:
Fair values are estimated for portfolio loans based on the present value of
future estimated cash flows using discount rates which incorporate a premium
commensurate with normal credit and interest rate risks involved. Loans are
segregated by type such as commercial and industrial, commercial real estate,
residential mortgage and installment.
Fair value for non-performing loans is based on the premise that management
has allocated adequate reserves for loan losses. As a result, the fair value of
non-performing loans approximate their carrying value.
58
Notes to Consolidated Financial Statements
Note 23. Estimated Fair Value of Financial Instruments (Continued)
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-
bearing demand deposits, savings, money market and NOW accounts, is equal to the
amount payable on demand. The estimated fair value of certificates of deposit
is based on the present value of future estimated cash flows using the rates
currently offered for deposits of similar remaining maturities.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase:
Fair value approximates the carrying value since the majority of these
instruments were entered into at or near December 31, 1999. There were no
outstanding balances in 2000.
Other Short-Term Borrowings:
The carrying amount is a reasonable estimate of fair value of other short-term
borrowings as these financial instruments are tied to floating rate indices such
as prime and LIBOR, and reprice frequently.
FHLB Advances and Long-Term Debt:
Fair value is estimated based on the present value of future estimated cash
flows using current rates offered to the Company for debt with similar terms.
Off-Balance Sheet Financial Instruments:
The Company's off-balance sheet financial instruments are detailed in Note 22
in the Notes to Consolidated Financial Statements. The Company's commitments to
fund residential real estate loan applications with agreed-upon interest rates
may result in a gain or loss upon the sale of the funded residential real estate
loans. Additionally, the Company's forward commitments to sell residential real
estate loans may result in a gain or loss. The aggregated fair value of these
off-balance sheet financial instruments at December 31, 2000 and 1999 were not
material.
The following table presents the estimated fair values of the Company's
financial instruments:
- ---------------------------------------------------------------------------------------------
2000 1999
December 31 Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
- ---------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 82,377 $ 82,377 $ 83,761 $ 83,761
Mortgage loans held for sale 385,207 387,711 459,059 462,043
Securities available for sale 211,860 211,860 206,459 206,459
Loans, net of the allowance for loan losses 3,743,226 3,732,821 3,346,297 3,304,434
Liabilities:
Noninterest-bearing deposits 267,509 267,509 206,990 206,990
NOW, savings and money market accounts 740,532 740,532 797,573 797,573
Certificates of deposit maturing in:
Six months or less 18,463 18,459 333,060 333,156
Over six months to one year 228,573 229,038 160,571 160,045
Over one year to three years 1,223,512 1,228,238 335,263 336,009
Over three years 249,937 250,877 779,593 782,512
---------- ---------- ---------- ----------
Total deposits 2,728,526 2,734,653 2,613,050 2,616,285
Federal funds purchased and securities sold
under agreements to repurchase and other
short-term borrowings 1,729 1,729 57,243 57,243
FHLB advances 1,383,513 1,428,902 1,172,211 1,168,693
Long-term debt 47,500 47,755 47,500 47,495
- ---------------------------------------------------------------------------------------------
59
Notes to Consolidated Financial Statements
Note 24. Regulatory Matters
The Company's bank subsidiary is required by law to maintain average cash
reserve balances with the Federal Reserve Bank based on a percentage of
deposits. At December 31, 2000 and 1999, these reserves totaled $4.6 million
and $4.2 million, respectively.
The principal source of cash flows for the parent company is dividends from
Republic Bank. The banking regulatory agencies limit the amount of dividends
these state chartered financial institutions may declare to the parent company
in any calendar year. On December 31, 2000, $183.4 million was available for
payment of dividends.
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by regulators that, if undertaken, could have an effect on the
Company's financial statements. Capital adequacy guidelines require minimum
capital ratios of 8.00% for total risk-based capital, 4.00% for Tier 1 risk-
based capital and 4.00% (and in some cases 3.00%) for Tier 1 leverage. Under
the framework for prompt corrective action, all financial institutions must meet
capital guidelines that involve quantitative measures of the Company's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. To be considered well capitalized under the regulatory
framework for prompt corrective action, minimum capital ratios of 10.00% for
total risk-based capital, 6.00% for Tier 1 risk-based capital and 5.00% for Tier
1 leverage must be maintained. The Company's capital amounts and classification
are also subject to qualitative judgments by the regulators with respect to
components, risk weightings and other factors.
Management believes, as of December 31, 2000, that the Company met all capital
adequacy requirements to which it is subject. In addition, Republic Bank had
regulatory capital ratios in excess of the levels established for well
capitalized institutions.
As of December 31, 2000, the Federal Reserve Bank of Chicago considers the
Company to be "well capitalized" under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Company's category.
Presented in the table below are the capital amounts and ratios for the
Company and its bank subsidiary, Republic Bank, at December 31, 2000, along with
a comparison to the year-end capital amounts and ratios established by the
regulators.
60
Notes to Consolidated Financial Statements
Note 24. Regulatory Matters (Continued)
- -------------------------------------------------------------------------------------------------
(Dollars in thousands) Actual Adequately Capitalized Well Capitalized
- -------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------
As of December 31, 2000
Total capital
(to risk weighted assets)/(1)/:
Consolidated $335,286 10.38% $258,505 8.00% $323,131 10.00%
Republic Bank 371,535 11.54 257,572 8.00 321,965 10.00
Tier 1 capital
(to risk weighted assets)/(1)/:
Consolidated $306,836 9.50% $129,252 4.00% $193,878 6.00%
Republic Bank 343,085 10.66 128,786 4.00 193,179 6.00
Tier 1 capital
(to average assets)/(1)/:
Consolidated $306,836 6.82% $134,959 3.00% $224,932 5.00%
Republic Bank 343,085 7.59 134,920 3.00 224,867 5.00
- --------------------------------------------------------------------------------------------------
As of December 31, 1999
Total capital
(to risk weighted assets)/(1)/:
Consolidated $308,852 10.60% $233,049 8.00% $291,311 10.00%
Republic Bank 198,641 11.49 138,248 8.00 172,810 10.00
D&N Bank 142,881 11.87 96,259 8.00 120,324 10.00
Tier 1 capital
(to risk weighted assets)/(1)/:
Consolidated $281,724 9.67% $116,525 4.00% $174,787 6.00%
Republic Bank 186,060 10.77 69,124 4.00 103,686 6.00
D&N Bank 128,335 10.67 48,129 4.00 72,194 6.00
Tier 1 capital
(to average assets)/(1)/:
Consolidated $281,724 6.59% $128,168 3.00% $213,613 5.00%
Republic Bank 186,060 7.36 75,878 3.00 126,463 5.00
D&N Bank 128,335 6.95 55,358 3.00 92,263 5.00
- --------------------------------------------------------------------------------------------------
/(1)/ As defined in the regulations
61
Notes to Consolidated Financial Statements
Note 25. Parent Company Financial Information
The condensed financial statements of Republic Bancorp Inc. (Parent Company
only) are as follows:
- ----------------------------------------------------------------------------------
Parent Company Only Balance Sheets
December 31 (In thousands) 2000 1999
- ----------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 274 $ 372
Interest earning deposits 16,714 21,813
-------- --------
Cash and cash equivalents 16,988 22,185
Investment in subsidiary 330,423 299,147
Notes and advances receivable from subsidiary 250 2,485
Furniture and equipment 225 202
Other assets 12,118 9,175
-------- --------
Total assets $360,004 $333,194
======== ========
Liabilities and Shareholders' Equity:
Accrued expenses and other liabilities $ 17,640 $ 19,253
Long-term debt 47,500 47,500
-------- --------
Total liabilities 65,140 65,753
Total shareholders' equity 294,864 266,441
-------- --------
Total liabilities and shareholders' equity $360,004 $333,194
======== ========
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Parent Company Only Income Statements
Year Ended December 31 (In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------
Interest income $ 345 $ 864 $ 1,732
Dividends from subsidiary 20,000 8,000 612
Other income 1 1,288 -
------- -------- --------
Total income 20,346 10,152 2,344
Interest expense 3,434 3,435 3,435
Salaries and employee benefits 2,785 5,601 4,816
Other expenses 875 643 3,301
Merger integration and restructuring (431) 6,620 -
------- -------- --------
Total expenses 6,663 16,299 11,552
------- -------- --------
Income (loss) before income taxes and
excess (deficiency) of undistributed earnings of
subsidiary over dividends 13,683 (6,147) (9,208)
Income tax credits (3,056) (4,186) (3,270)
------- -------- --------
Income (loss) before excess of
undistributed earnings of
subsidiary over dividends 16,739 (1,961) (5,938)
Excess of undistributed earnings of
subsidiary over dividends 28,938 16,872 44,890
------- -------- --------
Net income $45,677 $ 14,911 $ 38,952
======= ======== ========
- ----------------------------------------------------------------------------------
62
Notes to Consolidated Financial Statements
Note 25. Parent Company Financial Information (Continued)
- ------------------------------------------------------------------------------------------
Parent Company Only Statements of Cash Flows
Year Ended December 31 (In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 45,677 $ 14,911 $ 38,952
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 559 562 573
Excess of undistributed earnings of
subsidiary over dividends (28,938) (16,872) (44,890)
Increase in other assets (1,343) (2,649) (1,719)
(Decrease) increase in other liabilities (1,942) 3,756 4,039
Other, net (999) (546) (1,117)
-------- -------- --------
Total adjustments (32,663) (15,749) (43,114)
-------- -------- --------
Net cash provided by (used in) operating activities 13,014 (838) (4,162)
Cash Flows from Investing Activities:
Equipment expenditures (91) (63) (115)
Decrease in notes and advances receivable
from subsidiary 2,235 3,774 411
-------- -------- --------
Net cash provided by investing activities 2,144 3,711 296
Cash Flows from Financing Activities:
Net proceeds from issuance of common shares through
exercise of stock options and stock warrants 3,096 5,452 7,785
Repurchase of common shares (8,054) (3,048) (1,602)
Dividends paid on common shares (15,397) (11,914) (9,394)
-------- -------- --------
Net cash used in financing activities (20,355) (9,510) (3,211)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (5,197) (6,637) (7,077)
Cash and cash equivalents at beginning of year 22,185 28,822 35,899
-------- -------- --------
Cash and cash equivalents at end of year $ 16,988 $ 22,185 $ 28,822
======== ======== ========
- ------------------------------------------------------------------------------------------
63
Report of Management
Management of Republic Bancorp Inc. is responsible for the preparation of the
financial statements and other related financial information included in the
Annual Report on Form 10-K. The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and include the amounts based on management's best estimates and judgments.
Financial information appearing throughout the Annual Report on Form 10-K is
consistent with the financial statements.
Republic Bancorp Inc.'s independent auditors have been engaged to perform an
audit of the consolidated financial statements in accordance with auditing
standards generally accepted in the United States and the independent auditors'
report expresses their opinion as to the fair presentation of the consolidated
financial statements in accordance with accounting principles generally accepted
in the United States.
Management maintains accounting systems and internal controls to meet its
responsibilities for reliable consolidated financial statements. There are
inherent limitations in the effectiveness of internal controls, including the
possibility of errors or irregularities. Furthermore, because of changes in
conditions, the effectiveness of internal controls may vary over time.
Management believes that these systems and controls provide reasonable assurance
that assets are safeguarded and transactions are properly recorded and executed,
in accordance with management's authorization. An internal audit function is
maintained to continually evaluate the adequacy and effectiveness of such
internal controls, policies, and procedures.
The Board of Directors pursues its oversight role for the financial statements
through the Audit Committee, which is composed entirely of outside directors.
The Audit Committee meets periodically with management, the internal auditors
and the independent auditors, to discuss internal controls and accounting,
auditing and financial reporting matters. The Audit Committee reviews and
approves the scope of internal and external audits, as well as recommendations
made with respect to internal controls by the independent and internal auditors
and the various regulatory agencies.
/s/ Dana M. Cluckey /s/ Thomas F. Menacher
- ------------------------------------- ---------------------------------------
Dana M. Cluckey, CPA Thomas F. Menacher, CPA
President and Chief Executive Officer Executive Vice President, Treasurer and
Chief Financial Officer
64
Independent Auditors' Report
Republic Bancorp Inc. Board of Directors
We have audited the accompanying consolidated balance sheets of Republic Bancorp
Inc. and subsidiaries as of December 31, 2000 and 1999 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the two years ended December 31, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Republic Bancorp
Inc. and subsidiaries at December 31, 2000 and 1999 and the consolidated results
of their operations and their cash flows for the two years ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
We previously audited and reported on the consolidated statements of income,
changes in shareholders' equity, and cash flows of Republic Bancorp Inc. and
subsidiaries for the year ended December 31, 1998 prior to their restatement for
the 1999 pooling of interests as described in Note 2. The contribution of
Republic Bancorp Inc. to revenues and net income represented 75% and 59%,
respectively, of the 1998 restated totals. Financial statements of the other
pooled company included in the 1998 restated consolidated statements were
audited and reported on separately by other auditors. We also have audited, as
to combination only, the accompanying consolidated statements of income, changes
in shareholders' equity, and cash flows for the year ended December 31, 1998,
after restatement for the 1999 pooling of interests; in our opinion, such
consolidated financial statements have been properly combined on the basis
described in the notes to the consolidated financial statements.
/s/ Ernst & Young LLP
Detroit, Michigan
January 12, 2001
65
Quarterly Data (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
years 2000 and 1999:
- -----------------------------------------------------------------------------------------------------------------------
Full
(Dollars in thousands, except per share data) 1Q 2Q 3Q 4Q Year
- -----------------------------------------------------------------------------------------------------------------------
2000
Earnings Summary
Interest income $ 80,238 $ 87,176 $ 90,851 $ 90,063 $ 348,328
Interest expense 47,527 52,598 57,271 56,284 213,680
Net interest income 32,711 34,578 33,580 33,779 134,648
Provision for loan losses 1,600 1,600 1,600 1,700 6,500
Mortgage banking revenue 18,699 16,801 14,813 8,846 59,159
Investment securities gains (losses) 107 (10) - 12 109
Other non-interest income 2,692 3,020 3,156 2,702 11,570
Non-interest expense 34,793 33,563 32,330 26,955/(1)/ 127,641
Income before taxes 17,816 19,226 17,619 16,684 71,345
Net income 11,292 12,126 11,327 10,932 45,677
Per Common Share
Basic earnings $ .22 $ .25 $ .23 $ .22 $ .92
Diluted earnings .22 .25 .23 .22 .92
Cash dividends declared .08 .08 .08 .08 .32
- -----------------------------------------------------------------------------------------------------------------------
1999
Earnings Summary
Interest income $ 71,017 $ 71,034 $ 76,342 $ 81,269 $ 299,662
Interest expense 42,133 40,425 42,537 46,301 171,396
Net interest income 28,884 30,609 33,805 34,968 128,266
Provision for loan losses 1,525 6,575/(1)/ 1,575 1,975 11,650
Mortgage banking revenue 24,818 23,680 19,024 18,947 86,469
Investment securities gains (losses) 649 (7,237)/(1)/ 10 (767) (7,345)
Other non-interest income 2,800 2,961 3,286 4,512 13,559
Non-interest expense 39,261 68,730/(1)/ 34,664 38,265 180,920
Income (loss) before taxes 16,365 (25,292)/(1)/ 19,886 17,420 28,379
Net income (loss) 10,155 (18,508)/(1)/ 12,455 10,809 14,911
Per Common Share
Basic earnings $ .21 $ (.36) $ .25 $ .20 $ .30
Diluted earnings .21 (.36) .25 .20 .30
Cash dividends declared .07 .07 .08 .08 .30
- -----------------------------------------------------------------------------------------------------------------------
/(1)/ Amounts for 2000 include a pre-tax credit of $4 million associated with
the completion of the D&N Financial merger integration and restructuring
plan. Amounts for 1999 include the impact of one-time pre-tax charges
related to the merger with D&N Financial Corporation, consisting of $31.5
million ($22.0 million after tax) one-time merger integration and
restructuring charges, a $7.6 million ($4.9 million after tax) loss on
the sale of low-yielding fixed rate securities, and an additional $5.0
million ($3.3 million after tax) provision for loan losses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There is no information required by this Item relating to a change in
accountants.
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information set forth under the caption "Board of Directors" of the
Registrant's 2001 Proxy Statement is incorporated herein by reference.
The executive officers of Republic Bancorp Inc. are listed under Item 1 of
this document.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Compensation Committee Report"
and "Summary Compensation Table" of the Registrant's 2001 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Stock Ownership" of the
Registrant's 2001 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" of the Registrant's 2001 Proxy Statement is incorporated herein by
reference.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following financial statements of the Company are filed as a part of
this document under Item 8. Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Reports
2. Financial Statement Schedules
All financial statement schedules required by Article 9 of Regulation S-X
have been included in the consolidated financial statements or are either
not applicable or not significant.
3. Exhibits
(3)(a)/(4)(a) Second Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of
the registrant's Current Report on Form 8-K dated May
17, 1999 filed with the Securities and Exchange
Commission on or about May 28, 1999 (file no. 0-
15734)).
(3)(b)/(4)(b) Bylaws, as amended, of the Company (incorporated by
reference to Exhibit 3.2 of the registrant's Current
Report on Form 8-K dated may 17, 1999 filed with the
Securities and Exchange Commission on or about May 28,
1999 (file no. 0-15734)).
(4)(c) Debenture Purchase Agreement dated as of March 30,
1994, between the Company and Scudder, Steven & 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 (incorporated by reference to
Exhibit 4(p) of the Company's Annual Report on Form 10-
K for the year ended December 31, 1994 filed with the
Securities and Exchange Commission on March 27, 1995
(file no. 0-15734)).
(4)(d) Debenture Purchase Agreement dated as of January 29,
1996, between the Company and American United Life
Insurance, State Life Insurance Co., Mutual of America
Life Insurance Co., GNA, Mega Life & Health Insurance
Co. and Provident Mutual Life Insurance Company,
related to 6.95% Senior Debentures due January 15,
2003, (incorporated by reference to Exhibit 4(c) of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 filed with the Securities and
Exchange Commission on March 29, 1996 (file no. 0-
15734)).
(4)(e) Revolving Credit Agreement dated as of December 29,
2000, between the Company and Firstar Bank, National
Association.*
(10)(a) 1998 Stock Option Plan of the Company, (incorporated by
reference to Exhibit 10(a) of the Company's Annual
Report on Form 10-K for the year ended December 31,
1997 filed with the Securities and Exchange Commission
on March 20, 1998 (file no. 0-15734)).
68
(10)(b) First Amendment to the 1998 Stock Option Plan of the Company
dated October 21, 1999, (incorporated by reference to Exhibit
10(c) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 22, 2000 (file no. 0-15734)).
(10)(c) 1997 Stock Option Plan of the Company, (incorporated by reference
to Exhibit 10(b) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 filed with the Securities and
Exchange Commission on March 28, 1997 (file no. 0-15734)).
(10)(d) First Amendment to the 1997 Stock Option Plan of the Company
dated February 19, 1998, (incorporated by reference to Exhibit
10(e) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 22, 2000 (file no. 0-15734)).
(10)(e) Second Amendment to the 1997 Stock Option Plan of the Company
dated October 21, 1999, (incorporated by reference to Exhibit
10(f) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 22, 2000 (file no. 0-15734)).
(10)(f) Non-Qualified Stock Option Plan of the Company, (incorporated by
reference to Exhibit 10(b) of the Company's Annual Report on Form
10-K for the year ended December 31, 1992 filed with the
Securities and Exchange Commission on March 23, 1993 (file no. 0-
15734)).
(10)(g) Incentive Stock Plan, as Amended, of the Company dated February
19, 1998, (incorporated by reference to Exhibit 10(h) of the
Company's Annual Report on Form 10-K for the year ended December
31, 1999 filed with the Securities and Exchange Commission on
March 22, 2000 (file no. 0-15734)).
(10)(h) Amendment to the Incentive Stock Plan, as Amended, of the Company
dated October 21, 1999, (incorporated by reference to Exhibit
10(i) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 22, 2000 (file no. 0-15734)).
(10)(i) Voluntary Management Stock Accumulation Program of the Company,
(incorporated by reference to Exhibit 10(e) of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission on March 20,
1998 (file no. 0-15734)).
(10)(j) First Amendment to the Voluntary Management Stock Accumulation
Program of the Company dated October 21, 1999, (incorporated by
reference to Exhibit 10(k) of the Company's Annual Report on Form
10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 22, 2000 (file no. 0-
15734)).
(10)(k) Directors Compensation Plan of the Company, (incorporated by
reference to Exhibit 10(e) of the Company's Annual Report on Form
10-K for the year ended December 31, 1992 filed with the
Securities and Exchange Commission on March 23, 1993 (file no. 0-
15734)).
(10)(l) Deferred Compensation Plan of the Company, as Amended and
Restated Effective June 17, 1999, (incorporated by reference to
Exhibit 10(m) of the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 filed with the Securities and
Exchange Commission on March 22, 2000 (file no. 0-15734)).
(10)(m) Form of Indemnity Agreement and schedule of officers and
directors of the Company who executed such agreements,
(incorporated by reference to Exhibit 10(e) of the Company's
Registration Statement Form S-2 filed with the Securities and
Exchange Commission on February 12, 1992 (file no. 33-46069)).
69
(10)(n) D&N Financial Corporation 1984 Stock Option and Incentive Plan
(incorporated by reference to the registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on July 20, 1999 (file no. 333-83267)).
(10)(o) D&N Financial Corporation 1994 Management Stock Incentive Plan
(incorporated by reference to the registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on July 20, 1999 (file no. 333-83265)).
(10)(p) Management Retention Agreement for Dana M. Cluckey (incorporated
by reference to Exhibit 10 to the registrant's Form 10-Q filed
with the Securities and Exchange Commission on November 14, 2000
(file no. 000-15734)).
(10)(q) Second Amendment to the 1998 Stock Option Plan of the Company
dated February 17, 2000.*
(11) No statement is required to be filed because the computations can
be clearly determined from the materials contained in the Annual
Report on Form 10-K.
(12) No statement is required to be filed because the computations can
be clearly determined from the materials contained in the Annual
Report on Form 10-K.
(21) Subsidiaries of the Company. *
(23)(a) Consent of independent auditors, Ernst & Young LLP.*
(23)(b) Consent of independent auditors, PricewaterhouseCoopers, LLP.*
(24) Powers of Attorney.*
(99) Report of independent auditors, PricewaterhouseCoopers LLP.*
*Filed herewith
Management contracts and compensatory plans or arrangements:
The management contracts and compensatory plans or arrangements required to
be filed as exhibits and included in such list of exhibits are as follows:
(10)(a) 1998 Stock Option Plan of the Company, (incorporated by reference
to Exhibit 10(a) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 filed with the Securities and
Exchange Commission on March 20, 1998 (file no. 0-15734)).
(10)(b) First Amendment to the 1998 Stock Option Plan of the Company
dated October 21, 1999, (incorporated by reference to Exhibit
10(c) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 22, 2000 (file no. 0-15734)).
(10)(c) 1997 Stock Option Plan of the Company, (incorporated by reference
to Exhibit 10(b) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 filed with the Securities and
Exchange Commission on March 28, 1997 (file no. 0-15734)).
(10)(d) First Amendment to the 1997 Stock Option Plan of the Company
dated February 19, 1998, (incorporated by reference to Exhibit
10(e) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 22, 2000 (file no. 0-15734)).
(10)(e) Second Amendment to the 1997 Stock Option Plan of the Company
dated October 21, 1999, (incorporated by reference to Exhibit
10(f) of the Company's Annual Report on
70
Form 10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 22, 2000 (file no. 0-
15734)).
(10)(f) Non-Qualified Stock Option Plan of the Company, (incorporated by
reference to Exhibit 10(b) of the Company's Annual Report on Form
10-K for the year ended December 31, 1992 filed with the
Securities and Exchange Commission on March 23, 1993 (file no. 0-
15734)).
(10)(g) Incentive Stock Plan, as Amended, of the Company dated February
19, 1998, (incorporated by reference to Exhibit 10(h) of the
Company's Annual Report on Form 10-K for the year ended December
31, 1999 filed with the Securities and Exchange Commission on
March 22, 2000 (file no. 0-15734)).
(10)(h) Amendment to the Incentive Stock Plan, as Amended, of the Company
dated October 21, 1999, (incorporated by reference to Exhibit
10(i) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 22, 2000 (file no. 0-15734)).
(10)(i) Voluntary Management Stock Accumulation Program of the Company,
(incorporated by reference to Exhibit 10(e) of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission on March 20,
1998 (file no. 0-15734)).
(10)(j) First Amendment to the Voluntary Management Stock Accumulation
Program of the Company dated October 21, 1999, (incorporated by
reference to Exhibit 10(k) of the Company's Annual Report on Form
10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 22, 2000 (file no. 0-
15734)).
(10)(k) Directors Compensation Plan of the Company, (incorporated by
reference to Exhibit 10(e) of the Company's Annual Report on Form
10-K for the year ended December 31, 1992 filed with the
Securities and Exchange Commission on March 23, 1993 (file no. 0-
15734)).
(10)(l) Deferred Compensation Plan of the Company, as Amended and
Restated Effective June 17, 1999, (incorporated by reference to
Exhibit 10(m) of the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 filed with the Securities and
Exchange Commission on March 22, 2000 (file no. 0-15734)).
(10)(m) Form of Indemnity Agreement and schedule of officers and
directors of the Company who executed such agreements,
(incorporated by reference to Exhibit 10(e) of the Company's
Registration Statement Form S-2 filed with the Securities and
Exchange Commission on February 12, 1992 (file no. 33-46069)).
(10)(n) D&N Financial Corporation 1984 Stock Option and Incentive Plan
(incorporated by reference to the registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on July 20, 1999 (file no. 333-83267)).
(10)(o) D&N Financial Corporation 1994 Management Stock Incentive Plan
(incorporated by reference to the registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on July 20, 1999 (file no. 333-83265)).
(10)(p) Management Retention Agreement for Dana M. Cluckey (incorporated
by reference to Exhibit 10 to the registrant's Form 10-Q filed
with the Securities and Exchange Commission on November 14, 2000
(file no. 000-15734)).
(10)(q) Second Amendment to the 1998 Stock Option Plan of the Company
dated February 17, 2000.*
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 2000.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 22nd day of March
2001.
REPUBLIC BANCORP INC.
By: /s/ Dana M. Cluckey
---------------------------------------
Dana M. Cluckey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated, on the 22nd day of March 2001.
Signature Title Date
--------- ----- ----
/s/ Dana M. Cluckey President and Chief Executive Officer March 22, 2001
- -------------------------
Dana M. Cluckey
/s/ Thomas F. Menacher Executive Vice President, Treasurer March 22, 2001
- ------------------------- and Chief Financial Officer
Thomas F. Menacher (Principal Financial Officer and
Principal Accounting Officer)
DIRECTORS *
Jerry D. Campbell George A. Eastman John J. Lennon Isaac J. Powell
George J. Butvilas Howard J. Hulsman Sam H. McGoun B. Thomas M. Smith Jr.
Mary P. Cauley Gary Hurand Kelly E. Miller Jeoffrey K. Stross
Steven Coleman Dennis J. Ibold Joe D. Pentecost Peter Van Pelt
Richard J. Cramer Sr. Stanley A. Jacobson Randolph P. Piper Steven E. Zack
* By: /s/ Thomas F. Menacher
--------------------------
Attorney in Fact
72
EXHIBIT INDEX
(4)(e) Revolving Credit Agreement dated as of December 29, 2000, between the
Company and Firstar Bank, National Association.
(10)(q) Second Amendment to the 1998 Stock Option Plan of the Company dated
February 17, 2000.
(21) Subsidiaries of the Company.
(23)(a) Consent of independent auditors, Ernst & Young LLP.
(23)(b) Consent of independent auditors, PricewaterhouseCoopers, LLP.
(24) Powers of Attorney.
(99) Report of independent auditors, PricewaterhouseCoopers LLP.