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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
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: (989) 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, 2002 of $13.940, was
$737.1 million.
Number of shares of Registrant's common stock outstanding as of March 6,
2002: 52,879,714.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Registrant's definitive proxy statement for its 2002 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............................................................................... 4
Principal Sources of Revenue............................................................ 4
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........................ 10
Item 6 - Selected Financial Data..................................................................... 11
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 12
Item 7A- Quantitative and Qualitative Disclosures about Market Risk.................................. 32
Item 8 - Financial Statements and Supplementary Data................................................. 33
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................ 62
Part III
Item 10 - Directors and Executive Officers of the Registrant.......................................... 63
Item 11 - Executive Compensation...................................................................... 63
Item 12 - Security Ownership of Certain Beneficial Owners and Management.............................. 63
Item 13 - Certain Relationships and Related Transactions.............................................. 63
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 64
Signatures ............................................................................................ 69
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
97 banking and mortgage banking offices in Michigan, Ohio and Indiana and a loan
production office in Massachusetts.
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, the assets and liabilities of Republic Banc Mortgage
Corporation, a wholly-owned mortgage banking subsidiary of Republic Bank, were
assigned to and assumed by Republic Bank to create additional cross-sell
opportunities for products and improve operating efficiencies.
On June 29, 2001, the Company sold Market Street Mortgage Corporation
("Market Street"), which was an 80% majority-owned mortgage banking subsidiary
with headquarters in Clearwater, Florida.
Through its wholly-owned banking subsidiary, Republic Bank, a Michigan
state-chartered banking corporation, the Company provides commercial, retail and
mortgage banking products and services. Republic Bank is headquartered in
Lansing, Michigan. Republic Bank exercises the power of a full-service
commercial bank and operates 97 offices and 116 ATMs in 7 market areas in
Michigan, in the greater Cleveland, Ohio area, as well as Indianapolis, Indiana.
At December 31, 2001, Republic Bank had $4.7 billion in assets and $2.8 billion
in deposits.
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(R) under the symbol DNFCP. The
preferred stock is treated as Tier-1 capital by the Company.
Republic Bank also has a wholly-owned subsidiary, Quincy Investment
Services, Inc., a licensed insurance agency that could provide investment and
insurance services and CAS Properties, Inc., formed to manage certain
non-performing assets. Both Quincy Investment Services, Inc. and CAS Properties,
Inc. are inactive.
In October 2001, the Company formed Republic Capital Trust I, a Delaware
business trust, for the purpose of issuing $50 million of 8.60% Cumulative Trust
Preferred Securities (liquidation preference of $25 per preferred security). The
preferred securities are treated as Tier 1 Capital by the Company and trade on
The Nasdaq Stock Market(R) under the symbol RBNCP.
At December 31, 2001, Republic Bancorp Inc. had consolidated total assets
of $4.7 billion, total deposits of $2.8 billion and shareholders' equity of
$304.9 million. For the year ended December 31, 2001, the Company reported net
income of $47.9 million compared to $45.7 million for 2000. Net income for the
year ended December 31, 2001 included an after-tax $7.8 million gain on the sale
of Market Street and after-tax restructuring costs to exit the mortgage
servicing business of $12.4 million. Net income for the year ended 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
related to the merger with D&N Financial. Residential mortgage loan closings,
excluding Market Street Mortgage for comparable purposes, totaled $4.1 billion
in 2001, compared to $2.3 billion in 2000. Commercial loan closings totaled $490
million in 2001 versus $531 million in 2000. Small Business Administration (SBA)
loan closings totaled $34 million in 2001, compared to $32 million in 2000. At
December 31, 2001, the Company's mortgage loan servicing portfolio was $189
million, compared to $2.2 billion at December 31, 2000.
2
Business Segments
The Company engages in three lines of business--Commercial Banking, Retail
Banking and Mortgage Banking. See Note 21 to the Consolidated Financial
Statements.
Commercial Banking
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Commercial banking is conducted at 84 branches of Republic Bank in
Michigan, Ohio and Indiana by providing traditional commercial banking products
and services to small- and medium-size businesses. Products and services offered
include commercial and small business loans, other types of installment loans
and commercial products and deposit services. Lending activity at Republic Bank
is primarily focused on real estate-secured lending to minimize credit risk
(e.g., fixed and variable rate 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 and United
States Department of Agriculture (USDA) 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.
Retail Banking
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Retail banking is conducted at 83 branches of Republic Bank in Michigan and
Ohio by providing traditional retail banking products and services to consumers.
Products and services offered include home equity loans and lines of credit,
other types of installment loans, and demand, savings and time deposit accounts.
The marketing effort of Republic Bank targets a particular segment of the
consumer population that is interested in receiving personalized banking
service. The Company's deposit base consists primarily of retail deposits
gathered from within local markets served. At December 31, 2001, retail deposits
comprised 83% 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, prior to its sale in June 2001, 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
within Republic Bank's footprint of Michigan, Ohio and Indiana. To help
accomplish this objective, the Company sold its mortgage banking subsidiary,
Market Street Mortgage Corporation, in June 2001. Another strategy of the
Company is to capitalize on the opportunity to cross-sell products using a
shared customer base between the mortgage and retail banking business lines.
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 a loan production office located in
Massachusetts. Retail loan production offices are responsible for processing
loan applications received and preparing loan documentation. Loan applications
are then evaluated by the underwriting department 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 (Fannie Mae) and Federal Home Loan
Mortgage Corporation (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 2001 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 generally sold within a period
of 30 to 60 days after closing. 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. During
2001, the majority of variable rate mortgages were 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
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. In
2001, in conjunction with the sale of Market Street, the Company sold its $1.8
billion mortgage servicing portfolio of loans serviced for others and exited the
servicing business.
Competition
Commercial, retail 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 Republic Bank 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 Republic Bank 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.
Republic Bank competes for deposits by offering depositors a variety of checking
and savings accounts, time deposits, convenient office locations, and
personalized customer service. 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.
Employees
As of December 31, 2001, the Company and its subsidiaries had 1,299
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 $316.3 million in 2001, a decrease of 5% from $333.7 million in
2000 and up 18% from $268.6 million in 1999. In 2001, interest and fees on loans
accounted for 78% of total revenues, compared to 80% and 68% of total revenues
in 2000 and 1999, respectively. Mortgage banking
4
revenue includes mortgage loan production revenue and net mortgage servicing
revenue. Mortgage banking revenue, the largest component of noninterest income,
totaled $46.7 million in 2001, a decrease of 21% from $59.2 million in 2000 and
down 46% from $86.5 million in 1999. Mortgage loan banking revenue represented
12% of total revenues in 2001, compared to 14% in 2000, and 22% in 1999.
Monetary Policy and Economic Controls
The earnings of Republic Bank, 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
weakness of the U.S. economy in 2001 contributed to the decision of the Federal
Reserve Board to dramatically decrease 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
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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 Republic Bank and from dividends paid to it by Republic
Bank. There are statutory and regulatory requirements applicable to the payment
of dividends by Republic Bank to the Company as well as by the Company to its
shareholders.
Under Federal Reserve Board policy, the Company is expected to act as a
source of financial and managerial strength to its subsidiaries 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.
5
Interstate Banking and Branching
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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
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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
Republic Bank 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
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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 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
6
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 financial 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
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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 Republic Bank are considered to be well capitalized
as of December 31, 2001.
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, Republic 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 Republic 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.
The FDIC has stated that the possibility exists for higher BIF deposit
insurance assessments for the second half of 2002. The impact of higher deposit
insurance assessments to the Company cannot be determined at this time.
Under the Deposit Insurance Funds Act of 1996, effective January 1, 1997,
Republic Bank 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 1.84 cents per $100
of deposits.
Mortgage Banking Activities
- ---------------------------
The Company's banking subsidiary, Republic Bank, is engaged in the business
of originating, selling and servicing mortgage loans secured by residential real
estate. In the origination of mortgage loans, Republic Bank is 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 is a participant in the secondary mortgage market with some or all of
the following: private institutional investors, Fannie Mae, GNMA, Freddie Mac,
VA and FHA. In their dealings with these agencies, Republic Bank is 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 that 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 Fannie Mae, Freddie Mac, GNMA, VA and FHA, Republic Bank
represents and warrants 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) to
repurchase the non-conforming mortgage loans. Additionally, Fannie Mae, Freddie
Mac, GNMA, VA and FHA may require Republic Bank 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 Fannie Mae 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. Republic 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:
o significantly increased competition among depository and
other financial institutions;
o inflation and changes in the interest rate environment that
reduce our margins or reduce the fair value of financial
instruments;
o general economic conditions, either nationally or in our
market areas, that are worse than expected;
o adverse changes in the securities markets;
o legislative or regulatory changes that adversely affect our
business;
o the ability to enter new markets successfully and capitalize
on growth opportunities;
o effects of and changes in trade, monetary and fiscal
policies and laws, including interest rate policies of the
Federal Reserve Board;
o timely development of and acceptance of new products and
services;
o changes in consumer spending, borrowing and savings habits;
o effect of changes in accounting policies and practices, as
may be adopted by the bank regulatory agencies and the
Financial Accounting Standards Board;
o changes in our organization, compensation and benefit plans;
o costs and effects of litigation and unexpected or adverse
outcomes in such litigation; and
o our success in 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 (4) of the Company as
of December 31, 2001. All of these officers are elected annually by the Board of
Directors. Each of the executive officers has served as an officer of the
Company for more than five years. There are no family relationships among any of
the executive officers.
Name Age Position
- ---- --- --------
Jerry D. Campbell.................. 61 Chairman of the Board (Since 1985)
Dana M. Cluckey, CPA............... 41 President and Chief Executive
Officer (Since 1986)
Barry J. Eckhold................... 55 Senior Vice President and Chief
Credit Officer (Since 1990)
Thomas F. Menacher, CPA............ 45 Executive Vice President, Treasurer,
Chief Financial Officer and
Corporate Secretary (Since 1992)
ITEM 2. PROPERTIES
The Company's executive offices are located at 1070 East Main Street,
Owosso, Michigan 48867. At December 31, 2001, the Company had 97 commercial,
retail, and mortgage banking offices in Michigan, Ohio and Indiana, of which 39
were owned and 58 were leased. Additionally, the Company has a loan production
office in Massachusetts, which is 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 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Quarterly Dividends and Market Price Summary
- --------------------------------------------------------------------------------
Common Stock
Dividends Price Range (1)
Declared ---------------
Per Share (1) High Low
- --------------------------------------------------------------------------------
2001
Fourth quarter.................. $ 0.085 $14.050 $12.127
Third quarter................... 0.077 14.518 11.809
Second quarter.................. 0.077 12.773 10.739
First quarter................... 0.078 11.648 9.773
--------
Year........................ $ 0.317 $14.518 $ 9.773
========
2000
Fourth quarter.................. $ 0.077 $10.455 $ 7.017
Third quarter................... 0.070 8.058 6.715
Second quarter.................. 0.070 8.833 6.250
First quarter................... 0.071 9.814 6.457
--------
Year........................ $ 0.288 $10.455 $ 6.250
========
- --------------------------------------------------------------------------------
(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 6, 2002.
10
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Earnings Summary (in thousands)
Interest income $333,376 $ 348,328 $299,662 $285,979 $ 244,545
Interest expense 189,767 213,680 171,396 173,649 148,666
Net interest income 143,609 134,648 128,266 112,330 95,879
Provision for loan losses 8,700 6,500 11,650(2) 6,500 4,381
Mortgage banking revenue 46,681 59,159 86,469 85,258 67,632
Other noninterest income 24,703(2) 11,679 6,214(2) 13,290 15,067
Noninterest expense 132,213(2) 127,641(2) 180,920(2) 142,076 122,229
Income before preferred stock dividends 51,565 48,400 17,634 41,675 34,332
Net income 47,910 45,677 14,911 38,952 33,114
- -------------------------------------------------------------------------------------------------------------------
Per Common Share(1)
Basic earnings $ .88 $ .84 $ .27 $ .73 $ .62
Diluted earnings .87 .83 .27 .71 .61
Operating diluted earnings .95(3) .83 .81(3) .71 .61
Cash dividends declared .32 .29 .27 .24 .22
Book value (year-end) 5.74 5.42 4.86 4.91 4.83
Closing price of common stock (year-end) 13.85 9.83 10.03 10.24 12.85
Dividend payout ratio (operating) 34% 35% 33% 33% 37%
- -------------------------------------------------------------------------------------------------------------------
Operating Data (in millions)
Loan closings:
Residential mortgage loans $ 5,340 $ 3,852 $ 5,200 $ 6,614 $ 4,225
Commercial loans 490 531 462 410 267
SBA loans 34 32 44 39 28
Direct consumer loans 438 359 291 109 152
Indirect consumer loans - 65 191 206 172
Mortgage loan servicing portfolio (year-end) 189 2,229 3,089 3,517 3,632
- -------------------------------------------------------------------------------------------------------------------
Year-End Balances (in millions)
Total assets $ 4,741 $ 4,611 $ 4,302 $ 4,214 $ 3,688
Total earning assets 4,573 4,375 4,052 3,999 3,530
Mortgage loans held for sale 748 385 459 770 519
Total portfolio loans 3,458 3,772 3,373 2,544 2,402
Total deposits 2,753 2,729 2,613 2,643 2,220
Total short-term borrowings and FHLB advances 1,477 1,385 1,229 1,084 1,038
Long-term debt 14 48 48 52 54
Shareholders' equity 305 295 266 266 229
- -------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.14%(3) 1.02% 1.10%(3) 1.00% 1.02%
Return on average equity 17.25(3) 16.28 17.07 (3) 15.73 15.37
Net interest margin (4) 3.31 3.14 3.29 3.05 3.11
Net loan charge-offs to average total loans (5) .19 .13 .17 .09 .09
Allowance for loan losses as a percentage
of year-end portfolio loans .84 .75 .80 .84 .74
Non-performing assets as a percentage
of year-end total assets .66 .56 .52 .61 .48
Operating efficiency ratio 56.17 64.10 65.44 68.19 70.21
Net interest income to operating expenses 126.85 105.49 70.90 74.13 83.04
Average shareholders' equity to average assets 6.63 6.26 6.46 6.37 6.64
Tier 1 risk-based capital 11.43 9.50 9.67 9.80 10.35
Total risk-based capital 12.31 10.38 10.60 10.55 11.12
Tier 1 leverage 8.34 6.82 6.59 6.54 6.56
- -------------------------------------------------------------------------------------------------------------------
<FN>
(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 2001 include a pre-tax gain of $12.0 million on the sale of
Market Street Mortgage Corporation and pre-tax restructuring costs of $19.0
million to exit the mortgage servicing business. 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 a 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.
(3) Amounts for 2001 exclude the after-tax gain of $7.8 million on the sale of
Market Street Mortgage Corporation and the after-tax restructuring costs of
$12.35 million to exit the mortgage servicing business. Including these
amounts, return on average assets was 1.04% and return on average equity
was 15.76% in 2001. Amounts for 1999 exclude the after-tax impact of a
$22.0 million 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.
</FN>
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Net income for 2001 was $47.9 million compared to net income of $45.7
million in 2000. Diluted earnings per share were $.87 in 2001 compared to $.83
in 2000. The results for 2001 include an after tax gain of $7.8 million on the
sale of Market Street Mortgage Corporation and after tax restructuring costs of
$12.4 million to exit the mortgage servicing business. Excluding these charges,
the Company reported net operating income of $52.5 million in 2001, up 15% over
2000 and diluted operating earnings per share of $.95 in 2001, up 14% from 2000.
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. Net operating income for 2001 generated return on average
assets of 1.14% and return on equity of 17.25%. These compare with return on
average assets of 1.02% and return on average equity of 16.28% in 2000.
The Company's 2001 results of operations reflected the following trends in
earnings:
o Net interest income increased 7% during 2001 following an increase of
5% in 2000. Increasing average earning asset balances during these
periods contributed to the growth in net interest income.
o The net interest margin expanded to 3.31% in 2001, compared to 3.14% in
2000 and 3.29% in 1999. The increase in the net margin during 2001 was
due to the Company's cost of funds on interest-bearing liabilities
decreasing more than the decline in yield on earning assets.
o The commercial loan portfolio balance increased 20% in 2001 to $1.4
billion after increasing 27% in 2000, reflecting continued strong
commercial real estate lending in the Company's markets.
Shareholders' equity totaled $304.9 million at December 31, 2001. 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
$736.4 million at December 31, 2001. Capital ratios, by all measures, remain in
excess of regulatory requirements for a well-capitalized financial institution.
For 1999, net income was $14.9 million and diluted earnings per share were
$.27. The results for 1999 include one-time after tax charges relating to the
merger with D&N Financial Corporation of (1) $22.0 million merger integration
and restructuring charge, (2) $4.9 million loss on the sale of low yielding
fixed rate securities and (3) additional $3.3 million provision for loan losses.
Excluding these charges, the Company reported net operating income of $45.1
million and diluted operating earnings per share of $.81 in 1999.
In order to reflect the comparable 2001 and 1999 results of operations for
the Company against 2000, the remaining Management's Discussion and Analysis of
Financial Condition and Results of Operations is based upon the net operating
earnings reported for 2001 and 1999. Amounts for 2001 exclude the gain on sale
of Market Street Mortgage Corporation and the restructuring costs to exit the
mortgage servicing business and amounts for 1999 exclude the merger integration
and restructuring charge. The following table summarizes the effect of the
merger integration and restructuring charge on 1999 results of operations.
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 $ .83 $ (.56) $ .27
Diluted earnings per share $ .81 $ (.54) $ .27
- -----------------------------------------------------------------------------------------
12
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 included 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, were 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 represented the costs associated with the expected
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 included the expenses
from the integration of the two banking systems which was completed in the
fourth quarter of 2000. Other merger-related costs included 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 benefit
accruals, 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) $ -
======== ======== ======== ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
13
Business Segments
The Company's operations are managed as three major business segments:
(1) commercial banking (2) retail banking, and (3) mortgage banking. The
commercial 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. The retail banking segment consists
of home equity lending, other consumer lending and the deposit-gathering
function. Deposits and loan products are offered through 83 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. As discussed earlier, the
Company sold Market Street Mortgage in the second quarter of 2001 and in
conjunction with the sale of Market Street, the Company exited the mortgage
servicing business. Mortgage loan production is now conducted in 54 offices of
Republic Bank. 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) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Republic Bank $ 4,146,685 $ 2,266,494 $ 3,036,871
Market Street Mortgage 1,193,476 1,585,273 2,163,180
------------ ------------ ------------
Total closings $ 5,340,161 $ 3,851,767 $ 5,200,051
============ ============ ============
Retail loans percentage 100% 100% 96%
Wholesale loans percentage - - 4
- -------------------------------------------------------------------------------------------------------------------
The Company's total closings of single-family residential mortgage loans
increased $1.5 billion, or 39%, to $5.3 billion in 2001. The increase in
origination volumes in 2001 was primarily the result of a decreasing interest
rate environment during 2001 which resulted in a higher level of refinance
activity. Refinances totaled $2.9 billion, or 54% of total closings in 2001,
compared to $483 million, or 13% of total closings in 2000. In 2000, total
mortgage loan closings decreased $1.3 billion, or 26%, to $3.9 billion compared
to $5.2 billion in 1999, reflecting an increasing interest rate environment
during 2000, which resulted in a lower level of refinance activity during 2000.
The Company's pipeline of mortgage loan applications in process was $611 million
at December 31, 2001, compared to $368 million at December 31, 2000, excluding
Market Street Mortgage.
Table 4
Mortgage Banking Revenue
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Mortgage loan production revenue (1) $ 46,808 $ 55,720 $ 80,368
Net mortgage loan servicing revenue (expense) (2) (127) 1,179 6,101
Gain on bulk sales of mortgage servicing rights - 2,260 -
--------- --------- ---------
Total mortgage banking revenue $ 46,681 $ 59,159 $ 86,469
========== ========= =========
- -------------------------------------------------------------------------------------------------------------------
<FN>
(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 $39.4 million, $28.8
million and $42.6 million for 2001, 2000 and 1999, respectively.
(2) Includes servicing fees, late fees and other ancillary charges, net of
amortization and charges for impairment of mortgage servicing rights, if
any.
</FN>
Mortgage banking revenue, the largest component of total noninterest
income, decreased $12.5 million, or 21%, to $46.7 million in 2001, after
decreasing 32%, to $59.2 million in 2000. The decreases in 2001 and 2000 were
the result of decreases in mortgage loan production revenue and a decrease in
net mortgage loan servicing revenue.
Mortgage loan production revenue decreased $8.9 million, or 16%, in 2001
due to a reduction in the ratio of mortgage production revenue to mortgage loans
sold. The Company sold $4.2 billion of single-family residential mortgages in
2001, compared to $3.6 billion and $4.9 billion in 2000 and 1999, respectively.
The ratio of mortgage production revenue to mortgage loans sold was 1.10% in
2001, compared to 1.37% in 2000 and 1.63% in 1999.
14
Net mortgage loan servicing expense was $127,000 in 2001 compared to net
mortgage servicing revenue of $1.2 million in 2000 and $6.1 million in 1999. The
decrease in 2001 was primarily the result of exiting the mortgage servicing
business in June of 2001 through the sale of Market Street's $1.8 billion
mortgage loan servicing portfolio. During the last half of 2001, the Company's
loans serviced for others portfolio averaged only $177 million. As a result, net
mortgage loan servicing revenue was immaterial and is expected to be immaterial
in the future. The decrease in net mortgages servicing revenue 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. Loans serviced for others averaged $2.7
billion in 2000, a 19% decrease from a year earlier. In 1999, the Company
reported $6.1 million in net servicing revenue, and average loans serviced for
others totaled $3.3 billion.
Amortization of mortgage servicing rights, including the write down of
mortgage servicing rights to market value and impairment reserves totaled $20.4
million in 2001, compared to $14.0 million in 2000 and $12.2 million in 1999. As
discussed earlier, at the end of the first quarter of 2001, the Company elected
to exit the mortgage servicing business. Accordingly, the Company recorded a
write-down of mortgage servicing rights at the end of the first quarter of 2001
of $16.1 million to reflect the current market value of the servicing portfolio.
In addition, transaction costs associated with the servicing portfolio sale were
$2.0 million and costs associated with winding down the servicing operation were
$900,000. A sale agreement regarding Market Street's mortgage servicing
portfolio was subsequently signed in April 2001 with an unaffiliated company and
the Company completed the sale during the second quarter. The significant
decrease in the value of the servicing portfolio from December 31, 2000 to March
31, 2001 was a result of dramatic increases in the prepayment speed assumptions
(PSA) during the first quarter of 2001, as well as an over 120 basis point
decrease in the earnings rate received on escrow balances. These changes were a
result of the decline in short-term interest rates occurring during the quarter
due to the Federal Reserve Board's action to lower the federal funds rate. After
selling Market Street's servicing portfolio, there was no impairment reserve at
December 31, 2001.
At December 31, 2000, the weighted average PSA increased from the 1999
weighted average PSA. 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 by $4.2 million in 2000. The Company's impairment reserve as of
December 31, 2000 was $6.6 million compared to $2.4 million at December 31,
1999.
The Company expects to sell mortgage servicing rights concurrently with the
sale of the underlying loans rather than in bulk form. The sale of Market
Street's $1.8 billion servicing portfolio completed in the second quarter of
2001 did not result in a material gain or loss. 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. The Company did not have any bulk sales of mortgage
servicing rights in 1999.
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 9% to $146.8 million in 2001, compared to
$134.7 million in 2000, primarily due to growth in average earning assets and a
decrease in the Company's cost of funds. Average earning assets rose $132.7
million, or 3%, to $4.4 billion in 2001, as the increase in average mortgage
loans held for sale and investment securities more than offset a reduction in
average portfolio loans. Net interest income growth also benefited as the
Company's cost of funds decreased more than the yield on earning assets.
15
Table 5
Analysis of Net Interest Income (FTE)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(Dollar amounts in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Average Avg. Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments $ 2,448 $ 102 4.17% $ 2,904 $ 170 5.85% $ 12,039 $ 661 5.49%
Mortgage loans held for sale 520,565 37,900 7.28 425,956 34,535 8.11 508,415 37,106 7.30
Investment securities 293,085 20,171 6.88 195,364 14,571 7.46 463,828 30,521 6.58
Portfolio loans: (1)
Commercial loans 1,258,535 103,671 8.12 1,018,415 92,578 9.09 729,729 64,051 8.78
Real estate mortgage loans 1,730,386 122,350 7.07 1,905,915 141,237 7.41 1,527,618 109,922 7.20
Installment loans 611,619 52,371 8.56 735,429 65,317 8.88 665,591 57,473 8.63
---------- --------- ---- ---------- --------- ---- ---------- --------- ----
Total loans, net of
unearned income 3,600,540 278,392 7.69 3,659,759 299,132 8.17 2,922,938 231,446 7.92
---------- --------- ---- ---------- --------- ---- ---------- --------- ----
Total interest-earning assets 4,416,638 336,565 7.59 4,283,983 348,408 8.13 3,907,220 299,734 7.67
Allowance for loan losses (28,970) (28,319) (23,988)
Cash and due from banks 66,371 60,022 43,867
Other assets 132,397 169,674 165,832
---------- ---------- ----------
Total assets $4,586,436 $4,485,360 $4,092,931
========== ========== ==========
Average Liabilities and
Shareholders' Equity:
Interest-bearing demand
deposits $ 147,694 1,967 1.33 $ 102,233 1,708 1.67 $ 98,117 1,722 1.76
Savings deposits 724,655 22,251 3.07 723,153 22,625 3.13 776,648 22,701 2.92
Time deposits 1,604,469 90,386 5.63 1,634,479 98,829 6.05 1,517,590 82,150 5.41
---------- --------- ---- ---------- --------- ---- ---------- --------- ----
Total interest bearing
deposits 2,476,818 114,604 4.63 2,459,865 123,162 5.01 2,392,355 106,573 4.45
Short-term borrowings 96,430 3,460 3.54 55,047 3,532 6.42 63,158 3,462 5.40
FHLB advances 1,323,837 70,252 5.23 1,339,009 83,552 6.24 1,024,004 57,616 5.63
Long-term debt 20,125 1,451 7.21 47,500 3,434 7.23 52,121 3,745 7.19
---------- --------- ---- ---------- --------- ---- ---------- --------- ----
Total interest bearing
liabilities 3,917,210 189,767 4.82 3,901,421 213,680 5.48 3,531,638 171,396 4.85
Noninterest-bearing deposits 262,493 188,602 176,789
Other liabilities 63,104 85,981 91,511
---------- ---------- ----------
Total liabilities 4,242,807 4,176,004 3,799,938
Trust preferred securities and
preferred stock in subsidiary 39,552 28,719 28,719
Shareholders' equity 304,077 280,637 264,274
---------- ---------- ----------
Total liabilities and
shareholders' equity $4,586,436 $4,485,360 $4,092,931
========== ========== ==========
Net interest income/
Rate spread (FTE) $ 146,798 2.77% $ 134,728 2.65% $ 128,338 2.82%
========= ========= =========
FTE adjustment $ 3,189 $ 80 $ 72
========= ========= =========
Impact of noninterest-
bearing sources of funds .54 .49 .47
---- ---- ----
Net interest margin (FTE) 3.31% 3.14% 3.29%
==== ==== ====
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Non-accrual loans and overdrafts are included in average balances.
</FN>
16
Table 6
Rate/Volume Analysis (FTE)
- --------------------------------------------------------------------------------------------------------------------
2001/2000 2000/1999
- --------------------------------------------------------------------------------------------------------------------
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 $ (24) $ (44) $ (68) $ (531) $ 40 $ (491)
Mortgage loans held for sale 7,144 (3,779) 3,365 (6,417) 3,846 (2,571)
Investment securities 6,808 (1,208) 5,600 (19,588) 3,638 (15,950)
Loans, net of unearned income (2) (2,032) (18,708) (20,740) 60,352 7,334 67,686
-------- -------- -------- -------- -------- --------
Total interest income 11,896 (23,739) (11,843) 33,816 14,858 48,674
Interest Expense:
Interest-bearing demand deposits 660 (401) 259 73 (87) (14)
Savings deposits 48 (422) (374) (1,633) 1,557 (76)
Time deposits (1,766) (6,677) (8,443) 6,577 10,102 16,679
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits (1,058) (7,500) (8,558) 5,017 11,572 16,589
Short-term borrowings 1,940 (2,012) (72) (493) 563 70
FHLB advances (870) (12,430) (13,300) 19,181 6,755 25,936
Long-term debt (1,973) (10) (1,983) (332) 21 (311)
-------- -------- -------- -------- -------- --------
Total interest expense (1,961) (21,952) (23,913) 23,373 18,911 42,284
-------- -------- -------- -------- -------- --------
Net interest income (FTE) $ 13,857 $ (1,787) $ 12,070 $ 10,443 $ (4,053) $ 6,390
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
Net interest margin increased by 17 basis points to 3.31% in 2001 compared
to 3.14% in 2000. The increase in the margin was due to the Company's cost of
funds decreasing more than the yields on average earning assets during 2001. The
decrease in the Company's cost of funds was a result of decreases paid on
short-term borrowings, FHLB advances and interest bearing deposits.
In 2000, net interest margin decreased by 15 basis points to 3.14%,
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.
Noninterest Income
Noninterest income is a significant source of revenue for the Company,
contributing 15% of total revenues in 2001, excluding the gain on sale of
subsidiary, compared to 17% in 2000 and 24% in 1999. Details of the largest
component of noninterest income are presented in the "Mortgage Banking" section.
Exclusive of mortgage banking revenue and the gain on sale of subsidiary,
noninterest income increased to $12.7 million in 2001 from $11.7 million in
2000, primarily due to the $1.3 million increase in investment securities gains.
During 2001, the Company sold $175.3 million of investment securities for a
net gain of $1.4 million. 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 with total sales of $498.1 million of investment
securities for a net loss of $7.3 million.
The guaranteed portion of Small Business Administration (SBA) loans are
regularly sold to investors. In 2001, the Company sold $18.4 million of the
guaranteed portion of SBA loans, compared to $14.1 million in 2000 and $17.4
million in 1999, resulting in gains of $882,000, $576,000 and $750,000,
respectively, which are included in other noninterest income.
17
Table 7
Noninterest Income
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Mortgage loan production revenue $ 46,808 $ 55,720 $ 80,368
Net mortgage servicing revenue (expense) (127) 3,439 6,101
Service charges 7,720 7,819 7,327
Investment securities gains (losses) 1,425 109 (7,345)
Other noninterest income 3,558 3,751 6,232
Gain on sale of subsidiary 12,000 - -
---------- ---------- ----------
Total noninterest income $ 71,384 $ 70,838 $ 92,683
========== ========== ==========
- -------------------------------------------------------------------------------------------------------------------
Noninterest Expense
Total noninterest expense increased 4% in 2001 to $132.2 million, after
decreasing 29% in 2000. Excluding the $19.0 million in restructuring costs to
exit the mortgage servicing business, noninterest expense would have decreased
$18.4 million, or 14%, in 2001 and 12% in 2000. Salaries and employee benefits
expense decreased $8.2 million, or 11%, in 2001, following a decrease of $10.6
million, or 13%, in 2000. The decreases in salaries and employee benefits
expense in 2001 and 2000 reflect the decreases in the average number of hourly
and salaried employees, primarily due to the sale of Market Street in 2001 and
the completion of the combination of Republic Bank and D&N Bank in 2000.
Noninterest expense in 1999 includes one-time pre-tax merger integration
and restructuring charge recorded in the second quarter of that year 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.
Table 8
Noninterest Expense
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 64,377 $ 72,538 $ 83,161
Net occupancy expense of premises 11,427 13,467 13,594
Equipment expense 7,847 9,090 7,809
Other noninterest expense 29,562 36,546 44,835
Restructuring costs to exit the mortgage servicing business 19,000 - -
Merger integration and restructuring (credit) - (4,000) 31,521
----------- ------------ -----------
Total noninterest expense $ 132,213 $ 127,641 $ 180,920
=========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------
Net occupancy expense decreased 15% in 2001 primarily due to the sale of
Market Street Mortgage in June 2001. Net occupancy expense remained flat in 2000
compared to 1999. Equipment expense decreased 14% in 2001 also primarily due to
the sale of Market Street Mortgage, following an increase of 16% in 2000. 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.
Income Taxes
The provision for income taxes was $22.5 million in 2001, compared to
$22.9 million in 2000 and $10.7 million in 1999. The effective tax rate,
computed by dividing the provision for income taxes by income before taxes less
the dividends on preferred stock, was 32.0% for 2001, compared to 33.4% for 2000
and 41.9% for 1999. The effective tax rate in 2001 decreased primarily as a
result of an increase in the outstanding balance of tax-exempt securities in the
Company's securities available for sale portfolio. 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.
18
Financial Condition
Total assets were $4.7 billion at December 31, 2001 and $4.6 billion at
December 31, 2000. Average total assets rose $101.1 million, or 2%, to $4.6
billion during the year. The increase in total assets primarily reflects the
growth in mortgage loans held for sale and securities available for sale, which
was funded primarily by increases in deposits and short-term borrowings.
Assets
- ------
Portfolio Loans
The Company's loan portfolio is comprised of domestic loans to businesses
and consumers. At December 31, 2001 and 2000, 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) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and
industrial $ 68,428 2.0% $ 79,544 2.1% $ 88,370 2.6% $ 83,089 3.3% $ 79,497 3.3%
Real estate
construction 250,040 7.2 211,754 5.6 149,480 4.4 112,588 4.4 75,416 3.1
Commercial real
estate mortgages 1,044,594 30.2 840,994 22.3 650,642 19.3 437,014 17.2 314,329 13.1
---------- ----- ---------- ----- ---------- ---- ---------- ----- ---------- -----
Total commercial
loans 1,363,062 39.4 1,132,292 30.0 888,492 26.3 632,691 24.9 469,242 19.5
Residential real
estate mortgages 1,511,831 43.7 1,964,394 52.1 1,773,795 52.6 1,295,484 50.9 1,378,312 57.4
Installment loans:
Consumer direct 496,972 14.4 459,359 12.2 368,095 10.9 308,092 12.1 319,273 13.3
Consumer indirect 86,516 2.5 215,631 5.7 343,043 10.2 307,505 12.1 235,150 9.8
---------- ----- ---------- ----- ---------- ---- ---------- ----- ---------- -----
Total installment
loans 583,488 16.9 674,990 17.9 711,138 21.1 615,597 24.2 554,423 23.1
---------- ----- ---------- ----- ---------- ---- ---------- ----- ---------- -----
Total portfolio
loans $3,458,381 100.0% $3,771,676 100.0% $3,373,425 100.0% $2,543,772 100.0% $2,401,977 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
- ------------------------------------------------------------------------------------------------------------------------------
The total portfolio loans balance decreased $313.3 million, or 8%, to $3.5
billion at December 31, 2001, after increasing 12% in 2000. The decrease in 2001
is primarily due to higher payoffs of variable rate residential real estate
mortgages as a result of the low mortgage interest rates. Commercial real estate
growth was strong in local markets served by the Company and marketing efforts
directed at existing retail and mortgage customers increased home equity loans.
19
Commercial loans increased $230.8 million, or 20%, to $1.4 billion at
December 31, 2001, after increasing 27% in 2000. This growth, which was
concentrated exclusively in commercial real estate loans, reflects the Company's
efforts to complement traditional residential mortgage lending with quality
commercial real estate lending. Residential real estate mortgage loans decreased
$452.6 million, or 23%, to $1.5 billion at December 31, 2001, after increasing
11% a year earlier. During 2001, the mortgage portfolio experienced high payoffs
of variable rate mortgages as a result of significant refinance activity.
Consumer direct installment loans increased $37.6 million, or 8%, to $497.0
million at December 31, 2001, after rising 25% a year ago, reflecting the
continued success of specifically targeted sales and marketing efforts in home
equity lending. Consumer indirect installment loans decreased $129.1 million, or
60%, to $86.5 million at December 31, 2001, after decreasing 37% in 2000. The
decrease in the indirect loan balances was a result of loan sales and payoffs as
the Company discontinued its indirect lending line of business during the first
quarter of 2000.
Table 10
Maturity Distribution and Interest Rate Sensitivity of Commercial Loans
- -------------------------------------------------------------------------------------------------------------------
After One
December 31, 2001 Within But Within After
(In thousands) One Year Five Years Five Years Total
- -------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and industrial $ 24,894 $ 28,580 $ 14,954 $ 68,428
Real estate construction 157,050 56,277 36,713 250,040
Commercial real estate mortgages 93,705 548,089 402,800 1,044,594
---------- ----------- ----------- -----------
Total commercial loans $ 275,649 $ 632,946 $ 454,467 $ 1,363,062
========== =========== =========== ===========
Commercial Loans Maturing After One Year With:
Predetermined rates $ 354,556 $ 41,802
Floating or adjustable rates 278,390 412,665
----------- -----------
Total $ 632,946 $ 454,467
=========== ===========
- -------------------------------------------------------------------------------------------------------------------
The commercial loan portfolio contained no aggregate loans to any one
industry that exceeded 10% of total portfolio loans outstanding at December 31,
2001. The Company's total loan portfolio is geographically concentrated
primarily in Michigan, Ohio and Indiana as shown in the following table.
Table 11
Geographic Distribution of Loan Portfolio
- --------------------------------------------------------------------------------
December 31, 2001 Percent
(Dollars in thousands) Amount of Total
- --------------------------------------------------------------------------------
Michigan $ 2,382,501 69%
Ohio 636,676 18
Indiana 167,360 5
Other states 271,844 8
------------ ----
Total $ 3,458,381 100%
============ ====
- --------------------------------------------------------------------------------
Mortgage Loans Held for Sale
Mortgage loans held for sale increased $363.3 million, or 94%, to $748.5
million at December 31, 2001, after decreasing 16% to $385.2 million at December
31, 2000. The increase in 2001 was due to a higher level of mortgage origination
volumes in the fourth quarter compared to the prior year. The decrease in 2000
was due to a decreased level of mortgage origination volumes compared to prior
years. The average mortgage loans held for sale balance in 2001 increased 22%
compared to 2000 reflecting the Company's increased level of mortgage loan
production volumes during 2001.
20
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 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 by
obtaining sufficient collateral. To minimize credit risk, the Company
concentrates its commercial lending efforts on commercial real estate loans. At
December 31, 2001, commercial real estate loans accounted for 95% of total
commercial loans. Emphasis is also placed on loans that are government
guaranteed, such as SBA loans. Commercial 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, 2001, these loans accounted for 44% of total portfolio loans.
Credit risk in this area of lending is minimized by the assessment of the
creditworthiness of the borrower, including debt to income ratios, credit bureau
scores 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, credit bureau scores,
and for home equity lending, loan-to-value ratios generally 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.
21
Table 12
Non-Performing Assets
- -------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Commercial $ 6,413 $ 5,499 $ 4,651 $ 6,141 $ 1,705
Residential real estate mortgages 18,808 13,429 10,449 12,011 11,327
Installment 2,957 2,167 2,419 1,826 1,111
-------- -------- -------- ------- --------
Total non-accrual loans 28,178 21,095 17,519 19,978 14,143
Other real estate owned 2,978 4,906 4,743 5,648 3,535
-------- -------- -------- ------- --------
Total non-performing assets $ 31,156 $ 26,001 $ 22,262 $25,626 $ 17,678
======== ======== ======== ======= ========
- -------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of:
Portfolio loans and OREO .90% .69% .66% 1.01% .73%
Portfolio loans, mortgage loans held
for sale and OREO .74 .62 .58 .77 .60
Total assets .66 .56 .52 .61 .48
- -------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing interest:
Commercial $ 144 $ 209 $ 100 $ 74 $ 274
Residential real estate mortgages - - - - 228
Installment - - - - 6
-------- -------- -------- ------- --------
Total loans past due 90 days or more $ 144 $ 209 $ 100 $ 74 $ 508
======== ======== ======== ======= ========
- -------------------------------------------------------------------------------------------------------------------
Non-performing assets totaled $31.2 million at December 31, 2001, an
increase of $5.2 million compared to $26.0 million at December 31, 2000, due
primarily to increases in non-accrual residential real estate mortgage loans.
Historically, credit losses on loans secured by residential properties 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 $40.5 million, or 1.17%, of the loans in the loan portfolio
at December 31, 2001 were 30 to 89 days delinquent, compared to $45.2 million,
or 1.09% of portfolio loans at December 31, 2000. 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, 2001, total loans on the watch list, excluding
those categorized as non-accrual loans and loans past due 90 days and still
accruing interest, were $38.7 million, or 1.1% of total portfolio loans,
compared to $39.0 million, or 1.0% of total portfolio loans at December 31,
2000.
The following table presents the amount of interest income that would have
been earned on non-performing loans outstanding at December 31, 2001, 2000 and
1999 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.
Table 13
Forgone Interest on Non-Performing Loans
- -------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Non-Accrual Restructured Non-Accrual Restructured Non-Accrual Restructured
- -------------------------------------------------------------------------------------------------------------------
Pro forma interest income $ 3,164 $ - $ 1,513 $ - $1,326 $ -
Interest income earned 946 - 600 - 249 -
------- ------ ------- ------- ------ ------
Forgone interest income $ 2,218 $ - $ 913 $ - $1,077 $ -
======= ====== ======= ======= ====== ======
- -------------------------------------------------------------------------------------------------------------------
22
Impaired Loans
At December 31, 2001 and 2000, the gross recorded investment in impaired
loans totaled $6.4 million and $5.5 million, respectively. Similar to
non-accrual loans, interest payments subsequently received on impaired 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 risk allocated allowance is determined based
on the application of risk percentages to graded loans by categories. Specific
reserves are established for individual loans when deemed necessary by
management. In addition, management 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 allocated allowance may be written down to
the fair value of the underlying collateral via a direct charge-off against the
allowance for loan losses at the time it is determined the loan balance exceeds
the fair value of the collateral. Consequently, those impaired loans not
requiring a specific allocated 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 $2.4 million to $9.0 million in 2001,
compared to $6.5 million in 2000 and $7.4 million in 1999. The increase in 2001
is primarily due to increases in the Company's commercial loan charge-offs,
which have been impacted by growth in the Company's commercial real estate loan
portfolio and the overall economy in the Company's primary market areas of
Michigan, Ohio and Indiana. Based on these factors, the Company may have higher
loss experience on such loans in the future.
The ratio of net loan charge-offs to average loans, including loans held
for sale, was .19% in 2001, compared to .13% for 2000 and .17% for 1999.
Commercial loan net charge-offs as a percentage of average commercial loans was
.32% for 2001, compared to .14% for 2000 and .38% for 1999. Residential real
estate mortgage loan net charge-offs as a percentage of average residential
mortgage loans, including loans held for sale, was .03% for 2001 compared to
.02% for 2000 and .03% for 1999. Installment loan net charge-offs as a
percentage of average installment loans was .55% for 2001, compared to .44% for
2000 and .40% for 1999.
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 collateralized, 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.
23
Table 14
Analysis of the Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 28,450 $ 27,128 $ 21,446 $ 17,883 $ 15,751
Loan charge-offs:
Commercial loans 4,137 1,884 3,452 302 745
Residential real estate mortgage loans 671 724 572 678 303
Installment loans 4,159 3,922 3,376 2,539 1,743
--------- --------- -------- -------- ---------
Total loan charge-offs 8,967 6,530 7,400 3,519 2,791
Recoveries:
Commercial loans 149 452 691 83 115
Residential real estate mortgage loans - 178 27 52 20
Installment loans 825 722 714 447 407
--------- --------- -------- -------- ---------
Total recoveries 974 1,352 1,432 582 542
--------- --------- -------- -------- ---------
Net loan charge-offs 7,993 5,178 5,968 2,937 2,249
Provision charged to expense 8,700 6,500 11,650 6,500 4,381
--------- --------- -------- -------- ---------
Balance at end of year $ 29,157 $ 28,450 $ 27,128 $ 21,446 $ 17,883
========= ========= ======== ======== =========
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of
year-end portfolio loans .84% .75% .80% .84% .74%
Allowance for loan losses as a percentage of
year-end non-performing loans 103.47 134.87 154.85 107.35 126.44
Net charge-offs as a percentage of average
total loans (including loans held for sale) .19 .13 .17 .09 .09
- -------------------------------------------------------------------------------------------------------------------
The following table summarizes the Company's allocation of the allowance
for loan losses for risk allocated, specific allocated 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.
Table 15
Allocation of the Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
- -------------------------------------------------------------------------------------------------------------------------
Risk allocated allowances:
Commercial loans $8,597 39% $ 7,109 30% $ 4,705 26% $2,339 25% $2,940 20%
Residential real estate
mortgage loans 4,203 44 4,009 52 5,643 53 4,489 51 3,795 57
Installment loans 7,905 17 8,089 18 8,717 21 4,616 24 3,735 23
------ ------- ------- ------- -------
Total risk allocated
allowances 20,705 19,207 19,065 11,444 10,470
Specific allocated allowances:
Commercial loans - - - - - - 1,145 - 145 -
Residential real estate
mortgage loans - - - - - - - - - -
Installment loans - - - - - - - - - -
------ --- ------- --- ------- --- ------ --- ------- ---
Total specific
allowances - - - - - - 1,145 - 145 -
Unallocated allowances 8,452 - 9,243 - 8,063 - 8,857 - 7,268 -
------ --- ------- --- ------- --- ------ --- ------- ---
Total allowance for
loan losses $29,157 100% $28,450 100% $27,128 100% $21,446 100% $17,883 100%
======= === ======= === ======= === ======= === ======= ===
- -------------------------------------------------------------------------------------------------------------------------
The following table summarizes the graded loan categories used by the
Company to determine the adequacy of the risk allocated allowance for loan
losses at December 31, 2001, 2000 and 1999.
24
Table 16
Graded Loan Categories Used in the
Allocation of the Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------------------
December 31
(Dollar amounts in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Loan Loan Loan
Amount(1) Amount(1) Amount(1)
- -------------------------------------------------------------------------------------------------------------------
Graded loan categories:
Pass (Superior, High and Satisfactory) $ 4,724,893 $ 4,641,892 $ 4,127,646
Special mention 38,713 35,034 25,934
Substandard 36,739 27,989 24,482
Doubtful - - 72
Loss - - 2
----------- ----------- -----------
Total loans $ 4,800,345 $ 4,704,915 $ 4,178,136
=========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Loan amounts include mortgage loans held for sale and unfunded commitments
of $594 million, $548 million and $346 million at December 31, 2001, 2000
and 1999, respectively.
</FN>
Each element of the risk allocated allowance for December 31, 2001, 2000
and 1999 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.
Grades for commercial loans are assigned based upon review of such factors such
as debt service coverage, collateral value, financial condition of the borrower,
experience and reputation of management 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. In
addition, the Officer Loan Committee will, on a monthly basis, conduct reviews
of certain individual loans exceeding $500,000 that have not exhibited
delinquency trends. These reviews assign a current risk rating based on the
financial condition of the borrower and collateral values.
Based upon these reviews, the Company determines the grades for its loan
portfolio on a monthly basis and computes the allocation for allowance for loan
losses. These reviews provide a mechanism that results in loans being graded in
the proper category and accordingly, assigned the proper risk percentage in
computing the risk allocated or specific allocated allowance.
The unallocated allowance for loan losses decreased to $8.5 million at
December 31, 2001 from $9.2 million at December 31, 2000. The decrease is
primarily a result of an increase in the commercial loans outstanding which
require higher risk percentages than residential real estate mortgages.
The provision for loan losses increased to $8.7 million during 2001 from
$6.5 million in 2000. Risk allocated provisions were necessary as a result of
the $2.8 million increase in net charge-offs, the increase in the commercial
loan portfolio and the increase in non-accrual loans in 2001. In 2000, the
provision for loan losses decreased to $6.5 million 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. Risk allocated 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. 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, however, risk percentages for certain loan classifications within
the "pass" category were adjusted in 2000.
25
Securities Available for Sale
The Company's investment securities portfolio serves as a secondary source
of earnings and contributes to the management of interest rate risk and
liquidity risk. The debt securities portfolio is comprised principally of
municipal securities and collateralized mortgage obligations. At December 31,
2001, fixed rate investment securities within the portfolio, excluding municipal
securities, totaled $81.0 million compared to $73.3 million at December 31,
2000.
Investment securities available for sale totaled $364.6 million at December
31, 2001, a $152.8 million increase from $211.9 million at December 31, 2000.
Investment securities available for sale totaled $206.5 million at December 31,
1999. The increase from 2000 reflects purchases of municipal securities. The
investment securities portfolio constituted 7.7% of the Company's assets at
December 31, 2001, compared to 4.6% a year earlier.
The following table summarizes the composition of the Company's investment
securities portfolio at December 31, 2001, 2000 and 1999.
Table 17
Securities Available For Sale Portfolio
- -------------------------------------------------------------------------------------------------------------------
December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury and Government agency securities $ 8,396 $ 12,494 $ 44,548
Collateralized mortgage obligations 49,329 88,249 65,903
Mortgage-backed securities 1,952 19,869 16,152
Municipal and other securities 225,876 14,512 3,289
----------- ----------- ----------
Total debt securities 285,553 135,124 129,892
Investment in FHLB 79,095 76,736 76,567
----------- ----------- ----------
Total securities available for sale $ 364,648 $ 211,860 $ 206,459
=========== =========== ==========
- -------------------------------------------------------------------------------------------------------------------
The maturity distribution of and average yield information for investment
securities held as of December 31, 2001 is provided in the following table.
Table 18
Maturity Distribution of Securities Available for Sale Portfolio
- -------------------------------------------------------------------------------------------------------------------
December 31, 2001 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 $ - -% $ 255 6.75% $ - -% $ 8,141 6.88% $ 8,396 6.88%
Collateralized mortgage
obligations (2) (3) - - - - - - 49,329 4.19 49,329 4.19
Mortgage-backed
securities (2) (3) - - - - - - 1,952 7.20 1,952 7.20
Municipal and other
securities (1) 105 3.85 236 7.26 2,156 7.74 223,379 7.48 225,876 7.48
Equity securities and
investment in FHLB 79,095 7.24 - - - - - - 79,095 7.24
------- ---- -------- ----- -------- ---- -------- ----- --------- ----
Total securities
available for sale $79,200 7.24% $ 491 7.00% $ 2,156 7.74% $282,801 7.34% $ 364,648 6.97%
======= ==== ======== ===== ======== ==== ======== ===== ========= ====
- -------------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
26
Liabilities
- -----------
Deposits
Total deposits, the Company's primary source of funding, increased 1% to
$2.75 billion at December 31, 2001, after increasing 4% 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
and money market accounts. At December 31, 2001, core deposits totaled $1.22
billion, a 21% increase when compared to $1.01 billion at December 31, 2000.
Table 19
Maturity Distribution of Certificates of Deposit of $100,000 or More
- -------------------------------------------------------------------------------
December 31
(In thousands) 2001
- -------------------------------------------------------------------------------
Three months or less $ 355,439
Over three months through six months 163,660
Over six months through twelve months 101,706
Over twelve months 94,534
-----------
Total $ 715,339
===========
- -------------------------------------------------------------------------------
The Company also funds its loans with brokered certificates of deposit and
municipal certificates of deposit. At December 31, 2001, these deposits totaled
$48.0 million and $417.7 million, respectively, and represented 17% of total
deposits on a combined basis. At December 31, 2000, brokered certificates of
deposit totaled $105.4 million and municipal certificates of deposit totaled
$422.7 million, representing 19% of total deposits on a combined basis.
Short-Term Borrowings
Short-term borrowings increased $174.8 million to $176.5 million at
December 31, 2001, following a 97% decline to $1.7 million a year earlier.
Short-term borrowings at December 31, 2001 consisted of federal funds purchased
and treasury, tax and loan demand notes. Short-term borrowings at year-end 2000
consisted of treasury, tax and loan demand notes. The amount provided by these
funding sources increased during 2001 primarily due to decreases in short- and
long-term FHLB advances and the increase in mortgage loans held for sale. See
Note 9 to the Consolidated Financial Statements for further information
regarding short-term borrowings.
FHLB Advances
Republic Bank routinely utilizes FHLB advances, both on a short-term and
long-term basis, to provide funding for mortgage loans held for sale 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 145% of the total
advances. Total FHLB advances were $1.30 billion at December 31, 2001 compared
to $1.38 billion at December 31, 2000, representing a 6% decrease. This decrease
was primarily attributable to the increase in deposits and federal funds
purchased. See Note 10 to the Consolidated Financial Statements for further
information regarding FHLB advances.
Long-Term Debt
Long-term debt totaled $13.5 million and $47.5 million at December 31, 2001
and 2000, respectively. During 2001 the Company paid off $34.0 million of senior
debentures in accordance with the terms of the debenture agreements. See Note 11
to the Consolidated Financial Statements for further information regarding
long-term debt.
27
Capital
- -------
Shareholders' equity increased $10.1 million, or 3%, to $304.9 million at
December 31, 2001, after increasing 11% to $294.9 million a year earlier. The
increase in shareholders' equity during 2001 resulted primarily from net income
of $47.9 million being offset by $17.2 million in cash dividends to shareholders
and $25.4 million in stock repurchases. The total cash dividend paid in 2001
represented a 9% increase over the amount declared in 2000, reflecting the
increase in the shares outstanding that resulted from the Company's 10% stock
dividend.
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
the 2001 Stock Repurchase Program authorizing the repurchase of up to 1,100,000
shares, which was further amended in October 2001 to allow for the repurchase of
up to 3,300,000 shares. The 2001 Stock Repurchase Program commenced 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 184,000 shares and 916,000
shares under the 1999 program during 2001 and 2000, respectively. The Company
repurchased 1,665,000 shares under the 2001 program during 2001. As of December
31, 2001, there were 1,635,000 shares available for repurchase under the
program.
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 12.31% at December 31,
2001 compared to 10.38% at December 31, 2000. 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 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, retail, 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, 2001 the Company's balance of certificates of
deposit maturing within the next twelve months was $821.8 million. 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, 2001, Republic Bank had available $85.5 million in unused
lines of credit with third parties for federal funds purchased and $113.7
million available in unused borrowings with the FHLB.
Republic Bancorp Inc. has two major funding sources to meet its liquidity
requirements: dividends from Republic Bank and access to the capital markets. On
December 31, 2001, $184.0 million was available from Republic Bank for payment
of dividends to the parent company without prior regulatory approval, compared
to $183.4 million at December 31, 2000. Also, at December 31, 2001, the parent
company had interest-earning deposits of $18.4 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, 2001, which expires on December 28, 2002.
As discussed in Item 1 of the Company's 2001 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.
28
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
2001 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 Republic
Bank is responsible for ensuring that the Bank asset and liability management
procedures adhere to corporate policies and risk limits established by their
respective board of directors.
During 2001, short-term interest rates decreased significantly while
long-term interest rates remained fairly stable. The three-month treasury bill
decreased 417 basis points and the prime-lending rate decreased 475 basis points
from December 31, 2000 to December 31, 2001, while the 30-year treasury bond
increased 1 basis point during 2001. The demand for residential loans increased
during 2001 as mortgage rates declined. The Company's residential real estate
mortgage balance declined during the year due to a high level of loan
refinancings, however, many of those loans were refinanced by Republic Bank.
Commercial lending continued to be strong due to the successful efforts by our
team of experienced commercial lenders and the lower prime lending rates. The
Company's net interest margin increased 17 basis points to 3.31% during 2001 due
to the Company's cost of funds decreasing more than the yield on 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
held for sale 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 rates and holding
residential mortgage loans for sale 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.
29
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 than rates paid on interest-bearing
liabilities. 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, 2001, the cumulative
one-year gap was a positive 7.10% of total earning assets. At December 31, 2000,
the cumulative one-year gap was a negative 3.55% 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, 2001, the earnings simulation model projects net
interest income would increase by less than 1% 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 2%. These projected levels are
well within the Company's policy limits. These results portray the Company's
interest rate risk position as neutral 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.
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. 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.
30
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, 2001
Interest-Earning Assets:
Federal funds sold and other money market
investments $ 1,464 $ - $ - $ - $ 1,464
Mortgage loans held for sale 748,463 - - - 748,463
Securities available for sale 114,257 3,577 9,013 237,801 364,648
Loans, net of unearned income 1,026,603 738,055 1,273,242 420,481 3,458,381
---------- ---------- ---------- ---------- -----------
Total interest-earning assets $1,890,787 $ 741,632 $1,282,255 $ 658,282 $ 4,572,956
========== ========== ========== ========== ===========
Interest-Bearing Liabilities:
Deposits:
NOW accounts $ - $ - $ 123,071 $ 30,768 $ 153,839
Savings and money market accounts 32,074 377,763 313,614 96,223 819,674
Certificates of deposit:
Under $100,000 192,006 423,649 187,861 15,705 819,221
$100,000 or more 355,439 265,366 93,995 539 715,339
---------- ---------- ---------- ---------- -----------
Total certificates of deposit 547,445 689,015 281,856 16,244 1,534,560
---------- ---------- ---------- ---------- -----------
Total interest-bearing deposits 579,519 1,066,778 718,541 143,235 2,508,073
Short-term borrowings (2) 176,500 - - - 176,500
FHLB advances 360,000 125,000 118,503 697,215 1,300,718
Long-term debt - - 13,500 - 13,500
---------- ---------- ---------- ---------- -----------
Total interest-bearing liabilities $1,116,019 $1,191,778 $ 850,544 $ 840,450 $ 3,998,791
========== ========== ========== ========== ===========
Interest rate sensitivity gap $ 774,768 $ (450,146) $ 431,711 $(182,168) $ 574,165
As a percentage of total interest-earning assets 16.94% (9.84)% 9.44% (3.98)% 12.56%
Cumulative interest rate sensitivity gap $ 774,768 $ 324,622 $ 756,333 $ 574,165
As a percentage of total interest-earning assets 16.94% 7.10% 16.54% 12.56%
- -------------------------------------------------------------------------------------------------------------------
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:
NOW accounts $ - $ - $ 120,381 $ 30,095 $ 150,476
Savings and money market accounts - 82,874 422,320 84,862 590,056
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 618,199 833,329 876,121 133,368 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 $ 945,329 $ 923,124 $ 755,627 $ 3,893,759
========== ========== ========== ========== ===========
Interest rate sensitivity gap $ 39,272 $ (194,716) $ 814,116 $ (177,869) $ 480,803
As a percentage of total interest-earning assets .90% (4.45)% 18.61% (4.07)% 10.99%
Cumulative interest rate sensitivity gap $ 39,272 $ (155,444) $ 658,672 $ 480,803
As a percentage of total interest-earning assets .90% (3.55)% 15.06% 10.99%
- -------------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
31
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 Statement No. 133 effective January 1, 2001. The
transition adjustments resulting from adopting Statement No. 133 were
immaterial. The Company's 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 impact of Statement No. 133 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 No. 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 No. 141
further clarifies the criteria to recognize intangible assets separately from
goodwill. The requirements of Statement No. 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 No. 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 No. 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 No. 142 in their fiscal year
beginning after December 15, 2001.
At December 31, 2001, the Company's goodwill balance was $1.2 million and
intangible asset balance was $6.6 million. As a result, the Company does not
expect the adoption of these Statements to have a material impact on the
financial position or results of operations.
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.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Republic Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 2001 2000
- ----------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 75,270 $ 76,558
Interest-earning deposits with banks 1,464 5,819
----------- -----------
Cash and cash equivalents 76,734 82,377
Mortgage loans held for sale 748,463 385,207
Securities available for sale 364,648 211,860
Loans, net of unearned income 3,458,381 3,771,676
Less allowance for loan losses (29,157) (28,450)
----------- -----------
Net loans 3,429,224 3,743,226
Premises and equipment 30,858 36,094
Mortgage servicing rights 2,482 51,796
Other assets 88,196 100,081
----------- -----------
Total assets $ 4,740,605 $ 4,610,641
=========== ===========
Liabilities
Noninterest-bearing deposits $ 245,395 $ 267,509
Interest bearing deposits:
NOW accounts 153,839 150,476
Savings and money market accounts 819,674 590,056
Certificates of deposit 1,534,560 1,720,485
----------- -----------
Total interest-bearing deposits 2,508,073 2,461,017
----------- -----------
Total deposits 2,753,468 2,728,526
Federal funds purchased and
other short-term borrowings 176,500 1,729
FHLB advances 1,300,718 1,383,513
Accrued expenses and other liabilities 112,783 125,790
Long-term debt 13,500 47,500
----------- -----------
Total liabilities 4,356,969 4,287,058
Trust preferred securities and preferred stock of subsidiary 78,719 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; 53,166,000 and 54,366,000 shares
issued and outstanding in 2001 and 2000, respectively 265,831 247,119
Capital surplus 38,693 44,961
Retained earnings 3,542 2,994
Accumulated other comprehensive loss (3,149) (210)
----------- -----------
Total shareholders' equity 304,917 294,864
----------- -----------
Total liabilities and shareholders' equity $ 4,740,605 $ 4,610,641
=========== ===========
- ----------------------------------------------------------------------------------------------
See accompanying notes.
33
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Income
- ------------------------------------------------------------------------------------------------------
Years Ended December 31
(Dollars in thousands, except per share data) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans $ 316,292 $ 333,667 $ 268,552
Interest on investment securities 17,084 14,661 31,110
--------- --------- ---------
Total interest income 333,376 348,328 299,662
--------- --------- ---------
Interest Expense
Interest on deposits:
NOW accounts 1,967 1,708 1,722
Savings and money market accounts 22,251 22,625 22,701
Certificates of deposits 90,386 98,829 82,150
--------- --------- ---------
Total interest expense on deposits 114,604 123,162 106,573
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 3,460 3,532 3,462
Interest on FHLB advances 70,252 83,552 57,616
Interest on long-term debt 1,451 3,434 3,745
--------- --------- ---------
Total interest expense 189,767 213,680 171,396
--------- --------- ---------
Net interest income 143,609 134,648 128,266
Provision for loan losses 8,700 6,500 11,650
--------- --------- ---------
Net interest income after provision for loan losses 134,909 128,148 116,616
--------- --------- ---------
Noninterest Income
Mortgage loan production revenue 46,808 55,720 80,368
Net mortgage servicing (expense) revenue (127) 3,439 6,101
Service charges 7,720 7,819 7,327
Investment securities gains (losses) 1,425 109 (7,345)
Other noninterest income 3,558 3,751 6,232
Gain on sale of subsidiary 12,000 - -
--------- --------- ---------
Total noninterest income 71,384 70,838 92,683
--------- --------- ---------
Noninterest Expense
Salaries and employee benefits 64,377 72,538 83,161
Occupancy expense of premises 11,427 13,467 13,594
Equipment expense 7,847 9,090 7,809
Other noninterest expenses 29,562 36,546 44,835
Restructuring costs to exit mortgage servicing business 19,000 - -
Merger integration and restructuring (credit) - (4,000) 31,521
--------- --------- ---------
Total noninterest expense 132,213 127,641 180,920
--------- --------- ---------
Income before income taxes 74,080 71,345 28,379
Provision for income taxes 22,515 22,945 10,745
--------- --------- ---------
Income before dividends 51,565 48,400 17,634
Dividends on trust preferred securities and
preferred stock of subsidiary 3,655 2,723 2,723
--------- --------- ---------
Net Income $ 47,910 $ 45,677 $ 14,911
========= ========= =========
Basic earnings per share $ .88 $ .84 $ .27
========= ========= =========
Diluted earnings per share $ .87 $ .83 $ .27
========= ========= =========
- ------------------------------------------------------------------------------------------------------
See accompanying notes.
34
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Number of Other Total
Common Common Capital Retained Comprehensive Shareholders'
(In thousands, except per share data) Shares Stock Surplus Earnings Income (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1999 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 $2,571 income tax benefit 4,774 4,774
-------- --------
Net unrealized losses on securities, net of tax (4,042) (4,042)
--------
Comprehensive income 10,869
Cash dividends declared ($.27 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
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 $38 income tax expense (71) (71)
-------- --------
Net unrealized losses on securities, net of tax 2,342 2,342
--------
Comprehensive income 48,019
Cash dividends declared ($.29 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
Comprehensive income:
Net income 47,910 47,910
Unrealized holding losses on securities,
net of $1,084 income tax benefit (2,013) (2,013)
Reclassification adjustment for gains included in net
income, net of $499 income tax expense (926) (926)
-------- --------
Net unrealized losses on securities, net of tax (2,939) (2,939)
--------
Comprehensive income 44,971
Cash dividends declared ($.32 per share) (17,163) (17,163)
Awards of common stock under Incentive Stock Plan (795) (795)
Amortization of restricted stock 1,514 1,514
10% common share dividend 4,877 24,388 5,787 (30,199) (24)
Issuance of common shares:
Through exercise of stock options 609 3,045 1,168 4,213
Through exercise of stock warrants 14 70 43 113
Through employee stock awards 91 455 630 1,085
Tax benefit relating to exercise of stock options and
warrants and vesting of restricted stock 1,555 1,555
Repurchase of common shares (1,849) (9,246) (16,170) (25,416)
-------- -------- -------- -------- -------- --------
Balances at December 31, 2001 53,166 $265,831 $ 38,693 $ 3,542 $ (3,149) $304,917
======== ======== ======== ======== ======== ========
See accompanying notes.
35
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 47,910 $ 45,677 $ 14,911
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,554 10,406 9,302
Amortization and impairment of mortgage servicing rights 20,433 13,974 12,157
Net gains on sale of mortgage servicing rights (21,521) (28,445) (37,158)
Net (gains) losses on sale of securities available for sale (1,425) (109) 7,345
Net gains on sale of loans (3,697) (1,112) (3,883)
Net gain on sale of subsidiary (12,000) - -
Proceeds from sale of mortgage loans held for sale 4,074,133 3,509,017 4,643,117
Origination of mortgage loans held for sale (4,652,237) (3,435,165) (4,332,148)
Decrease (increase) in other assets 7,668 3,858 (1,473)
Increase (decrease) in other liabilities 33,267 9,339 (24,353)
Other, net (2,796) (6,139) (4,287)
----------- ----------- -----------
Total adjustments (549,621) 75,624 268,619
----------- ----------- -----------
Net cash (used in) provided by operating activities (501,711) 121,301 283,530
Cash Flows From Investing Activities:
Proceeds from sale of securities available for sale 176,764 41,373 498,089
Proceeds from maturities/payments of
securities available for sale 12,197 24,651 325,183
Purchases of securities available for sale (344,303) (67,838) (251,959)
Purchases of securities held to maturity - - (121,561)
Proceeds from sale of consumer loans 39,485 56,400 -
Proceeds from sale of commercial and residential real estate loans 182,018 115,541 174,249
Net decrease (increase) in loans made to customers 95,395 (566,961) (995,420)
Proceeds from sale of subsidiary and payments received
on related borrowings 193,248 - -
Proceeds from sale of mortgage servicing rights 96,994 63,887 75,953
Additions to mortgage servicing rights (49,768) (40,647) (53,975)
----------- ----------- -----------
Net cash provided by (used in) investing activities 402,030 (373,594) (349,441)
Cash Flows From Financing Activities:
Net increase (decrease) in total deposits 24,942 115,476 (29,781)
Net increase (decrease) in short-term borrowings 174,771 (55,514) (39,695)
Net (decrease) increase in short-term FHLB advances (70,000) (202,000) 549,000
Proceeds from long-term FHLB advances 160,000 635,302 35,000
Payments on long-term FHLB advances (172,795) (222,000) (398,360)
Payments on long-term debt (34,000) - (4,694)
Net proceeds from issuance of trust preferred securities 47,963 - -
Net proceeds from issuance of common shares 5,411 3,096 5,452
Repurchase of common shares (25,416) (8,054) (3,048)
Dividends paid on common shares (16,838) (15,397) (11,914)
----------- ----------- -----------
Net cash provided by financing activities 94,038 250,909 101,960
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (5,643) (1,384) 36,049
Cash and cash equivalents at beginning of year 82,377 83,761 47,712
----------- ----------- -----------
Cash and cash equivalents at end of year $ 76,734 $ 82,377 $ 83,761
=========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 198,245 $ 210,304 $ 169,692
Income taxes 27,832 22,273 13,607
Supplemental Schedule of Non-Cash Investing Activities:
Portfolio loan charge-offs $ 8,967 $ 6,530 $ 7,400
Transfer of securities held to maturity to securities
available for sale $ - $ - $ 58,476
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes
36
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Republic Bancorp Inc. and Subsidiaries (the "Company") is a bank holding
company headquartered in Ann Arbor, Michigan. The Company has three primary
lines of business: commercial banking, retail banking and mortgage banking. The
Company's bank subsidiary, Republic Bank, offers financial products to consumers
and businesses through its 97 retail, commercial and mortgage banking branches
located in Michigan, Ohio and Indiana and a loan production office in
Massachusetts.
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 wholly-owned subsidiaries, D&N Capital Corporation, Quincy
Investment Services, Inc., and CAS Properties, Inc.) and Republic Capital Trust
I. The consolidated financial statements also include the operations of Republic
Bank's 80% majority owned mortgage company subsidiary, Market Street Mortgage
Corporation, through June 29, 2001, when the subsidiary was sold. Therefore, the
consolidated balance sheet as of December 31, 2001 does not include Market
Street Mortgage Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to current
year presentations.
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 mandatory forward commitments to sell the loans to
investors in the secondary market. Such forward 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.
37
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 risk allocated allowance is determined based
on the application of 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 allocated allowance may be written down to
the fair value of the underlying collateral via a direct charge-off against the
allowance for loan losses at the time it is determined the loan balance exceeds
the fair value of the collateral. Consequently, those impaired loans not
requiring a specific allocated 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 risk allocated allowance for December 31, 2001, 2000
and 1999 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.
38
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting
Policies (Continued)
The Company reviews each delinquent commercial loan on a bi-weekly basis.
Grades for commercial loans are assigned based upon review of such factors such
as debt service coverage, collateral value, financial condition of the borrower,
experience and reputation of management 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. In
addition, the Officer Loan Committee will, on a monthly basis, conduct reviews
of certain individual loans exceeding $500,000 that have not exhibited
delinquency trends. These reviews assign a current risk rating based on the
financial condition of the borrower and collateral values.
Based upon these reviews, the Company determines the grade for its loan
portfolio on a monthly basis and computes the allowance for loan losses. These
reviews provide a mechanism that results in loans being graded in the proper
category and accordingly, assigned the proper risk loss percentage in computing
the risk allocated or specific allocated allowance.
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. In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years
beginning after December 15, 2001. The Company does not expect the adoption of
SFAS No. 144 to have a material impact on its financial position or results of
operations.
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 and Core Deposit Intangibles
The excess of cost over the fair value of net assets acquired is included
in other assets and was 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. As of January 1, 2002, in accordance with
Statement No. 142, Goodwill and Other Intangible Assets, goodwill is no longer
amortized, but will be reviewed annually for impairment. Core deposit
intangibles will continue to be amortized.
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.
39
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting
Policies (Continued)
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.
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
totaled $558,000 at December 31, 2001 and is a reduction to capital surplus.
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 and Divestitures
On June 29, 2001, the Company sold its 80% majority-owned subsidiary,
Market Street Mortgage Corporation to NetBank, Inc. The Company received $4.9
million in cash and NetBank stock valued at $17.6 million. During the fourth
quarter of 2001, the Company sold its entire investment in NetBank, Inc. stock
for total proceeds of $17.2 million. In total, the Company received $22.1
million in consideration for the sale of Market Street. Net of the Company's
investment in the subsidiary and transaction costs, the Company's pre-tax gain
on the sale of Market Street was $12 million.
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.
The effect on the results of operations for the period prior to the
combination is as follows:
- --------------------------------------------------------------------------------
For the Three Months Ended Basic Diluted
March 31, 1999 (Unaudited) Total Net Earnings Earnings
(In thousands) Revenue Income Per Share(1) Per Share(1)
- --------------------------------------------------------------------------------
Republic Bancorp Inc. $ 60,052 $ 6,136 $ .19 $ .19
D&N Financial Corporation 39,312 4,019 .43 .42
--------- -------
Total $ 99,364 $10,155
========= =======
- --------------------------------------------------------------------------------
(1) Republic Bancorp Inc. per share amounts presented have been adjusted to
reflect the issuance of stock dividends or splits effected in the form of
stock dividends.
40
Notes to Consolidated Financial Statements
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 included 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, were 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 represented the costs associated with the
estimated 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 included the expenses
expected from the integration of the two banking systems which was completed in
the fourth quarter of 2000. Other merger-related costs included 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 benefit
accruals, 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:
- -------------------------------------------------------------------------------------------------------------------
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) $ -
======== ========== ======== ======== ======= =======
- -------------------------------------------------------------------------------------------------------------------
41
Notes to Consolidated Financial Statements
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, 2001:
U.S. Treasury and Government agency securities $ 8,576 $ 8 $ 188 $ 8,396
Collateralized mortgage obligations 49,515 121 307 49,329
Mortgage-backed securities 1,913 39 - 1,952
Municipal and other securities 230,393 207 4,724 225,876
---------- ---------- ---------- ----------
Total debt securities 290,397 375 5,219 285,553
Equity securities and investment in FHLB 79,095 - - 79,095
---------- ---------- ---------- ----------
Total securities available for sale $ 369,492 $ 375 $ 5,219 $ 364,648
========== ========== ========== ==========
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
Equity securities and investment in FHLB 76,736 - - 76,736
---------- ---------- ---------- ----------
Total securities available for sale $ 212,183 $ 328 $ 651 $ 211,860
========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of securities available
for sale at December 31, 2001, 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 1.2 years.
Collateral for all mortgage-backed securities and collateralized mortgage
obligations is guaranteed by U.S. Government agencies.
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 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 $ - $ - $ 254 $ 255 $ - $ - $ 8,322 $ 8,141 $ 8,576 $ 8,396
Collateralized mortgage
obligations - - - - - - 49,515 49,329 49,515 49,329
Mortgage-backed securities - - - - - - 1,913 1,952 1,913 1,952
Municipal and other
securities 104 105 227 236 2,042 2,156 228,020 223,379 230,393 225,876
Equity securities and
investment in FHLB 79,095 79,095 - - - - - - 79,095 79,095
-------- -------- -------- --------- -------- -------- --------- --------- --------- ---------
Total securities
available for sale $ 79,199 $ 79,200 $ 481 $ 491 $ 2,042 $ 2,156 $ 287,770 $ 282,801 $ 369,492 $ 364,648
======== ======== ======== ========= ======== ======== ========= ========= ========= =========
- ---------------------------------------------------------------------------------------------------------------------------------
42
Notes to Consolidated Financial Statements
Note 4. Securities Available for Sale (Continued)
Sales of investment securities resulted in the following realized gains
and losses:
- -------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------
Proceeds from sales $ 176,764 $ 41,373 $ 498,089
Realized gains (losses):
Securities gains $ 1,809 $ 119 $ 2,420
Securities losses (384) (10) (9,765)
---------- ---------- ----------
Net securities gains (losses) $ 1,425 $ 109 $ (7,345)
=========== ========== ==========
- -------------------------------------------------------------------------------
Securities with a carrying value of approximately $8.4 million and
$58.7 million at December 31, 2001 and 2000, 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) 2001 2000
- -------------------------------------------------------------------------------
Commercial:
Commercial and industrial $ 68,428 $ 79,544
Real estate construction 250,040 211,754
Commercial real estate mortgages 1,044,594 840,994
----------- -----------
Total commercial loans 1,363,062 1,132,292
Residential real estate mortgages 1,511,831 1,964,394
Installment loans 583,488 674,990
----------- -----------
Total loans, net of unearned income $ 3,458,381 $ 3,771,676
=========== ===========
- -------------------------------------------------------------------------------
A geographic concentration exists within the Company's loan portfolio since
most portfolio lending activity is conducted in Michigan and Ohio. At December
31, 2001, approximately 69% of outstanding portfolio loans were concentrated in
Michigan and 18% in Ohio. At December 31, 2001, there were no aggregate loan
concentrations of 10% or more of total portfolio loans to any particular
industry.
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) 2001 2000 1999
- -------------------------------------------------------------------------------
Balance at beginning of year $ 28,450 $ 27,128 $ 21,446
Loans charged off (8,967) (6,530) (7,400)
Recoveries on loans previously charged off 974 1,352 1,432
-------- -------- --------
Net loans charged off (7,993) (5,178) (5,968)
Provision for loan losses 8,700 6,500 11,650
-------- -------- --------
Balance at end of year $ 29,157 $ 28,450 $ 27,128
======== ======== ========
Amount of balance at end of year:
Related to impaired loans $ - $ - $ -
Related to all other loans $ 29,157 $ 28,450 $ 27,128
- -------------------------------------------------------------------------------
43
Notes to Consolidated Financial Statements
Note 6. Allowance for Loan Losses and Impaired Loans (Continued)
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 $28.2 million and $21.1 million at December 31, 2001 and 2000,
respectively:
- -------------------------------------------------------------------------------------------------------------------
December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Average recorded investment in impaired loans for the year $ 6,677 $ 6,487 $ 4,378
Gross recorded investment in impaired loans (year-end) $ 6,413 $ 5,499 $ 4,651
Impaired loans requiring a specific allocated allowance - - -
Specific impairment allowance - - -
Interest income recognized on impaired loans $ 946 $ 600 $ 249
- -------------------------------------------------------------------------------------------------------------------
An impaired loan for which it is deemed necessary to record a specific
allocated allowance may be written down to the fair value of the underlying
collateral via a direct charge-off against the allowance for loan losses at the
time it is determined the loan balance exceeds the fair value of the collateral.
Consequently, those impaired loans not requiring a specific allocated 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) 2001 2000 1999
- -------------------------------------------------------------------------------
Balance at beginning of year $ 51,796 $ 67,290 $ 64,267
Additions 49,768 40,647 53,975
Sales (78,649) (42,167) (38,795)
Amortization expense (4,368) (9,774) (12,245)
Impairment reserve - (4,200) 88
Permanent write down to market value (16,065) - -
--------- --------- --------
Balance at end of year $ 2,482 $ 51,796 $ 67,290
======== ======== ========
Estimated fair value at end of year $ 2,482 $ 51,796 $ 70,783
======== ======== ========
- -------------------------------------------------------------------------------
Mortgage Servicing Activity
The Company expects to sell mortgage servicing rights concurrently with the
sale of the underlying mortgage loans. 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 $189 million at December 31, 2001 and
consisted of approximately 1,900 loans. At December 31, 2000, the mortgage
servicing portfolio was $2.2 billion and consisted of approximately 26,000
loans.
44
Notes to Consolidated Financial Statements
Note 7. Mortgage Servicing Rights (Continued)
Amortization of mortgage servicing rights, including the write-down of
mortgage servicing rights to market value and impairment reserves, totaled $20.4
million in 2001, compared to $14.0 million in 2000 and $12.2 million in 1999. As
discussed earlier, at the end of the first quarter of 2001, the Company elected
to exit the mortgage servicing business. Accordingly, the Company recorded a
write-down of mortgage servicing rights of $16.1 million to reflect the current
market value of the servicing portfolio. In addition, transaction costs
associated with the sale of the servicing portfolio were $2.0 million and costs
associated with winding down the servicing operations were $900,000. A sale
agreement regarding Market Street's mortgage servicing portfolio was
subsequently signed in April 2001 with an unaffiliated company and the Company
completed the sale during the second quarter. The significant decrease in the
value of the servicing portfolio from December 31, 2000 to March 31, 2001 was a
result of dramatic increases in the prepayment speed assumptions (PSA) during
the first quarter of 2001, as well as an over 120 basis point decrease in the
earnings rate received on escrow balances. These changes were a result of the
decline in short-term interest rates occurring during the quarter due to the
Federal Reserve Board's action to lower the federal funds rate. After selling
Market Street's servicing portfolio, there was no impairment reserve at December
31, 2001.
At December 31, 2000, the weighted average PSA increased from the 1999
weighted average PSA. 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's impairment reserve as of
December 31, 2000 was $6.6 million compared to $2.4 million at December 31,
1999.
At December 31, 2001 and 2000, the Company was responsible for $34.3
million and $76.4 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) 2001 2000
- -------------------------------------------------------------------------------
Land $ 3,539 $ 3,632
Furniture, fixtures and equipment 47,499 52,727
Buildings and improvements 24,186 25,279
-------- --------
75,224 81,638
Less accumulated amortization and depreciation (44,366) (45,544)
-------- --------
Premises and equipment $ 30,858 $ 36,094
======== ========
- --------------------------------------------------------------------------------
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, 2001, 2000 and 1999 totaled $5.7 million, $8.6 million and $9.9
million, respectively.
As of December 31, 2001, the future aggregate minimum lease payments
required under noncancellable operating leases are as follows:
- --------------------------------------------------------------------------------
Operating
Year Ending Lease Payments
- --------------------------------------------------------------------------------
2002 $ 3,440
2003 2,765
2004 2,216
2005 1,927
2006 1,464
2007 and thereafter 3,178
----------
Total minimum lease payments required $ 14,990
==========
- --------------------------------------------------------------------------------
45
Notes to Consolidated Financial Statements
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, 2001
Federal funds purchased $176,000 1.80% $ 90,290 3.47% $ 176,000
Other short-term borrowings 500 1.50 6,140 5.28 11,012
-------- ---- --------- ---- ---------
Total short-term borrowings $176,500 1.80% $ 96,430 3.54% $ 187,012
======== ==== ========= ==== =========
- -------------------------------------------------------------------------------------------------------------------
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
======== ==== ========= ==== =========
- -------------------------------------------------------------------------------------------------------------------
Federal funds purchased mature within one day following the transaction
date. At December 31, 2001, Republic Bank had $85.5 million of unused lines of
credit available with third parties for federal funds purchased. Other
short-term borrowings at December 31, 2001 and 2000 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, 2001 or 2000.
The agreement expires on December 28, 2002.
Note 10. FHLB Advances
FHLB advances outstanding as of December 31, 2001 and 2000 are presented
below. Classifications are based on original maturities.
- -------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Average Average
Ending Rate at Ending Rate at
Balance Year-End Balance Year-End
- -------------------------------------------------------------------------------------------------------------------
Short-term FHLB advances $ 485,000 2.69% $ 555,000 6.08%
Long-term FHLB advances 815,718 5.59 828,513 5.82
------------ ---- ----------- ----
Total FHLB advances $ 1,300,718 4.51% $ 1,383,513 5.92%
============ ==== =========== ====
- -------------------------------------------------------------------------------------------------------------------
Republic Bank routinely borrows short-term and long-term advances from the
Federal Home Loan Bank (FHLB) to fund mortgage loans held for sale 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 145% of the advances.
Republic Bank had $113.7 million available in unused borrowings with the FHLB at
December 31, 2001.
The principal maturities of long-term FHLB advances outstanding at December
31, 2001 are as follows:
- --------------------------------------------------------------------------------
(In thousands) Amount
- --------------------------------------------------------------------------------
2002 $ -
2003 55,000
2004 -
2005 33,503
2006 30,000
2007 and thereafter 697,215
----------
Total $ 815,718
==========
- --------------------------------------------------------------------------------
46
Notes to Consolidated Financial Statements
Note 11. Long-Term Debt
Obligations with original maturities of more than one year and the
principal maturities of long-term debt outstanding consisted of the following:
- --------------------------------------------------------------------------------
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
========= =========
- --------------------------------------------------------------------------------
7.17% Senior Debentures Due 2001
These senior debentures were issued through a private offering in March
1994 and matured on April 1, 2001. Interest was 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, of which $9.0 million matured on January 15, 2001 and
$13.5 million will mature on January 15, 2003. Interest is payable at the stated
rate semi-annually on April 1 and October 1 of each year.
Note 12. Trust Preferred Securities and 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(R) under the symbol DNFCP.
During both 2001 and 2000, D&N Capital Corporation declared and paid preferred
dividends totaling $2.72 million.
In October 2001, Republic Capital Trust I, a Delaware business trust and
newly-formed subsidiary of the Company, issued $50 million of 8.60% Cumulative
Trust Preferred Securities (liquidation preference of $25 per preferred
security). The trust preferred securities must be redeemed on December 31, 2031,
however, the Company has the option to redeem the securities at par any time
after December 30, 2006, subject to regulatory approval. The preferred
securities are treated as Tier 1 Capital by the Company and trade on The Nasdaq
Stock Market(R) under the symbol RBNCP. The Company used the net proceeds for
general corporate purposes, for working capital and for repurchases of its
common stock.
Note 13. Shareholders' Equity
On October 18, 2001, the Board of Directors declared a 10% stock dividend
distributed on December 3, 2001 to shareholders of record on November 9, 2001.
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 on December 3, 1999.
Share amounts for all periods presented have been adjusted to reflect the
issuance of stock dividends.
The Company repurchased 1,849,000, 922,000, and 240,000 shares of common
stock in 2001, 2000 and 1999, respectively. On February 20, 2001, 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. On October 18,
2001, the Board of Directors amended the 2001 Stock Repurchase Program to allow
for the repurchase of up to 3,300,000 shares. The program commenced at the
conclusion of the 1999 stock repurchase program that the Board of Directors
approved on November 18, 1999 authorizing the repurchase of up to 1,100,000
shares of the Company's outstanding common shares. As of December 31, 2001,
there were 1,635,000 shares available for repurchase under the program.
47
Notes to Consolidated Financial Statements
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) 2001(1) 2000(1) 1999(1)
- ----------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net income $ 47,910 $ 45,677 $ 14,911
=========== =========== ===========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 54,224,956 54,546,064 54,641,613
Effect of dilutive securities:
Employee stock options 742,351 321,225 673,646
Warrants 52,707 22,506 54,089
----------- ----------- -----------
Dilutive potential common shares 795,058 343,731 727,735
Denominator for diluted earnings per share-
adjusted weighted-average shares for
assumed conversions 55,020,014 54,889,795 55,369,348
=========== =========== ===========
Basic earnings per share $ .88 $ .84 $ .27
=========== =========== ===========
Diluted earnings per share $ .87 $ .83 $ .27
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------
<FN>
(1) Share amounts for all periods presented have been adjusted to reflect the
issuance of stock dividends.
</FN>
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 2,873,750 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 2,873,750 options to purchase common shares
under the 1998 Stock Option Plan, up to 1,331,000 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, 2001 and 2000, options available for future grant under the 1998
Stock Option Plan totaled 913,245 and 1,250,729, respectively. Options available
for future grant under the 1997 Stock Option Plan totaled 360,528 and 338,996 at
December 31, 2001 and 2000, 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,
2001 and 2000, 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.
48
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation (Continued)
The following table presents stock option activity for the years indicated:
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
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 3,959,225 $ 8.30 3,930,155 $ 7.90 3,149,214 $ 6.68
Granted 516,069 11.51 748,162 8.59 1,493,342 9.23
Exercised (652,248) 6.40 (396,650) 3.71 (624,907) 4.68
Canceled (208,171) 9.23 (322,442) 9.72 (87,494) 9.98
--------- ------ ---------- ------- --------- ------
Outstanding at end of year 3,614,875 $ 9.06 3,959,225 $ 8.30 3,930,155 $ 7.90
========= ====== ========= ======= ========= ======
- -------------------------------------------------------------------------------------------------------------------
Additional information regarding stock options outstanding and exercisable
at December 31, 2001 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
- -------------------------------------------------------------------------------------------------------------------
$ 2.84 - $ 6.76 593,274 4.1 $ 5.15
$ 7.04 - $ 8.85 634,865 7.6 8.29
$ 9.20 - $ 9.20 789,065 7.4 9.20
$ 9.25 - $10.06 519,949 7.0 9.44
$10.24 - $11.48 872,382 7.8 11.28
$11.50 - $12.63 198,401 6.6 11.66
$13.88 - $13.88 6,939 9.6 13.88
- -------------------------------------------------------------------------------------------------------------------
$ 2.84 - $13.88 3,614,875 6.9 $ 9.06
===================================================================================================================
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
166,375 common shares per year for sale as program shares, subject to an overall
maximum of 665,500 shares while the Program is in effect. Consequently, an
annual maximum of 332,750 common shares is authorized for tandem stock options
(subject to an overall maximum of 1,331,000 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 from the date of grant. At December 31, 2001, common shares
and tandem stock options available for future grant totaled 204,347 and 408,694,
respectively. At December 31, 2000, common shares and tandem stock options
available for future grant totaled 295,998 and 591,996, respectively.
49
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation (Continued)
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 are granted at exercise prices equal to the market value of the
Company's common stock on the date of grant, are immediately exercisable, and
have maximum contractual lives of ten years. In 2001, 28,050 warrants were
issued, compared to 32,670 warrants in 2000 and 41,927 warrants in 1999. At
December 31, 2001, 231,992 warrants were outstanding with exercise prices
ranging from $4.10 to $12.74.
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, 2001, the
maximum number of authorized shares allowed for grant totaled 2,658,312.
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, 2001 and 2000, 240,353 and
402,750 common shares, respectively, 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 $825,000 in 2001, $968,000 in 2000 and $838,000 in
1999. The unamortized portion of restricted stock is included as a component of
shareholders' equity in the consolidated balance sheets. In 2001, 70,184
restricted shares were issued, compared to 70,103 in 2000 and 59,690 in 1999.
The weighted average grant-date fair value of restricted shares issued in 2001
was $11.33.
Pro Forma Disclosures
For purposes of providing the pro forma disclosures of net income and
earnings per share required by SFAS No. 123, Accounting for Stock-Based
Compensation, 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 47.1%; an expected dividend yield of 2.45%; a risk-free
interest rate of 4.30%; and an expected life of the option of 5.2 years. The
weighted average grant-date fair value of stock options and stock warrants
granted during each of the years 2001, 2000 and 1999 was $4.39, $3.67 and $1.77,
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) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Net income (as reported) $ 47,910 $ 45,677 $ 14,911
Net income (pro forma) 46,358 43,818 13,146
Basic earnings per share (as reported) $ .88 $ .84 $ .27
Basic earnings per share (pro forma) .85 .80 .24
Diluted earnings per share (as reported) $ .87 $ .83 $ .27
Diluted earnings per share (pro forma) .84 .80 .24
- -------------------------------------------------------------------------------------------------------------------
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, 2001,
2000 and 1999 totaled $2.0 million, $2.2 million, and $2.3 million,
respectively.
50
Notes to Consolidated Financial Statements
Note 17. Other Noninterest Expense
The two largest components of other noninterest expense were as follows:
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Voice and data communications $ 3,988 $ 5,215 $ 6,188
Data processing 2,056 5,857 5,684
- -------------------------------------------------------------------------------------------------------------------
Note 18. Income Taxes
The current and deferred components of the provision for Federal income tax
expense for the years ended December 31, 2001, 2000, and 1999 are as follows.
- -------------------------------------------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Current income tax expense $ 25,912 $ 20,409 $ 19,083
Deferred income tax expense (benefit) (3,397) 2,536 (8,338)
---------- --------- ---------
Total income tax expense $ 22,515 $ 22,945 $ 10,745
========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
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, 2001 and 2000 were as follows:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Deferred Deferred
Asset Liability Asset Liability
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses $ 9,819 $ - $ 10,033 $ -
Mortgage servicing rights amortization - - 396 -
Originated mortgage servicing rights - 700 - 9,025
Deferred loan origination fees and costs, net - 9,527 - 7,012
Impairment reserve for mortgage servicing rights - - 2,183 -
Deferred compensation contributions and gains 2,420 - 2,493 -
Restricted stock amortization 847 - 997 -
Depreciation/amortization - 480 - 1,092
Stock dividends on FHLB stock - 1,162 - 1,143
Purchase accounting adjustment amortization 24 - - 18
Unrealized loss on securities available for sale 1,695 - 113 -
Loan mark-to-market adjustment 1,703 - 876 -
Other temporary differences 53 337 947 372
-------- -------- -------- --------
Total deferred taxes $ 16,561 $ 12,206 $ 18,038 $ 18,662
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
Items causing differences between the statutory tax rate and the effective
tax rate are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31
(Dollars in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------------
Statutory tax rate $ 24,649 35.0% $ 24,018 35.0% $ 8,980 35.0%
Amortization of goodwill 87 .1 87 .1 87 .3
Net tax exempt interest income (2,152) (3.0) (123) (.2) (142) (.6)
Merger integration and restructuring charge - - - - 1,550 6.1
Other, net (69) (.1) (1,037) (1.5) 270 1.1
--------- ---- --------- ---- --------- ----
Provision for income taxes $ 22,515 32.0% $ 22,945 33.4% $ 10,745 41.9%
========= ==== ========= ==== ========= ====
- -------------------------------------------------------------------------------------------------------------------
51
Notes to Consolidated Financial Statements
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, 2001,
2000 and 1999 follows:
- --------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Balance at beginning of the year $ 14,456 $ 8,157 $ 2,876
New loans and advances 2,435 8,641 5,382
Repayments (1,357) (2,342) (101)
-------- -------- --------
Balance at end of year $ 15,534 $ 14,456 $ 8,157
======== ======== ========
- --------------------------------------------------------------------------------
Note 21. Segment Information
The Company's operations are managed as three major business segments: (1)
commercial banking (2) retail banking and (3) mortgage banking. The commercial
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. The retail banking segment consists of home equity
lending, other consumer lending and the deposit-gathering function. Deposits and
loan products are offered through 83 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 55 offices of Republic Bank. As
discussed in Note 1, Market Street Mortgage was sold in the second quarter of
2001 and in conjunction with the sale of Market Street, the Company exited the
mortgage servicing business and separately sold its mortgage servicing
portfolio. Prior to 2001, over 90% of the Company's mortgage loan servicing was
performed by Market Street Mortgage. Treasury and Other is comprised of balance
sheet management activities that include the securities portfolio, residential
real estate mortgage portfolio loans and non-deposit funding. Treasury and Other
also includes unallocated corporate expenses such as corporate overhead,
including accounting and operation costs.
The Company evaluates performance and allocates resources based on profit
or loss from operations. 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. Each business
segment is credited for the interest income earned on its assets. The assets of
commercial banking are commercial loans. Retail banking's assets include direct
consumer loans and deposits in excess of its loan balances. The mortgage banking
segment's assets are mortgage loans held for sale and residential construction
loans. The commercial and mortgage segments' internal funding costs are based on
the
52
Notes to Consolidated Financial Statements
Note 21. Segment Information (Continued)
overall cost of funds of Republic Bank. The retail segment is charged for the
interest expense on deposits and receives an internal funding credit for excess
deposits at Republic Bank's overall yield on earning assets. Excluding the
internal funding, the Company does not have intracompany revenues or expenses.
Noninterest income and expenses directly attributable to a business segment's
operations are assigned to that business segment. The provision for loan losses
for each segment reflects net charge-offs in each segment and the maintenance of
a fixed allowance for loan losses to loans ratio. Additionally, segment income
tax expense is calculated using the marginal tax rate. The difference between
the marginal and effective tax rate is included in Treasury and Other. Equity is
allocated to each segment based on a percentage of its assets.
Revenues from no individual customer exceeded 10 percent of consolidated
total revenues. The Company's segments are not necessarily comparable with
similar information for any other financial institution.
In conjunction with the merger of Republic Bank and D&N Bank in 2000 and
the sale of Market Street Mortgage Corporation in 2001, the Company redefined
its business segments. All prior period amounts have been restated to conform to
the current year presentation.
The following table presents the financial results of each business segment
for the last three years.
- ----------------------------------------------------------------------------------------------------------------------------------
Treasury
(In thousands) Commercial Retail Mortgage and Other Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2001(1)
Net interest income from external customers $ 102,428 $ (80,907) $ 49,710 $ 72,378 $ 143,609
Internal funding (50,581) 168,007 (29,149) (88,277) -
------------ ------------ ------------ ------------ ------------
Net interest income 51,847 87,100 20,561 (15,899) 143,609
Provision for loan losses 4,641 634 - 3,425 8,700
Noninterest income 1,537 7,764 48,714 1,369 59,384
Noninterest expense 9,571 32,006 47,192 24,444 113,213
------------ ------------ ------------ ------------ ------------
Operating income before taxes 39,172 62,224 22,083 (42,399) 81,080
Preferred stock dividend - - - 3,655 3,655
Income taxes 13,710 21,779 7,729 (18,253) 24,965
------------ ------------ ------------ ------------ ------------
Net operating income $ 25,462 $ 40,445 $ 14,354 $ (27,801) $ 52,460
============ ============ ============ ============ ============
Depreciation and amortization $ 150 $ 3,293 $ 6,727 $ 2,752 $ 12,922
Capital expenditures $ 168 $ 1,319 $ 328 $ 1,686 $ 3,501
Net identifiable assets (in millions) $ 1,335 $ 2,911 $ 914 $ (419) $ 4,741
Return on equity(2) 20.47% 15.50% 40.77% n/m 17.25%
Return on assets 2.05% 1.41% 2.04% n/m 1.14%
Efficiency ratio 17.93% 33.74% 68.12% n/m 56.17%
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2000(1)
Net interest income from external customers $ 92,578 $ (87,410) $ 45,333 $ 84,147 $ 134,648
Internal funding (50,921) 178,667 (35,697) (92,049) -
------------ ------------ ------------ ------------ ------------
Net interest income 41,657 91,257 9,636 (7,902) 134,648
Provision for loan losses 3,260 1,153 - 2,087 6,500
Noninterest income 986 7,598 59,159 3,095 70,838
Noninterest expense 8,384 31,772 63,392 24,093 127,641
------------ ------------ ------------ ------------ ------------
Operating income before taxes 30,999 65,930 5,403 (30,987) 71,345
Preferred stock dividend - - - 2,723 2,723
Income taxes 10,850 23,076 1,891 (12,872) 22,945
------------ ------------ ------------ ------------ ------------
Net income $ 20,149 $ 42,854 $ 3,512 $ (20,838) $ 45,677
============ ============ ============ ============ ============
Depreciation and amortization $ 184 $ 3,281 $ 17,939 $ 2,976 $ 24,380
Capital expenditures $ 201 $ 1,401 $ 3,613 $ 3,919 $ 9,134
Net identifiable assets (in millions) $ 1,112 $ 2,794 $ 494 $ 211 $ 4,611
Return on equity(2) 20.21% 15.34% 13.14% n/m 16.28%
Return on assets 2.02% 1.53% .66% n/m 1.02%
Efficiency ratio 19.66% 32.14% 92.15% n/m 64.10%
- ----------------------------------------------------------------------------------------------------------------------------------
53
Notes to Consolidated Financial Statements
Note 21. Segment Information (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Treasury
(In thousands) Commercial Retail Mortgage and Other Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999(1)
Net interest income from external customers $ 64,051 $ (81,711) $ 37,722 $ 108,204 $ 128,266
Internal funding (35,777) 179,810 (28,159) (115,874) -
------------ ------------ ------------ ------------ ------------
Net interest income 28,274 98,099 9,563 (7,670) 128,266
Provision for loan losses 4,680 838 - 1,132 6,650
Noninterest income 877 7,081 86,469 5,808 100,235
Noninterest expense 6,866 31,157 79,146 32,230 149,399
------------ ------------ ------------ ------------ ------------
Operating income before taxes 17,605 73,185 16,886 (35,224) 72,452
Preferred stock dividend - - - 2,723 2,723
Income taxes 6,162 25,615 5,910 (13,066) 24,621
------------ ------------ ------------ ------------ ------------
Net operating income $ 11,443 $ 47,570 $ 10,976 $ (24,881) $ 45,108
============ ============ ============ ============ ============
Depreciation and amortization $ 238 $ 3,150 $ 15,444 $ 2,627 $ 21,459
Capital expenditures $ 211 $ 1,491 $ 4,715 $ 3,621 $ 10,038
Net identifiable assets (in millions) $ 882 $ 2,790 $ 575 $ 55 $ 4,302
Return on equity(2) 15.11% 16.81% 30.05% n/m 17.07%
Return on assets 1.51% 1.68% 1.50% n/m 1.10%
Efficiency ratio 23.55% 29.62% 82.42% n/m 65.44%
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Amounts for 2001 exclude $12.0 million of pretax gain on sale of subsidiary
and $19.0 million pretax restructuring costs to exit the mortgage servicing
business. 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) The Company allocated capital as a percentage of assets of 10%, 10% and 5%
for the commercial, retail and mortgage segments, respectively.
n/m - Not meaningful
</FN>
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, 2001, the Company had outstanding $257.9 million of
commitments to fund residential real estate loan applications with agreed-upon
rates ("Interest Rate Lock Commitments" or "IRLCs").
54
Notes to Consolidated Financial Statements
Note 22. Off-Balance Sheet Transactions (Continued)
At December 31, 2001, the Company had outstanding mandatory forward
commitments to sell $931.6 million of residential mortgage loans, of which
$725.8 million covered the mortgage loans held for sale balance and $205.8
million covered IRLCs. These outstanding forward commitments to sell mortgage
loans are expected to settle in the first quarter of 2002 without producing any
material gains or losses. At December 31, 2001, the mortgage loans held for sale
balance included $22.7 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 these loans were committed for
bulk sale to third parties prior to year-end.
At December 31, 2000, outstanding forward commitments to sell mortgage
loans totaled $517.2 million, of which $355.6 million covered the mortgage loans
held for sale balance and $161.6 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 Statement No. 133
effective January 1, 2001. The transition adjustments resulting from adopting
Statement No. 133 were immaterial. For the year ended December 31, 2001, the
Company's hedging policies using mandatory forward commitments, as they relate
to IRLCs and mortgage loans held for sale, were highly effective. Therefore, the
impact of Statement No. 133 on net income was immaterial.
The following table presents the contractual amounts of the Company's
off-balance sheet financial instruments outstanding at December 31, 2001 and
2000:
- -------------------------------------------------------------------------------------------------------------------
December 31
(In thousands) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to fund residential real estate loans $ 464,572 $ 801,382
Commitments to fund commercial real estate loans 236,280 285,905
Other unused commitments to extend credit 266,560 196,174
Standby letters of credit 36,799 33,120
Financial instruments subject to interest rate risk:
Residential real estate loan applications with agreed-upon rates $ 257,946 $ 199,428
Forward commitments to sell residential real estate mortgage loans 931,600 517,173
- -------------------------------------------------------------------------------------------------------------------
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.
55
Notes to Consolidated Financial Statements
Note 23. Estimated Fair Value of Financial Instruments (Continued)
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.
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:
Fair value approximates the carrying value since the majority of these
instruments were entered into at or near December 31, 2001. 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.
Trust Preferred Securities and Preferred Stock of Subsidiary:
Fair value is estimated based on the present value of future estimated cash
flows using current rates offered to the Company for trust preferred securities
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, 2001 and
2000 were not material.
56
Notes to Consolidated Financial Statements
Note 23. Estimated Fair Value of Financial Instruments (Continued)
The following table presents the estimated fair values of the Company's
financial instruments:
- -------------------------------------------------------------------------------------------------------------------
2001 2000
December 31 Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
- -------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 76,734 $ 76,734 $ 82,377 $ 82,377
Mortgage loans held for sale 748,463 753,328 385,207 387,711
Securities available for sale 364,648 364,648 211,860 211,860
Loans, net of the allowance for loan losses 3,429,224 3,466,446 3,743,226 3,732,821
Liabilities:
Noninterest-bearing deposits 245,395 245,395 267,509 267,509
NOW, savings and money market accounts 973,513 973,513 740,532 740,532
Certificates of deposit maturing in:
Six months or less 11,082 11,088 18,463 18,459
Over six months to one year 176,148 176,864 228,573 229,038
Over one year to three years 1,142,230 1,159,846 1,223,512 1,228,238
Over three years 205,100 214,990 249,937 250,877
----------- ----------- ----------- -----------
Total certificates of deposit 1,534,560 1,562,788 1,720,485 1,726,612
Total deposits 2,753,468 2,781,696 2,728,526 2,734,653
Federal funds purchased and other
short-term borrowings 176,500 176,500 1,729 1,729
FHLB advances 1,300,718 1,360,040 1,383,513 1,428,902
Long-term debt 13,500 13,596 47,500 47,755
Trust preferred securities and preferred
stock of subsidiary 78,719 76,638 28,719 28,710
- -------------------------------------------------------------------------------------------------------------------
Note 24. Regulatory Matters
Republic Bank is required by law to maintain average cash reserve balances
with the Federal Reserve Bank based on a percentage of deposits. At December 31,
2001 and 2000, these reserves totaled $3.8 million and $4.6 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 a
state chartered financial institution may declare to the parent company in any
calendar year. On December 31, 2001, $184.0 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, 2001, 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, 2001, 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.
57
Notes to Consolidated Financial Statements
Note 24. Regulatory Matters (Continued)
Presented in the table below are the capital amounts and ratios for the
Company and its bank subsidiary, Republic Bank, at December 31, 2001, along with
a comparison to the year-end capital amounts and ratios established by the
regulators.
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Actual Adequately Capitalized Well Capitalized
- ---------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
As of December 31, 2001
Total capital (to risk weighted assets)(1):
Consolidated $ 407,921 12.31% $ 265,088 8.00% $ 331,361 10.00%
Republic Bank 388,578 11.84 262,590 8.00 328,237 10.00
Tier 1 capital (to risk weighted assets)(1):
Consolidated $ 378,764 11.43% $ 132,544 4.00% $ 198,816 6.00%
Republic Bank 359,421 10.95 131,295 4.00 196,942 6.00
Tier 1 capital (to average assets)(1):
Consolidated $ 378,764 8.34% $ 136,164 3.00% $ 226,941 5.00%
Republic Bank 359,421 7.97 135,278 3.00 225,463 5.00
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) As defined in the regulations
</FN>
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) 2001 2000
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 539 $ 274
Interest earning deposits 18,366 16,714
-------- --------
Cash and cash equivalents 18,905 16,988
Investment in subsidiaries 336,681 330,423
Notes and advances receivable from subsidiary 6,004 250
Furniture and equipment 176 225
Other assets 31,248 12,118
-------- --------
Total assets $393,014 $360,004
======== ========
Liabilities and Shareholders' Equity:
Accrued expenses and other liabilities $ 23,051 $ 17,640
Subordinated debentures 51,546 -
Long-term debt 13,500 47,500
-------- --------
Total liabilities 88,097 65,140
Total shareholders' equity 304,917 294,864
-------- --------
Total liabilities and shareholders' equity $393,014 $360,004
======== ========
- --------------------------------------------------------------------------------
58
Notes to Consolidated Financial Statements
Note 25. Parent Company Financial Information (Continued)
- ------------------------------------------------------------------------------------------------------
Parent Company Only Income Statements
Year Ended December 31 (In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Interest income $ 198 $ 345 $ 864
Dividends from subsidiary 35,029 20,000 8,000
Other income 12,000 1 1,288
-------- -------- --------
Total income 47,227 20,346 10,152
Interest expense 2,678 3,434 3,435
Investment securities losses 355 - -
Salaries and employee benefits 4,950 2,785 5,601
Other expenses 1,951 875 643
Merger integration and restructuring - (431) 6,620
-------- -------- --------
Total expenses 9,934 6,663 16,299
-------- -------- --------
Income (loss) before income taxes and
excess (deficiency) of undistributed earnings of
subsidiary over dividends 37,293 13,683 (6,147)
Income tax expense (credit) 890 (3,056) (4,186)
-------- -------- --------
Income (loss) before excess of undistributed earnings
of subsidiary over dividends 36,403 16,739 (1,961)
Excess of undistributed earnings of
subsidiary over dividends 11,507 28,938 16,872
-------- -------- --------
Net income $ 47,910 $ 45,677 $ 14,911
======== ======== ========
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Parent Company Only Statements of Cash Flows
Year Ended December 31 (In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 47,910 $ 45,677 $ 14,911
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 693 559 562
Net loss on securities available for sale 355 - -
Excess of undistributed earnings of
subsidiary over dividends (11,507) (28,938) (16,872)
Increase in other assets (18,174) (1,343) (2,649)
(Decrease) increase in other liabilities (4,521) (1,942) 3,756
Gain on sale of subsidiary (12,000) - -
Other, net (23) (1,090) (609)
-------- -------- --------
Total adjustments (45,177) (32,754) (15,812)
-------- -------- --------
Net cash provided by (used in) operating activities 2,733 12,923 (901)
Cash Flows from Investing Activities:
Decrease in notes and advances receivable
from subsidiary 22,064 2,235 3,774
-------- -------- --------
Net cash provided by investing activities 22,064 2,235 3,774
Cash Flows from Financing Activities:
Repayment of long-term debt (34,000) - -
Net proceeds from issuance of subordinated debentures 47,963 - -
Net proceeds from issuance of common shares through
exercise of stock options and stock warrants 5,411 3,096 5,452
Repurchase of common shares (25,416) (8,054) (3,048)
Dividends paid on common shares (16,838) (15,397) (11,914)
-------- -------- --------
Net cash used in financing activities (22,880) (20,355) (9,510)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,917 (5,197) (6,637)
Cash and cash equivalents at beginning of year 16,988 22,185 28,822
-------- -------- --------
Cash and cash equivalents at end of year $ 18,905 $ 16,988 $ 22,185
======== ======== ========
- ------------------------------------------------------------------------------------------------------
59
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 Thomas F. Menacher, CPA
President and Chief Executive Officer Executive Vice President, Treasurer and
Chief Financial Officer
60
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, 2001 and 2000 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Detroit, Michigan
January 11, 2002
61
Quarterly Data (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
years 2001 and 2000:
- -------------------------------------------------------------------------------------------------------------------
Full
(Dollars in thousands, except per share data) 1Q 2Q 3Q 4Q Year
- -------------------------------------------------------------------------------------------------------------------
2001
Earnings Summary
Interest income $ 88,465 $ 88,999 $ 79,555 $ 76,357 $ 333,376
Interest expense 54,512 51,318 44,497 39,440 189,767
Net interest income 33,953 37,681 35,058 36,917 143,609
Provision for loan losses 2,000 2,300 2,000 2,400 8,700
Mortgage banking revenue 16,451 17,622 6,166 6,442 46,681
Investment securities gains 367 163 404 491 1,425
Other non-interest income 2,503 14,404(1) 3,408 2,963 23,278
Non-interest expense 49,405(1) 34,618 22,408 25,782 132,213
Income before taxes 1,869 32,952 20,628 18,631 74,080
Net income 799 21,318 13,493 12,300 47,910
Per Common Share
Basic earnings $ .01 $ .39 $ .25 $ .23 $ .88
Diluted earnings .01 .39 .24 .23 .87
Cash dividends declared .08 .08 .08 .08 .32
- -------------------------------------------------------------------------------------------------------------------
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 $ .21 $ .22 $ .21 $ .20 $ .84
Diluted earnings .20 .22 .21 .20 .83
Cash dividends declared .07 .07 .07 .08 .29
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Amounts for 2001 include a $12 million pre-tax gain on the sale of
subsidiary and $19 million pre-tax restructuring costs to exit the mortgage
servicing business. 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.
</FN>
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.
62
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 2002 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 2002 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 2002 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 2002 Proxy Statement is incorporated
herein by reference.
63
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, 2001 and 2000
Consolidated Statements of Income for the Years Ended December 31,
2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999
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 Republic
Bancorp Inc. (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 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)(d) First Amendment to Revolving Credit Agreement dated
as of December 29, 2001, between the Company and
Firstar Bank, National Association.*
(4)(e) Form of Indenture between the Company and Wilmington
Trust Company for the Company's 8.60% Subordinated
Debentures due 2031 (incorporated by reference to
Exhibit (4)(e) of the Company's registration
statement on Form S-3 filed with the Securities and
Exchange Commission on September 24, 2001
(registration no. 333-70062).
64
(4)(f) Form of the Company's 8.60% Subordinated Debenture
due 2031 (incorporated by reference to Exhibit (4)(f)
of the Company's registration statement on Form S-3
filed with the Securities and Exchange Commission on
September 24, 2001 (registration no. 333-70062)
(which Exhibit (4)(f) is included as an exhibit to
Exhibit (4)(e) of the Company's registration
statement on Form S-3 filed with the Securities and
Exchange Commission on September 24, 2001
(registration no. 333-70062)).
(4)(g) Certificate of Trust of Republic Capital Trust I, a
subsidiary of the Company (incorporated by reference
to Exhibit (4)(g) of the Company's registration
statement on Form S-3 filed with the Securities and
Exchange Commission on September 24, 2001
(registration no. 333-70062).
(4)(h) Trust Agreement of Republic Capital Trust I, a
subsidiary of the Company (incorporated by reference
to Exhibit (4)(h) of the Company's registration
statement on Form S-3 filed with the Securities and
Exchange Commission on September 24, 2001
(registration no. 333-70062).
(4)(i) Form of Amended and Restated Trust Agreement of
Republic Capital Trust I, a subsidiary of the Company
(incorporated by reference to Exhibit (4)(i) of the
Company's registration statement on Form S-3 filed
with the Securities and Exchange Commission on
September 24, 2001 (registration no. 333-70062).
(4)(j) Form of Trust Preferred Securities Certificate of
Republic Capital Trust I, a subsidiary of the Company
(incorporated by reference to Exhibit (4)(j) of the
Company's registration statement on Form S-3 filed
with the Securities and Exchange Commission on
September 24, 2001 (registration no. 333-70062)
(which Exhibit (4)(j) is included as an exhibit to
Exhibit (4)(i) of the Company's registration
statement on Form S-3 filed with the Securities and
Exchange Commission on September 24, 2001
(registration no. 333-70062)).
(4)(k) Form of Agreement as to Expenses and Liabilities
between the Company and Republic Capital Trust I, a
subsidiary of the Company (incorporated by reference
to Exhibit (4)(k) of the Company's registration
statement on Form S-3 filed with the Securities and
Exchange Commission on September 24, 2001
(registration no. 333-70062).
(4)(l) Form of Trust Preferred Securities Guarantee
Agreement between the Company and Wilmington Trust
Company (incorporated by reference to Exhibit (4)(l)
of the Company's registration statement on Form S-3
filed with the Securities and Exchange Commission on
September 24, 2001 (registration no. 333-70062).
(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)).
65
(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)).
(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 (incorporated by
reference to Exhibit 10 to the registrant's Form 10-K
filed with the Securities and Exchange Commission on
March 22, 2001 (file no. 000-15734)).
66
(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) Computations of ratios of earnings to fixed charges.*
(21) Subsidiaries of the Company. *
(23) Consent of independent auditors, Ernst & Young LLP.*
(24) Powers of Attorney.*
*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 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)).
67
(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 (incorporated by
reference to Exhibit 10 to the registrant's Form 10-K
filed with the Securities and Exchange Commission on
March 22, 2001 (file no. 000-15734)).
* Filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 2001.
68
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 2002.
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 2002.
Signature Title Date
--------- ----- ----
/s/ Dana M. Cluckey President and Chief Executive March 22, 2002
- ----------------------------- Officer
Dana M. Cluckey
/s/ Thomas F. Menacher Executive Vice President, March 22, 2002
- ----------------------------- Treasurer and Chief Financial
Thomas F. Menacher Officer (Principal Financial
Officer and Principal
Accounting Officer)
DIRECTORS *
Jerry D. Campbell Howard J. Hulsman Sam H. McGoun B. Thomas M. Smith Jr.
George J. Butvilas Gary Hurand Kelly E. Miller Jeoffrey K. Stross
Mary P. Cauley Dennis J. Ibold Joe D. Pentecost Peter Van Pelt
Richard J. Cramer Sr. Stanley A. Jacobson Randolph P. Piper Steven E. Zack
George A. Eastman John J. Lennon Isaac J. Powell
* By: /s/ Thomas F. Menacher
-------------------------------
Attorney in Fact
69
EXHIBIT INDEX
(4)(d) First Amendment to Revolving Credit Agreement dated as of December 29,
2001, between the Company and Firstar Bank, National Association.
(12) Computations of ratios of earnings to fixed charges.
(21) Subsidiaries of the Company.
(23) Consent of independent auditors, Ernst & Young LLP.
(24) Powers of Attorney.