SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2604669
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1070 EAST MAIN STREET, OWOSSO, MICHIGAN 48867
(Address of principal executive offices)
(517) 725-7337
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock Outstanding as of July 31, 2000:
Common Stock, $5 Par Value ......................... 45,068,000 Shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 ............................................................. 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2000 and 1999................................................ 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999................................................ 5
Notes to Consolidated Financial Statements......................................... 6 - 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition...................................... 10 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 23
Item 2. Changes in Securities.............................................................. 23
Item 6. Exhibits and Reports on Form 8-K................................................... 23
SIGNATURE............................................................................................ 24
EXHIBITS............................................................................................. 25
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ............................... $ 85,624 $ 83,761
Mortgage loans held for sale ............................ 461,960 459,059
Securities available for sale (amortized cost of
$194,243 and $210,385, respectively) ................. 189,763 206,459
Loans ................................................... 3,753,888 3,373,425
Less allowance for loan losses ....................... (28,370) (27,128)
----------- -----------
Net loans ............................................... 3,725,518 3,346,297
----------- -----------
Premises and equipment .................................. 34,940 40,025
Mortgage servicing rights ............................... 61,447 67,290
Other assets ............................................ 98,652 98,724
----------- -----------
Total assets ............................................ $ 4,657,904 $ 4,301,615
=========== ===========
LIABILITIES
Noninterest-bearing deposits ............................ $ 231,761 $ 206,990
Interest-bearing deposits ............................... 2,480,364 2,406,060
----------- -----------
Total deposits ..................................... 2,712,125 2,613,050
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings ...... 1,479 57,243
FHLB advances ........................................... 1,456,804 1,172,211
Accrued expenses and other liabilities .................. 131,058 115,356
Long-term debt .......................................... 47,500 47,500
----------- -----------
Total liabilities .................................. 4,348,966 4,005,360
Minority interest ....................................... 726 1,095
Preferred stock of subsidiary ........................... 28,719 28,719
SHAREHOLDERS' EQUITY
Preferred stock, $25 stated value: $2.25 cumulative
and convertible; 5,000,000 shares authorized,
none issued and outstanding .......................... -- --
Common stock, $5 par value, 75,000,000 shares
authorized; 45,068,000 and 45,285,745 shares
issued and outstanding, respectively ................. 225,339 226,429
Capital surplus ......................................... 37,908 39,163
Retained earnings ....................................... 19,150 3,401
Accumulated other comprehensive loss .................... (2,904) (2,552)
----------- -----------
Total shareholders' equity .............................. 279,493 266,441
----------- -----------
Total liabilities and shareholders' equity ......... $ 4,657,904 $ 4,301,615
=========== ===========
See notes to consolidated financial statements.
3
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans, including fees ............................. $ 83,601 $ 61,276 $ 160,081 $ 121,907
Investment securities ............................. 3,575 9,758 7,333 20,144
--------- --------- --------- ---------
Total interest income ...................... 87,176 71,034 167,414 142,051
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits .......................................... 29,139 26,635 56,958 54,088
Short-term borrowings ............................. 1,306 627 2,401 1,894
FHLB advances ..................................... 21,295 12,216 39,049 24,652
Long-term debt .................................... 858 947 1,717 1,924
--------- --------- --------- ---------
Total interest expense ..................... 52,598 40,425 100,125 82,558
--------- --------- --------- ---------
Net interest income ............................... 34,578 30,609 67,289 59,493
Provision for loan losses ......................... 1,600 6,575 3,200 8,100
--------- --------- --------- ---------
Net interest income after provision for loan losses 32,978 24,034 64,089 51,393
--------- --------- --------- ---------
NONINTEREST INCOME:
Service charges ................................... 1,897 1,805 3,676 3,509
Mortgage production and servicing revenue ......... 16,801 23,680 35,500 48,578
Gain (loss) on sale of securities ................. (10) (7,237) 97 (6,588)
Other noninterest income .......................... 1,123 1,156 2,036 2,252
--------- --------- --------- ---------
Total noninterest income ................... 19,811 19,404 41,309 47,751
--------- --------- --------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits .................... 17,801 21,636 37,623 43,239
Occupancy expense of premises ..................... 3,420 3,456 6,955 6,792
Equipment expense ................................. 2,254 1,662 4,507 3,445
Other noninterest expense ......................... 10,088 10,455 19,271 23,074
Merger integration and restructuring .............. -- 31,521 -- 31,521
--------- --------- --------- ---------
Total noninterest expense .................. 33,563 68,730 68,356 108,071
--------- --------- --------- ---------
Income (loss) before income taxes ................. 19,226 (25,292) 37,042 (8,927)
Provision (credit) for income taxes ............... 6,420 (7,464) 12,263 (1,935)
--------- --------- --------- ---------
Income (loss) before preferred stock dividends .... 12,806 (17,828) 24,779 (6,992)
Preferred stock dividends ......................... 680 680 1,361 1,361
--------- --------- --------- ---------
NET INCOME (LOSS) ................................. $ 12,126 $ (18,508) $ 23,418 $ (8,353)
========= ========= ========= =========
Basic earnings (loss) per share ................... $ .27 $ (.41) $ .52 $ (.19)
======== ========= ========= ========
Diluted earnings (loss) per share ................. $ .27 $ (.40) $ .52 $ (.18)
======== ========= ========= ========
Average common shares outstanding - diluted ....... 45,384 45,705 45,469 45,654
======== ========= ========= ========
Cash dividends declared per common share .......... $ .085 $ .082 $ .170 $ .164
======== ========= ========= =========
See notes to consolidated financial statements.
4
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30 (In thousands) 2000 1999
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 23,418 $ (8,353)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 4,525 5,761
Amortization of mortgage servicing rights ................... 3,778 7,943
Net (gain) loss on sale of securities available for sale .... (97) 6,588
Net gain on sale of mortgage servicing rights ............... (16,017) (21,843)
Net gain on sale of loans ................................... (415) (682)
Origination of mortgage loans held for sale ................. (2,002,094) (2,675,140)
Proceeds from sales of mortgage loans held for sale ......... 1,999,193 3,024,755
Net decrease (increase) in other assets ..................... 3,588 (6,595)
Net increase in other liabilities ........................... 15,332 8,089
Other, net .................................................. (2,644) 2,598
----------- -----------
Total adjustments ......................................... 5,149 351,474
----------- -----------
Net cash provided by operating activities ............. 28,567 343,121
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities available for sale .............. 19,114 192,791
Proceeds from maturities/payments of securities
available for sale............................................... 6,161 299,318
Purchases of securities available for sale ....................... (9,176) (165,590)
Proceeds from maturities/payments of securities
held to maturity ................................................. -- 11,149
Purchases of securities held to maturity ......................... -- (121,561)
Proceeds from sale of loans ...................................... 88,878 51,371
Net increase in loans made to customers .......................... (467,703) (387,325)
Proceeds from sale of fixed assets ............................... 1,673 82
Proceeds from sale of mortgage servicing rights .................. 38,664 42,224
Additions to mortgage servicing rights ........................... (21,754) (28,723)
----------- -----------
Net cash used in investing activities ................. (344,143) (106,264)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits .............................. 99,075 (85,469)
Net decrease in short-term borrowings ............................ (55,764) (73,488)
Net (decrease) increase in short-term FHLB advances .............. (48,309) 67,000
Proceeds from long-term FHLB advances ............................ 475,000 35,000
Payments on long-term FHLB advances .............................. (142,098) (171,660)
Payments on long-term debt ....................................... -- (525)
Net proceeds from issuance of common shares ...................... 1,699 4,184
Repurchase of common shares ...................................... (4,446) (1,598)
Dividends paid ................................................... (7,718) (4,510)
----------- -----------
Net cash provided by (used in) financing activities ... 317,439 (231,066)
----------- -----------
Net increase in cash and cash equivalents ........................ 1,863 5,791
Cash and cash equivalents at beginning of period ................. 83,761 47,712
----------- -----------
Cash and cash equivalents at end of period ....................... $ 85,624 $ 53,503
=========== ===========
See notes to consolidated financial statements.
5
REPUBLIC BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Republic Bancorp
Inc. and Subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes necessary
for a comprehensive presentation of financial position, results of operations
and cash flow activity required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all normal
recurring adjustments necessary for a fair presentation of results have been
included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
Certain amounts in prior periods have been reclassified to conform to the
current year's presentation. The primary reclassification from the prior year is
the deduction of mortgage loan commission expense against mortgage loan
production and servicing revenue.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the parent
company, Republic Bancorp Inc., and its wholly-owned banking subsidiaries,
Republic Bank (including its subsidiaries Republic Banc Mortgage Corporation and
Market Street Mortgage Corporation) and D&N Bank (including its wholly-owned
subsidiaries D&N Capital Corporation and Quincy Investment Services, Inc.).
Republic Banc Mortgage Corporation, including its division, Home Banc Mortgage
Corporation, is a wholly-owned mortgage company subsidiary and Market Street
Mortgage Corporation is an 80% majority-owned mortgage company subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 3 - MERGER INTEGRATION AND RESTRUCTURING CHARGE
In connection with the merger of D&N Financial Corporation on May 17, 1999, the
Company recorded $31.5 million ($22.0 million after tax) in merger integration
and restructuring charges in the second quarter of 1999. Actions incorporated in
the business combination and restructuring plan are targeted for implementation
over a 12 - 18 month period following the merger. The merger integration and
restructuring costs include appropriate accruals, reserves and charges for
severance and employee benefit accruals, professional fees, branch closings and
real estate transactions, systems and other charges.
Severance and employee benefit accruals consisted primarily of severance and
benefits costs for separated employees that resulted from the elimination of
duplicate functions such as finance, investor relations, human resources,
operations and marketing. The expected net reduction of approximately 200
full-time positions represents 14% of the combined workforce of Republic Bank
and D&N Bank. As of June 30, 2000, 147 positions had been eliminated under the
merger integration and restructuring plan. Professional fees represent
investment banking fees and accounting and legal fees associated with the merger
transaction. Branch closings and real estate transactions primarily represent
the costs associated with the closing of 7 offices and the divestiture of
identified banking facilities related to the consolidation of operations. The
Company also recorded write-downs of certain fixed assets in conjunction with
the merger. The impairment of these assets was included in the $8.7 million
charge for branch closings and real estate transactions. Systems charges include
the expenses expected from the integration of the two banking systems which is
expected to be completed in the fourth quarter of 2000. Other merger-related
costs include various transaction costs.
6
The following table provides details of the pre-tax merger integration and
restructuring charge by type of cost recorded in the second quarter of 1999 and
the reserve balance remaining at June 30, 2000:
- -----------------------------------------------------------------------------------------------
Initial Amount Reserve
(In thousands) Reserve Utilized Balance
- -----------------------------------------------------------------------------------------------
Type of Costs:
Severance and employee benefit accruals $10,446 $ 8,755 $ 1,691
Professional fees 5,133 5,123 10
Branch closings and real estate transactions 8,652 7,026 1,626
Systems 2,201 73 2,128
Other 5,089 5,089 --
------- ------- -------
Total merger integration and restructuring charge $31,521 $26,066 $ 5,455
======= ======= =======
- -----------------------------------------------------------------------------------------------
NOTE 4 - CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information for the six months ended June
30, include:
(In thousands) 2000 1999
---- ----
Cash paid during the period for:
Interest........................................................................... $ 99,206 $ 82,689
Income taxes....................................................................... $ 8,972 4,098
Non-cash investing activities:
Loan charge-offs................................................................... $ 2,615 $ 5,335
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share data) 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings (loss) per share:
Net income (loss) ................................... $ 12,126 $ (18,508) $ 23,418 $ (8,353)
Denominator for basic earnings per share--
weighted-average shares ............................. 45,062,374 45,122,304 45,139,301 45,010,591
Effect of dilutive securities:
Employee stock options ........................ 303,377 532,554 309,783 594,000
Warrants ...................................... 18,296 50,142 19,419 50,342
------------ ------------ ------------ -----------
Dilutive potential common shares ......... 321,673 582,696 329,202 644,342
------------ ------------ ------------ -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares for assumed conversions ..... 45,384,047 45,705,000 45,468,503 45,654,933
============ ============ ============ ===========
Basic earnings (loss) per share ..................... $ .27 $ (.41) $ .52 $ (.19)
============ ============ ============ ===========
Diluted earnings (loss) per share ................... $ .27 $ (.40) $ .52 $ (.18)
============ ============ ============ ===========
7
NOTE 6 - COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income:
- -------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------
Net income (loss) ..................................... $ 12,126 $(18,508) $ 23,418 $ (8,353)
Unrealized holding losses on securities, net of tax ... $ (190) $ (5,878) $ (415) $ (7,287)
Reclassification adjustment for (gains) losses included
in net income, net of tax ..................... 7 4,283 (63) 3,861
Net unrealized losses on securities, net of tax (183) (1,595) (352) (3,426)
-------- -------- -------- --------
Comprehensive income .................................. $ 11,943 $(20,103) $ 23,066 $ (4,927)
======== ======== ======== ========
NOTE 7 - SEGMENT INFORMATION
The Company's operations are managed as two major business segments: (1)
commercial and retail banking and (2) mortgage banking. The commercial and
retail banking segment consists of commercial lending to small- and medium-sized
companies, primarily in the form of commercial real estate and Small Business
Administration (SBA) loans; mortgage portfolio lending; home equity lending; and
the deposit-gathering function. The mortgage banking segment is comprised of
mortgage loan production and mortgage loan servicing.
The following table presents the financial results of each business segment for
the three months ended June 30, 2000 and 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL AND
RETAIL BANKING MORTGAGE BANKING CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED, THREE MONTHS ENDED, THREE MONTHS ENDED,
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(IN THOUSANDS) 2000 1999(1) 2000 1999(1) 2000 1999(1)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 77,443 $ 61,860 $ 9,733 $ 9,174 $ 87,176 $ 71,034
Interest expense 42,804 32,620 9,794 7,805 52,598 40,425
--------- --------- --------- --------- --------- ---------
Net interest income(2) 34,639 29,240 (61) 1,369 34,578 30,609
Provision for loan losses 1,600 1,575 - - 1,600 1,575
Noninterest income 3,010 3,276 16,801 23,681 19,811 26,957
Noninterest expense 16,868 15,180 16,695 22,029 33,563 37,209
--------- --------- --------- --------- --------- ---------
Income before taxes $ 19,181 $ 15,761 $ 45 $ 3,021 $ 19,226 $ 18,782
========= ========= ========= ========= ========= ========
Preferred stock dividend $ 680 $ 680 $ - $ - $ 680 $ 680
Income taxes $ 6,404 $ 5,334 $ 16 $ 1,077 $ 6,420 $ 6,411
Depreciation and amortization $ 1,218 $ 1,954 $ 2,967 $ 4,203 $ 4,185 $ 6,157
Capital expenditures $ 498 $ 532 $ 200 $ 1,449 $ 698 $ 1,981
Identifiable assets (in millions) $ 4,072 $ 3,430 $ 586 $ 548 $ 4,658 $ 3,978
Efficiency ratio 44.79% 46.68% 99.73% 92.15% 61.70% 71.33%
- -----------------------------------------------------------------------------------------------------------------------------------
8
NOTE 7 - SEGMENT INFORMATION (CONTINUED)
The following table presents the financial results of each business segment for
the six months ended June 30, 2000 and 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL AND
RETAIL BANKING MORTGAGE BANKING CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED, SIX MONTHS ENDED, SIX MONTHS ENDED,
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(IN THOUSANDS) 2000 1999(1) 2000 1999(1) 2000 1999(1)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 149,131 $ 122,519 $ 18,283 $ 19,532 $ 167,414 $ 142,051
Interest expense 82,536 65,763 17,589 16,795 100,125 82,558
--------- --------- --------- --------- --------- ---------
Net interest income(2) 66,595 56,756 694 2,737 67,289 59,493
Provision for loan losses 3,200 3,100 - - 3,200 3,100
Noninterest income 5,809 6,725 35,500 74,255 41,309 55,304
Noninterest expense 33,457 32,881 34,899 69,345 68,356 76,550
--------- --------- --------- --------- --------- ---------
Income before taxes $ 35,747 $ 27,500 $ 1,295 $ 7,647 $ 37,042 $ 35,147
========= ========= ========= ========= ========= =========
Preferred stock dividend $ 1,361 $ 1,361 $ - $ - $ 1,361 $ 1,361
Income taxes $ 11,810 $ 9,371 $ 453 $ 2,569 $ 12,263 $ 11,940
Depreciation and amortization $ 2,572 $ 4,019 $ 5,731 $ 9,685 $ 8,303 $ 13,704
Capital expenditures $ 690 $ 2,708 $ 3,197 $ 2,399 $ 3,887 $ 5,107
Identifiable assets (in millions) $ 4,072 $ 3,430 $ 586 $ 548 $ 4,658 $ 3,978
Efficiency ratio 46.27% 51.27% 96.42% 90.07% 63.00% 69.51%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Amounts for 1999 exclude $31.5 million of pre-tax merger integration and
restructuring charges related to the merger with D&N Financial Corporation in
the second quarter , a $7.6 million pre-tax loss on the sale of low-yielding
fixed rate securities, and an additional $5 million pre-tax provision for loan
losses.
(2) Net interest income for the mortgage banking segment is generated from the
interest earned on mortgage loans held for sale, less the interest expense
incurred to fund loan production and servicing acquisitions.
9
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
EARNINGS PERFORMANCE
The Company reported record net income for the second quarter of 2000 of $12.1
million, an increase of 4% over net operating income of $11.7 million for the
second quarter of 1999. Diluted earnings per share were $0.27 for the quarter,
up from $0.26 earned for the second quarter of 1999. Net income for the quarter
generated annualized returns of 1.08% on average assets and 17.55% on average
equity. These compare with returns of 1.18% on average assets and 17.56% on
average equity for the second quarter of 1999.
Net income for the six months ended June 30, 2000 was $23.4 million, a 7%
increase over net operating income of $21.8 million for the six months ended
June 30, 1999. For the six months period ended June 30, 2000, diluted earnings
per share were $0.52, an increase of 8% over the $0.48 earned in 1999.
Annualized returns on average assets and shareholders' equity for the first six
months of 2000 were 1.07% and 17.16%, respectively.
To better understand underlying trends and performance, net operating earnings
for 1999 exclude the impact of the one-time charges related to the Company's
merger with D&N Financial Corporation. In total, $44.1 million of charges were
recorded in the second quarter of 1999, consisting of $31.5 million in merger
and restructuring charges, a $7.6 million loss on the sale of low-yielding fixed
rate securities, and an additional $5.0 million provision for loan losses.
Including these charges, the Company reported a net loss for the second quarter
of 1999 of $18.5 million and a net loss of $8.4 million for the six months ended
June 30, 1999.
RESULTS OF OPERATIONS
MORTGAGE BANKING
The following discussion provides information that relates specifically to the
Company's mortgage banking line of business, which generates revenue from
mortgage loan production and mortgage loan servicing activities. Mortgage
banking revenue represents the largest component of the Company's total
noninterest income.
The Company closed $1.15 billion in single-family residential mortgage loans in
the second quarter of 2000, compared to $1.51 billion closed in the same period
last year. During the first half of 2000, mortgage loan closings were $2.00
billion, compared to $2.89 billion for the comparable period in 1999. Mortgage
loan volumes during the first half of 2000 decreased due to a rising interest
rate environment which has resulted in a lower level of refinance activity.
Refinancings for the second quarter of 2000 represented approximately 10% of
total closings compared to 20% in the second quarter of 1999. During the first
half of 2000, refinancings represented approximately 11% of total closings
compared to 22% for the first half of 1999.
The following table summarizes the Company's income from mortgage banking
activities:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage loan production revenue (1)...................... $ 14,016 $ 22,908 $ 28,738 $ 47,430
Net mortgage loan servicing revenue (2)................... 1,667 772 4,544 1,148
Gain on sale of bulk servicing............................ 1,118 - 2,218 -
-------- -------- -------- --------
Total mortgage banking revenue...................... $ 16,801 $ 23,680 $ 35,500 $ 48,578
======== ======== ======== ========
(1) Includes fee revenue derived from the loan origination process (i.e.,
points collected), gains on the sale of mortgage loans and gains on the
sale of mortgage servicing rights released concurrently with the underlying
loans sold, net of commissions paid to loan originators.
(2) Includes servicing fees, late fees and other ancillary charges, net of
amortization and charges for impairment of mortgage servicing rights, if
any.
10
For the three months ended June 30, 2000, mortgage banking revenue decreased
$6.9 million, or 29%, to $16.8 million from $23.7 million a year earlier. For
the six months ended June 30, 2000, mortgage banking revenue decreased $13.1
million, or 27%, compared to the same period a year ago. These decreases are
primarily the result of decreases in mortgage loan production revenue of 39% for
the three and six months ended June 30, 2000 compared to 1999 primarily
reflecting the decrease in mortgage loan closing volume discussed above. The
decrease in mortgage loan production revenue was also due to a higher demand for
adjustable rate mortgage loans which yield a lower margin than fixed rate
mortgage loans when sold in the secondary market. The decreases in mortgage loan
production revenue were partially offset by increases in net mortgage loan
servicing revenue and gain on sale of bulk servicing.
Net mortgage loan servicing revenue was $1.7 million for the quarter ended June
30, 2000 compared to $772,000 for the quarter ended June 30, 1999. Net mortgage
loan servicing revenue for the six months ended June 30, 2000 was $4.5 million
compared to $1.1 million in 1999. These increases are primarily the result of
decreases in amortization expense of mortgage servicing rights. The increase in
net mortgage loan servicing revenue was offset by a decrease in the average
loans serviced. Loans serviced for others averaged $2.7 billion for the second
quarter of 2000 compared to $3.6 billion for 1999. For the six months ended June
30, 2000 and 1999, loans serviced for others averaged $2.9 billion and $3.7
billion, respectively.
Amortization of mortgage servicing rights totaled $2.0 million for the second
quarter of 2000 compared to $3.5 million for the same quarter last year. For the
six months ended June 30, 2000, amortization of mortgage servicing rights
totaled $3.8 million compared to $7.9 million for the same period in 1999. The
decreases in amortization expense were the result of a decline in residential
mortgage loan refinance activity during 2000 and corresponding declines in
mortgage prepayments compared to 1999.
The Company evaluates its mortgage servicing rights for impairment on a
quarterly basis and as of June 30, 2000 had $2.0 million recorded in impairment
reserves, a decrease of $360,000 from December 31, 1999. The impairment reserves
were reduced as a result of the bulk sales of mortgage servicing rights during
the first half of 2000.
The Company may elect to sell mortgage servicing rights concurrently with the
sale of the underlying loans or retain the servicing rights. Any servicing
rights retained may subsequently be sold in bulk form. The level of bulk
servicing sales is dependent upon the Company's strategy to either build or
reduce the servicing portfolio and is further based upon current market
conditions. In the first six months of 2000, bulk sales of mortgage servicing
rights for loans with principal balances of $657 million resulted in a gain of
$2.2 million. The Company did not have any bulk sales of mortgage servicing
rights in the first half of 1999.
COMMERCIAL AND RETAIL BANKING
The remaining disclosures and analyses within Management's Discussion and
Analysis regarding the Company's results of operations and financial condition
relate principally to the commercial and retail banking line of business.
Net Interest Income
The following discussion should be read in conjunction with Tables I and II on
the following pages, which provide detailed analyses of the components impacting
net interest income for the three and six months ended June 30, 2000 and 1999.
11
Net interest income, on a fully taxable equivalent (FTE) basis, was $34.6
million for the second quarter of 2000, an increase of $4.0 million, or 13%,
over the second quarter of 1999. This increase was primarily the result of a
$1.0 billion, or 38%, increase in average portfolio loans during the second
quarter of 2000 compared to 1999, which reflects a $291.6 million, or 42%
increase in average commercial loans, a $610.4 million, or 46% increase in
residential mortgage loans, and a $109.6 million, or 17% increase in installment
loans. Primarily funding the growth in portfolio loans was a reduction in the
average balance of investment securities and mortgage loans held for sale, as
well as an increase in short-term borrowings and FHLB advances. In order to
reduce interest rate risk and improve future net interest income, the Company
sold $400 million of low-yielding fixed rate investment securities in the second
and third quarters of 1999. The proceeds from the sale were redeployed into
higher yielding commercial and residential mortgage loans.
The net interest margin (FTE) was 3.20% for the quarter ended June 30, 2000, a
decrease of 5 basis points from 3.25% in 1999. The decrease in the margin was
due to an increase in the Company's cost of funds during the second quarter of
2000, which was partially offset by an improved mix of earning assets from
low-yielding fixed rate investment securities toward higher-yielding loan
products.
For the six months ended June 30, 2000, net interest income (FTE) was $67.3
million, an increase of $7.8 million, or 13%, over the first half of 1999. The
net interest margin (FTE) for the six months ended June 30, 2000, rose 7 basis
points to 3.20% from 3.13% for the comparable period in 1999. The increase in
the net interest margin was due to the improved mix of earning assets, which was
partially offset by an increase in the Company's cost of funds during the first
half of 2000.
12
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ASSETS:
Short-term investments............................ $ 1,416 $ 19 5.38% $ 31,447 $ 433 5.52%
Mortgage loans held for sale ...................... 451,993 9,481 8.41 508,324 9,126 7.20
Investment securities ............................. 194,703 3,575 7.34 570,569 9,344 6.55
Portfolio loans(1):
Commercial loans ............................... 981,904 22,135 9.04 690,350 14,750 8.57
Real estate mortgage loans ..................... 1,930,898 35,366 7.33 1,320,515 23,520 7.12
Installment loans .............................. 755,995 16,619 8.82 646,426 13,879 8.61
----------- ----------- ---- ----------- ----------- ----
Total loans, net of unearned income .......... 3,668,797 74,120 8.09 2,657,291 52,149 7.86
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets ................ 4,316,909 87,194 8.09 3,767,631 71,052 7.55
Allowance for loan losses ......................... (28,212) (22,480)
Cash and due from banks ........................... 61,604 44,622
Other assets ...................................... 147,027 167,721
----------- -----------
Total assets ................................. $ 4,497,328 $ 3,957,494
=========== ===========
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand deposits .................. $ 111,160 430 1.55 $ 95,539 398 1.67
Savings deposits .................................. 722,004 5,496 3.05 795,055 5,730 2.89
Time deposits ..................................... 1,579,652 23,213 5.89 1,532,098 20,507 5.37
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing deposits ................ 2,412,816 29,139 4.84 2,422,692 26,635 4.41
Short-term borrowings ............................. 81,286 1,306 6.44 44,404 627 5.66
FHLB advances ..................................... 1,384,549 21,295 6.17 862,387 12,216 5.68
Long-term debt .................................... 47,500 858 7.23 53,583 947 7.07
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing liabilities ........... 3,926,151 52,598 5.37 3,383,066 40,425 4.79
----------- ---- ----------- ----
Noninterest-bearing deposits ...................... 200,461 163,524
Other liabilities ................................. 65,681 115,881
----------- -----------
Total liabilities ............................ 4,192,293 3,662,471
Preferred stock of subsidiary ..................... 28,719 28,719
Shareholders' equity .............................. 276,316 266,304
----------- -----------
Total liabilities and shareholders' equity ... $ 4,497,328 $ 3,957,494
=========== ===========
Net interest income/rate spread (FTE) ............. $ 34,596 2.72% $ 30,627 2.76%
=========== ==== =========== ====
Net interest margin (FTE) ......................... 3.20% 3.25%
==== ====
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
-------------------------------------------------------------------------------------------------
Short-term investments .................. $ (403) $ (11) $ (414)
Mortgage loans held for sale ............ (1,082) 1,436 354
Investment securities ................... (6,781) 1,012 (5,769)
Portfolio loans(1):
Commercial loans ..................... 6,536 849 7,385
Real estate mortgage loans ........... 11,136 710 11,846
Installment loans .................... 2,396 344 2,740
-------- -------- --------
Total loans, net of unearned income 20,068 1,903 21,971
-------- -------- --------
Total interest income .............. 11,802 4,340 16,142
Interest-bearing demand deposits ........ 62 (30) 32
Savings deposits ........................ (543) 309 (234)
Time deposits ........................... 656 2,050 2,706
-------- -------- --------
Total interest-bearing deposits ....... 175 2,329 2,504
Short-term borrowings ................... 582 97 679
FHLB advances ........................... 7,947 1,132 9,079
Long-term debt .......................... (110) 21 (89)
-------- -------- --------
Total interest expense ............. 8,594 3,579 12,173
-------- -------- --------
Net interest income ................ $ 3,208 $ 761 $ 3,969
======== ======== ========
(1) Non-accrual loans and overdrafts are included in average balances.
(2) Rate/volume variances are proportionately allocated to rate and volume based
on the absolute value of the change in each.
13
Table II - Year-to-Date Net Interest Income and Rate/Volume Analysis (FTE)
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ASSETS:
Short-term investments............................ $ 2,030 $ 54 5.33% $ 28,483 $ 604 4.28%
Mortgage loans held for sale...................... 442,391 18,175 8.24 555,858 19,553 7.09
Investment securities............................. 202,739 7,315 7.22 612,235 19,576 6.39
Portfolio loans(1):
Commercial loans............................... 949,915 42,139 8.90 669,071 28,593 8.62
Real estate mortgage loans..................... 1,862,255 67,437 7.24 1,300,162 46,791 7.20
Installment loans.............................. 742,841 32,330 8.73 633,180 26,970 8.59
---------- -------- ---- ---------- ------- ----
Total loans, net of unearned income.......... 3,555,011 141,906 7.99 2,602,413 102,354 7.90
---------- -------- ---- ---------- ------- ----
Total interest-earning assets................ 4,202,171 167,450 7.98 3,798,989 142,087 7.51
Allowance for loan losses......................... (27,942) (22,152)
Cash and due from banks........................... 61,095 37,618
Other assets...................................... 161,984 244,538
---------- ----------
Total assets................................. $4,397,308 $4,058,993
========== ==========
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand deposits.................. $ 110,321 872 1.59 $ 99,578 887 1.80
Savings deposits.................................. 716,537 10,819 3.03 790,948 11,471 2.92
Time deposits..................................... 1,581,071 45,267 5.74 1,545,400 41,730 5.45
---------- -------- ---- ---------- ------- ----
Total interest-bearing deposits................ 2,407,929 56,958 4.74 2,435,926 54,088 4.48
Short-term borrowings............................. 78,079 2,401 6.17 71,030 1,894 5.37
FHLB advances.................................... 1,299,107 39,049 6.03 873,688 24,652 5.69
Long-term debt.................................... 47,500 1,717 7.23 55,302 1,924 6.96
---------- -------- ---- ---------- ------- ----
Total interest-bearing liabilities........... 3,832,615 100,125 5.24 3,435,946 82,558 4.84
-------- ---- ------- ----
Noninterest-bearing deposits...................... 192,535 176,034
Other liabilities................................. 70,426 150,060
---------- ----------
Total liabilities............................ 4,095,576 3,762,040
Preferred stock of subsidiary..................... 28,719 28,719
Shareholders' equity.............................. 273,013 268,234
---------- ----------
Total liabilities and shareholders' equity... $4,397,308 $4,058,993
========== ==========
Net interest income/Rate spread (FTE)............. $ 67,325 2.74% $59,529 2.67%
======== ==== ======= ====
Net interest margin............................... 3.20% 3.13%
==== ====
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
-------------------------------------------------------------------------------------------------------
Short-term investments .................. $ (672) $ 122 $ (550)
Mortgage loans held for sale ............ (4,330) 2,952 (1,378)
Investment securities ................... (14,522) 2,261 (12,261)
Portfolio loans(1):
Commercial loans ..................... 12,573 973 13,546
Real estate mortgage loans ........... 20,384 262 20,646
Installment loans .................... 4,899 461 5,360
-------- -------- --------
Total loans, net of
unearned income................... 37,856 1,696 39,552
-------- -------- --------
Total interest income .............. 18,332 7,031 25,363
Interest-bearing demand deposits ........ 94 (109) (15)
Savings deposits ........................ (1,087) 435 (652)
Time deposits ........................... 1,070 2,467 3,537
-------- -------- --------
Total interest-bearing deposits ....... 77 2,793 2,870
Short-term borrowings ................... 203 304 507
FHLB advances ........................... 12,824 1,573 14,397
Long-term debt .......................... (340) 133 (207)
-------- -------- --------
Total interest expense ............. 12,764 (4,803) 17,567
-------- -------- --------
Net interest income ................ $ 5,568 $ 2,228 $ 7,796
======== ======== ========
(1) Non-accrual loans and overdrafts are included in average balances.
(2) Rate/volume variances are proportionately allocated to rate and volume based
on the absolute value of the change in each.
14
Noninterest Expense
For the quarter ended June 30, 2000, total noninterest expense decreased $3.6
million, or 10%, to $33.6 million compared to $37.2 million for the second
quarter of 1999, which excludes the one-time merger integration and
restructuring charge of $31.5 million related to the merger with D&N Financial
Corporation. For the six months ended June 30, 2000, total noninterest expense
decreased $8.2 million, or 11%, to $68.4 million from $76.6 million in 1999,
excluding the merger and restructuring charge. These decreases are primarily the
result of decreases in salaries and employee benefits and other noninterest
expense, reflecting cost savings associated with the integration of D&N Bank,
and the reduced level of mortgage loan production and the decrease of 26
mortgage loan production offices at June 30, 2000 compared to a year ago.
BALANCE SHEET ANALYSIS
ASSETS
At June 30, 2000, the Company had $4.7 billion in total assets, an increase of
$356.3 million, or 8%, from $4.3 billion at December 31, 1999. The increase is
primarily the result of increases in the Company's portfolio of commercial and
residential real estate mortgage loans.
Securities
Investment securities available for sale decreased $16.7 million, to $189.8
million, representing 4.1% of total assets at June 30, 2000. At December 31,
1999, the investment securities portfolio totaled $206.5 million, or 4.8% of
total assets. During the first half of 2000, the company `sold $11.2 million of
investment securities and realized gross gains and losses on the sales of
available for sale securities of $111,000 and $14,000, respectively.
The Company's investment securities portfolio, while serving as a source of
earnings and liquidity risk, carries relatively minimal principal risk and
contributes to the management of interest rate risk. The portfolio is comprised
primarily of U.S. Government agency obligations, obligations collateralized by
U.S. Government sponsored agencies, mainly in the form of mortgage-backed
securities, and collateralized mortgage obligations. The maturity structure of
the securities portfolio is generally short-term in nature or indexed to
variable rates. The Company's equity securities portfolio consists primarily of
Federal Home Loan Bank stock.
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at June 30, 2000:
Securities Available for Sale
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury and Government agency securities............. $ 34,423 $ - $ 1,139 $ 33,284
Collateralized mortgage obligations........................ 63,739 - 2,641 61,098
Interest-only certificates................................. 71 - - 71
Mortgage-backed securities................................. 16,118 - 716 15,402
Municipal and other securities............................. 3,160 23 7 3,176
----------- ----------- ----------- ------------
Total debt securities.................................... 117,511 23 4,503 113,031
Equity securities and investment in FHLB...................... 76,732 - - 76,732
----------- ----------- ----------- ------------
Total securities available for sale........................ $ 194,243 $ 23 $ 4,503 $ 189,763
=========== =========== =========== ============
Certain securities having a carrying value of approximately $109.9 million and
$25.3 million at June 30, 2000 and December 31, 1999, respectively, were pledged
to secure FHLB advances and public deposits as required by law.
15
Mortgage Loans Held for Sale
Mortgage loans held for sale were $462.0 million at June 30, 2000 compared to
$459.1 million at December 31, 1999. This increase was caused by an increase in
residential mortgage loan closings during the second quarter of 2000 over the
fourth quarter of 1999 (loans closed generally remain in loans held for sale for
30 to 60 days after closing).
Portfolio Loans
Total portfolio loans were $3.75 billion at June 30, 2000, an increase of $380.5
million, or 11%, from $3.37 billion at December 31, 1999. This increase resulted
from increases in the commercial, residential real estate mortgage and
installment loan portfolios. The residential mortgage portfolio loan balance
increased $189.7 million, or 11%, since year-end 1999 to $1.96 billion at June
30, 2000. The increase in residential mortgage loans resulted from the Company
holding a higher percentage of variable rate residential loan closings in its
portfolio.
The commercial portfolio loan balance increased $150.2 million during the first
six months of 2000, for an annualized growth rate of 34%, reflecting continued
strong demand for real estate-secured lending in markets served by the Company.
During the second quarter of 2000, the Company closed $11.2 million in Small
Business Administration (SBA) loans compared to $12.9 million closed in the
second quarter of 1999. For the first six months of 2000 and 1999, SBA loan
closings were $19.0 million and $18.8 million, respectively. The Company sold
$8.9 million and $4.6 million of the guaranteed portion of SBA loans in the
first six months of 2000 and 1999, respectively, resulting in corresponding
gains of $337,000 and $348,000, respectively.
The following table provides further information regarding the Company's loan
portfolio:
June 30, 2000 December 31, 1999
----------------------------- ---------------------------
(Dollars in thousands) Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and industrial......................... $ 85,246 2.3% $ 88,370 2.6%
Commercial real estate mortgage .................. 953,459 25.4 800,122 23.7
----------- ------ ---------- -----
Total commercial loans........................ 1,038,705 27.7 888,492 26.3
Residential real estate mortgages.................... 1,963,514 52.3 1,773,795 52.6
Installment loans.................................... 751,669 20.0 711,138 21.1
----------- ------ ---------- -----
Total portfolio loans......................... $ 3,753,888 100.0% $3,373,425 100.0%
=========== ====== ========== =====
Credit Quality
The Company attempts to minimize credit risk in the loan portfolio by focusing
primarily on real estate-secured lending (i.e., residential real estate
construction loans, residential real estate mortgage loans, commercial real
estate construction loans, commercial real estate mortgage loans, and home
equity loans). As of June 30, 2000, such loans comprised approximately 85% of
total portfolio loans. The Company's general policy is to originate conventional
residential real estate mortgages with loan-to-value ratios of 80% or less and
SBA-secured loans or real estate-secured commercial loans with loan-to-value
ratios of 75% or less.
The substantial majority of the Company's residential mortgage loan production
is underwritten in compliance with the requirements for sale to or conversion to
mortgage-backed securities issued by Freddie Mac, the Federal National Mortgage
Association (FNMA), or the Government National Mortgage Association (GNMA). The
majority of the Company's commercial loans is secured by real estate and is
generally made to small and medium-size businesses. These loans are made at
rates based on the prevailing prime interest rates of Republic Bank and D&N
Bank, as well as fixed rates for terms generally ranging from three to five
years. Management's
16
emphasis on real estate-secured lending and adherence to conservative
underwriting standards is reflected in the Company's historically low net
charge-offs.
Non-Performing Assets
Non-performing assets consist of non-accrual loans and other real estate owned
(OREO). OREO represents real estate properties acquired through foreclosure or
by deed in lieu of foreclosure. Commercial loans, residential real estate
mortgage loans and installment loans are generally placed on non-accrual status
when principal or interest is 90 days or more past due, unless the loans are
well-secured and in the process of collection. In all cases, loans may be placed
on non-accrual status earlier when, in the opinion of management, reasonable
doubt exists as to the full, timely collection of interest or principal.
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
June 30, December 31,
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans:
Commercial ........................................... $ 9,773 $ 4,651
Residential real estate mortgages .................... 12,944 10,449
Installment ............................................ 1,965 2,419
------- -------
Total non-performing loans ......................... 24,682 17,519
Other real estate owned ................................ 4,132 4,743
------- -------
Total non-performing assets ........................ $28,814 $22,262
======= =======
Non-performing assets as a percentage of:
Portfolio loans and OREO ............................. .77% .66%
Portfolio loans, mortgage loans held for
sale and OREO .................................. .68% .58%
Total assets ......................................... .62% .52%
Loans past due 90 days or more and still accruing interest:
Commercial ............................................. $ -- $ 100
Residential real estate ................................ -- --
Installment ............................................ -- --
------- -------
Total loans past due 90 days or more ............... $ -- $ 100
======= =======
At June 30, 2000, approximately $28.6 million, or .76% of total portfolio loans
were 30-89 days delinquent, compared to $34.5 million, or 1.02%, at December 31,
1999.
Provision and Allowance for Loan Losses
The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the loan portfolio that have been
incurred as of the balance sheet date. The allowance for loan losses is
maintained at an adequate level through additions to the provision for loan
losses. An appropriate level of the general allowance is determined based on the
application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. Management also considers other factors when
determining the unallocated allowance, including loan quality, changes in the
size and character of the loan portfolio, consultation with regulatory
authorities, amount of nonperforming loans, delinquency trends and economic
conditions and industry trends.
17
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by
SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the contractual
terms of the original loan agreement. Consistent with this definition, all
non-accrual and restructured loans (with the exception of residential mortgage
and consumer installment loans) are impaired. An impaired loan for which it is
deemed necessary to record a specific allowance is, typically, written down to
the fair value of the underlying collateral at the time it is placed in
non-accrual status via a direct charge-off against the allowance for loan
losses. Consequently, those impaired loans not requiring a specific allowance
represent loans for which the fair value of the underlying collateral equaled or
exceeded the recorded investment in the loan. All impaired loans were evaluated
using the fair value of the underlying collateral as the measurement method.
It must be understood, however, that inherent risks and uncertainties related to
the operation of a financial institution require management to depend on
estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial prospects
of borrowers may result in abrupt changes to the estimates, appraisals or
evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Gross loan charge-offs decreased $2.7 million to $2.6 million for the six months
ended June 30, 2000 compared to $5.3 million for the same period of 1999. The
decrease is primarily related to charge-offs of certain commercial loans during
the second quarter of 1999. The Company recorded provision for loan losses of
$3.2 million for the six months ended June 30, 2000 compared to $8.1 million for
1999, reflecting an increase in the provision for loan losses recorded in the
second quarter of 1999 as a result the increase in charge-offs.
The following table provides an analysis of the allowance for loan losses:
Six Months Ended
June 30,
------------------------------
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at January 1 ............................................. $ 27,128 $ 21,446
Loans charged off ............................................. (2,615) (5,335)
Recoveries of loans previously charged off .................... 657 278
-------- --------
Net charge-offs ............................................. (1,958) (5,057)
Provision charged to expense .................................. 3,200 8,100
-------- --------
Balance at June 30 ............................................... $ 28,370 $ 24,489
======== ========
Annualized net charge-offs as a percentage of average loans
(including loans held for sale) ............................. .10% .32%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end ................................... .76 .85
Allowance for loan losses as a percentage of non-performing
loans ....................................................... 114.94 163.01
18
Off-Balance Sheet Instruments
At June 30, 2000, the Company had outstanding $276.5 million of commitments to
fund residential real estate loan applications with agreed-upon rates.
Committing to fund residential real estate loan applications at specified rates
and holding residential mortgage loans for sale to the secondary market exposes
the Company to interest rate risk during the period from application to when the
loan is sold to the investors. To minimize this exposure to interest rate risk,
the Company enters into firm commitments to sell such mortgage loans at
specified future dates to various third parties.
At June 30, 2000, the Company had outstanding mandatory forward commitments to
sell $635.0 million of residential mortgage loans, of which $398.6 million
covered mortgage loans held for sale and $236.4 million covered commitments to
fund residential real estate loan applications with agreed-upon rates. These
outstanding forward commitments to sell mortgage loans are expected to settle in
the third quarter of 2000 without producing any material gains or losses. At
June 30, 2000, the mortgage loans held for sale balance included $63.4 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 $47.6 million, or 75%, of these loans were loans that
had been committed for bulk sale to third parties prior to June 30, 2000 or were
floating rate residential loans.
LIABILITIES.
Total liabilities were $4.3 billion at June 30, 2000, a $344 million, or 9%
increase from $4.0 billion at December 31, 1999. This increase was primarily due
to an increase in deposits and FHLB advances corresponding to the increase in
total loans.
Deposits
Total deposits increased $99.1 million, or 4%, to $2.71 billion at June 30, 2000
from $2.61 billion at December 31, 1999 as the Company successfully initiated
several new deposit products.
Short-Term Borrowings
Short-term borrowings with maturities of less than one year, along with the
related average balances and interest rates for the six months ended June 30,
2000 and the year ended December 31, 1999, were as follows:
June 30, 2000 December 31, 1999
----------------------------------------- ---------------------------------------------------
Average Average
Ending Average Rate During Ending Average Rate During
(Dollars in thousands) Balance Balance Period Balance Balance Period
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased ...... $ -- $76,503 6.20% $54,700 $61,320 5.41%
Other short-term borrowings .. 1,479 1,576 5.70 2,543 1,838 5.06
------- ------- ---- ------- ------- ----
Total short-term borrowings $ 1,479 $78,079 6.17% $57,243 $63,158 5.40%
======= ======= ==== ======= ======= ====
At June 30, 2000 and December 31, 1999, other short-term borrowings consisted of
treasury, tax and loan (TT&L) demand notes.
FHLB Advances
Republic Bank and D&N Bank routinely borrow short- and long-term advances from
the Federal Home Loan Bank (FHLB) to provide liquidity for mortgage loan
originations and to minimize the interest rate risk associated with certain
fixed rate commercial and residential mortgage portfolio loans. These advances
are generally secured under a blanket security agreement by first mortgage loans
with an aggregate book value equal to at least 150% of the advances.
19
FHLB advances outstanding at June 30, 2000 and December 31, 1999, were as
follows:
June 30, 2000 December 31, 1999
------------------------ -----------------------------
Average Average
Ending Rate At Ending Rate At
(Dollars in thousands) Balance Period-End Balance Period-End
- ---------------------------------------------------------------------------------------------------------------------------------
Short-term FHLB advances............................ $ 708,691 6.90% $ 757,000 5.52%
Long-term FHLB advances.............................. 748,113 5.87 415,211 5.69
---------- ---- ---------- ----
Total........................................... $1,456,804 6.37% $1,172,211 5.58%
========== ==== ========== ====
The long-term FHLB advances have original maturities ranging from August 2000 to
June 2010.
Long-Term Debt
Obligations with original maturities of more than one year consisted of the
following:
June 30, December 31,
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
7.17% Senior Debentures due 2001................................................ $ 25,000 $ 25,000
6.75% Senior Debentures due 2001................................................ 9,000 9,000
6.95% Senior Debentures due 2003................................................ 13,500 13,500
-------- --------
Total long-term debt $ 47,500 $ 47,500
======== ========
CAPITAL
Shareholders' equity was $279.5 million at June 30, 2000, a $13.1 million, or
5%, increase from $266.4 million at December 31, 1999. This increase primarily
resulted from the retention of $11.3 million in earnings after the payment of
dividends and the repurchase of 512,000 shares of common stock during the first
six months of 2000.
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by regulators that, if undertaken, could have an effect on the
Company's financial statements. Capital adequacy guidelines require minimum
capital ratios of 8.00% for Total risk-based capital, 4.00% for Tier 1
risk-based capital and 3.00% for Tier 1 leverage. To be considered
well-capitalized under the regulatory framework for prompt corrective action,
minimum capital ratios of 10.00% for Total risk-based capital, 6.00% for Tier 1
risk-based capital and 5.00% for Tier 1 leverage must be maintained.
As of June 30, 2000, the Company met all capital adequacy requirements to which
it is subject and management does not anticipate any difficulty in meeting these
requirements on an ongoing basis. The Company's capital ratios were as follows:
June 30, December 31,
2000 1999
------------- -------------
Total capital to risk-weighted assets (1).............................. 10.01% 10.60%
Tier 1 capital to risk-weighted assets (1)............................. 9.13 9.67
Tier 1 capital to average assets (1)................................... 6.56 6.59
(1) As defined by the regulations.
As of June 30, 2000, the Company's total risk-based capital was $322.4 million
and Tier 1 risk-based capital was $294.1 million, an excess of $333,000 and
$100.8 million, respectively, over the minimum guidelines prescribed by
regulatory agencies for a well-capitalized institution. In addition, Republic
Bank and D&N Bank had regulatory capital ratios in excess of the minimum levels
established for well-capitalized institutions.
20
Forward-Looking Statements
The section that follows entitled "Market Risk Management" contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve certain
risks, uncertainties, estimates and assumptions by management, which may cause
actual results to differ materially from those contemplated by such statements.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, foreign exchange
rates and equity prices. The Company's market risk exposure is composed entirely
of interest rate risk. Interest rate risk arises in the normal course of
business to the extent that there is a difference between the amount of the
Company's interest-earning assets and interest-bearing liabilities that are
prepaid/withdrawn, reprice or mature in specified periods.
The primary objective of asset and liability management is to maintain stability
in the level of net interest income by producing the optimal yield and maturity
mix of assets and liabilities within the interest rate risk limits set by the
Company's Asset and Liability Management Committee (ALCO) and consistent with
projected liquidity needs and capital adequacy requirements.
The Company's ALCO, which meets weekly, is responsible for reviewing the
interest rate sensitivity position of the Company and establishing policies to
monitor and limit exposure to interest rate risk. Senior management at each of
the Company's subsidiaries is responsible for ensuring that the subsidiary asset
and liability management procedures adhere to corporate policies and risk limits
established by its respective board of directors.
The Company utilizes two complementary quantitative tools to measure and monitor
interest rate risk: static gap analysis and earnings simulation modeling. Each
of these interest rate risk measurements has limitations, but when evaluated
together, they provide a reasonably comprehensive view of the exposure the
Company has to interest rate risk.
Static Gap Analysis: Static gap analysis is utilized at the end of each month to
measure the amount of interest rate risk embedded in the balance sheet as of a
point in time. It does this by comparing the differences in the repricing
characteristics of interest-earning assets and interest-bearing liabilities. A
gap is defined as the difference between the principal amount of
interest-earning assets and interest-bearing liabilities that reprice within a
specified time period. This gap provides a general indication of the sensitivity
of the Company's net interest income to interest rate changes. Consequently, if
more assets than liabilities reprice or mature in a given period, resulting in
an asset sensitive position or positive gap, increases in market interest rates
will generally benefit net interest income because earning asset rates will
reflect the changes more quickly. Alternatively, where interest-bearing
liabilities reprice more quickly than interest-earning assets, resulting in a
liability sensitive position or negative gap, increases in market interest rates
will generally have an adverse impact on net interest income. At June 30, 2000,
the Company's cumulative one-year gap was a negative 12.11% of total earning
assets.
The Company's current policy is to maintain a mix of asset and liabilities with
repricing and maturity characteristics that permit a moderate amount of
short-term interest rate risk based on current interest rate projections,
customer credit demands and deposit preferences. The Company generally operates
in a range of plus or minus 15% of total earning assets for the cumulative
one-year gap. Management believes that this range reduces the vulnerability of
net interest income to large shifts in market interest rates while allowing the
Company to take advantage of fluctuations in current short-term rates.
21
Earnings Simulation Modeling: On a quarterly basis, the earnings simulation
model is used to quantify the effects of various hypothetical changes in
interest rates on the Company's projected net interest income over the ensuing
twelve-month period. The model permits management to evaluate the effects of
various parallel shifts of the U.S. Treasury yield curve, upward and downward,
on net interest income expected in a stable interest rate environment (i.e.,
base net interest income).
As of June 30, 2000, the earnings simulation model projects net interest income
would decrease by 9.6% of base net interest income, assuming an immediate
parallel shift upward in market interest rates by 200 basis points. If market
interest rates fall by 200 basis points, the model projects net interest income
would increase by 8.5%. These projected levels are well within the Company's
policy limits. These results portray the Company's interest rate risk position
as liability-sensitive for the one-year horizon. The earnings simulation model
assumes that current balance sheet totals remain constant and all maturities and
prepayments of interest-earning assets and interest-bearing liabilities are
reinvested at current market rates.
Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which was amended
in June 1999 by Statement No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
and is required to be adopted by the Company in years beginning after June 15,
2000. The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement 133 will be on
the earnings and financial position of the Company.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and its
subsidiaries are parties to certain routine litigation. In the
opinion of management, the aggregate liabilities, if any, arising
from such legal proceedings would not have a material adverse
effect on the Company's consolidated financial position, results
of operations and liquidity.
Item 2. Changes in Securities
On May 18, 2000, the Board of Directors declared a quarterly cash
dividend of $0.085 per share of common stock, payable on July 3,
2000 to shareholders of record June 9, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second
quarter of 2000.
23
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC BANCORP INC.
---------------------
(Registrant)
Date: August 14, 2000 BY: /s/ Thomas F. Menacher
--------------------------
Thomas F. Menacher
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24