SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2001 Commission File Number 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2604669
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices)
(517) 725-7337
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO _______
----------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock Outstanding as of July 31, 2001:
Common Stock, $5 Par Value ............................... 49,488,000 Shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 ....................................................... 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2001 and 2000.......................................... 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2001 and 2000.......................................... 5
Notes to Consolidated Financial Statements................................... 6 - 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition................................ 10 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 23
Item 2. Changes in Securities........................................................ 23
Item 6. Exhibits and Reports on Form 8-K............................................. 23
SIGNATURE................................................................................... 24
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
(Dollars in thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents.............................................. $ 113,803 $ 82,377
Mortgage loans held for sale........................................... 430,159 385,207
Securities available for sale (amortized cost of
$310,922 and $212,183, respectively)................................ 309,678 211,860
Loans.................................................................. 3,544,090 3,771,676
Less allowance for loan losses...................................... (28,924) (28,450)
----------- -----------
Net loans.............................................................. 3,515,166 3,743,226
----------- -----------
Premises and equipment................................................. 31,759 36,094
Mortgage servicing rights.............................................. 2,022 51,796
Other assets........................................................... 77,838 100,081
----------- -----------
Total assets........................................................... $ 4,480,425 $ 4,610,641
=========== ===========
LIABILITIES
Noninterest-bearing deposits........................................... $ 318,986 $ 267,509
Interest-bearing deposits:
NOW accounts...................................................... 144,230 150,476
Savings and money market accounts................................. 739,790 590,056
Certificates of deposit........................................... 1,617,036 1,720,485
----------- -----------
Total interest-bearing deposits................................... 2,501,056 2,461,017
----------- -----------
Total deposits.................................................... 2,820,042 2,728,526
Federal funds purchased and other short-term borrowings ............... 10,958 1,729
FHLB advances.......................................................... 1,243,718 1,383,513
Accrued expenses and other liabilities................................. 56,675 125,790
Long-term debt......................................................... 13,500 47,500
----------- -----------
Total liabilities................................................. 4,144,893 4,287,058
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; 49,459,000 and 49,424,000 shares
issued and outstanding, respectively................................ 247,294 247,119
Capital surplus........................................................ 43,638 44,961
Retained earnings...................................................... 16,690 2,994
Accumulated other comprehensive loss................................... (809) (210)
----------- -----------
Total shareholders' equity.......................................... 306,813 294,864
----------- -----------
Total liabilities and shareholders' equity........................ $ 4,480,425 $ 4,610,641
=========== ===========
See notes to consolidated financial statements.
3
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans, including fees...................................................... $ 84,843 $ 83,601 $ 169,766 $160,081
Investment securities...................................................... 4,156 3,575 7,698 7,333
--------- -------- --------- --------
Total interest income............................................... 88,999 87,176 177,464 167,414
--------- -------- --------- --------
Interest Expense:
Deposits................................................................... 30,796 29,139 63,810 56,958
Short-term borrowings...................................................... 935 1,306 1,459 2,401
FHLB advances.............................................................. 19,346 21,295 39,593 39,049
Long-term debt............................................................. 241 858 968 1,717
--------- -------- --------- --------
Total interest expense.............................................. 51,318 52,598 105,830 100,125
--------- -------- --------- --------
Net interest income........................................................ 37,681 34,578 71,634 67,289
Provision for loan losses.................................................. 2,300 1,600 4,300 3,200
--------- -------- --------- --------
Net interest income after provision for loan losses........................ 35,381 32,978 67,334 64,089
--------- -------- --------- --------
Noninterest Income:
Service charges............................................................ 1,892 1,897 3,543 3,676
Mortgage production revenue................................................ 17,857 14,016 34,507 28,738
Net mortgage servicing (expense) revenue................................... (235) 2,785 (434) 6,762
Gain (loss) on sale of securities.......................................... 163 (10) 530 97
Other noninterest income................................................... 512 1,123 1,364 2,036
Gain on sale of subsidiary................................................. 12,000 - 12,000 -
--------- -------- --------- --------
Total noninterest income............................................ 32,189 19,811 51,510 41,309
--------- -------- --------- --------
Noninterest Expense:
Salaries and employee benefits............................................. 20,285 17,801 36,954 37,623
Occupancy expense of premises.............................................. 3,226 3,420 6,626 6,955
Equipment expense.......................................................... 2,378 2,254 4,753 4,507
Other noninterest expense.................................................. 8,729 10,088 16,690 19,271
Restructuring costs to exit mortgage servicing............................. - - 19,000 -
--------- -------- --------- --------
Total noninterest expense........................................... 34,618 33,563 84,023 68,356
--------- -------- --------- ---------
Income before income taxes................................................. 32,952 19,226 34,821 37,042
Provision for income taxes................................................. 10,954 6,420 11,343 12,263
--------- -------- --------- --------
Income before preferred stock dividends.................................... 21,998 12,806 23,478 24,779
Preferred stock dividends.................................................. 680 680 1,361 1,361
--------- -------- --------- --------
Net income................................................................. $ 21,318 $ 12,126 $ 22,117 $ 23,418
========= ======== ========= ========
Basic earnings per share................................................... $ .43 $ .24 $ .45 $ .47
========= ======== ========= ========
Diluted earnings per share................................................. $ .42 $ .24 $ .44 $ .47
========= ======== ========= ========
Average common shares outstanding - diluted ............................... 50,184 49,922 50,151 50,016
========= ======== ========= ========
Cash dividends declared per common share................................... $ .085 $ .077 $ .170 $ .155
========= ======== ========= ========
See notes to consolidated financial statements.
4
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30 (In thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income (loss)............................................................................ $ 22,117 $ 23,418
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................................... 4,706 4,525
Amortization and write-down of mortgage servicing rights................................ 20,079 3,778
Net gain on sale of mortgage servicing rights........................................... (21,521) (16,017)
Net gain on sale of securities available for sale....................................... (530) (97)
Net gain on sale of loans............................................................... (718) (415)
Net gain on sale of subsidiary.......................................................... (12,000) -
Proceeds from sales of mortgage loans held for sale..................................... 2,615,500 1,999,193
Origination of mortgage loans held for sale............................................. (2,878,136) (2,002,094)
Net decrease in other assets............................................................ 30,965 3,588
Net (decrease) increase in other liabilities............................................ (34,678) 15,332
Other, net.............................................................................. (1,275) (2,644)
------------- -------------
Total adjustments..................................................................... (277,608) 5,149
------------- -------------
Net cash provided by operating activities...................................... (255,491) 28,567
------------- -------------
Cash Flows From Investing Activities:
Proceeds from sale of securities available for sale.......................................... 86,611 19,114
Proceeds from maturities/payments of securities available for sale........................... 4,442 6,161
Purchases of securities available for sale................................................... (171,610) (9,176)
Proceeds from sale of consumer loans......................................................... 39,485 -
Proceeds from sale of SBA and residential real estate loans.................................. 28,980 88,878
Net decrease (increase) in loans made to customers........................................... 158,710 (467,703)
Proceeds from sale of subsidiary and payments received on related borrowings................. 175,184 -
Proceeds from sale of mortgage servicing rights.............................................. 93,882 38,664
Additions to mortgage servicing rights....................................................... (46,017) (21,754)
Proceeds from sale of fixed assets........................................................... - 1,673
------------- -------------
Net cash used in investing activities............................................. 369,667 (344,143)
------------- -------------
Cash Flows From Financing Activities:
Net increase in deposits ....................................... 91,516 99,075
Net increase (decrease) in short-term borrowings............................................. 9,229 (55,764)
Net decrease in short-term FHLB advances..................................................... (81,500) (48,309)
Proceeds from long-term FHLB advances........................................................ 60,000 475,000
Payments on long-term FHLB advances.......................................................... (118,295) (142,098)
Payments on long-term debt................................................................... (34,000) -
Net proceeds from issuance of common shares.................................................. 2,925 1,699
Repurchase of common shares.................................................................. (4,205) (4,446)
Dividends paid............................................................................... (8,420) (7,718)
------------- -------------
Net cash provided by (used in) financing activities............................... (82,750) 317,439
------------- -------------
Net increase in cash and cash equivalents.................................................... 31,426 1,863
Cash and cash equivalents at beginning of period............................................. 82,377 83,761
------------- -------------
Cash and cash equivalents at end of period................................................... $ 113,803 $ 85,624
============= =============
See notes to consolidated financial statements.
5
REPUBLIC BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of Republic Bancorp
Inc. and Subsidiaries (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes necessary for a comprehensive presentation of financial position,
results of operations and cash flow activity required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all normal recurring adjustments necessary for a fair
presentation of results have been included. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Certain amounts in prior periods have been reclassified to conform to the
current year's presentation.
Note 2 - Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the parent
company, Republic Bancorp Inc., and its wholly-owned banking subsidiary,
Republic Bank (including its subsidiaries Market Street Mortgage Corporation,
D&N Capital Corporation and Quincy Investment Services, Inc.). D&N Capital
Corporation and Quincy Investment Services, Inc. are wholly-owned subsidiaries
and Market Street Mortgage Corporation was an 80% majority-owned mortgage
company subsidiary that was sold on June 29, 2001. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Note 3 - Consolidated Statements of Cash Flows
-------------------------------------
Supplemental disclosures of cash flow information for the six months ended June
30, include:
(In thousands) 2001 2000
---- ----
Cash paid during the period for:
Interest........................................................................... $ 113,872 $ 99,206
Income taxes....................................................................... $ 6,819 8,972
Non-cash investing activities:
Loan charge-offs................................................................... $ 4,382 $ 2,615
6
Note 4 - Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net income .............................................. $ 21,318 $ 12,126 $ 22,117 $ 23,418
Denominator for basic earnings per share--
weighted-average shares ................................. 49,487,086 49,568,611 49,492,346 49,653,231
Effect of dilutive securities:
Employee stock options ....................... 650,918 333,715 615,114 340,761
Warrants .......................................... 46,079 20,126 43,386 21,361
----------- ----------- ----------- -----------
Dilutive potential common shares.............. 696,997 353,841 658,500 362,122
----------- ----------- ----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares for assumed conversions.......... 50,184,083 49,922,452 50,150,846 50,015,353
=========== =========== =========== ===========
Basic earnings per share................................. $ .43 $ .24 $ .45 $ .47
=========== =========== =========== ===========
Diluted earnings per share.............................. $ .42 $ .24 $ .44 $ .47
=========== =========== =========== ===========
Note 5 - Comprehensive Income
--------------------
The following table sets forth the computation of comprehensive income:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net income ......................................................... $ 21,318 $ 12,126 $ 22,117 $ 23,418
Unrealized holding losses on securities, net of tax.................. $ (580) $ (190) $ (254) $ (289)
Reclassification adjustment for (gains) losses included
in net income, net of tax............................ (106) 7 (345) (63)
----------- ----------- ----------- -----------
Net unrealized losses on securities, net of tax...................... (686) (183) (599) (352)
----------- ----------- ----------- -----------
Comprehensive income................................................. $ 20,632 $ 11,943 $ 21,934 $ 23,066
=========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
7
Note 6 - Segment Information
-------------------
The Company's operations are managed as two major business segments: (1)
commercial and retail banking and (2) mortgage banking. The commercial and
retail banking segment consists of commercial lending to small- and medium-sized
companies, primarily in the form of commercial real estate and Small Business
Administration (SBA) loans; mortgage portfolio lending; home equity lending; and
the deposit-gathering function. The mortgage banking segment is comprised of
mortgage loan production and mortgage loan servicing.
The following table presents the financial results of each business segment for
the three months ended June 30, 2001 and 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial and
Retail Banking Mortgage Banking Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended, Three Months Ended, Three Months Ended,
June 30, June 30, June 30, June 30, June 30, June 30,
(In thousands) 2001 2000 2001/(2)/ 2000 2001/(2)/ 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 72,232 $ 75,102 $ 16,767 $ 12,074 $ 88,999 $ 87,176
Interest expense 40,861 42,777 10,457 9,821 51,318 52,598
--------- --------- --------- --------- --------- ---------
Net interest income(1) 31,371 32,325 6,310 2,253 37,681 34,578
Provision for loan losses 2,300 1,600 - - 2,300 1,600
Noninterest income 2,564 3,010 17,625 16,801 20,189 19,811
Noninterest expense 14,865 16,468 19,753 17,095 34,618 33,563
--------- --------- --------- --------- --------- ---------
Income before taxes $ 16,770 $ 17,267 $ 4,182 $ 1,959 $ 20,952 $ 19,226
========= ========= ========= ========= ========= =========
Preferred stock dividend $ 680 $ 680 $ - $ - $ 680 $ 680
Income taxes $ 5,290 $ 5,734 $ 1,464 $ 686 $ 6,754 $ 6,420
Depreciation and amortization $ 1,400 $ 1,218 $ 1,551 $ 2,967 $ 2,951 $ 4,185
Capital expenditures $ 551 $ 498 $ 188 $ 200 $ 739 $ 698
Identifiable assets (in millions) $ 3,871 $ 4,072 $ 609 $ 586 $ 4,480 $ 4,658
Efficiency ratio 44.02% 46.59% 82.53% 89.72% 60.00% 61.70%
- -----------------------------------------------------------------------------------------------------------------------------------
The following table presents the financial results of each business segment for
the six months ended June 30, 2001 and 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial and
Retail Banking Mortgage Banking Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended, Six Months Ended, Six Months Ended,
June 30, June 30, June 30, June 30, June 30, June 30,
(In thousands) 2001 2000 2001/(2)/ 2000 2001/(2)/ 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 148,262 $ 144,462 $ 29,202 $ 22,952 $ 177,464 $ 167,414
Interest expense 86,149 82,209 19,681 17,916 105,830 100,125
--------- --------- --------- --------- --------- ---------
Net interest income(1) 62,113 62,253 9,521 5,036 71,634 67,289
Provision for loan losses 4,300 3,200 - - 4,300 3,200
Noninterest income 5,434 5,809 34,076 35,500 39,510 41,309
Noninterest expense 29,102 32,419 35,921 35,937 65,023 68,356
--------- --------- --------- --------- --------- ---------
Income before taxes $ 34,145 $ 32,443 $ 7,676 $ 4,599 $ 41,821 $ 37,042
========= ========= ========= ========= ========= =========
Preferred stock dividend $ 1,361 $ 1,361 $ - $ - $ 1,361 $ 1,361
Income taxes $ 11,106 $ 10,653 $ 2,687 $ 1,610 $ 13,793 $ 12,263
Depreciation and amortization $ 2,793 $ 2,572 $ 5,927 $ 5,731 $ 8,720 $ 8,303
Capital expenditures $ 1,482 $ 690 $ 267 $ 3,197 $ 1,749 $ 3,887
Identifiable assets (in millions) $ 3,871 $ 4,072 $ 609 $ 586 $ 4,480 $ 4,658
Efficiency ratio 43.42% 47.70% 82.39% 88.65% 58.79% 63.00%
- ------------------------------------------------------------------------------------------------------------------------------------
/(1)/ 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 its overall cost of funds for the
loans held for sale balances and an interest rate based on the prime rate to fund its servicing portfolio and operations.
/(2)/ Excludes impact of $12.0 million gain on sale of subsidiary recorded in the second quarter and the impact of $19.0 million
charge related to the exit of the residential mortgage servicing business recorded in the first quarter.
- ------------------------------------------------------------------------------------------------------------------------------------
8
Note 8 - Accounting and Financial Reporting Developments
-----------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which was
amended in June 1999 by Statement No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, and 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 companies
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 Statement 133, as amended, effective January 1, 2001.
The cumulative effect of the adoption of Statement 133 was not material. For the
quarter and six months ended June 30, 2001, the Company's hedging policies using
mandatory forward commitments, as they relate to Interest Rate Lock Commitments
and mortgage loans held for sale, were highly effective. Therefore, Statement
133's impact on net income was immaterial.
In July 2001, the FASB issued Statement No. 141, Business Combinations and
Statement No. 142, Goodwill and Other Intangible Assets. These Statements
drastically change the accounting for business combinations, goodwill, and
intangible assets. Statement 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. Statement 141 further clarifies the
criteria to recognize intangible assets separately from goodwill. The
requirements of Statement 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001
(i.e., the acquisition date is July 1, 2001 or after).
Under Statement 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of
Statement 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, companies are required to adopt Statement 142 in their fiscal year
beginning after December 15, 2001.
The Company expects the adoption of these Statements will not have a material
impact on the financial position or results of operations.
9
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
EARNINGS PERFORMANCE
- --------------------
The Company reported record net operating income for the second quarter of 2001
of $13.5 million, an increase of 11% over net operating income of $12.1 million
for the second quarter of 2000. Diluted net operating earnings per share were
$0.27 for the quarter, up 12% from $0.24 earned for the second quarter of 2000.
Net operating income for the quarter generated annualized returns of 1.14% on
average assets and 18.23% on average equity. These compare with annualized
returns of 1.08% on average assets and 17.55% on average equity for the second
quarter of 2000.
The Company completed the sale of its subsidiary, Market Street Mortgage
Corporation, to NetBank, Inc. on June 29, 2001. The Company received cash of
$5.0 million and NetBank stock valued at $17.6 million, for total consideration
of $22.6 million. Net of the Company's investment in the subsidiary and
transaction costs, the Company's pre-tax gain on the sale of Market Street
Mortgage was $12.0 million. Including the gain on sale of the subsidiary, the
Company had net income of $21.3 million, or diluted earnings per share of $0.42
for the quarter ended June 30, 2001.
Net operating income for the six months ended June 30, 2001 was $26.7 million, a
14% increase over the $23.4 million earned for the six months ended June 30,
2000. For the six months period ended June 30, 2001, diluted earnings per share
were $0.53, an increase of 13% over the $0.47 earned in 2000. Annualized returns
on average assets and shareholders' equity for the first six months of 2001 were
1.14% and 17.94%, respectively. Net operating earnings for the six months ended
June 30, 2001 exclude the $12.0 million gain on sale of subsidiary and the $19.0
million of pre-tax charges related to the exit of the Company's residential
mortgage servicing business recorded in the first quarter of 2001. Including
these charges, the Company reported net income of $22.1 million and diluted
earnings per share of $0.44 for the six months ended June 30, 2001.
RESULTS OF OPERATIONS
- ---------------------
Mortgage Banking
The following discussion provides information that relates specifically to the
Company's mortgage banking line of business, which generates revenue from
mortgage loan production and mortgage loan servicing activities. Mortgage
banking revenue represents the largest component of the Company's total
noninterest income.
The Company closed $1.72 billion in single-family residential mortgage loans in
the second quarter of 2001, compared to $1.15 billion closed in the same period
last year. During the first half of 2001, mortgage loan closings were $3.08
billion, compared to $2.00 billion for the comparable period in 2000. Mortgage
loan volumes during the first half of 2001 increased primarily due to the
declining interest rate environment which has resulted in a higher level of
mortgage refinance activity. Refinancings for the second quarter of 2001
represented approximately 44% of total closings compared to 9% in the second
quarter of 2000. During the first half of 2001, refinancings represented
approximately 48% of total closings compared to 11% for the first half of 2000.
10
The following table summarizes the Company's income from mortgage banking
activities:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage loan production revenue /(1)/.................... $ 17,857 $ 14,016 $ 34,507 $ 28,738
Net mortgage loan servicing (expense) revenue /(2)/....... (235) 1,667 (434) 4,544
Gain on sale of bulk servicing............................ - 1,118 - 2,218
--------- -------- -------- --------
Total mortgage banking revenue...................... $ 17,622 $ 16,801 $ 34,073 $ 35,500
========= ======== ======== ========
/(1)/ Includes fee revenue derived from the loan origination process (i.e.,
points collected), gains on the sale of mortgage loans and gains on the
sale of mortgage servicing rights released concurrently with the
underlying loans sold, net of commissions paid to loan originators.
/(2)/ Includes servicing fees, late fees and other ancillary charges and net of
amortization.
For the three months ended June 30, 2001, mortgage banking revenue increased
$821,000, or 5%, to $17.6 million from $16.8 million a year earlier. The
increase is the result of a $3.8 million, or 27%, increase in mortgage
production revenue, which was offset by a $3.0 million decrease in mortgage loan
servicing revenue. For the six months ended June 30, 2001, mortgage banking
revenue decreased $1.4 million, or 4%, compared to the same period a year ago.
The decrease is the result of a $5.8 million, or 20%, increase in mortgage loan
production revenue, which was offset by a $7.2 million decrease in mortgage loan
servicing revenue and gains on sale of bulk servicing. The increases in mortgage
loan production revenue reflect the increases in mortgage loan closing volumes
discussed above and the resulting sales of loans in the secondary market. Total
loans sold during the quarter were $1.49 billion compared to $891 million during
the second quarter of 2000. The ratio of mortgage production revenue to mortgage
loans sold was 1.98% in the second quarter of 2001 compared to 2.27% in the
second quarter of 2000.
For the quarter ended June 30, 2001, net mortgage loan servicing expense was
$235,000 compared to net mortgage loan servicing revenue of $1.7 million for the
quarter ended June 30, 2000. For the six months ended June 30, 2001, net
mortgage loan servicing expense was $434,000 compared to net mortgage loan
servicing revenue of $4.5 million in 2000. These decreases in revenue primarily
reflect a reduction in the average mortgage loan servicing portfolio as loans
serviced for others averaged $888 million for the second quarter of 2001
compared to $2.7 billion in 2000. For the six months ended June 30, 2001 and
2000, mortgage loans serviced for others averaged $1.5 billion and $2.9 billion,
respectively. The Company expects to sell all mortgage servicing rights
concurrently with the sale of the underlying loans.
At the end of the first quarter of 2001 the Company elected to exit the
residential mortgage servicing business and reduced mortgage servicing rights by
$16.1 million to reflect the current market value of the servicing portfolio. A
sale agreement regarding Market Street's mortgage servicing portfolio was
subsequently signed in April 2001 with an unaffiliated company. The Company
completed the sale of Market Street's mortgage servicing portfolio during the
second quarter.
11
Commercial and Retail Banking
The remaining disclosures and analyses within Management's Discussion and
Analysis regarding the Company's results of operations and financial condition
relate principally to the commercial and retail banking line of business.
Net Interest Income
- -------------------
The following discussion should be read in conjunction with Tables I and II on
the following pages, which provide detailed analyses of the components impacting
net interest income for the three and six months ended June 30, 2001 and 2000.
Net interest income, on a fully taxable equivalent (FTE) basis, was $38.4
million for the second quarter of 2001, an increase of $3.8 million, or 11%,
over the second quarter of 2000. This increase was primarily the result of an
increase in the Company's average interest-earnings assets of $337 million. The
average mortgage loans held for sale balance increased $304 million, or 67% for
the second quarter of 2001 compared to 2000, reflecting the increased mortgage
loan closing volume. The average portfolio loan balance decreased $36 million,
or 1% during the second quarter of 2001 compared to 2000. This decrease reflects
a $254 million, or 26% increase in average commercial loans offset by a decrease
of $142 million, or 7% in average residential real estate mortgage loans and a
decrease of $149 million, or 20% in average installment loans which is primarily
due to the $197 million decrease in the average indirect installment loan
balance. In addition, the average balance of investment securities increased $67
million, or 34% for the second quarter of 2001 compared to 2000. Primarily
funding the growth in commercial portfolio loans, mortgage loans held for sale
and investment securities was a reduction in the average balance of residential
real estate mortgage loans and installment loans, as well as increases in the
Company's savings and time deposits and FHLB advances.
The net interest margin (FTE) was 3.30% for the quarter ended June 30, 2001, an
increase of 10 basis points from 3.20% in 2000. The increase in the margin was
due to an improved mix of earning assets and a reduction in the Company's cost
of funds during the second quarter of 2001.
For the six months ended June 30, 2001, net interest income (FTE) was $72.6
million, an increase of $5.2 million, or 8%, over the first half of 2000. The
net interest margin (FTE) for the six months ended June 30, 2001, rose 3 basis
points to 3.23% from 3.20% for the comparable period in 2000. The increase in
the net interest margin was due to the improved mix of earning assets and a
decrease in the Company's cost of funds during the first half of 2001.
12
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments.............................. $ 4,194 $ 40 3.84% $ 1,416 $ 19 5.38%
Mortgage loans held for sale........................ 755,606 13,458 7.14 451,993 9,481 8.41
Investment securities .............................. 261,632 4,851 7.44 194,703 3,575 7.34
Portfolio loans(1):
Commercial loans................................. 1,235,790 26,053 8.34 981,904 22,135 9.04
Real estate mortgage loans....................... 1,789,315 31,994 7.17 1,930,898 35,366 7.33
Installment loans................................ 607,482 13,338 8.81 755,995 16,619 8.82
------------ -------- ------ ----------- ---------- -------
Total loans, net of unearned income........ 3,632,587 71,385 7.84 3,668,797 74,120 8.09
------------ -------- ------ ----------- ---------- -------
Total interest-earning assets.............. 4,654,019 89,734 7.70 4,316,909 87,194 8.09
Allowance for loan losses........................... (29,033) (28,212)
Cash and due from banks............................. 70,281 61,604
Other assets........................................ 43,178 147,027
------------ -----------
Total assets............................... $ 4,738,445 $ 4,497,328
============ ===========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits.................... $ 28,696 121 1.69 $ 111,160 430 1.55
Savings deposits ................................... 896,945 6,704 3.00 722,004 5,496 3.05
Time deposits....................................... 1,641,912 23,972 5.86 1,579,652 23,213 5.89
------------ -------- ------ ----------- ---------- -------
Total interest-bearing deposits............ 2,567,553 30,797 4.81 2,412,816 29,139 4.84
Short-term borrowings............................... 79,306 935 4.67 81,286 1,306 6.44
FHLB advances....................................... 1,455,480 19,346 5.26 1,384,549 21,295 6.17
Long-term debt...................................... 13,500 241 7.14 47,500 858 7.23
------------ -------- ------ ----------- ---------- -------
Total interest-bearing liabilities......... 4,115,839 51,319 4.97 3,926,151 52,598 5.37
-------- ------ ---------- -------
Noninterest-bearing deposits........................ 215,758 200,461
Other liabilities................................... 81,508 65,681
------------ -----------
Total liabilities.......................... 4,413,105 4,192,293
Preferred stock of subsidiary....................... 28,719 28,719
Shareholders' equity................................ 296,621 276,316
------------ ------------
Total liabilities and shareholders' equity. $ 4,738,445 $ 4,497,328
============ ===========
Net interest income/rate spread (FTE)............... $ 38,415 2.73% $ 34,596 2.72%
======== ====== ========== =======
Net interest margin (FTE)........................... 3.30% 3.20%
====== =======
Increase (decrease) due to change in: Volume/(2)/ Rate/(2)/ Net Change
-----------------------------------------------------------------------------------------------------------
Short-term investments................... $ 27 $ (6) $ 21
Mortgage loans held for sale............. 5,590 (1,613) 3,977
Investment securities.................... 1,227 49 1,276
Portfolio loans(1):
Commercial loans...................... 5,660 (1,742) 3,918
Real estate mortgage loans............ (2,599) (773) (3,372)
Installment loans..................... (3,262) (19) (3,281)
---------- ---------- ---------
Total loans, net of unearned income.. (201) (2,534) (2,735)
---------- ---------- ---------
Total interest income................ 6,644 (4,104) 2,540
Interest-bearing demand deposits......... (345) 36 (309)
Savings deposits......................... 1,300 (92) 1,208
Time deposits............................ 882 (123) 759
---------- ---------- ---------
Total interest-bearing deposits........ 1,837 (179) 1,658
Short-term borrowings.................... (30) (341) (371)
FHLB advances............................ 1,122 (3,071) (1,949)
Long-term debt........................... (606) (11) (617)
---------- ---------- ---------
Total interest expense............... 2,322 (3,601) (1,279)
---------- ---------- ---------
Net interest income.................. $ 4,322 $ (503) $ 3,819
========== ========== =========
/(1)/ Non-accrual loans and overdrafts are included in average balances.
/(2)/ Rate/volume variances are proportionately allocated to rate and volume
based on the absolute value of the change in each.
13
Table II - Year-to-Date Net Interest Income and Rate/Volume Analysis (FTE)
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments............................ $ 3,689 $ 87 4.77% $ 2,030 $ 54 5.33%
Mortgage loans held for sale...................... 600,711 22,731 7.63 442,391 18,175 8.24
Investment securities............................. 230,118 8,551 7.49 202,739 7,315 7.22
Portfolio loans(1):
Commercial loans............................... 1,205,081 52,305 8.63 949,915 42,139 8.90
Real estate mortgage loans..................... 1,825,738 66,366 7.33 1,862,255 67,437 7.24
Installment loans.............................. 629,292 28,364 9.09 742,841 32,330 8.73
------------ ----------- ------ ---------- ---------- ------
Total loans, net of unearned income........... 3,660,111 147,035 8.06 3,555,011 141,906 7.99
------------ ----------- ------ ---------- ---------- ------
Total interest-earning assets................ 4,494,629 178,404 7.97 4,202,171 167,450 7.98
Allowance for loan losses......................... (29,019) (27,942)
Cash and due from banks........................... 69,417 61,095
Other assets...................................... 160,564 161,984
------------ ----------
Total assets................................. $ 4,695,591 $4,397,308
============ ==========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits.................. $ 30,163 342 2.29 $ 110,321 872 1.59
Savings deposits.................................. 854,972 13,099 3.09 716,537 10,819 3.03
Time deposits..................................... 1,675,619 50,369 6.06 1,581,071 45,267 5.74
------------ ----------- ------ ----------- ---------- ------
Total interest-bearing deposits............... 2,560,754 63,810 5.03 2,407,929 56,958 4.74
Short-term borrowings............................. 58,145 1,459 4.99 78,079 2,401 6.17
FHLB advances..................................... 1,431,342 39,593 5.50 1,299,107 39,049 6.03
Long-term debt.................................... 25,250 968 7.67 47,500 1,717 7.23
------------ ----------- ------ ---------- ---------- ------
Total interest-bearing liabilities........... 4,075,491 105,830 5.21 3,832,615 100,125 5.24
------------ ----------- ------ ---------- ---------- ------
Noninterest-bearing deposits...................... 207,821 192,535
Other liabilities................................. 86,188 70,426
------------ ----------
Total liabilities............................ 4,369,500 4,095,576
Preferred stock of subsidiary..................... 28,719 28,719
Shareholders' equity.............................. 297,372 273,013
------------ ----------
Total liabilities and shareholders' equity... $ 4,695,591 $4,397,308
============ ==========
Net interest income/Rate spread (FTE)............. $ 72,574 2.76% $67,325 2.74%
=========== ====== ========== ======
Net interest margin............................... 3.23% 3.20%
====== ========== ======
Increase (decrease) due to change in: Volume/(2)/ Rate/(2)/ Net Change
-----------------------------------------------------------------------------------------------------------
Short-term investments................... $ 40 $ (7) $ 33
Mortgage loans held for sale............. 6,011 (1,455) 4,556
Investment securities.................... 968 268 1,236
Portfolio loans(1):
Commercial loans...................... 11,439 (1,273) 10,166
Real estate mortgage loans............ (1,681) 610 (1,071)
Installment loans..................... (5,229) 1,263 (3,966)
--------- --------- ---------
Total loans, net of unearned income.. 4,528 601 5,129
--------- --------- ---------
Total interest income................ 11,546 (592) 10,954
Interest-bearing demand deposits......... (811) 281 (530)
Savings deposits......................... 2,068 212 2,280
Time deposits............................ 2,641 2,461 5,102
--------- --------- ---------
Total interest-bearing deposits........ 3,898 2,954 6,852
Short-term borrowings.................... (538) (404) (942)
FHLB advances............................ 6,869 (6,325) 544
Long-term debt........................... (956) 207 (749)
--------- --------- ---------
Total interest expense.............. 9,272 (3,567) 5,705
--------- --------- ---------
Net interest income................. $ 2,274 $ 2,975 $ 5,249
========= ========= =========
/(1)/ Non-accrual loans and overdrafts are included in average balances.
/(2)/ Rate/volume variances are proportionately allocated to rate and volume
based on the absolute value of the change in each.
14
Noninterest Expense
- -------------------
For the quarter ended June 30, 2001, total noninterest expense increased $1.0
million, or 3%, to $34.6 million compared to $33.6 million for the second
quarter of 2000. The increase reflects a $2.5 million, or 14% increase in
salaries and employee benefits expense offset by a $1.4 million, or 14% decrease
in other noninterest expense. Excluding the $19.0 million of charges related to
the exit of the residential mortgage servicing business, total non-interest
expense for the six months ended June 30, 2001, decreased $3.3 million 5%, to
$65.0 million from $68.3 million in 2000. This decrease is primarily the result
of decreases in other noninterest expense, reflecting cost savings associated
with the integration of D&N Bank and Republic Banc Mortgage into Republic Bank
which took place in December 2000.
BALANCE SHEET ANALYSIS
- ----------------------
ASSETS
- ------
At June 30, 2001, the Company had $4.48 billion in total assets, a decrease of
$130.2 million, or 3%, from $4.61 billion at December 31, 2000. The decrease is
primarily the result of the sale of Market Street Mortgage Corporation and a
decrease in the Company's portfolio of residential real estate mortgage and
installment loans.
Securities
- ----------
Investment securities available for sale increased $97.8 million, to $309.7
million, representing 6.9% of total assets at June 30, 2001. At December 31,
2000, the investment securities portfolio totaled $211.9 million, or 4.6% of
total assets. During the first half of 2001, the Company sold $86.1 million of
investment securities and realized gross gains and losses on the sales of
available for sale securities of $559,000 and $29,000, respectively.
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 primarily of municipal securities and collateralized mortgage
obligations. The Company's equity securities portfolio consists primarily of
NetBank, Inc. common stock.
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at June 30, 2001:
Securities Available for Sale
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury and Government agency securities............. $ 10,377 $ 9 $ 205 $ 10,181
Collateralized mortgage obligations........................ 48,460 33 221 48,272
Interest-only certificates................................. 68 - - 68
Mortgage-backed securities................................. 2,196 28 - 2,224
Municipal and other securities............................. 153,156 567 1,455 152,268
---------- ----------- ----------- ----------
Total debt securities.................................... 214,257 637 1,881 213,013
Equity securities............................................. 17,625 - - 17,625
Investment in FHLB............................................ 79,040 - - 79,040
---------- ----------- ----------- ----------
Total securities available for sale........................ $ 310,922 $ 637 $ 1,881 $ 309,678
========== =========== =========== ==========
Certain securities having a carrying value of approximately $10.7 million and
$58.7 million at June 30, 2001 and December 31, 2000, respectively, were pledged
to secure FHLB advances and public deposits as required by law.
15
Mortgage Loans Held for Sale
- ----------------------------
Mortgage loans held for sale were $430.2 million at June 30, 2001 compared to
$385.2 million at December 31, 2000. This increase was caused by an increase in
residential mortgage loan closings during the second quarter of 2001 over the
fourth quarter of 2000 (loans closed generally remain in loans held for sale for
30 to 60 days after closing).
Portfolio Loans
- ---------------
Total portfolio loans were $3.54 billion at June 30, 2001, a decrease of $227.6
million, or 6%, from $3.77 billion at December 31, 2000. This decrease was due
to decreases in the residential real estate mortgage and consumer indirect loan
portfolios which were partially offset by an increase in the commercial loan
balance. The residential mortgage portfolio loan balance decreased $273.0
million, or 14%, since year-end 2000 to $1.69 billion at June 30, 2001. The
decrease in residential mortgage loans was due to a significant increase of
loans being refinanced from the residential mortgage loan portfolio. The Company
refinanced a significant portion of these mortgage portfolio loans, which are
subsequently reflected as loans held for sale.
The installment loan portfolio decreased $78.2 million at June 30, 2001 compared
to December 31, 2000, primarily to due to loan sales and runoff from the
indirect consumer loan portfolio. During the first six months of 2001, the
Company sold $39 million of indirect marine and RV loans. There was no material
gain on the sale. The direct consumer loan portfolio increased $11.4 million at
June 30, 2001 compared to year-end 2000.
The commercial portfolio loan balance increased $123.6 million during the first
six months of 2001, for an annualized growth rate of 22%, reflecting continued
strong demand for real estate-secured lending in markets served by the Company.
During the second quarter of 2001 and 2000, the Company closed $9.0 million and
$11.2 million, respectively, in Small Business Administration (SBA) loans. For
the first six months of 2001 and 2000, SBA loan closings were $14.5 million and
$19.0 million, respectively. The Company sold $4.7 million and $8.9 million of
the guaranteed portion of SBA loans in the first six months of 2001 and 2000,
respectively, resulting in corresponding gains of $257,000 and $337,000,
respectively.
The following table provides further information regarding the Company's loan
portfolio:
June 30, 2001 December 31, 2000
---------------------------- ----------------------------
(Dollars in thousands) Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and industrial......................... $ 73,694 2.1% $ 79,544 2.1%
Commercial real estate mortgage .................. 1,182,186 33.3 1,052,748 27.9
------------ ------- ------------ ------
Total commercial loans....................... 1,255,880 35.4 1,132,292 30.0
Residential real estate mortgages.................... 1,691,387 47.7 1,964,394 52.1
Installment loans:
Consumer direct................................. 470,746 13.3 459,359 12.2
Consumer indirect............................... 126,077 3.6 215,631 5.7
------------ ------- ------------ ------
Total installment loans..................... 596,823 16.9 674,990 17.9
------------ ------- ------------ ------
Total portfolio loans........................ $ 3,544,090 100.0% $ 3,771,676 100.0%
============ ======= ============ ======
Credit Quality
- --------------
The Company attempts to minimize credit risk in the loan portfolio by focusing
primarily on real estate-secured lending (i.e., commercial real estate mortgage
loans, commercial real estate construction loans, residential real estate
mortgage loans, residential real estate construction loans, and home equity
loans). As of June 30, 2001, such loans comprised approximately 93% of total
portfolio loans. The Company's general policy is to originate conventional
residential real estate mortgages with loan-to-value ratios of 80% or less and
SBA-secured loans or real estate-secured commercial loans with loan-to-value
ratios of 75% or less and secured by personal guarantees.
16
The substantial majority of the Company's residential mortgage loan production
is underwritten in compliance with the requirements for sale to or conversion to
mortgage-backed securities issued by Freddie Mac, the Federal National Mortgage
Association (FNMA), or the Government National Mortgage Association (GNMA). The
majority of the Company's commercial loans is secured by real estate and is
generally made to small and medium-size businesses. These loans are made at
rates based on the prevailing prime interest rates of Republic Bank, as well as
fixed rates for terms generally ranging from three to five years. Management's
emphasis on real estate-secured lending and adherence to conservative
underwriting standards is reflected in the Company's historically low net
charge-offs.
Non-Performing Assets
- ---------------------
Non-performing assets consist of non-accrual loans and other real estate owned
(OREO). OREO represents real estate properties acquired through foreclosure or
by deed in lieu of foreclosure. Commercial loans, residential real estate
mortgage loans and installment loans are generally placed on non-accrual status
when principal or interest is 90 days or more past due, unless the loans are
well-secured and in the process of collection. In all cases, loans may be placed
on non-accrual status earlier when, in the opinion of management, reasonable
doubt exists as to the full, timely collection of interest or principal.
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
June 30, December 31,
(Dollars in thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans:
Commercial.................................................. $ 6,176 $ 5,499
Residential real estate mortgages........................... 16,872 13,429
Installment................................................. 2,437 2,167
--------- --------
Total non-performing loans................................ 25,485 21,095
Other real estate owned....................................... 4,842 4,906
--------- --------
Total non-performing assets............................... $ 30,327 $ 26,001
========= ========
Non-performing assets as a percentage of:
Portfolio loans and OREO..................................... .85% .69%
Portfolio loans, mortgage loans held for
sale and OREO ......................................... .76% .62%
Total assets................................................. .68% .56%
Loans past due 90 days or more and still accruing interest:
Commercial................................................... $ 39 $ 209
Residential real estate...................................... 10 -
Installment.................................................. - -
--------- --------
Total loans past due 90 days or more....................... $ 49 $ 209
========= ========
At June 30, 2001, approximately $44.4 million, or 1.25% of total portfolio loans
were 30-89 days delinquent, compared to $45.2 million, or 1.20%, at December 31,
2000.
17
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 in
non-accrual status via a direct charge-off against the allowance for loan
losses. Consequently, those impaired loans not requiring a specific allowance
represent loans for which the fair value of the underlying collateral equaled or
exceeded the recorded investment in the loan. All impaired loans were evaluated
using the fair value of the underlying collateral as the measurement method.
It must be understood, however, that inherent risks and uncertainties related to
the operation of a financial institution require management to depend on
estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial prospects
of borrowers may result in abrupt changes to the estimates, appraisals or
evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Gross loan charge-offs increased $1.8 million to $4.4 million for the six months
ended June 30, 2001 compared to $2.6 million for the same period of 2000. The
increase is primarily related to charge-offs of certain commercial loans during
the first six months of 2001. The Company recorded provision for loan losses of
$4.3 million for the six months ended June 30, 2001 compared to $3.2 million for
2000 as a result the increase in charge-offs.
18
The following table provides an analysis of the allowance for loan losses:
Six Months Ended
June 30,
------------------------------
(Dollars in thousands) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at January 1............................................................ $ 28,450 $ 27,128
Loans charged off............................................................ (4,382) (2,615)
Recoveries of loans previously charged off................................... 556 657
--------- ---------
Net charge-offs............................................................ (3,826) (1,958)
Provision charged to expense................................................. 4,300 3,200
--------- ---------
Balance at June 30.............................................................. $ 28,924 $ 28,370
========= =========
Annualized net charge-offs as a percentage of average loans
(including loans held for sale) ........................................... .18% .10%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end.................................................. .82 .76
Allowance for loan losses as a percentage of non-performing
loans...................................................................... 113.49 114.94
Off-Balance Sheet Instruments
- -----------------------------
At June 30, 2001, the Company had outstanding $259 million of commitments to
fund residential real estate loan applications with agreed-upon rates (Interest
Rate Lock Commitments). Interest Rate Lock Commitments and holding residential
mortgage loans for sale to the secondary market exposes the Company to interest
rate risk during the period from application to when the loan is sold to the
investors. To minimize this exposure to interest rate risk, the Company enters
into firm commitments to sell such mortgage loans and Interest Rate Lock
Commitments at specified future dates to various third parties.
At June 30, 2001, the Company had outstanding mandatory forward commitments to
sell $649 million of residential mortgage loans, of which $430 million covered
mortgage loans held for sale and $219 million covered Interest Rate Lock
Commitments. These outstanding forward commitments to sell mortgage loans are
expected to settle in the third quarter of 2001 without producing any material
gains or losses.
The Company implemented FAS 133, as amended effective January 1, 2001. The
cumulative effect of the adoption of FAS 133 was not material. For the six
months ended June 30, 2001, the Company's hedging policies using mandatory
forward commitments, as they relate to Interest Rate Lock Commitments and
mortgage loans held for sale, were highly effective. Therefore, FAS 133's impact
on net income was immaterial.
LIABILITIES
- -----------
Total liabilities were $4.14 billion at June 30, 2001, a $142 million, or 3%
decrease from $4.29 billion at December 31, 2000. This decrease was primarily
due to decreases in FHLB advances and accrued expenses and other liabilities
related to the sale of Market Street Mortgage. This decrease was partially
offset by an increase in deposits.
Deposits
- --------
Total deposits increased $91.5 million, or 3%, to $2.82 billion at June 30, 2001
from $2.73 billion at December 31, 2000. Noninterest bearing deposits increased
$51 million during the first six months of 2001 while savings and money market
accounts increased $150 million from year-end. These increases were partially
offset by a $103 million decrease in certificates of deposit from December 31,
2000.
19
Short-Term Borrowings
- ---------------------
Short-term borrowings with maturities of less than one year, along with the
related average balances and interest rates for the six months ended June 30,
2001 and the year ended December 31, 2000, were as follows:
June 30, 2001 December 31, 2000
-------------------------------------- --------------------------------------
Average Average
Ending Average Rate During Ending Average Rate During
(Dollars in thousands) Balance Balance Period Balance Balance Period
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased..................... $ - $ - -% $ - $ 53,687 6.44%
Other short-term borrowings................. 10,958 58,145 4.99 1,729 1,360 5.59
------- -------- ---- -------- -------- ----
Total short-term borrowings.............. $ 10,958 $ 58,145 4.99% $ 1,729 $ 55,047 6.42%
======== ======== ==== ======== ======== ====
At June 30, 2001, other short-term borrowings consisted of treasury, tax and
loan (TT&L) demand notes and amounts owed by the parent company under a
revolving credit agreement. At December 31, 2000, other short-term borrowings
consisted of treasury, tax and loan (TT&L) demand notes.
FHLB Advances
- -------------
Republic Bank routinely borrows short- and long-term advances from the Federal
Home Loan Bank (FHLB) to provide fund mortgage loan originations and to minimize
the interest rate risk associated with certain fixed rate commercial and
residential mortgage portfolio loans and investment securities. These advances
are generally secured under a blanket security agreement by first mortgage loans
with an aggregate book value equal to at least 145% of the advances.
FHLB advances outstanding at June 30, 2001 and December 31, 2000, were as
follows:
June 30, 2001 December 31, 2000
------------------------- ---------------------------
Average Average
Ending Rate At Ending Rate At
(Dollars in thousands) Balance Period-End Balance Period-End
- -------------------------------------------------------------------------------------------------------------------------------
Short-term FHLB advances............................ $ 473,500 4.57% $ 555,000 6.08%
Long-term FHLB advances.............................. 770,218 5.75 828,513 5.82
---------- ---- --------- ----
Total........................................... $1,243,718 5.30% $1,383,513 5.92%
========== ==== ========== ====
The long-term FHLB advances have original maturities ranging from July 2001 to
October 2017.
Long-Term Debt
- --------------
Obligations with original maturities of more than one year consisted of the
following:
June 30, December 31,
(Dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
7.17% Senior Debentures due 2001................................................ $ - $ 25,000
6.75% Senior Debentures due 2001................................................ - 9,000
6.95% Senior Debentures due 2003................................................ 13,500 13,500
------- --------
Total long-term debt $13,500 $ 47,500
======= ========
The Company paid-off the 7.17% Senior Debentures and the 6.75% Senior Debentures
on April 1, 2001 and January 15, 2001, respectively, in accordance with the
terms of the debenture agreements.
20
CAPITAL
- -------
Shareholders' equity was $306.8 million at June 30, 2001, an $11.9 million, or
4%, increase from $294.9 million at December 31, 2000. This increase primarily
resulted from the retention of $9.5 million in earnings after the payment of
dividends and the repurchase of 332,000 shares of common stock during the first
six months of 2001.
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by regulators that, if undertaken, could have an effect on the
Company's financial statements. Capital adequacy guidelines require minimum
capital ratios of 8.00% for Total risk-based capital, 4.00% for Tier 1
risk-based capital and 3.00% for Tier 1 leverage. To be considered
well-capitalized under the regulatory framework for prompt corrective action,
minimum capital ratios of 10.00% for Total risk-based capital, 6.00% for Tier 1
risk-based capital and 5.00% for Tier 1 leverage must be maintained.
As of June 30, 2001, the Company met all capital adequacy requirements to which
it is subject and management does not anticipate any difficulty in meeting these
requirements on an ongoing basis. The Company's capital ratios were as follows:
June 30, December 31,
2001 2000
-------- ------------
Total capital to risk-weighted assets /(1)/.............................. 11.38% 10.38%
Tier 1 capital to risk-weighted assets /(1)/............................. 10.45 9.50
Tier 1 capital to average assets /(1)/................................... 6.93 6.82
/(1)/ As defined by the regulations.
As of June 30, 2001, the Company's total risk-based capital was $356.6 million
and Tier 1 risk-based capital was $327.7 million, an excess of $43.1 million and
$139.6 million, respectively, over the minimum guidelines prescribed by
regulatory agencies for a well-capitalized institution. In addition, Republic
Bank had regulatory capital ratios in excess of the minimum levels established
for well-capitalized institutions.
FORWARD-LOOKING STATEMENTS
- --------------------------
The section that follows entitled "Market Risk Management" contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve certain
risks, uncertainties, estimates and assumptions by management, which may cause
actual results to differ materially from those contemplated by such statements.
MARKET RISK MANAGEMENT
- ----------------------
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, foreign exchange
rates and equity prices. The Company's market risk exposure is composed entirely
of interest rate risk. Interest rate risk arises in the normal course of
business to the extent that there is a difference between the amount of the
Company's interest-earning assets and interest-bearing liabilities that are
prepaid/withdrawn, reprice or mature in specified periods.
The primary objective of asset and liability management is to maintain stability
in the level of net interest income by producing the optimal yield and maturity
mix of assets and liabilities within the interest rate risk limits set by the
Company's Asset and Liability Management Committee (ALCO) and consistent with
projected liquidity needs and capital adequacy requirements. The Company's ALCO,
which meets weekly, is responsible for reviewing the interest rate sensitivity
position of the Company and establishing policies to monitor and limit exposure
to interest rate risk.
21
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 June 30, 2001,
the Company's cumulative one-year gap was a positive 7.22% 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 Modeling: On a quarterly basis, the earnings simulation
model is used to quantify the effects of various hypothetical changes in
interest rates on the Company's projected net interest income over the ensuing
twelve-month period. The model permits management to evaluate the effects of
various parallel shifts of the U.S. Treasury yield curve, upward and downward,
on net interest income expected in a stable interest rate environment (i.e.,
base net interest income).
As of June 30, 2001, the earnings simulation model projects net interest income
would decrease by 2.94% of base net interest income, assuming an immediate
parallel shift upward in market interest rates by 200 basis points. If market
interest rates fall by 200 basis points, the model projects net interest income
would increase by 2.93%. These projected levels are well within the Company's
policy limits. 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.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In the ordinary course of business, the Company and its
subsidiaries are parties to certain routine litigation. In the
opinion of management, the aggregate liabilities, if any, arising
from such legal proceedings would not have a material adverse
effect on the Company's consolidated financial position, results
of operations and liquidity.
Item 2. Changes in Securities
---------------------
On May 18, 2001, the Board of Directors declared a quarterly cash
dividend of $0.085 per share of common stock, payable on July 2,
2001 to shareholders of record June 8, 2001.
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
On July 9, 2001, the Company filed a report on Form 8-K
announcing the Company had completed the sale of Market Street
Mortgage Corporation to NetBank, Inc. of Alpharetta, Georgia.
23
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC BANCORP INC.
---------------------
(Registrant)
Date: August 14, 2001 BY: /s/ Thomas F. Menacher
----------------------------
Thomas F. Menacher
Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
24