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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to ___________
Commission File Number: 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2604669
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 725-7337
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Registrant's common stock held by
non-affiliates, based on the closing price on March 10, 1999 of $13.56, was
$285.6 million.
Number of shares of Registrant's common stock outstanding as of March 10,
1999: 23,789,893.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Registrant's definitive proxy statement for its 1999 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....................................................................... 2
Competition............................................................................. 4
Employees............................................................................... 4
Principal Sources of Revenue............................................................ 4
Monetary Policy and Economic Controls................................................... 5
Supervision and Regulation.............................................................. 5
Forward-Looking Statements.............................................................. 8
Executive Officers of the Registrant.................................................... 9
Item 2 - Properties ................................................................................. 10
Item 3 - Legal Proceedings .......................................................................... 10
Item 4 - Submission of Matters to a Vote of Security Holders ........................................ 10
Part II
Item 5 - Market for Registrant's Common Stock and Related Stockholder Matters ....................... 11
Item 6 - Selected Financial Data..................................................................... 12
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 13
Item 7A - Quantitative and Qualitative Disclosures about Market Risk.................................. 34
Item 8 - Financial Statements and Supplementary Data ................................................ 35
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................ 68
Part III
Item 10 - Directors and Executive Officers of the Registrant.......................................... 68
Item 11 - Executive Compensation...................................................................... 68
Item 12 - Security Ownership of Certain Beneficial Owners and Management.............................. 68
Item 13 - Certain Relationships and Related Transactions.............................................. 68
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 69
Signatures ............................................................................................ 72
1
PART I
ITEM 1. BUSINESS
General Description
Republic Bancorp Inc. (the "Company") is a bank holding company incorporated
under the laws of the State of Michigan in 1986. The Company's principal office
is located in Ann Arbor, Michigan. Currently, the Company has 134 banking and
mortgage banking offices in 21 states.
Through its wholly-owned banking subsidiary, Republic Bank, a
state-chartered bank headquartered in Lansing, Michigan, the Company provides
commercial and retail banking products and services. On January 1, 1999,
Republic Savings Bank was merged with and into Republic Bank to enhance customer
service throughout the Midwest and improve operating efficiencies. Republic
Bank, exercises the powers of a full-service commercial bank and operates 32
offices in seven market areas in Michigan and 21 offices primarily in the
greater Cleveland area as well as Columbus, Dayton and Cincinnati, Ohio and
Indianapolis, Indiana or, in total, 40 commercial and retail banking offices and
13 mortgage loan production offices. At December 31, 1998, the combined Republic
Bank had $2.2 billion in assets and $1.4 billion in deposits.
To complement its commercial and retail banking network, the Company has
grown a nationwide mortgage lending network through various nonbank companies
engaged in the mortgage banking business. Market Street Mortgage Corporation
("Market Street Mortgage") is an 80% majority-owned mortgage banking subsidiary
of Republic Bank with headquarters in Clearwater, Florida, and 54 offices in 14
states. Republic Bancorp Mortgage Inc. ("Republic Bancorp Mortgage") is a
wholly-owned mortgage banking subsidiary of Republic Bank with headquarters in
Farmington Hills, Michigan, and 19 offices in 5 states. CUB Funding Corporation
("CUB Funding") is a wholly-owned mortgage banking subsidiary of Republic Bank
with headquarters in Clearwater, Florida, and 8 offices in 3 states.
On December 1, 1998, the Company and D&N Financial Corporation ("D&N
Financial") entered into an Agreement and Plan of Merger ("Merger Agreement").
Pursuant to the Merger Agreement, D&N Financial will merge with and into the
Company, whereby the Company will be the surviving corporation ("Merger"). At
the effective time of the Merger, each share of D&N Financial issued and
outstanding common stock will be converted into 1.82 shares of the Company's
common stock (or cash in lieu of fractional shares otherwise deliverable in
respect thereof.) The Merger has been structured as a tax-free exchange of
shares and is to be accounted for as a pooling-of-interests. The Merger, which
was approved by the boards of directors of both companies, is subject to normal
regulatory approvals and the approval of the shareholders of both companies. The
transaction is expected to close in the second quarter of 1999.
Simultaneously with the execution of the Merger Agreement, the Company also
entered into a Stock Option Agreement with D&N Financial. Pursuant to the terms
and conditions set forth in the Stock Option Agreement, D&N Financial granted
the Company an option to acquire up to 1,823,837 fully paid and nonassessable
shares of D&N Financial common stock at a price per share of $21.625,
exercisable under certain circumstances.
At December 31, 1998, Republic Bancorp Inc. had consolidated total
assets of $2.2 billion, total deposits of $1.4 billion and shareholders' equity
of $150.4 million. For the year ended December 31, 1998, the Company reported
net income of $22.9 million, compared to $18.8 million for 1997. Residential
mortgage loan closings totaled $6.1 billion in 1998, compared to $3.9 billion in
1997. Commercial loan closings totaled $263 million in 1998 versus $175 million
in 1997. Small Business Administration (SBA) loan closings totaled $39 million
in 1998, compared to $28 million in 1997. At December 31, 1998, the Company's
mortgage loan servicing portfolio was $2.9 billion, compared to $3.1 billion at
year-end 1997.
Business Segments
The Company engages in two lines of business--Commercial and Retail Banking and
Mortgage Banking. See Note 19 to the Consolidated Financial Statements.
2
Commercial and Retail Banking
Commercial and retail banking is conducted at 40 branches of Republic Bank
by providing traditional commercial and retail banking products and services to
consumers and small- to medium-size businesses. Products and services offered
include commercial loans; small business loans; mortgage loans; home equity
loans and lines of credit; other types of installment loans; and demand, savings
and time deposit accounts. Lending activity at Republic Bank is primarily
focused on real estate-secured lending to minimize credit risk (e.g., fixed rate
and variable rate residential mortgage loans; residential construction loans;
commercial real estate mortgage loans; and commercial real estate construction
loans). In addition, emphasis is placed on loans that are government guaranteed
or insured, such as SBA loans, United States Department of Agriculture (USDA)
loans, and FHA/VA loans. Commercial and industrial loans are made to a lesser
extent and are typically secured by the customer's assets at a 75% or less
loan-to-value ratio and by personal guarantees.
The marketing effort of the Company's bank subsidiary targets a particular
segment of the consumer population that is interested in receiving personalized
banking service and attention when handling transactions related to their
deposit accounts. The Company's deposit base consists primarily of retail
deposits gathered from within local markets served. At December 31, 1998, retail
deposits comprised 82% of total deposits.
Mortgage Banking
Mortgage banking activities encompass two areas: mortgage loan production
and mortgage loan servicing. Mortgage loan production involves the origination
and sale of single-family residential mortgage loans and is conducted by all of
the Company's affiliates. All mortgage loan originations are funded by Republic
Bank.
Retail residential mortgage loans are originated by the Company's own sales
staff through 93 retail mortgage loan production offices and 40 retail banking
offices located in Michigan, Alabama, Arizona, Colorado, Connecticut, Florida,
Georgia, Illinois, Indiana, Maryland, Massachusetts, Missouri, New York, North
Carolina, Ohio, Oklahoma, Pennsylvania, Texas, Utah and Virginia. Each retail
loan production office is responsible for processing loan applications received
and preparing loan documentation. Loan applications are then evaluated by the
underwriting departments of either the Company's banking or mortgage banking
affiliates for compliance with the Company's underwriting criteria, including
loan-to-value ratios, borrower qualifications and required insurance. The
Company also maintains a wholesale production office in California that engages
in the purchase of residential mortgage loans from brokers. Residential loans
purchased through the wholesale operation are processed and prepared by the
brokers. The Company's quality control personnel subsequently review these loans
using certain verification procedures.
The Company originates primarily conventional mortgage loans secured by
residential properties which conform to the underwriting guidelines for sale to
the Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC). 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).
Growth in the Company's residential mortgage origination business during
1998 was funded primarily with the bank's retail deposits and short-term
borrowings, including federal funds purchased and Federal Home Loan Bank (FHLB)
advances. The majority of all mortgage loans originated are held for a short
period of time (generally less than 60 days) with the intent of selling them to
investors in the secondary market. These loans are classified as mortgage loans
held for sale in the Company's consolidated balance sheet. 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 held for sale are typically sold
without recourse by the Company in the event of default by the borrowers. To
minimize interest rate risk, the Company obtains mandatory purchase commitments
from investors prior to funding the loans.
Consistent with the Company's strategy of managing interest rate risk,
substantially all long-term fixed rate mortgages originated are typically
securitized and sold or sold directly to secondary market investors. The
majority of short-term fixed rate mortgages and variable rate mortgages are
typically securitized and sold or sold directly to secondary market investors,
although a portion of the variable rate mortgages may be retained in the loan
portfolio
3
of Republic Bank. Portfolio loans may be securitized at a later date and either
sold or held as securities available for sale.
When the Company sells originated or purchased residential mortgage loans
to investors, it makes a determination to either retain or sell the rights to
service those loans. Servicing rights may also be acquired through bulk
purchases of loans. While there is an active market for selling servicing rights
(which are generally valued in relation to the present value of the anticipated
cash flow generated by the servicing rights), the aggregation of a servicing
portfolio creates a substantial continuing source of income and enables the
Company to reduce the sensitivity of its earnings to increases in interest
rates.
Mortgage loan servicing is conducted primarily by Market Street Mortgage,
which receives servicing fees ranging from 25 to 45 basis points per annum on
its servicing portfolio. The mortgage loan servicing function involves the
administration of loans; collection and remittance of loan payments; receipt of
escrow funds for payment of taxes and insurance; counseling of delinquent
mortgagors and supervision of foreclosures and property dispositions in the
event of unremedied defaults.
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. To help accomplish this
objective, the Company expanded its target market for mortgage customers during
1998 by opening 23 new retail and mortgage loan production offices. Selling
mortgage loans to investors in the secondary market provides additional revenue
and liquidity. In addition, the mortgage banking segment effectively earns
long-term interest rates on mortgage loans held for sale which helps the Company
to minimize interest rate risk as these loans will typically be sold within 60
days.
Competition
Commercial and Retail Banking and Mortgage Banking are highly competitive
businesses in which the Company faces numerous banking and non-banking
institutions as competitors. By reason of changes in Federal law (which became
effective on September 29, 1995) and 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
on page 5.)
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
affiliates also face significant competition from numerous bank and non-bank
companies in the area of mortgage lending. Generally, other financial
institutions have greater resources to use in making acquisitions and higher
lending limits than those of the Company's bank subsidiary or any banking
institution that the Company could acquire. Such institutions may also provide
certain non-traditional financial products and services to their customers which
the Company's bank subsidiary currently does not offer (e.g., trust services,
brokerage services and insurance products).
The principal factors of competition in the markets for deposits and loans
are price (interest rates paid and/or fees charged) and customer service. The
Company's bank subsidiary competes for deposits by offering depositors a variety
of checking and savings accounts, time deposits, convenient office locations and
personalized customer services. The Company competes for loans through the
efficiency and quality of the services it provides to borrowers, real estate
brokers and home builders. The Company seeks to compete for loans primarily on
the basis of customer service, including prompt underwriting decisions and
funding of loans, and by offering a variety of loan programs as well as
competitive interest rates.
Employees
As of December 31, 1998, the Company and its subsidiaries had 1,632 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 $141.5 million in 1998, an increase of 34% from $105.8 million in
1997 and up 76% from $80.4 million in 1996. In 1998, interest and fees on loans
accounted for
4
50% of total revenues, compared to 48% of total revenues in 1997 and 42% in
1996. Mortgage banking revenue, the largest component of noninterest income,
totaled $132.6 million in 1998, an increase of 42% from $93.7 million in 1997
and up 54% from $86.4 million in 1996. Mortgage banking revenue represented 47%
of total revenues in 1998, compared to 42% in 1997 and 45% in 1996.
Monetary Policy and Economic Controls
The earnings of the bank subsidiary, and, therefore, the earnings of the
Company, are affected by the policies of regulatory authorities, including the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
An important function of the Federal Reserve Board is to promote orderly
economic growth by influencing interest rates and the supply of money and
credit. Among the methods that have been used to achieve this objective are open
market operations in U.S. government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against bank
deposits. These methods are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, interest rates
on loans and securities, and rates paid for deposits.
The Federal Reserve Board's monetary policies strongly influence the
behavior of interest rates and can have a significant effect on the operating
results of commercial banks and mortgage banking companies. Continued moderate
price inflation in 1998 and the potential slowing of the U.S. economy as a
result of monetary and economic concerns in Asia and South America contributed
to the decision of the Federal Reserve Board to reduce short-term interest
rates. The effects of the various Federal Reserve Board policies on the future
business and earnings of the Company cannot be predicted. Other economic
controls also have affected the Company's operations in the past. The Company
cannot predict the nature or extent of any effects that possible future
governmental controls or legislation may have on its business and earnings.
Supervision and Regulation
General
Bank holding companies and banks are highly regulated at both the state and
federal level. As a bank holding company, the Company is subject to supervision
and regulation by the Federal Reserve Board under the Bank Holding Company Act
of 1956, as amended (the "BHC Act"). Under the BHC Act, the Company is
prohibited from engaging in activities other than those of banking or of
managing or controlling banks and from acquiring or retaining direct or indirect
ownership or control of voting shares of any company which is not a bank or bank
holding company, unless the activities engaged in by the Company or the company
whose voting shares are acquired by the Company are activities which the Federal
Reserve Board determines to be so closely related to the business of banking as
to be a proper incident thereto.
Republic Bank is chartered by the State of Michigan and is supervised and
regulated by the Financial Institutions Bureau of the State of Michigan (the
"FIB"). As an insured state bank, Republic Bank is also regulated by the Federal
Deposit Insurance Company ("FDIC").
The Company is a legal entity separate and distinct from its banking
subsidiary. Most of the Company's revenues result from interest earned on
deposits maintained at its subsidiary bank and from dividends paid to it by its
bank subsidiary. There are statutory and regulatory requirements applicable to
the payment of dividends by the subsidiary bank to the Company as well as by the
Company to its shareholders.
Under Federal Reserve Board policy, the Company is expected to act as a
source of financial and managerial strength to Republic Bank and to commit
resources to support it. This support may be required at times when, in the
absence of such Federal Reserve Board policy, the Company would not otherwise be
required to provide it.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act"), among other things: (i) permits bank holding companies to
acquire control of banks in any state, subject to (a) specified maximum national
state deposit concentration limits; (b) any applicable state law provisions
requiring the acquired bank to be in existence for a specified period of up to
five years; (c) any applicable nondiscriminatory state provisions that make an
acquisition of a bank contingent upon a requirement to hold a portion of such
bank's assets available for call by a state sponsored housing entity; and (d)
applicable anti-trust laws; (ii) authorizes
5
interstate mergers by banks in different states (and retention of interstate
branches resulting from such mergers) beginning June 1, 1997, subject to the
provisions noted 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 FIB, (i) acquisition of
Michigan-chartered banks (such as Republic Bank) by FDIC-insured banks, savings
banks or savings and loan associations located in other states, (ii) the sale by
a Michigan-chartered bank of one or more of its branches (not comprising all or
substantially all of its assets) to an FDIC-insured bank, savings bank or
savings and loan association located in a state in which a Michigan-chartered
bank could purchase one or more branches of the purchasing entity, (iii) the
acquisition by a Michigan-chartered bank of an FDIC-insured bank, savings bank
or savings and loan association located in another state, (iv) the acquisition
by a Michigan-chartered bank of one or more branches (not comprising all or
substantially all of the assets) of an FDIC-insured bank, savings bank or
savings and loan association located in another state, (v) the consolidation of
one or more Michigan-chartered banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states with the resulting
organization chartered either by Michigan or one of such other states, (vi) the
establishment by Michigan-chartered banks of branches located in other states,
the District of Columbia, or U.S. territories or protectorates, (vii) the
establishment of branches in Michigan by FDIC-insured banks located in other
states, the District of Columbia, or U.S. territories or protectorates having
laws permitting a Michigan-chartered bank to establish a branch in such
jurisdiction, and (viii) the establishment by foreign banks of branches located
in Michigan.
Dividends
Michigan law places specific limits on the source and amount of dividends which
may be paid by Republic Bank. The payment of dividends by the Company and its
bank subsidiary are also affected by various regulatory requirements and
policies, such as the requirement to maintain adequate capital above regulatory
guidelines. The "prompt corrective action" provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") impose further
restrictions on the payment of dividends by insured banks which fail to meet
specified capital levels and, in some cases, their parent bank holding
companies. FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized.
The FDIC may prevent an insured bank from paying dividends if the bank is
in default of payment of any assessment due to the FDIC. In addition, payment of
dividends by a bank may be prevented by the applicable federal regulatory
authority if such payment is determined, by reason of the financial condition of
such bank, to be an unsafe and unsound banking practice. The Federal Reserve
Board has issued a policy statement providing that bank holding companies and
insured banks should generally only pay dividends out of current operating
earnings.
These regulations and restrictions may limit the Company's ability to
obtain funds from its subsidiary for its cash needs, including funds for
acquisitions, payment of dividends and interest and the payment of operating
expenses.
FIRREA
Banking legislation, including the Financial Institutions Reform and Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA, has broadened the regulatory
powers of the federal bank regulatory agencies. Under FIRREA, a depository
institution insured by the FDIC shall be liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (i) the
default of a commonly controlled FDIC-insured depository institution, or (ii)
any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined as the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance.
FDICIA
In December 1991, FDICIA was enacted, substantially revising the bank regulatory
and funding provisions of the Federal Deposit Insurance Act and making revisions
to several other federal banking statutes. Among other things, FDICIA requires
the federal banking agencies to take "prompt corrective action" in respect of
depository institutions that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well-
6
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 bank subsidiary of the Company is considered to be well
capitalized as of December 31, 1998.
FDICIA directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, asset quality, earnings, stock valuation and other standards as
they deem appropriate. Such standards were issued jointly by the agencies on
August 9, 1995, in guideline form.
FDICIA also contains a variety of other provisions that may affect the
operations of depository institutions including new reporting requirements,
regulatory standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch and a prohibition on the
acceptance or renewal of brokered deposits by depository institutions that are
not well capitalized or are adequately capitalized and have not received a
waiver from the FDIC. Under regulations relating to the brokered deposit
prohibition, the Company's subsidiary bank is well-capitalized and may accept
brokered deposits without restriction.
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 ("SAIF")
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. 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). Pursuant to the Omnibus Consolidated Appropriations
Act, 1997 ("OCAA"), a special one-time assessment was made by the FDIC in
October 1996, on SAIF-insured deposits to bring the SAIF to its mandated reserve
ratio of 1.25% of aggregate SAIF-insured deposits by January 1, 1997.
Mortgage Banking Affiliates
The Company's non-depository mortgage banking affiliates, Market Street
Mortgage, Republic Bancorp Mortgage and CUB Funding (collectively referred to as
the "mortgage companies") are engaged in the business of originating, selling
and servicing mortgage loans secured by residential real estate. In the
origination of mortgage loans, the mortgage companies are subject to state usury
and licensing laws and to various federal statutes, such as the Equal Credit
Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate
Settlement Procedures Act, and Home Mortgage Disclosure Act, and the regulations
promulgated thereunder, which prohibit discrimination, specify disclosures to be
made to borrowers regarding credit and settlement costs, and regulate the
mortgage loan servicing activities of such entities, including the maintenance
and operation of escrow accounts and the transfer of mortgage loan servicing.
CUB Funding purchases mortgage loans from approved brokers after they
perform their own underwriting review of the mortgage loans. Brokers qualify to
participate in CUB Funding's wholesale program only after a review of their
financial condition, including a review of references and financial statements.
In such activities, CUB Funding is also subject to applicable usury and other
state and federal laws, including various states' licensing statutes.
7
As sellers and servicers of mortgage loans, the mortgage companies are
participants in the secondary mortgage market with some or all of the following:
private institutional investors, FNMA, GNMA, FHLMC, VA and FHA. In their
dealings with these agencies, the mortgage companies are subject to various
eligibility requirements prescribed by the agencies, including but not limited
to net worth, quality control, bonding, financial reporting and compliance
reporting requirements. The mortgage loans which they originate and purchase are
subject to agency-prescribed procedures, including, without limitation,
inspection and appraisal of properties, maximum loan-to-value ratios, and
obtaining credit reports on prospective borrowers. On some types of loans, the
agencies prescribe maximum loan amounts, interest rates and fees. When selling
mortgage loans to FNMA, FHLMC, GNMA, VA and FHA, each of the mortgage companies
represents and warrants that all such mortgage loans sold by it 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 Bancorp Mortgage,
Market Street Mortgage or CUB Funding) to repurchase the non-conforming mortgage
loans. Additionally, FNMA, FHLMC, GNMA, VA and FHA may require the mortgage
companies to indemnify them against all losses arising from their failure to
perform their contractual obligations under the applicable selling or servicing
contract. Certain provisions of the Housing and Community Development Act of
1992, and regulations adopted thereunder may affect the operations and programs
of FNMA and FHLMC.
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.
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.
Forward-Looking Statements
From time to time, we may publish forward-looking statements relating to such
matters as possible or assumed future results of our operations, anticipated
financial performance, business prospects, new products, and similar matters.
These forward-looking statements are subject to risks and uncertainties. Also,
when we use any of the words "believes," "expects," "plans," "anticipates,"
"estimates" or similar expressions we are making forward-looking statements.
We claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for all of our
forward-looking statements. We believe that our forward-looking statements are
reasonable. You should not place undue reliance on any such forward-looking
statements, which speak only as of the date made. You should understand that the
following important factors, in addition to those discussed elsewhere in this
Annual Report on Form 10-K, in our press releases, and in our public documents
to which we refer, could affect our future results and performance. This could
cause those results to differ materially from those expressed in our
forward-looking statements. Factors that might cause such a difference include
the following:
- significantly increased competition among the depository and other
financial institutions;
8
- inflation and changes in the interest rate environment that reduce
our margins or reduce the fair value of financial instruments;
- general economic conditions, either nationally or in our market
areas, that are worse than expected;
- adverse changes in the securities markets;
- legislative or regulatory changes that adversely affect our
business;
- the ability to enter new markets successfully and capitalize on
growth opportunities;
- technological changes, including "Year 2000" data systems
compliance issues, that are more difficult or expensive than we
expect;
- effects of and changes in trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve
Board;
- timely development of and acceptance of new products and services;
- changes in consumer spending, borrowing and savings habits;
- effect of changes in accounting policies and practices, as may be
adopted by the bank regulatory agencies and the Financial
Accounting Standards Board;
- changes in our organization, compensation and benefit plans;
- costs and effects of litigation and unexpected or adverse outcomes
in such litigation; and
- our success and managing risks involved in the foregoing.
The Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made to reflect the occurrence of unanticipated events.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all the executive officers (5) of the Company as
of December 31, 1998. All of these officers are elected annually by the Board of
Directors. Excluding Mr. Parker, each of the executive officers has served as an
officer of the Company for more than five years. Prior to joining the Company in
1997, Mr. Parker was a principal in the law firm of Miller, Canfield, Paddock &
Stone, PLC, Detroit, Michigan, for more than twenty-five years. There are no
family relationships among any of the executive officers.
Name Age Position
- ---- --- --------
Jerry D. Campbell............. 58 Chairman of the Board and Chief Executive
Officer (Since 1985)
Dana M. Cluckey, CPA.......... 39 President and Chief Operating Officer
(Since 1986)
Barry J. Eckhold.............. 52 Vice President and Chief Credit Officer
(Since 1990)
Thomas F. Menacher, CPA....... 42 Senior Vice President, Treasurer and
Chief Financial Officer (Since 1992)
George E. Parker III.......... 64 General Counsel and Corporate Secretary
(Since 1997)
9
ITEM 2. PROPERTIES
The Company's executive offices are located at 1070 East Main Street,
Owosso, Michigan 48867. At December 31, 1998, the Company had 40 banking
locations, of which 12 were owned and 28 were leased, and 94 mortgage loan
production offices, all of which were leased. All of these offices are
considered by management to be well maintained and adequate for the purpose
intended. See Note 7 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 17 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 1998.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Quarterly Dividends and Market Price Summary
- --------------------------------------------------------------------------------
Dividends Common Stock
Declared Price Range (1)
Per Share (1) High Low
- --------------------------------------------------------------------------------
1998
Fourth quarter ...... $ 0.080 $ 17.125 $ 12.000
Third quarter ....... 0.080 15.656 13.094
Second quarter ...... 0.080 16.953 14.797
First quarter ....... 0.080 16.594 14.797
--------
Year ............ $ 0.320 $ 17.125 $ 12.000
========
1997
Fourth quarter ...... $ 0.080 $ 17.094 $ 12.188
Third quarter ....... 0.073 12.000 10.453
Second quarter ...... 0.073 10.547 9.188
First quarter ....... 0.073 9.906 8.641
--------
Year ............ $ 0.299 $ 17.094 $ 8.641
========
- --------------------------------------------------------------------------------
(1) Dividends and market price data have been restated to reflect the issuance
of stock dividends.
The principal market for the quotations of stock prices of the Company's
common stock is The Nasdaq Stock Market. The Company's common stock trades under
the symbol RBNC. There were approximately 14,600 shareholders of record of the
Company's common stock as of March 10, 1999.
11
ITEM 6. SELECTED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Earnings Summary (in thousands)
Interest income $146,005 $118,852 $ 99,147 $ 95,597 $ 78,219
Interest expense 86,364 71,912 62,427 65,192 44,999
Net interest income 59,641 46,940 36,720 30,405 33,220
Provision for loan losses 4,000 3,031 290 24 94
Mortgage banking revenue 132,600 93,700 86,377 70,960 69,899
Other noninterest income 4,841 8,815 4,469 4,241 5,762
Noninterest expense 157,466 117,742 104,492(1) 83,152 85,021
Income before extraordinary item 22,890 18,789 15,066 14,264 15,719
Net income 22,890 18,789 14,678 14,264 15,719
- -----------------------------------------------------------------------------------------------------------------------
Per Common Share(2)
Basic earnings $ .97 $ .80 $ .61 $ .57 $ .62
Diluted earnings .96 .79 .59 .56 .60
Cash dividends declared .32 .30 .27 .22 .18
Book value (year-end) 6.33 5.61 5.17 5.07 4.65
Closing price of common stock (year-end) 13.63 17.10 8.45 7.11 5.94
Dividend payout ratio 33% 37% 46% 40% 30%
- -----------------------------------------------------------------------------------------------------------------------
Operating Data (in millions)
Loan closings:
Residential mortgage loans $ 6,103 $ 3,892 $ 3,581 $ 2,847 $ 2,837
Commercial loans 263 175 122 50 27
SBA loans 39 28 24 17 12
Mortgage loan servicing portfolio (year-end) 2,941 3,113 2,706 3,967 4,669
- -----------------------------------------------------------------------------------------------------------------------
Year-End Balances (in millions)
Total assets $ 2,196 $ 1,873 $ 1,490 $ 1,473 $ 1,364
Total earning assets 2,035 1,731 1,349 1,323 1,224
Mortgage loans held for sale 761 514 329 423 152
Total portfolio loans 1,212 1,096 785 578 605
Total deposits 1,379 1,177 1,014 905 819
Total short-term borrowings and FHLB advances 510 425 255 344 327
Long-term debt 48 48 49 52 56
Shareholders' equity 150 131 122 126 118
- -----------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.15% 1.16% 1.02% 1.00% 1.23%
Return on average equity 16.20 15.09 11.95 11.71 13.43
Net interest margin (3) 3.24 3.16 2.88 2.38 2.88
Net loan charge-offs to average total loans (4) .05 .03 .06 .06 .20
Allowance for loan losses as a percentage
of year-end portfolio loans .86 .67 .60 .87 .92
Non-performing assets as a percentage
of year-end total assets .75 .68 .44 .20 .30
Operating efficiency ratio 79.78 80.92 82.41 79.54 80.03
Net interest income to operating expenses 37.88 39.87 35.14 36.57 39.07
Average shareholders' equity to average assets 7.09 7.69 8.52 8.56 9.14
Tier 1 risk-based capital 9.48 9.75 13.30 15.72 17.57
Total risk-based capital 10.20 10.35 13.84 18.63 21.05
Tier 1 leverage 6.56 6.58 8.16 8.31 8.43
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes a one-time assessment of $1.5 million ($975,000 after tax, or $.04
per share) for the recapitalization of the SAIF.
(2) 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.
(3) Net interest income (FTE) expressed as a percentage of average
interest-earning assets.
(4) Includes mortgage loans held for sale.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Net income for 1998 was $22.9 million, an increase of 22% from net income of
$18.8 million in 1997. Diluted earnings per share rose 22% during the year to
$.96 from $.79 in 1997. In 1996, net income was $14.7 million, or $.59 per
common share. Return on average assets was 1.15% in 1998, compared with 1.16% in
1997 and 1.02% in 1996. Return on average equity for 1998 was 16.20%, compared
with 15.09% in 1997 and 11.95% in 1996.
The Company's 1998 results of operations reflected the following trends in
earnings:
- Net interest income increased 27% during 1998 following an
increase of 28% in 1997. Increasing average earning asset balances
during these periods contributed to the growth in net interest
income.
- The net interest margin expanded further to 3.24% in 1998,
compared to 3.16% in 1997 and 2.88% in 1996. A shift in average
earning assets away from investment securities and toward
higher-yielding loans and a decline in the cost of funds over the
past two years helped widen the net interest margin.
- Mortgage banking revenue grew 42% during 1998 after increasing 8%
in 1997, as a result of record retail lending production volumes.
Shareholders' equity totaled $150.4 million at December 31, 1998. 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
$323.6 million at December 31, 1998. Capital ratios, by all measures, remain in
excess of regulatory requirements for a well-capitalized financial institution.
Acquisitions and Divestitures
In December 1998, the Company and D&N Financial, headquartered in Troy and
Hancock, Michigan, entered into a Merger Agreement. Pursuant to the Merger
Agreement, D&N Financial will merge with and into the Company and the Company
will be the surviving corporation. The combined company will be the fourth
largest bank holding company in Michigan with over $4 billion in assets and 187
offices, including 87 retail and commercial banking offices in Michigan, Ohio
and Indiana and 100 mortgage loan production offices in 21 states. The merger is
subject to normal regulatory approvals and the approval of the shareholders of
both companies. The transaction is expected to close in the second quarter of
1999.
In May 1998, Republic Savings Bank acquired certain assets and the mortgage
origination network of World Class Mortgage Corporation of Naperville, Illinois.
The mortgage operation has one office and operates as a loan production office
of Republic Bank. The purchase price of the assets of World Class Mortgage was
not significant.
Business Segments
The Company's operations are managed as two major business segments: (1)
commercial and retail banking and (2) mortgage banking. The Commercial and
Retail Banking segment consists of commercial lending to small- and medium-sized
companies, primarily in the form of commercial real estate and Small Business
Administration (SBA) loans; mortgage portfolio lending; home equity lending; and
the deposit-gathering function. Deposits and loan products are offered through
the 40 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. Mortgage loan production
is conducted in all of the Company's 134 offices. The majority of the Company's
mortgage loan servicing is performed primarily by Market Street Mortgage. See
Note 19 to the Consolidated Financial Statements for further discussion of
business segments.
13
Mortgage Banking
The Mortgage Banking segment is comprised of mortgage loan production and
mortgage loan servicing.
Table 1
Residential Mortgage Loan Closings
- --------------------------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Total closings $6,103,490 $3,891,894 $3,580,700
Retail loans percentage 97% 88% 76%
Wholesale loans percentage 3 12 24
- --------------------------------------------------------------------------------
The Company's total closings of single-family residential mortgage loans
increased $2.2 billion, or 57%, to $6.1 billion in 1998. The retail portion of
this volume reached a record $5.9 billion in 1998, up 73% from 1997. Successful
sales efforts by our increased team of mortgage loan originators and a declining
interest rate environment were major contributors to the growth in retail loan
closings. The strong retail lending efforts in 1998 were supported by an
increase of 82 mortgage loan originators and processors, a 23% increase from
year-end 1997, and the addition of 23 new offices. In 1997, total mortgage loan
closings rose $311.2 million, or 9%, to $3.9 billion, reflecting the dual impact
on production of a relatively low interest rate environment and strong retail
lending efforts. Retail mortgage loan closings totaled $3.4 billion in 1997, a
25% increase from 1996. Wholesale mortgage loan volume continued to decline
since 1996 as the Company placed more emphasis on its more profitable retail
mortgage lending. Refinances totaled $2.5 billion, or 41% of total closings in
1998, compared to $950.3 million, or 24% of total closings, a year earlier. The
Company's pipeline of mortgage loan applications in process was $1.4 billion at
December 31, 1998, compared to $895.1 million at December 31, 1997.
Table 2
Mortgage Banking Revenue
- ---------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Mortgage loan production revenue (1) $ 132,741 $ 85,655 $ 70,499
Net mortgage loan servicing revenue (expense) (2) (376) 6,428 8,220
Gain on bulk sales of mortgage servicing rights 235 1,617 7,658
--------- --------- ---------
Total mortgage banking revenue $ 132,600 $ 93,700 $ 86,377
========= ========= =========
- ---------------------------------------------------------------------------------------------
(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.
(2) Includes servicing fees, late fees and other ancillary charges, net of
amortization and charges for impairment of mortgage servicing rights, if
any.
Mortgage banking revenue, the largest component of total noninterest
income, rose $38.9 million, or 42%, to $132.6 million in 1998, after increasing
8%, to $93.7 million in 1997. This increase resulted as growth in mortgage loan
production revenue more than offset declines in net mortgage loan servicing
revenue and gains on bulk sales of mortgage servicing rights.
Mortgage loan production revenue increased $47.1 million, or 55%, in 1998.
This increase resulted primarily as volume levels improved in retail mortgage
production activities. The Company sold $5.62 billion of single-family
residential mortgages in 1998, compared to $3.55 billion in both 1997 and 1996.
The ratio of mortgage production revenue to mortgage loans sold was 2.36% in
1998, compared to 2.42% in 1997 and 1.99% in 1996.
Net mortgage loan servicing expense was $376,000 in 1998, compared to net
servicing revenue of $6.4 million in 1997. In 1997, net servicing revenue
decreased 22% from $8.2 million to $6.4 million. The decrease in 1998 was
primarily the result of an increase of $9.5 million in amortization expense and
reserves for impairment of mortgage servicing rights, which was partially offset
by an increase in the average loans serviced. The decline in 1997 corresponds to
a decrease in the average size of the mortgage servicing portfolio during that
year. Loans
14
serviced for others averaged $3.3 billion in 1998, a 15% increase from a year
earlier. In 1997, average loans serviced for others totaled $2.9 billion, which
was 17% lower than the 1996 average.
Amortization of mortgage servicing rights totaled $14.4 million in 1998,
compared to $6.9 million in 1997 and $7.6 million in 1996. The Company evaluates
its mortgage servicing rights for impairment on a quarterly basis and as of
December 31, 1998, had recorded $2.0 million in impairment reserves. No
impairment reserves were required in 1997 and 1996 in accordance with Statement
of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The most
significant assumption that changed in the valuation of the mortgage servicing
rights at December 31, 1998 from December 31, 1997 was the change in the
prepayment speed assumption (PSA). At December 31, 1998, the weighted average
PSA used was 234, or a 29% increase, compared to 182 at December 31, 1997. The
increase in the PSA was a result of the increase in residential mortgage loan
refinance activity in 1998 compared to 1997. An increase in the PSA will result
in a shorter life of the mortgage servicing rights and accordingly reduce the
fair value of the mortgage servicing rights.
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 1998, bulk sales of mortgage servicing rights for loans with
principal balances of $492.6 million resulted in gains of $235,000. In 1997 and
1996, bulk sales of mortgage servicing rights for loans with principal balances
of $345.2 million and $2.3 billion, respectively, resulted in gains of $1.6
million and $7.7 million, respectively.
Commercial and Retail Banking
The remaining disclosures and analyses within this Management's Discussion and
Analysis of the Company's results of operations and financial condition 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 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 26% to $59.7 million in 1998, compared to
$47.3 million in 1997, primarily due to growth in average earning assets and a
decline in the Company's cost of funds. Average earning assets rose $346.5
million, or 23%, to $1.8 billion in 1998, as increases in mortgage loans held
for sale and average portfolio loans more than offset a reduction in average
investment securities. Net interest income growth also benefited as the mix of
earning assets continued to favor higher-yielding commercial, residential and
installment loan balances rather than lower-yielding investment securities.
Partially offsetting the increase in net interest income was the incremental
interest expense associated with a $344.5 million, or 26%, increase in
interest-bearing liabilities.
The net interest margin widened by 8 basis points to 3.24% in 1998,
compared to 3.16% in 1997. The improved margin was the result of a continued
shift in the mix of earning assets to higher-yielding commercial, residential
and installment loan balances and a decrease in the Company's cost of funds in
1998 of 23 basis points. The decrease in the Company's cost of funds was a
result of a decrease in short-term borrowing rates, the Company reducing the
rates paid on its certificates of deposit and savings accounts to reflect the
overall decrease in the interest rate environment and a greater mix of lower
rate savings deposits as a percentage of total interest bearing deposits.
In 1997, net interest income (FTE) increased 26% to $47.3 million from
$37.5 million in 1996, primarily due to growth in average earning assets.
Average earning assets rose $196.0 million, or 15%, to $1.5 billion in 1997, as
a $324.9 million increase in average portfolio loans more than offset a
reduction in average investment
15
securities and a slight decrease in average mortgage loans held for sale. Net
interest income growth also benefited as the mix of earning assets continued to
favor higher-yielding commercial, residential and installment loan balances
rather than lower-yielding investment securities. Partially offsetting the
increase in net interest income was the incremental interest expense associated
with a $197.1 million, or 17%, increase in interest-bearing liabilities in 1997
compared to 1996.
Table 3
Analysis of Net Interest Income (FTE)
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Average Avg. Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments $ 6,582 $ 358 5.44% $ 5,917 $ 264 4.46% $ 9,155 $ 438 4.78%
Mortgage loans held for sale 593,651 43,256 7.29 317,114 24,235 7.64 340,375 26,392 7.75
Investment securities 66,127 4,183 6.33 198,946 13,102 6.59 301,338 19,054 6.32
Portfolio loans: (1)
Commercial loans 391,891 35,915 9.16 251,299 24,139 9.61 162,463 15,183 9.35
Real estate mortgage loans 680,476 51,696 7.60 631,638 48,065 7.61 415,981 31,521 7.58
Installment loans 105,623 10,671 10.10 92,963 9,380 10.09 72,565 7,340 10.12
---------- -------- ----- ---------- -------- ----- ---------- ------- -----
Total loans, net of
unearned income 1,177,990 98,282 8.34 975,900 81,584 8.36 651,009 54,044 8.30
---------- -------- ---- ---------- -------- ---- ---------- ------- ----
Total interest-earning
assets 1,844,350 146,079 7.92 1,497,877 119,185 7.96 1,301,877 99,928 7.68
Allowance for loan losses (9,226) (6,281) (4,819)
Cash and due from banks 25,853 22,270 26,213
Other assets 131,106 106,038 118,782
---------- ---------- ----------
Total assets $1,992,083 $1,619,904 $1,442,053
========== ========== ==========
Average Liabilities and
Shareholders' Equity:
Interest-bearing demand
deposits $ 29,925 602 2.01 $ 44,933 993 2.21 $ 57,754 1,358 2.35
Savings deposits 438,872 14,962 3.41 298,104 12,331 4.14 215,357 8,882 4.12
Time deposits 749,541 43,531 5.81 619,371 35,662 5.76 545,151 32,028 5.88
---------- -------- ---- ---------- -------- ---- ---------- ------- ----
Total interest-bearing
deposits 1,218,338 59,095 4.85 962,408 48,986 5.09 818,262 42,268 5.17
Short-term borrowings 44,187 2,462 5.57 107,271 6,181 5.76 174,734 10,322 5.91
FHLB advances 378,689 21,372 5.64 226,634 13,275 5.86 103,244 6,094 5.90
Long-term debt 47,500 3,435 7.23 47,948 3,470 7.23 50,873 3,743 7.36
---------- -------- ---- ---------- -------- ---- ---------- ------- ----
Total interest-bearing
liabilities 1,688,714 86,364 5.11 1,344,261 71,912 5.34 1,147,113 62,427 5.44
Noninterest-bearing deposits 90,226 108,667 124,976
Other liabilities 71,867 42,452 47,172
---------- ---------- ----------
Total liabilities 1,850,807 1,495,380 1,319,261
Shareholders' equity 141,276 124,524 122,792
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,992,083 $1,619,904 $1,442,053
========== ========== ==========
Net interest income/
Rate spread (FTE) $ 59,715 2.81% $ 47,273 2.60% $37,501 2.24%
======== ======== =======
FTE adjustment $ 74 $ 333 $ 781
======== ======== =======
Impact of net noninterest-
bearing sources of funds .43 .56 .64
---- ----- ----
Net interest margin (FTE) 3.24% 3.16% 2.88%
==== ===== ====
- -----------------------------------------------------------------------------------------------------------------------
(1) Non-accrual loans and overdrafts are included in average balances.
16
Table 4
Rate/Volume Analysis (FTE)
- -------------------------------------------------------------------------------------------------------------------------
1998/1997 1997/1996
- -------------------------------------------------------------------------------------------------------------------------
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 $ 32 $ 62 $ 94 $ (147) $ (27) $ (174)
Mortgage loans held for sale 20,181 (1,160) 19,021 (1,786) (371) (2,157)
Investment securities (8,422) (497) (8,919) (6,733) 781 (5,952)
Loans, net of unearned income (2) 16,893 (195) 16,698 27,003 537 27,540
-------- -------- -------- -------- -------- --------
Total interest income 28,684 (1,790) 26,894 18,337 920 19,257
Interest Expense:
Interest-bearing demand deposits (308) (83) (391) (288) (77) (365)
Savings deposits 5,085 (2,454) 2,631 3,406 43 3,449
Time deposits 7,557 312 7,869 4,298 (664) 3,634
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 12,334 (2,225) 10,109 7,416 (698) 6,718
Short-term borrowings (3,521) (198) (3,719) (3,886) (255) (4,141)
FHLB advances 8,613 (516) 8,097 7,222 (41) 7,181
Long-term debt (35) -- (35) (209) (64) (273)
-------- -------- -------- -------- -------- --------
Total interest expense 17,391 (2,939) 14,452 10,543 (1,058) 9,485
-------- -------- -------- -------- -------- --------
Net interest income (FTE) $ 11,293 $ 1,149 $ 12,442 $ 7,794 $ 1,978 $ 9,772
======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
(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.
Noninterest Income
Noninterest income is a significant source of revenue for the Company,
contributing 48% of total revenues in 1998, compared to 46% in 1997 and 48% in
1996. Details of the largest component of noninterest income are presented in
the "Mortgage Banking" section. Exclusive of mortgage banking revenue,
noninterest income decreased to $4.8 million in 1998 from $8.8 million in 1997,
primarily due to the $4.4 million pre-tax gain on the sale of four Republic Bank
branches and the related deposits in the second quarter of 1997.
Table 5
Noninterest Income
- ---------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------
Mortgage banking revenue $ 132,600 $ 93,700 $ 86,377
Service charges 1,513 1,446 1,218
Investment securities gains (losses) (305) (497) 766
Gain on sale of bank branches and deposits -- 4,442 --
Gain on sale of SBA loans 2,145 1,065 1,242
Other noninterest income 1,488 2,359 1,243
--------- --------- ---------
Total noninterest income $ 137,441 $ 102,515 $ 90,846
========= ========= =========
- ---------------------------------------------------------------------------------------
17
As part of the Company's strategy to support further loan growth, efforts
have been made to reduce the investment securities portfolio through sales and
maturities. In 1998, the Company sold $59.3 million of investment securities for
a net loss of $305,000. In 1997, the Company sold $189.7 million of investment
securities, compared to $144.7 million in 1996.
The guaranteed portion of Small Business Administration (SBA) loans are
regularly sold to investors. In 1998, the Company sold $28.1 million of the
guaranteed portion of SBA loans, compared to $13.8 million in 1997 and $17.9
million in 1996, resulting in gains of $2.1 million, $1.1 million and $1.2
million, respectively.
Noninterest Expense
Noninterest expense increased 34% in 1998 to $157.5 million, after rising 13% in
1997. Salaries and employee benefits expense increased $2.4 million, or 5%, in
1998, following an increase of $5.8 million, or 14%, in 1997. This year's
increase in salaries and benefits expense reflects the addition of 71 hourly and
salaried employees and normal wage increases. Mortgage loan commissions and
incentives paid to mortgage loan originators and processors rose $26.5 million,
or 89%, after increasing $5.2 million, or 21%, in 1997. The increase in mortgage
loan commissions and incentives resulted from the 73% increase in the volume of
retail mortgage loans originated during 1998 over 1997 and the addition of 82
commission-based mortgage loan originators and processors, a 23% increase over
1997. The commission rate paid on retail loan closings, which make up 97% of
total closings, is significantly higher than the commission rate paid on
wholesale closings.
Table 6
Noninterest Expense
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Salaries and employee benefits $ 50,787 $ 48,358 $ 42,589
Mortgage loan commissions and incentives 56,297 29,767 24,590
Net occupancy expense of premises 8,250 7,022 6,145
Equipment expense 5,263 4,538 4,626
SAIF assessment fee -- -- 1,500
Other noninterest expense 36,869 28,057 25,042
-------- -------- --------
Total noninterest expense $157,466 $117,742 $104,492
======== ======== ========
- --------------------------------------------------------------------------------
Net occupancy expense increased 17% in 1998, following a 14% increase in
1997, due to the addition of 23 retail bank and mortgage loan production offices
during 1998, the majority of which are leased. Equipment expense increased 16%
in 1998, following relatively stable amounts over the past several years. The
increase in 1998 reflects an increased level of expenses related to the 27%
increase in the balance of furniture, fixtures and equipment in 1998 compared to
1997 related to the expansion of the Company's retail bank and mortgage loan
production offices during 1998.
Included in noninterest expense for 1996 was a one-time pre-tax assessment
of $1.5 million levied on the Company's banking subsidiaries by the Federal
Deposit Insurance Corporation (FDIC) as a result of legislation passed by
Congress to recapitalize the Savings Association Insurance Fund (SAIF). This
one-time charge related to $212 million in SAIF-insured deposits at Republic
Savings Bank and $17 million in SAIF-insured deposits at Republic Bank.
Income Taxes
The provision for income taxes was $12.7 million in 1998, compared to $9.9
million in 1997 and $7.5 million in 1996 (inclusive of the tax benefit arising
from the extraordinary item). The effective tax rate, computed by dividing the
provision for income taxes by pre-tax income, was 35.7% for 1998, compared to
34.5% for 1997 and 33.8% for 1996. Pre-tax income in 1998 contained a lower
amount of tax-exempt interest income on bank-qualified municipal securities than
in 1997 and 1996.
18
Financial Condition
Total assets were $2.2 billion at December 31, 1998, an increase of 17% from
$1.9 billion at December 31, 1997. Average total assets rose $372.2 million, or
23%, to $2.0 billion during the year. This increase primarily reflects strong
growth in mortgage loans held for sale and the portfolio loans, which was funded
by a reduction in investment securities as well as increases in deposits and
FHLB advances.
Assets
Portfolio Loans
The Company's loan portfolio is comprised of domestic loans to businesses and
consumers. At December 31, 1998 and 1997, 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, predominantly home equity loans, are made
for various purposes, including home improvement, automobile purchases and
college tuition. The Company emphasizes home equity lending above all other
installment lending. Other types of installment loans are generally made to
accommodate customers who have an existing banking relationship with the
Company.
Table 7
Loan Portfolio Analysis
- ------------------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and
industrial $ 31,786 2.6% $ 41,095 3.7% $ 29,483 3.8% $ 22,523 3.9%
Real estate
construction 84,767 7.0 48,346 4.4 32,946 4.2 11,625 2.0
Commercial real
estate mortgages 343,171 28.3 233,078 21.3 132,763 16.9 98,285 17.0
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total commercial
loans 459,724 37.9 322,519 29.4 195,192 24.9 132,433 22.9
Residential real
estate mortgages 642,129 53.0 669,203 61.1 506,944 64.6 381,803 66.0
Installment loans 110,577 9.1 104,022 9.5 82,492 10.5 63,876 11.1
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total portfolio
Loans $1,212,430 100.0% $1,095,744 100.0% $ 784,628 100.0% $ 578,112 100.0%
========== ===== ========== ===== ========== ===== ========== =====
- ------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------
December 31
(Dollars in thousands) 1994
- --------------------------------------------------
Amount %
- --------------------------------------------------
Commercial loans:
Commercial and
industrial $ 20,556 3.4%
Real estate
construction 11,259 1.9
Commercial real
estate mortgages 66,096 10.8
---------- -----
Total commercial
loans 97,911 16.1
Residential real
estate mortgages 457,755 75.7
Installment loans 49,423 8.2
---------- -----
Total portfolio
Loans $ 605,089 100.0%
========== =====
- --------------------------------------------------------------------------------
The total portfolio loans balance grew $116.7 million, or 11%, to $1.2
billion at December 31, 1998, after increasing 40% in 1997. Lending remained
strong across all major categories in 1998. Commercial lending programs were
successful in local markets served by the Company and marketing efforts directed
at existing customers yielded additional home equity loans. The overall growth
of the loan portfolio stems from the Company's efforts to enhance long-term
profitability by improving the mix of earning assets on the balance sheet.
19
Commercial loans increased $137.2 million, or 43%, to $459.7 million at
December 31, 1998, after climbing 65% in 1997. This growth, which was
concentrated primarily in commercial real estate loans, reflects the Company's
efforts to complement traditional residential mortgage lending with commercial
real estate lending. Residential real estate mortgage loans decreased $27.1
million, or 4%, to $642.1 million at December 31, 1998, after growing 32% a year
earlier. Customers selected fixed rate residential mortgage loans during 1998,
resulting in a lower percentage of variable rate residential real estate loans
retained compared to prior years. Installment loans increased $6.6 million, or
6%, to $110.6 million at December 31, 1998, after rising 26% a year ago,
reflecting the continued success of specifically targeted sales and marketing
efforts in home equity lending.
Table 8
Maturity Distribution and Interest Rate Sensitivity of Commercial Loans
- --------------------------------------------------------------------------------------------------------------------
After One
December 31, 1998 Within But Within After
(In thousands) One Year Five Years Five Years Total
- --------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and industrial $ 7,689 $ 15,806 $ 8,291 $ 31,786
Real estate construction 29,479 48,385 6,903 84,767
Commercial real estate mortgages 22,355 193,601 127,215 343,171
---------- ----------- ----------- -----------
Total commercial loans $ 59,523 $ 257,792 $ 142,409 $ 459,724
========== =========== =========== ===========
Commercial Loans Maturing After One Year With:
Predetermined rates $ 196,958 $ 70,588
Floating or adjustable rates 60,834 71,821
----------- -----------
Total $ 257,792 $ 142,409
=========== ===========
- --------------------------------------------------------------------------------------------------------------------
The commercial loan portfolio contained no aggregate loans to any one
industry that exceeded 10% of total portfolio loans outstanding at December 31,
1998. The Company's total loan portfolio is geographically concentrated
primarily in Michigan and Ohio as shown in the following table.
Table 9
Geographic Distribution of Loan Portfolio
- --------------------------------------------------------------------------------
December 31, 1998 Percent
(Dollars in thousands) Amount of Total
- --------------------------------------------------------------------------------
Michigan $ 690,104 57%
Ohio 417,028 34
Indiana 30,340 3
Other states 74,958 6
------------ ---
Total $ 1,212,430 100%
============ ===
- --------------------------------------------------------------------------------
Mortgage Loans Held for Sale
Mortgage loans held for sale increased $247.7 million, or 48%, to $761.2 million
at December 31, 1998, after increasing 56% to $513.5 million at December 31,
1997. The increase in 1998 was primarily due to continued strong mortgage loan
production volumes. The average mortgage loans held for sale balance in 1998
increased 87% over 1997 reflecting the Company's record level of mortgage loan
production volumes throughout 1998.
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,
20
based on the amount of the loan and whether the loan is secured
or unsecured, have also been established. Loan approval authority ranges from
the individual loan officer to the Board of Directors' Loan Committee.
The Loan Review group within the Company's Risk Management Department
conducts ongoing, independent reviews of the lending process to ensure adherence
to established policies and procedures, monitors compliance with applicable laws
and regulations, provides objective measurement of the risk inherent in the loan
portfolio, and ensures that proper documentation exists. The results of these
periodic reviews are reported to the Audit Committee of the Company's Board of
Directors.
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 and expected economic conditions and the level of underwriting risk
the Company is willing to assume. To manage credit risk when extending
commercial credit, the Company focuses on adequately assessing the borrower's
ability to repay and on obtaining sufficient collateral. To minimize credit
risk, the Company concentrates its commercial lending efforts on commercial real
estate loans. At December 31, 1998 and 1997, commercial real estate loans
accounted for 93% and 87%, respectively, of total commercial loans. Emphasis is
also placed on loans that are government guaranteed, such as SBA loans.
Commercial and industrial loans are generally secured by the company's assets at
a 75% or less loan-to-value ratio and by personal guarantees. Management closely
monitors the composition and quality of the total commercial loan portfolio to
ensure that significant credit concentrations by borrower or industry do not
exist.
Residential Real Estate Mortgage Loans
The Company originates fixed rate and variable rate residential mortgage
loans which are secured by the underlying 1-4 family residential property. At
December 31, 1998 and 1997, these loans accounted for 53% and 61%, respectively,
of total portfolio loans. Credit risk exposure in this area of lending is
minimized by the assessment of the creditworthiness of the borrower, including
debt to equity ratios and adherence to underwriting policies that emphasize
conservative loan-to-value ratios of generally no more than 80%. Residential
mortgage loans granted in excess of the 80% loan-to-value ratio criterion are
generally insured by private mortgage insurance, unless otherwise guaranteed or
insured by the Federal, state or local government. Credit risk is further
reduced since the majority of the Company's fixed rate, mortgage loan production
and all of its sub-prime 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 and the creditworthiness of the borrower. In the home equity
lending category, loan-to-value ratios generally are limited to 80% of
collateral value. However, the Company may lend in excess of 80% of collateral
value and often utilizes an unaffiliated insurance company to minimize the risk
of the higher loan to value ratio loans.
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 10
Non-Performing Assets
- -------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Commercial $ 1,083 $ 1,457 $ 1,321 $ 848 $ 982
Residential real estate mortgages 10,581 9,217 3,968 313 1,304
Installment 448 307 50 131 79
--------- -------- -------- ------- ---------
Total non-accrual loans 12,112 10,981 5,339 1,292 2,365
Restructured loans - - - 688 1,130
-------- -------- -------- ------- --------
Total non-performing loans 12,112 10,981 5,339 1,980 3,495
Other real estate owned 4,276 1,671 1,250 980 586
--------- -------- -------- ------- --------
Total non-performing assets $ 16,388 $ 12,652 $ 6,589 $ 2,960 $ 4,081
========= ======== ======== ======= ========
- -------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of:
Portfolio loans and OREO 1.35% 1.15% .84% .51% .67%
Portfolio loans, mortgage loans held
for sale and OREO .83 .79 .59 .30 .54
Total assets .75 .68 .44 .20 .30
- -------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more and still
accruing interest:
Commercial $ 74 $ - $ - $ 209 $ 104
Residential real estate mortgages - 228 548 42 -
Installment - 6 22 94 35
-------- -------- -------- ------- --------
Total loans past due 90 days or more $ 74 $ 234 $ 570 $ 345 $ 139
======== ======== ======== ======= ========
- -------------------------------------------------------------------------------------------------------------------
Non-performing assets totaled $16.4 million at December 31, 1998, up $3.7
million from $12.7 million at December 31, 1997. The overall increase in total
non-performing assets is attributable to the increases in non-accrual
residential real estate mortgage loans and other real estate owned. The primary
cause for the rise in non-accrual residential mortgages and other real estate
owned was growth in the balance of portfolio residential mortgage loans
over the last five years, which has increased 180%. Historically, credit losses
on loans secured by residential property have been minimal as demonstrated by
the Company's low level of net loan charge-offs. The Company's actual losses
have, generally, been limited to forgone interest and costs related to the
foreclosure process, which may take several months to complete.
Approximately $11.7 million, or .96%, of the loans in the loan portfolio at
December 31, 1998, were 30 to 89 days delinquent, compared to $8.2 million, or
.75% of portfolio loans, at December 31, 1997. 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, 1998, total loans on the watch list, excluding
those categorized as non-accrual loans and loans past due 90 days and still
accruing interest, were $5.1 million, or .4% of total portfolio loans, compared
to $3.7 million, or .3% of total portfolio loans, at December 31, 1997.
The following table presents the amount of interest income that would have
been earned on non-performing loans outstanding at December 31, 1998, 1997 and
1996 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.
22
Table 11
Forgone Interest on Non-Performing Loans
- --------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Non-Accrual Restructured Non-Accrual Restructured Non-Accrual Restructured
- --------------------------------------------------------------------------------------------------------------------
Pro forma interest income $ 514 $ - $ 856 $ - $ 259 $ -
Interest income earned 247 - 478 - 34 -
------- ------ ------- ------- ------ ------
Forgone interest income $ 267 $ - $ 378 $ - $ 225 $ -
======= ====== ======= ======= ====== ======
- -------------------------------------------------------------------------------------------------------------------
Impaired Loans
At December 31, 1998 and 1997, the gross recorded investment in impaired loans
totaled $1,083,000 and $1,457,000, respectively. Similar to non-accrual loans,
interest payments subsequently received on impaired loans (with the exception of
residential mortgage and consumer installment loans) are applied against the
principal balance. See Note 5 to the Consolidated Financial Statements for
further discussion of impaired loans.
Provision and Allowance for Loan Losses
The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the loan portfolio that have been
incurred as of the balance sheet date. The allowance for loan losses is
maintained at an adequate level through additions to the provision for loan
losses. An appropriate level of the general allowance is determined based on the
application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. Management also considers other factors when
determining the unallocated allowance, including loan quality, changes in the
size and character of the loan portfolio, consultation with regulatory
authorities, amount of nonperforming loans, delinquency trends and economic
conditions and industry trends.
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended
by SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the contractual
terms of the original loan agreement. Consistent with this definition, all
non-accrual and restructured loans (with the exception of residential mortgage
and consumer installment loans) are impaired. An impaired loan for which it is
deemed necessary to record a specific allowance is, typically, written down to
the fair value of the underlying collateral at the time it is placed on
non-accrual status via a direct charge-off against the allowance for loan
losses. Consequently, those impaired loans not requiring a specific allowance
represent loans for which the fair value of the underlying collateral equaled or
exceeded the recorded investment in the loan. All impaired loans were evaluated
using the fair value of the underlying collateral as the measurement method.
It must be understood, however, that inherent risks and uncertainties
related to the operation of a financial institution require management to depend
on estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial prospects
of borrowers may result in abrupt changes to the estimates, appraisals or
evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Gross loan charge-offs increased $510,000 to $1.1 million in 1998, compared
to $608,000 in 1997 and $758,000 in 1996. The ratio of net loan charge-offs to
average loans, including loans held for sale, was .05% for 1998, compared to
.03% for 1997 and .06% for 1996. Commercial loan net charge-offs as a percentage
of average commercial loans was .04% for 1998, compared to .14% for 1997 and
.24% for 1996. Residential real estate mortgage loan net charge-offs as a
percentage of average residential mortgage loans, including loans held for sale,
was .03% in 1998, zero for 1997 and .001% for 1996. Installment loan net
charge-offs as a percentage of average installment loans was .30% for 1998,
compared to .06% for 1997 and .26% for 1996.
23
Table 12
Analysis of the Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 7,334 $ 4,709 $ 5,002 $ 5,544 $ 7,214
Loan charge-offs:
Commercial loans 250 468 494 661 1,521
Residential real estate mortgage loans 452 13 11 34 70
Installment loans 416 127 253 150 114
--------- --------- -------- ------ ---------
Total loan charge-offs 1,118 608 758 845 1,705
Recoveries:
Commercial loans 83 115 112 189 219
Residential real estate mortgage loans 52 20 2 47 -
Installment loans 100 67 61 43 72
--------- --------- -------- ------ ---------
Total recoveries 235 202 175 279 291
--------- --------- -------- ------ ---------
Net loan charge-offs 883 406 583 566 1,414
Provision charged to expense 4,000 3,031 290 24 94
Allowance for commercial loans sold - - - - (350)
--------- --------- -------- -------- ---------
Balance at end of year $ 10,451 $ 7,334 $ 4,709 $ 5,002 $ 5,544
========= ========= ======== ======== =========
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of
year-end portfolio loans .86% .67% .60% .87% .92%
Allowance for loan losses as a percentage of
year-end non-performing loans 86.28 66.79 88.18 252.64 158.61
Net charge-offs as a percentage of average
total loans (including loans held for sale) .05 .03 .06 .06 .20
- -------------------------------------------------------------------------------------------------------------------
The Company's policy for charging off loans varies with respect to the
category of and specific circumstances surrounding each loan under
consideration. Installment loans are generally charged off when deemed to be
uncollectible or 180 days past due, whichever comes first. Charge-offs of
commercial loans and residential real estate mortgage loans are made on the
basis of management's ongoing evaluation of non-performing loans.
The following table summarizes the Company's allocation of the allowance
for loan losses for general, specific and unallocated allowances by loan type
and the percentage of each loan type of total portfolio loans. The entire
allowance, however, is available for use against any type of loan loss deemed
necessary.
24
Table 13
Allocation of the Allowance for Loan Losses
- --------------------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of
total total total total
Amount loans Amount loans Amount loans Amount loans
- --------------------------------------------------------------------------------------------------------------------------------
General allowances:
Commercial loans $ 2,339 38% $ 2,173 29% $ 1,895 25% $ 1,172 23%
Residential real estate
mortgage loans 4,489 53 3,795 61 1,525 65 953 66
Installment loans 551 9 432 10 307 10 212 11
------- ------- ------- -------
Total general
allowances 7,379 6,400 3,727 2,337
Specific allowances:
Commercial loans -- -- -- -- 78 -- 350 --
Residential real estate
mortgage loans -- -- -- -- 18 -- 18 --
Installment loans -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- ------
Total specific
allowances -- -- -- -- 96 -- 368 --
Unallocated allowances 3,072 -- 934 -- 886 -- 2,297 --
------- ------- ------- ------- ------- ------- ------- -------
Total allowance for
loan losses $10,451 100% $ 7,334 100% $ 4,709 100% $ 5,002 100%
======= ======= ======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------
December 31
(Dollars in thousands) 1994
- ------------------------------------------------------
% of
total
Amount loans
- ------------------------------------------------------
General allowances:
Commercial loans $ 2,221 16%
Residential real estate
mortgage loans 598 76
Installment loans 501 8
-------
Total general
allowances 3,320
Specific allowances:
Commercial loans -- --
Residential real estate
mortgage loans -- --
Installment loans -- --
------- ------
Total specific
allowances -- --
Unallocated allowances 2,224 --
------- -------
Total allowance for
loan losses $ 5,544 100%
======= =======
- ------------------------------------------------------
The following table summarizes the graded loan categories used by the
Company to determine the adequacy of the general allowance for loan losses at
December 31, 1998, 1997 and 1996.
Table 14
Graded Loan Categories Used in the
Allocation of the Allowance for Loan Losses
- --------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Loan Loan Loan
Amount(1) Amount(1) Amount(1)
- --------------------------------------------------------------------------------------------------------------
Graded loan categories:
Pass (Superior, High and Satisfactory) $ 2,200,457 $ 1,740,495 $ 1,206,450
Special mention 11,659 16,812 9,460
Substandard 17,290 14,323 7,170
Doubtful 73 252 213
Loss - - -
----------- ----------- -----------
Total loans $ 2,229,479 $ 1,771,882 $ 1,223,293
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
(1) Loan amounts include mortgage loans held for sale and unfunded commitments
of $256 million, $163 million and $110 million at December 31, 1998, 1997
and 1996, respectively.
Each element of the general allowance for December 31, 1998, 1997 and 1996
was determined by applying the following risk percentages to each grade of loan:
Pass - .10% to .25%, depending on category of loans classified as Superior, High
and Satisfactory; Special mention - 5%; Substandard - 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.
25
The Company periodically reviews each commercial loan in excess of $25,000
and assigns a grade based on loan type, collateral value, financial condition of
the borrower and payment history. Delinquent mortgage and installment loans are
reviewed bi-weekly and assigned a rating based on their payment history,
financial condition of the borrower and collateral values. Specific mortgage and
installment loans are also reviewed in conjunction with the previously described
review of any related commercial loan.
Based upon these reviews, the Company determines the grades for its loan
portfolio on a quarterly basis and computes the allowance for loan losses.
Management believes this periodic review provides a mechanism that results in
loans being graded in the proper category and accordingly, assigned the proper
risk loss percentage in computing the general or specific reserve.
The unallocated allowance for loan losses increased to $3.1 million at
December 31, 1998 from $934,000 at December 31, 1997. The increase is primarily
a result of (a) the 43% increase in the commercial loan balance in 1998; (b) the
10% increase in non-accrual loans in 1998; (c) the increase during 1998 in loans
30 to 89 days delinquent; and (d) the increase during 1998 in total loans on the
watch credit list.
The provision for loan losses increased to $4.0 million during 1998 from
$3.0 million in 1997. General provisions were necessary as a result of the
increase in the commercial loan portfolio, the increase in the non-accrual loans
during 1998, the increase in loans 30 to 89 days delinquent in 1998 and the
increase during 1998 in total loans on the watch credit list. In 1997, the
provision for loan losses increased to $3.0 million from $290,000 in 1996.
General provisions were necessary as a result of the growth in the commercial,
residential real estate mortgages and installment loan balances. Additionally,
general provisions were also necessary in 1997 as a result of the 106% increase
in non-accrual loans. 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 or
assumptions since 1996.
Securities Available for Sale
The Company's investment securities portfolio, while serving as a secondary
source of earnings, carries relatively minimal principal risk and contributes to
the management of interest rate risk and liquidity risk. The portfolio is
comprised principally of U.S. Government agency obligations, obligations
collateralized by U.S. Government-sponsored agencies, mainly in the form of
collateralized mortgage obligations and mortgage-backed securities. The maturity
structure of the portfolio is generally short-term in nature or indexed to
variable rates. At December 31, 1998, fixed rate investment securities within
the portfolio, excluding municipal securities, totaled only $139,000.
Investment securities totaled $47.3 million at December 31, 1998, a $72.6
million, or 61%, decrease from $119.9 million at December 31, 1997. This
decrease reflects sales and maturities of securities primarily to fund growth in
higher-yielding portfolio loans and mortgage loans held for sale. The investment
securities portfolio constituted 2.2% of the Company's assets at year-end 1998,
compared to 6.4% a year earlier.
The following table summarizes the composition of the Company's investment
securities portfolio at December 31, 1998 and 1997.
Table 15
Securities Available For Sale Portfolio
- --------------------------------------------------------------------------------
December 31
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
U.S. Treasury and Government agency securities $ 5,088 $ 40,806
Collateralized mortgage obligations 1,443 24,249
Mortgage-backed securities 6,310 23,568
Municipal and other securities 3,190 3,185
Equity securities and investment in FHLB 31,238 28,073
-------- --------
Total securities available for sale $ 47,269 $119,881
======== ========
- --------------------------------------------------------------------------------
26
The maturity distribution of and average yield information for investment
securities held as of December 31, 1998 is provided in the following table.
Table 16
Maturity Distribution of Securities Available for Sale Portfolio
- -------------------------------------------------------------------------------------------------------------------
December 31, 1998 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 $ - -% $ - - % $ - -% $ 5,088 6.37% $ 5,088 6.37%
Collateralized mortgage
obligations (2) (3) - - - - - - 1,443 4.81 1,443 4.81
Mortgage-backed
securities (2) (3) - - 72 8.23 - - 6,238 5.80 6,310 5.83
Municipal and other
securities (1) 30 9.95 117 9.95 809 7.29 2,234 7.77 3,190 7.75
Equity securities 31,238 7.34 - - - - - - 31,238 7.34
------- ---- -------- ----- -------- ---- -------- ------ --------- ----
Total securities
available for sale $31,268 7.34% $ 189 9.29% $ 809 7.29% $ 15,003 5.45% $ 47,269 6.98%
======= ==== ======== ===== ======== ==== ======== ===== ======== ====
- -------------------------------------------------------------------------------------------------------------------
(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 are at variable rates or have estimated
average lives of less than 1.1 years. The average yield presented
represents the current yield on these securities.
Liabilities
Deposits
Total deposits, the Company's primary source of funding, grew 17% to $1.38
billion at December 31, 1998, after increasing 16% a year earlier. The Company's
core deposits represent the largest and most stable component of total deposits
and consist of demand deposits, NOW accounts, regular savings accounts, money
market accounts, Individual Retirement Accounts (IRAs) and retail certificates
of deposit. At year-end 1998, core deposits totaled $1.13 billion, a 16%
increase when compared to $976.8 million at year-end 1997.
The Company also funds its loans with brokered certificates of deposit and
municipal certificates of deposit. At December 31, 1998, these deposits totaled
$34.7 million and $212.8 million, respectively, and represented 18% of total
deposits on a combined basis. At December 31, 1997, brokered certificates of
deposit totaled $83.5 million and municipal certificates of deposit totaled
$117.0 million, representing 17% of total deposits on a combined basis.
Table 17
Maturity Distribution of Certificates of Deposit of $100,000 or More
December 31
(In thousands) 1998
- --------------------------------------------------------------------------------
Three months or less $219,333
Over three months through six months 61,600
Over six months through twelve months 74,825
Over twelve months 30,083
--------
Total $385,841
========
- --------------------------------------------------------------------------------
27
Short-Term Borrowings
Short-term borrowings decreased $4.8 million, or 8%, to $53.5 million at
December 31, 1998, following a 52% decline to $58.3 million a year earlier.
Included in short-term borrowings at year-end 1998 were federal funds purchased
and treasury, tax and loan demand notes. The amount provided by these funding
sources has declined over the past two years due to increases in total deposits
and short- and long-term FHLB advances. See Note 8 to the Consolidated Financial
Statements for further information regarding short-term borrowings.
FHLB Advances
The Company's bank subsidiary routinely utilizes FHLB advances, both on a
short-term and long-term basis, to provide funding for mortgage loan production
and to minimize the interest rate risk associated with certain fixed rate
commercial and residential mortgage portfolio loans. These advances are
generally secured under a blanket security agreement by first mortgage loans or
investment securities with an aggregate book value equal to at least 150% of the
total advances. Total FHLB advances were $456.6 million at December 31, 1998
compared to $366.6 million at December 31, 1997, representing a 25% increase.
This increase was primarily attributable to the utilization of short-term FHLB
advances to fund mortgage loan originations. See Note 9 to the Consolidated
Financial Statements for further information regarding FHLB advances.
Long-Term Debt
Long-term debt totaled $47.5 million at December 31, 1998 and 1997. See Note 10
to the Consolidated Financial Statements for further information regarding
long-term debt.
Capital
Shareholders' equity increased $19.3 million, or 15%, to $150.4 million at
December 31, 1998, after increasing 8% to $131.1 million a year earlier. The
increase in shareholders' equity during 1998 resulted primarily from the
retention of $15.3 million in net income after dividends. In addition, fewer
common shares were repurchased during the year under the Company's stock
repurchase plan--77,250 shares in 1998 versus 624,100 shares in 1997. The
Company declared $7.5 million in cash dividends to shareholders in 1998, a 9%
increase over the amount declared in 1997.
On December 1, 1998, prior to the announcement of the Company's merger with
D&N Financial, the Board of Directors formerly rescinded the Company's stock
repurchase 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 10.20% at December 31,
1998, compared to 10.35% a year ago. The slight decline in this ratio resulted
primarily from an increase in risk-weighted assets due to growth in the loan
portfolio. For further information regarding regulatory capital requirements,
see Note 22 to the Consolidated Financial Statements.
Liquidity Management
The objective of liquidity management is to provide funds at an acceptable cost
to meet mortgage and commercial loan demand and deposit withdrawals and to
service other liabilities as they become due. Managing liquidity also enables
the Company to take advantage of opportunities for business expansion. Funds are
available from a number of sources, including, but not limited to, cash and
money market investments, the investment securities portfolio, mortgage loans
held for sale and portfolio loan repayments and maturities.
Short-term liquidity is available from federal funds purchased, securities
sold under agreement to repurchase, core deposit growth, brokered and municipal
certificates of deposit and FHLB advances. Long-term liquidity is generated from
securities sold under agreement to repurchase, deposit growth, the maturity
structure of time deposits, brokered certificates of deposit and FHLB advances.
As of December 31, 1998, the Company's balance of certificates of deposit
maturing within the next twelve months was $664.6 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.
28
The parent company has two major funding sources to meet its liquidity
requirements: dividends from its subsidiary and access to the capital markets.
On December 31, 1998, $68.5 million was available within the bank subsidiary for
payment of dividends to the parent company without prior regulatory approval,
compared to $35.5 million at December 31, 1997. Also, at December 31, 1998, the
parent company had interest-earning deposits of $28.0 million at Republic Bank
to meet any liquidity requirements.
As discussed in Item 1 of the Company's 1998 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.
At December 31, 1998, Republic Bank had available $52.0 million in
unused lines of credit with third parties for federal funds purchased and $184.1
million available in unused borrowings with the FHLB.
Forward-Looking Statements
The sections that follow entitled "Market Risk Management" and "Impact of Year
2000" contain 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 1998 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 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.
During 1998, short-term and long-term interest rates decreased fairly
significantly. The three-month treasury-bill decreased 88 basis points from
December 31, 1997 to December 31, 1998, while the 30-year treasury bond
decreased 83 basis points and the prime lending rate decreased 75 basis points
during 1998. As a result of these rate decreases, the demand for residential
loans increased significantly during 1998. Commercial lending was also
positively affected by the drop in interest rates. The Company funded the
mortgage loans held for sale growth primarily with short-term FHLB borrowings,
short-term municipal deposits and core deposit growth. Commercial loan growth
was funded primarily with core deposit growth and long-term FHLB borrowings. The
Company was able to increase its net interest margin 8 basis points to 3.24%
during 1998 because short-term and long-term borrowing costs fell and the
Company reduced its rates paid on many deposit products.
The mortgage loans held for sale balance is the Company's most interest
rate sensitive asset. It is also short-term in nature as the majority of loans
in this balance are sold within 60 days. By funding this balance with primarily
short-term borrowings, the Company is able to both closely match its liquidity
needs as this balance will
29
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 20 to the
Consolidated Financial Statements, 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 market risk during the
period after the loans close but before they are sold to investors. To minimize
this exposure to market risk, the Company enters into firm commitments to sell
such mortgage loans at specified future dates to various third parties.
The Company utilizes two complementary quantitative tools to measure and
monitor interest rate risk: static gap analysis and earnings simulation
modeling. Each of these interest rate risk measurements has limitations, but
when evaluated together, they provide a reasonably comprehensive view of the
exposure the Company has to interest rate risk.
Static Gap Analysis: Static gap analysis is utilized at the end of each
month to measure the amount of interest rate risk embedded in the balance sheet
as of a point in time. It does this by comparing the differences in the
repricing characteristics of interest-earning assets and interest-bearing
liabilities. A gap is defined as the difference between the principal amount of
interest-earning assets and interest-bearing liabilities that reprice within a
specified time period. This gap provides a general indication of the sensitivity
of the Company's net interest income to interest rate changes. Consequently, if
more assets than liabilities reprice or mature in a given period, resulting in
an asset sensitive position or positive gap, increases in market interest rates
will generally benefit net interest income because earning asset rates will
reflect the changes more quickly. Alternatively, where interest-bearing
liabilities reprice more quickly than interest-earning assets, resulting in a
liability sensitive position or negative gap, increases in market interest rates
will generally have an adverse impact on net interest income. At December 31,
1998, the cumulative one-year gap was a positive 7.67% of total earning assets.
At December 31, 1997, the cumulative one-year gap was a positive 4.25% 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.
30
Table 18
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, 1998
Interest-Earning Assets:
Federal funds sold and other money market
investments $ 14,106 $ -- $ -- $ -- $ 14,106
Mortgage loans held for sale 761,227 -- -- -- 761,227
Securities available for sale 36,978 1,956 1,114 7,221 47,269
Loans, net of unearned income 351,817 212,212 459,614 188,787 1,212,430
---------- ---------- ---------- ---------- ----------
Total interest-earning assets $1,164,128 $ 214,168 $ 460,728 $ 196,008 $2,035,032
========== ========== ========== ========== ==========
Interest-Bearing Liabilities:
Deposits:
Savings and NOW accounts $ -- $ 190,879 $ 183,745 $ -- $ 374,624
Money market accounts -- 59,441 46,158 -- 105,599
Certificates of deposit:
Under $100,000 110,695 198,178 69,166 441 378,480
$100,000 or more 219,333 136,425 30,083 -- 385,841
---------- ---------- ---------- ---------- ----------
Total certificates of deposit 330,028 334,603 99,249 441 764,321
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits 330,028 584,923 329,152 441 1,244,544
Short-term borrowings (2) 53,500 -- -- -- 53,500
FHLB advances 198,000 55,700 187,868 15,000 456,568
Long-term debt -- -- 47,500 -- 47,500
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 581,528 $ 640,623 $ 564,520 $ 15,441 $1,802,112
========== ========== ========== ========== ==========
Interest rate sensitivity gap $ 582,600 $ (426,455) $ (103,792) $ 180,567 $ 232,920
As a percentage of total interest-earning assets 28.63% (20.96)% (5.10)% 8.87% 11.45%
Cumulative interest rate sensitivity gap $ 582,600 $ 156,145 $ 52,353 $ 232,920
As a percentage of total interest-earning assets 28.63% 7.67% 2.57% 11.45%
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997
Interest-Earning Assets:
Federal funds sold and other money market
investments $ 2,210 $ -- $ -- $ -- $ 2,210
Mortgage loans held for sale 513,533 -- -- -- 513,533
Securities available for sale 101,150 4,213 1,877 12,641 119,881
Loans, net of unearned income 268,562 261,426 378,422 187,334 1,095,744
---------- ---------- ---------- ---------- ----------
Total interest-earning assets $ 885,455 $ 265,639 $ 380,299 $ 199,975 $1,731,368
========== ========== ========== ========== ==========
Interest-Bearing Liabilities:
Deposits:
Savings and NOW accounts $ -- $ 155,148 $ 135,914 $ -- $ 291,062
Money market accounts -- 55,635 42,026 -- 97,661
Certificates of deposit:
Under $100,000 62,172 185,255 113,718 337 361,482
$100,000 or more 154,919 128,076 47,449 -- 330,444
---------- ---------- ---------- ---------- ----------
Total certificates of deposit 217,091 313,331 161,167 337 691,926
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits 217,091 524,114 339,107 337 1,080,649
Short-term borrowings (2) 57,315 959 -- -- 58,274
FHLB advances 216,000 62,000 88,632 -- 366,632
Long-term debt -- -- 34,000 13,500 47,500
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 490,406 $ 587,073 $ 461,739 $ 13,837 $1,553,055
========== ========== ========== ========== ==========
Interest rate sensitivity gap $ 395,049 $ (321,434) $ (81,440) $ 186,138 $ 178,313
As a percentage of total interest-earning assets 22.82% (18.57)% (4.70)% 10.75% 10.30%
Cumulative interest rate sensitivity gap $ 395,049 $ 73,615 $ (7,825) $ 178,313
As a percentage of total interest-earning assets 22.82% 4.25% (0.45)% 10.30%
- -----------------------------------------------------------------------------------------------------------------------------------
(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.
31
Earnings Simulation: 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 December 31, 1998, the earnings simulation model projects net
interest income would increase by 10.0% of base net interest income for 1999,
assuming an immediate parallel shift upward in market interest rates by 300
basis points. If market interest rates fall by 300 basis points, the model
projects net interest income would decrease by 14.1%. These projected levels are
well within the Company's policy limits. These results portray
the Company's interest rate risk position as asset-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.
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 may be much larger than would implied by a simple
linear extrapolation of the results generated by the earnings simulation model.
The Company's fair value of its mortgage servicing portfolio does increase,
however, in a rising interest rate environment. Significant decreases in
interest rates typically result in higher loan prepayment activity, which
reduces interest income and causes the Company's mortgage servicing rights to
decrease in value. However, a lower interest rate environment would enable more
potential borrowers to reduce their mortgage interest rate and qualify for
relatively higher mortgage loan balances, therefore resulting in higher mortgage
loan production activity as well as interest income.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company initiated the process of preparing its computer systems and
applications for the year 2000 in June 1997. Management of the Company has
developed and maintains a Year 2000 Compliance Plan. The status of the Plan was
reviewed quarterly by the Company's Board of Directors through 1998 and is being
reviewed monthly in 1999. This Plan contains requirements for assessing the
impact of the Year 2000 on critical computer systems and applications and for
modifying, replacing and testing certain hardware and software maintained by the
Company so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company's computer systems are
typically standard hardware from national computer hardware vendors. The
Company's computer software is typically purchased software from national
vendors, and is installed and operated without major modifications. The Company
presently believes that with modifications or replacements of existing software
and certain hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company's Year 2000 Compliance Plan has been prepared in accordance
with the Federal Financial Institutions Examination Council (FFIEC) guidelines
on Year 2000 Compliance and involves the following five phases: awareness,
assessment, renovation, testing, and implementation. To date, the Company has
completed the awareness, assessment and renovation phases of the Year 2000
Compliance Plan. As a part of the assessment phase, certain ancillary
applications were identified as not being Year 2000 compliant and have been
successfully replaced. The assessment of hardware compliance has found all
mission critical systems compliant, with the exception of one mortgage banking
hardware platform which has been replaced, and with only minimal personal
computer equipment not compliant. This personal computer equipment will be
replaced during the normal course
32
of business. In addition, due to the Company's business operating needs, the
Company's core banking system has recently been converted to a new system,
including complete replacement of hardware and software.
The testing of mission critical third party hardware and software
systems is approximately 70% completed, noting no Year 2000 compliance issues.
The Company is expected to complete the validation/testing phase for mission
critical systems by March 31, 1999 and is expected to complete the Year 2000
project no later than June 30, 1999. The total Year 2000 project cost for the
Company is estimated at $1.3 million and is being funded through operating cash
flows. To date, the Company has incurred approximately $540,000 ($180,000
expensed and $360,000 capitalized for new systems hardware and software). The
remaining $760,000 relates principally to validation/testing and capitalization
of equipment and software and is not expected to have a material effect on the
Company's results of operations, liquidity or capital resources.
The impact of the Year 2000 issues on the Company will depend not only
on corrective actions that the Company takes, but also on the way in which Year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from, the
Company, or whose financial condition or operational capability is important to
the Company. To reduce this exposure, the Company has initiated formal
communications with its significant suppliers and large customers to determine
the extent to which the Company's systems and processes are vulnerable to those
third parties' failures to resolve their own Year 2000 issues. The Company has
received communications from the all mission critical third party vendors and
the majority of other third party vendors either confirming that the third
parties software systems are Year 2000 compliant or providing the Company with a
time line of an expected compliance date by mid-1999. All third party vendors
with a direct interface to the Company's computer systems will be fully tested
during the validation/testing phase. The Company is continuing to seek
assurances that the systems of other companies on which the Company's systems
rely will be timely converted or modified.
The Company's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address Year 2000 issues. As a result,
Republic Bank has identified its material borrowers and have assessed these
borrowers' Year 2000 preparedness. The material borrowers' Year 2000 readiness
will be monitored periodically, based on the level of risk that the Year 2000
has been estimated to potentially impact the business of each borrower. The
Company's risk of material loss due to customer failure to adequately prepare
for the Year 2000 is reduced as a result of 93% of the Company's commercial loan
portfolio being secured by real estate.
The Company is preparing general contingency plans to address
unforeseen Year 2000 issues, including plans in the event that, despite all
efforts to ensure Year 2000 Compliance, mission critical systems still
experience difficulties or other significant third parties fail to adequately
address Year 2000 issues. These plans involve the operation of systems in an
off-line "limited computerized" environment. This would be accomplished by the
manual and desktop computer update of financial records until problems or
difficulties are remedied. The Company has determined that it must rely
primarily on its software vendors to remedy any unforeseen situations of its
mission critical systems in a timely manner.
The Company is also enhancing its existing business resumption plans
for both information and non-information technology areas to reflect Year 2000
issues. It is developing plans, designed to coordinate the efforts of its
personnel and resources, in addressing any year 2000 difficulties that become
evident as a result of Year 2000 issues. There can be no assurance that any
plans will fully mitigate any such difficulties. Furthermore, there may be
certain mission critical third parties, such as utilities or telecommunication
companies, where alternative arrangements or other sources are limited or
unavailable.
The costs of the project and the date on which the Company projects it
will complete the Year 2000 modifications were based on management's best
estimates. There can be no guarantee that these estimates will be achieved and
actual results could differ from those anticipated. Specific factors that might
cause differences include, without limitation, the ability of other companies on
which the Company's systems rely to modify or convert their systems to be Year
2000 compliant, the ability to locate and correct all relevant computer codes,
and similar uncertainties.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. In the
event that the Company does not complete any additional phases, under the most
reasonably likely worst case scenario, the Company could be unable to process
customer loan and deposit transactions, perform
33
interest computations or collect payments. In addition, disruptions in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation for
equipment shutdown or failure to properly date customer records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Accounting and Financial Reporting Developments
As of January 1, 1998, the Company adopted the Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income (Statement 130).
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however the adoption of this Statement
had no impact on the Company's net income or shareholders' equity. This
Statement requires unrealized gains or losses on the Company's available for
sale securities, which prior to the adoption were reported separately in
shareholders' equity, to be included in comprehensive income.
Also effective January 1, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information (Statement
131). Statement 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
Statement 131 also establishes standards for related disclosures about products
and services, geographic area, and major customers. The adoption of Statement
131 did not affect results of operations or financial position, but did affect
the disclosure of segment information. See Note 19 of the Notes to Consolidated
Financial Statements for further discussion of segment information.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. 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.
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.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Republic Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 17,627 $ 27,458
Interest-earning deposits with banks 14,106 2,210
------------ ------------
Cash and cash equivalents 31,733 29,668
Mortgage loans held for sale 761,227 513,533
Securities available for sale 47,269 119,881
Loans, net of unearned income 1,212,430 1,095,744
Less allowance for loan losses (10,451) (7,334)
------------ ------------
Net loans 1,201,979 1,088,410
Premises and equipment 18,180 12,505
Mortgage servicing rights 59,445 58,413
Other assets 75,779 50,483
------------ ------------
Total assets $ 2,195,612 $ 1,872,893
============ ============
Liabilities
Noninterest-bearing deposits $ 134,147 $ 96,644
Interest-bearing deposits:
NOW accounts 30,987 29,561
Savings and money market accounts 449,236 359,162
Certificates of deposit 764,321 691,926
------------ ------------
Total interest-bearing deposits 1,244,544 1,080,649
------------ ------------
Total deposits 1,378,691 1,177,293
Federal funds purchased, securities sold
under agreements to repurchase and
other short-term borrowings 53,500 58,274
FHLB advances 456,568 366,632
Accrued expenses and other liabilities 108,009 91,142
Long-term debt 47,500 47,500
------------ ------------
Total liabilities 2,044,268 1,740,841
Minority interest 927 964
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; 30,000,000 shares
authorized; 23,753,165 and 23,347,803 shares
issued and outstanding in 1998 and 1997,
respectively 118,766 93,391
Capital surplus 28,456 37,221
Retained earnings 3,432 1,274
Accumulated other comprehensive income (loss) (237) (798)
------------ ------------
Total shareholders' equity 150,417 131,088
------------ ------------
Total liabilities and shareholders' equity $ 2,195,612 $ 1,872,893
============ ============
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes.
35
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Income
- ---------------------------------------------------------------------------------------------------
Years Ended December 31
(Dollars in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans $ 141,537 $ 105,819 $ 80,436
Interest on investment securities 4,109 12,769 18,273
Interest on federal funds sold 243 141 282
Interest on interest-earning deposits with banks 116 123 156
--------- --------- ---------
Total interest income 146,005 118,852 99,147
--------- --------- ---------
Interest Expense
Interest on deposits:
NOW accounts 602 993 1,358
Savings and money market accounts 14,962 12,331 8,882
Certificates of deposits 43,531 35,662 32,028
--------- --------- ---------
Total interest expense on deposits 59,095 48,986 42,268
Federal funds purchased and securities sold
under agreements to repurchase 2,307 5,715 8,378
Other short-term borrowings 155 466 1,944
Interest on FHLB advances 21,372 13,275 6,094
Interest on long-term debt 3,435 3,470 3,743
--------- --------- ---------
Total interest expense 86,364 71,912 62,427
--------- --------- ---------
Net interest income 59,641 46,940 36,720
Provision for loan losses 4,000 3,031 290
--------- --------- ---------
Net interest income after provision for loan losses 55,641 43,909 36,430
--------- --------- ---------
Noninterest Income
Mortgage banking revenue 132,600 93,700 86,377
Service charges 1,513 1,446 1,218
Investment securities gains (losses) (305) (497) 766
Gain on sale of SBA loans 2,145 1,065 1,242
Gain on sale of bank branches and deposits -- 4,442 --
Other noninterest income 1,488 2,359 1,243
--------- --------- ---------
Total noninterest income 137,441 102,515 90,846
--------- --------- ---------
Noninterest Expense
Salaries and employee benefits 50,787 48,358 42,589
Mortgage loan commissions and incentives 56,297 29,767 24,590
Occupancy expense of premises 8,250 7,022 6,145
Equipment expense 5,263 4,538 4,626
SAIF assessment fee -- -- 1,500
Other noninterest expenses 36,869 28,057 25,042
--------- --------- ---------
Total noninterest expense 157,466 117,742 104,492
--------- --------- ---------
Income before income taxes and extraordinary item 35,616 28,682 22,784
Provision for income taxes 12,726 9,893 7,718
--------- --------- ---------
Income before extraordinary item 22,890 18,789 15,066
Extraordinary item - loss on early redemption of
debt, net of tax -- -- (388)
--------- --------- ---------
Net Income $ 22,890 $ 18,789 $ 14,678
========= ========= =========
Basic Earnings Per Share:
Income before extraordinary item $ .97 $ .80 $ .63
Extraordinary item -- -- (.02)
--------- --------- ---------
Net income per share--basic $ .97 $ .80 $ .61
========= ========= =========
Diluted Earnings Per Share:
Income before extraordinary item $ .96 $ .79 $ .61
Extraordinary item -- -- (.02)
--------- --------- ---------
Net income per share--assuming dilution $ .96 $ .79 $ .59
========= ========= =========
- ---------------------------------------------------------------------------------------------------
See accompanying notes.
36
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, 1996 16,478 $ 82,390 $ 43,177 $ 2,172 $ (1,363) $ 126,376
Comprehensive Income:
Net Income 14,678 14,678
Unrealized holding loss on securities,
net of $316 income tax benefit (587) (587)
Reclassification adjustment for gains
included in net income, net of $268
income tax expense (498) (498)
---------- ------------
Net unrealized gains on securities,
net of tax (1,085) (1,085)
------------
Comprehensive income 13,593
Cash dividends declared ($.27 per share) (6,531) (6,531)
Awards of common shares under
Restricted Stock Plan (790) (790)
Amortization of restricted stock 648 648
10% common share dividend 1,565 7,827 1,398 (9,240) (15)
Issuance of common shares:
Through exercise of stock options 212 1,062 (28) 1,034
Through exercise of stock warrants 2 9 (3) 6
Through employee stock awards 65 325 422 747
Tax benefit relating to exercise of
stock options 514 514
Repurchase of common shares (1,193) (5,967) (7,800) (13,767)
--------- --------- --------- ---------- --------- -----------
Balances at December 31, 1996 17,129 85,646 37,538 1,079 (2,448) 121,815
Comprehensive Income:
Net Income 18,789 18,789
Unrealized holding gains on securities,
net of $715 income tax expense 1,327 1,327
Reclassification adjustment for losses
included in net income, net of $174
income tax benefit 323 323
--------- -----------
Net unrealized gains on securities,
net of tax 1,650 1,650
-----------
Comprehensive income 20,439
Cash dividends declared ($.30 per share) (6,950) (6,950)
Awards of common shares under
Restricted Stock Plan (1,575) (1,575)
Amortization of restricted stock 824 824
10% common share dividend 1,693 8,466 3,155 (11,644) (23)
Issuance of common shares:
Through exercise of stock options 289 1,446 115 1,561
Through exercise of stock warrants 53 264 (70) 194
Through employee stock awards 138 690 1,196 1,886
Tax benefit relating to exercise
of stock options 1,123 1,123
Repurchase of common shares (624) (3,121) (5,085) (8,206)
--------- --------- --------- --------- --------- -----------
Balances at December 31, 1997 18,678 93,391 37,221 1,274 (798) 131,088
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes.
37
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Continued)
- ----------------------------------------------------------------------------------------------------------------------
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 December 31, 1997 18,678 $ 93,391 $ 37,221 $ 1,274 $ (798) $ 131,088
Comprehensive Income:
Net Income 22,890 22,890
Unrealized holding gains on securities,
net of $195 income tax expense 363 363
Reclassification adjustment for losses
included in net income, net of $107
income tax benefit 198 198
--------- -----------
Net unrealized gains on securities,
net of tax 561 561
-----------
Comprehensive income 23,451
Cash dividends declared ($.32 per share) (7,549) (7,549)
Awards of common shares under
Restricted Stock Plan (1,640) (1,640)
Amortization of restricted stock 979 979
5 for 4 stock split 4,737 23,685 (10,538) (13,183) (36)
Issuance of common shares:
Through exercise of stock options 117 585 354 939
Through exercise of stock warrants 135 673 (215) 458
Through employee stock awards 163 818 2,255 3,073
Tax benefit relating to exercise of stock
options and warrants and vesting of
restricted stock 873 873
Repurchase of common shares (77) (386) (833) (1,219)
--------- --------- --------- --------- --------- -----------
Balances at December 31, 1998 23,753 $ 118,766 $ 28,456 $ 3,432 $ (237) $ 150,417
========= ========= ========= ========= ========== ===========
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes.
38
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 22,890 $ 18,789 $ 14,678
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,602 5,099 5,258
Amortization and impairment of mortgage servicing rights 16,415 6,918 7,616
Net gains on sale of mortgage servicing rights (37,572) (29,398) (33,041)
Net losses (gains) on sale of securities available for sale 305 497 (766)
Net gains on sale of loans (5,602) (4,568) (5,488)
Proceeds from sale of mortgage loans held for sale 5,389,303 3,340,995 3,244,436
Origination of mortgage loans held for sale (5,636,997) (3,525,371) (3,150,229)
(Increase) decrease in other assets (37,497) 8,855 (5,205)
Increase in other liabilities 16,829 41,899 5,928
Other, net (6,652) (1,842) (3,292)
----------- ----------- -----------
Total adjustments (295,866) (156,916) 65,217
----------- ----------- -----------
Net cash (used in) provided by operating activities (272,976) (138,127) 79,895
Cash Flows From Investing Activities:
Proceeds from sale of mortgage servicing rights 74,997 26,483 53,182
Additions to mortgage servicing rights (44,845) (29,161) (19,638)
Proceeds from sale of securities available for sale 59,033 189,161 145,422
Proceeds from maturities/principal payments of
securities available for sale 21,513 31,873 57,139
Purchase of securities available for sale (8,098) (111,109) (115,115)
Proceeds from sale of loans 260,316 207,817 215,636
Net increase in loans made to customers (370,340) (511,641) (415,126)
Proceeds from sale of fixed assets 208 4,194 --
----------- ----------- -----------
Net cash used in investing activities (7,216) (192,383) (78,500)
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes.
39
Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
- -------------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase in total deposits $ 201,399 $ 215,722 $ 81,973
Purchase of bank branch deposits -- -- 27,005
Sale of bank branch deposits -- (52,136) --
Net decrease in short-term borrowings (4,774) (62,765) (141,899)
Net increase in short-term FHLB advances 52,000 117,000 4,500
Proceeds from long-term FHLB advances 70,000 156,432 49,200
Payments on long-term FHLB advances (32,064) (41,000) --
Payments on long-term debt -- (1,792) (25,649)
Proceeds from issuance of senior debentures and
subordinated notes, net of issuance costs -- (30) 22,233
Net proceeds from issuance of common shares 4,470 1,755 1,040
Repurchase of common shares (1,219) (6,320) (13,020)
Dividends paid (7,555) (6,802) (6,305)
--------- --------- ---------
Net cash provided by (used in) financing activities 282,257 320,064 (922)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,065 (10,446) 473
Cash and cash equivalents at beginning of year 29,668 40,114 39,641
--------- --------- ---------
Cash and cash equivalents at end of year $ 31,733 $ 29,668 $ 40,114
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 84,807 $ 72,004 $ 63,233
Income taxes $ 4,742 $ 6,153 $ 8,576
Supplemental Schedule of Non-Cash Investing Activities:
Portfolio loan charge-offs $ 1,118 $ 608 $ 758
- -------------------------------------------------------------------------------------------------------
See accompanying notes.
40
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 two primary lines
of business: (1) commercial and retail banking and (2) mortgage banking.
Financial products are offered to consumers and businesses through the 40 retail
bank branches of its banking subsidiary located in Michigan, Ohio and Indiana.
The Company also maintains a nationwide mortgage banking network of 134 offices
located in 21 states. In addition, the Company performs residential mortgage
loan servicing for the benefit of others with responsibilities ranging from
collecting and remitting loan payments to supervising foreclosure proceedings.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Republic
Bancorp Inc.; its wholly-owned banking subsidiary, Republic Bank (including its
wholly-owned mortgage company subsidiaries, Republic Bancorp Mortgage Inc. and
CUB Funding Corporation, and its 80% majority-owned mortgage company subsidiary,
Market Street Mortgage Corporation). Republic Bancorp Mortgage Inc. has three
divisions: Home Funding Inc., Unlimited Mortgage Services and Exchange Mortgage
Corporation. On January 1, 1999, Republic Savings merged with and into Republic
Bank. 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 are classified as available for sale
and stated at fair 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.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are treated as
collateralized borrowing transactions and are recorded at the amount at which
the securities were sold plus accrued interest. The securities sold represent
the underlying collateral in these transactions and are recorded on the balance
sheet at fair value.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. The cost basis of mortgage loans held for sale is adjusted by any gains
or losses generated from corresponding forward commitments to sell the loans to
investors in the secondary market. Such commitments are generally entered into
prior to closing 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.
41
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. Interest income earned on all loans is accrued daily. Loans for which
the accrual of interest has been discontinued are designated as non-accrual
loans. Commercial loans, residential real estate mortgage loans and installment
loans are placed on non-accrual status at the time the loan is 90 days past due,
unless the loan is well-secured and in the process of collection. In all cases,
loans may be placed on non-accrual status when, in the opinion of management,
reasonable doubt exists as to the full, timely collection of interest or
principal. All interest accrued but not collected for loans that are placed on
non-accrual status is reversed and charged against current income. Any interest
payments subsequently received on non-accrual loans are applied against the
principal balance. Loans are considered restructured when the Company makes
certain concessions to a financially troubled debtor that would not normally be
considered. Loan origination and commitment fees and certain direct loan
origination costs are deferred and recognized over the life of the related loan
as an adjustment to the yield on the loan.
Allowance for Loan Losses
The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the loan portfolio that have been
incurred as of the balance sheet date. The allowance for loan losses is
maintained at an adequate level through additions to the provision for loan
losses. An appropriate level of the general allowance is determined based on the
application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. Management also considers other factors when
determining the unallocated allowance, including loan quality, changes in the
size and character of the loan portfolio, consultation with regulatory
authorities, amount of nonperforming loans, delinquency trends and economic
conditions and industry trends.
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended
by SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the contractual
terms of the original loan agreement. Consistent with this definition, all
non-accrual and restructured loans (with the exception of residential mortgage
and consumer installment loans) are impaired. An impaired loan for which it is
deemed necessary to record a specific allowance is, typically, written down to
the fair value of the underlying collateral at the time it is placed on
non-accrual status via a direct charge-off against the allowance for loan
losses. Consequently, those impaired loans not requiring a specific allowance
represent loans for which the fair value of the underlying collateral equaled or
exceeded the recorded investment in the loan. All impaired loans were evaluated
using the fair value of the underlying collateral as the measurement method.
It must be understood, however, that inherent risks and uncertainties
related to the operation of a financial institution require management to depend
on estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial prospects
of borrowers may result in abrupt changes to the estimates, appraisals or
evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Each element of the general allowance for December 31, 1998, 1997 and 1996
was determined by applying the following risk percentages to each grade of loan:
Pass - .10% to .25%, depending on category of loans classified as Superior, High
and Satisfactory; Special mention - 5%; Substandard - 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.
42
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
The Company periodically reviews each commercial loan in excess of $25,000
and assigns a grade based on loan type, collateral value, financial condition of
the borrower and payment history. Delinquent mortgage and installment loans are
reviewed bi-weekly and assigned a rating based on their payment history,
financial condition of the borrower and collateral values. Specific mortgage and
installment loans are also reviewed in conjunction with the previously described
review of any related commercial loan.
Based upon these reviews, the Company determines the grade for its loan
portfolio on a quarterly basis and computes the allowance for loan losses.
Management believes the periodic review provides a mechanism that results in
loans being graded in the proper category and accordingly, assigned the proper
risk loss percentage in computing the general or specific reserve.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed on a straight-line basis over the shorter of the
estimated useful lives of the related assets or the remaining lease terms.
Mortgage Servicing Rights
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan and the mortgage servicing rights ("MSRs") based on
their relative fair values at the date of origination. The capitalized cost of
MSRs is amortized in proportion to and over the period of the estimated future
net servicing income. Mortgage servicing rights are periodically evaluated for
impairment, which represents the excess of cost of an individual MSR stratum
over its fair value. Impairment is recognized through a valuation allowance. For
purposes of measuring impairment, MSRs are stratified on the basis of loan type
(e.g., fixed, balloon or adjustable) and interest rate.
Fair values for individual stratum are based on the present value of
estimated future cash flows using a discount rate commensurate with the risks
involved. Estimates of fair value include assumptions about prepayment speeds,
default and interest rates, and other factors which are subject to change over
time. Changes in these underlying assumptions could cause the fair value of
MSRs, and the related valuation allowance, to change significantly in the
future.
Goodwill
The excess of cost over the fair value of net assets acquired is included
in other assets and is amortized using the straight-line method over a period of
15 years. Core deposit intangible assets are amortized on a straight-line basis
over a period of 10 to 15 years.
Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to temporary differences between the tax and financial statement
basis of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is established to the extent current available
evidence about future events raise doubt about the future realization of a
deferred tax asset. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enacted date.
Earnings Per Share
Basic earnings per share is calculated by dividing income available to
common shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share include any dilutive effects of options and warrants.
43
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Stock-Based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation. As permitted by the Statement, the Company continues
to use the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion No. 25 when accounting for its employee stock compensation plans.
Therefore, no compensation costs are charged against income for stock option
grants. Accordingly, the Company is required to disclose pro forma net income
and earnings per share information as if compensation expense had been
recognized for stock options granted based on the fair value method prescribed
by SFAS No. 123. See Note 13 to the Consolidated Financial Statements.
The Company continues to recognize compensation expense for restricted
stock over the vesting period in accordance with APB Opinion No. 25. Such
expense is included in salaries and employee benefits expense on the
consolidated statements of income. The unamortized portion of restricted stock
is included as a component of shareholders' equity.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest-earning deposits with banks,
federal funds sold and other short-term investments with maturities less than 90
days.
Note 2. Acquisitions and Divestitures
The Company completed the following acquisitions and divestitures in the years
indicated. The purchase price for each acquisition was immaterial, and all
acquisitions were accounted for under the purchase method of accounting unless
otherwise noted. With the exception of the sale of bank branches, these
transactions did not have a significant impact on the Company's results of
operations.
During 1998:
In May 1998, the Company acquired certain assets and the mortgage
origination network of World Class Mortgage Corporation of Naperville, Illinois.
The mortgage operation has one office and operates as a loan production office
of Republic Bank.
In December 1998, the Company and D&N Financial Corporation ("D&N
Financial"), headquartered in Troy and Hancock, Michigan, entered into an
Agreement and Plan of Merger ("Merger Agreement"). Pursuant to the Merger
Agreement, D&N Financial will merge with and into the Company and the Company
will be the surviving corporation. The combined company will be the fourth
largest bank holding company in Michigan with over $4 billion in assets and 187
offices, including 87 retail and commercial banking offices in Michigan, Ohio
and Indiana and 100 mortgage loan production offices in 21 states. The merger is
subject to normal regulatory approvals and the approval of the shareholders of
both companies. The transaction is expected to close in the second quarter of
1999. Under the terms of the Merger Agreement, the Merger will be accomplished
through a tax-free exchange of shares and accounted for as a
pooling-of-interests.
During 1997:
In May 1997, the Company completed the sale of four southern Michigan
branches of Republic Bank. The sale included the fixed assets of the Hillsdale,
Litchfield, Somerset Center and Spring Arbor offices and deposits totaling $52
million. The Company recognized a $4.4 million gain on the sale.
In September 1997, the Company acquired certain assets and the mortgage
origination network of Exchange Mortgage Corporation of Southfield, Michigan.
The mortgage operation has three offices in Michigan, including a sub-prime
mortgage lending division, Union Mortgage Services. Exchange Mortgage operates
as a division of Republic Bancorp Mortgage Inc.
44
Notes to Consolidated Financial Statements
Note 3. 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, 1998:
U.S. Treasury and Government agency securities $ 5,161 $ -- $ 73 $ 5,088
Collateralized mortgage obligations 1,455 -- 12 1,443
Mortgage-backed securities 6,374 1 65 6,310
Municipal and other securities 3,009 181 -- 3,190
-------- -------- -------- --------
Total debt securities 15,999 182 150 16,031
Equity securities and investment in FHLB 31,634 -- 396 31,238
-------- -------- -------- --------
Total securities available for sale $ 47,633 $ 182 $ 546 $ 47,269
======== ======== ======== ========
December 31, 1997:
U.S. Treasury and Government agency securities $ 40,900 $ 119 $ 213 $ 40,806
Collateralized mortgage obligations 24,283 34 68 24,249
Mortgage-backed securities 24,020 3 455 23,568
Municipal and other securities 3,051 134 -- 3,185
-------- -------- -------- --------
Total debt securities 92,254 290 736 91,808
Equity securities and investment in FHLB 28,855 -- 782 28,073
-------- -------- -------- --------
Total securities available for sale $121,109 $ 290 $ 1,518 $119,881
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of securities available for sale
at December 31, 1998, by contractual maturity, are shown on the following table.
Variable rate mortgage-backed securities are indexed to the 11th District Cost
of Funds. 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 1.0 year. Collateral
for all mortgage-backed securities and collateralized mortgage obligations is
guaranteed by U.S. Government agencies.
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1998 Due Within One to Five to After
(In thousands) One Year Five Years Ten Years Ten Years
- -----------------------------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and
Government agency
securities $ -- $ -- $ -- $ -- $ -- $ -- $ 5,161 $ 5,088
Collateralized mortgage
obligations -- -- -- -- -- -- 1,455 1,443
Mortgage-backed securities -- -- 70 72 -- -- 6,304 6,238
Municipal and other
securities 30 30 115 117 770 809 2,094 2,234
Equity securities 31,634 31,238 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total securities
available for sale $31,664 $31,268 $ 185 $ 189 $ 770 $ 809 $15,014 $15,003
======= ======= ======= ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------
December 31, 1998
(In thousands) Total
- ----------------------------------------------------
Estimated
Amortized Market
Cost Value
- ----------------------------------------------------
U.S. Treasury and
Government agency
securities $ 5,161 $ 5,088
Collateralized mortgage
obligations 1,455 1,443
Mortgage-backed securities 6,374 6,310
Municipal and other
securities 3,009 3,190
Equity securities 31,634 31,238
------- -------
Total securities
available for sale $47,633 $47,269
======= =======
45
Notes to Consolidated Financial Statements
Note 3. Securities Available for Sale (Continued)
Sales of investment securities resulted in the following realized gains and
losses:
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Proceeds from sales $ 59,033 $ 189,161 $ 145,422
Realized gains (losses):
Securities gains $ 390 $ 742 $ 824
Securities losses (695) (1,239) (58)
--------- --------- ---------
Net securities gains (losses) $ (305) $ (497) $ 766
========= ========= =========
- --------------------------------------------------------------------------------
Securities with a carrying value of approximately $8.8 million and $30.9 million
at December 31, 1998 and 1997, respectively, were pledged to secure certain
securities sold under agreements to repurchase and public deposits as required
by law.
Note 4. Loans
Information regarding the Company's loan portfolio follows:
- --------------------------------------------------------------------------------
December 31
(In thousands) 1998 997
- --------------------------------------------------------------------------------
Commercial:
Commercial and industrial $ 31,786 $ 41,095
Real estate construction 84,767 48,346
Commercial real estate mortgages 343,171 233,078
---------- ----------
Total commercial loans 459,724 322,519
Residential real estate mortgages 642,129 669,203
Installment loans 110,577 104,022
---------- ----------
Total loans, net of unearned income $1,212,430 $1,095,744
========== ==========
- --------------------------------------------------------------------------------
A geographic concentration exists within the Company's loan portfolio since
most portfolio lending activity is conducted in Michigan and Ohio. At December
31, 1998, approximately 57% of outstanding portfolio loans was concentrated in
Michigan and 34% in Ohio. At December 31, 1998, there were no aggregate loan
concentrations of 10% or more of total portfolio loans to any particular
industry.
Note 5. Allowance for Loan Losses and Impaired Loans
An analysis of changes in the allowance for loan losses follows:
- -------------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------
Balance at beginning of year $ 7,334 $ 4,709 $ 5,002
Loans charged off (1,118) (608) (758)
Recoveries on loans previously charged off 235 202 175
-------- -------- --------
Net loans charged off (883) (406) (583)
Provision for loan losses 4,000 3,031 290
-------- -------- --------
Balance at end of year $ 10,451 $ 7,334 $ 4,709
======== ======== ========
Amount of balance at end of year:
Related to impaired loans $ -- $ -- $ 96
Related to all other loans $ 10,451 $ 7,334 $ 4,613
- -------------------------------------------------------------------------------------
46
Notes to Consolidated Financial Statements
Note 5. 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 $12.1 million and $11.0 million at December 31, 1998 and 1997,
respectively:
- ---------------------------------------------------------------------------------------------
December 31
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Average recorded investment in impaired loans for the year $1,718 $1,483 $1,545
Gross recorded investment in impaired loans (year-end) $1,083 $1,457 $1,356
Impaired loans requiring a specific allowance -- -- 336
Impairment allowance -- -- 96
Interest income recognized on impaired loans $ 18 $ 22 $ 16
- ---------------------------------------------------------------------------------------------
An impaired loan for which it is deemed necessary to record a specific allowance
is, typically, written down to the fair value of the underlying collateral at
the time it is placed on non-accrual status via a direct charge-off against the
allowance for loan losses. Consequently, those impaired loans not requiring a
specific allowance represent loans for which the fair value of the underlying
collateral equaled or exceeded the recorded investment in the loan. All impaired
loans were evaluated using the fair value of the underlying collateral as the
measurement method.
Note 6. Mortgage Servicing Rights
Activity related to the Company's mortgage servicing rights is as follows:
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $ 58,413 $ 44,398 $ 58,265
Additions 44,845 29,161 19,638
Sales (27,398) (8,228) (25,889)
Amortization expense (14,441) (6,918) (7,616)
Impairment reserve (1,974) -- --
-------- -------- --------
Balance at end of year $ 59,445 $ 58,413 $ 44,398
======== ======== ========
Estimated fair value at end of year $ 59,445 $ 59,574 $ 50,869
======== ======== ========
- --------------------------------------------------------------------------------
Mortgage Servicing Activity
Mortgage loans secured principally by single-family residential properties are
originated and sold to investors without recourse. The Company retains the
servicing rights to certain loans sold. As a loan servicer, the Company is
responsible for collecting and remitting monthly principal and interest
payments, performing certain escrow services and conducting other duties related
to the administration of the loans within the servicing portfolio. The Company's
mortgage servicing portfolio totaled $2.9 billion at December 31, 1998 and
consisted of approximately 35,000 loans. At December 31, 1997, the mortgage
servicing portfolio was $3.1 billion and consisted of approximately 39,000
loans.
At December 31, 1998 and 1997, the Company was responsible for $112.1
million and $59.9 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.
47
Notes to Consolidated Financial Statements
Note 7. Premises and Equipment
Premises and equipment consisted of the following:
- --------------------------------------------------------------------------------
December 31
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Land $ 1,223 $ 1,289
Furniture, fixtures and equipment 28,996 22,899
Buildings and improvements 11,655 8,685
-------- --------
41,874 32,873
Less accumulated amortization and depreciation (23,694) (20,368)
-------- --------
Premises and equipment $ 18,180 $ 12,505
======== ========
- --------------------------------------------------------------------------------
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, 1998, 1997 and 1996 totaled $6.9 million, $5.4 million, and $4.6
million, respectively.
As of December 31, 1998, the future aggregate minimum lease payments
required under noncancellable operating leases are as follows:
- --------------------------------------------------------------------------------
Operating
Year Ending Lease Payments
- --------------------------------------------------------------------------------
1999 $ 5,378
2000 4,110
2001 2,717
2002 1,854
2003 1,298
2004 and thereafter 4,502
----------
Total minimum lease payments required $ 19,859
==========
- --------------------------------------------------------------------------------
48
Notes to Consolidated Financial Statements
Note 8. 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, 1998
Federal funds purchased $ 48,000 5.27% $ 35,717 5.59% $ 90,000
Securities sold under agreements
to repurchase -- -- 5,393 5.75 19,848
Other short-term borrowings 5,500 4.29 3,077 5.03 8,000
-------- ---- -------- ---- --------
Total short-term borrowings $ 53,500 5.16% $ 44,187 5.57% $117,848
======== ==== ======== ==== ========
- -----------------------------------------------------------------------------------------------
December 31, 1997
Federal funds purchased $ 32,000 6.61% $ 38,091 5.75% $ 70,900
Securities sold under agreements
to repurchase 20,770 5.89 62,163 5.67 106,596
Other short-term borrowings 5,504 5.27 7,017 6.64 7,205
-------- ---- -------- ---- --------
Total short-term borrowings $ 58,274 6.23% $107,271 5.76% $184,701
======== ==== ======== ==== ========
- -----------------------------------------------------------------------------------------------
Federal funds purchased mature within one day following the transaction
date and securities sold under agreements to repurchase generally mature within
ninety days from the transaction date. At December 31, 1998, Republic Bank had
$52.0 million of unused lines of credit available with third parties for federal
funds purchased.
Other short-term borrowings at December 31, 1998 and 1997 were comprised of
treasury, tax and loan demand notes.
Note 9. FHLB Advances
FHLB advances outstanding as of December 31, 1998 and 1997 are presented below.
Classifications are based on original maturities.
- ---------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
Average Average
Ending Rate at Ending Rate at
Balance Year-End Balance Year-End
- ---------------------------------------------------------------------------------------------------
Short-term FHLB advances $ 208,000 5.01% $ 156,000 5.93 %
Long-term FHLB advances 248,568 5.65 210,632 5.75
---------- ---- ----------- ----
Total FHLB advances $ 456,568 5.36% $ 366,632 5.83 %
========== ==== =========== ====
- ---------------------------------------------------------------------------------------------------
Republic Bank routinely borrows short-term and long-term advances from the
Federal Home Loan Bank (FHLB) to fund mortgage loan originations and to minimize
the interest rate risk associated with certain fixed rate commercial and
residential mortgage portfolio loans. These advances are generally secured under
a blanket security agreement by first mortgage loans or investment securities
with an aggregate book value equal to at least 150% of the advances. Republic
Bank had $184.1 million available in unused borrowings with the Federal Home
Loan Bank at December 31, 1998.
49
Notes to Consolidated Financial Statements
Note 9. FHLB Advances (Continued)
The principal maturities of long-term FHLB advances outstanding at December
31, 1998 are as follows:
- ------------------------------------------
(In thousands) Amount
- ------------------------------------------
1999 $ 46,200
2000 67,000
2001 17,868
2002 80,000
2003 15,000
2004 and thereafter 22,500
----------
Total $ 248,568
==========
- ------------------------------------------
Note 10. Long-Term Debt
Obligations with original maturities of more than one year consisted of the
following:
- --------------------------------------------------------------------
December 31
(In thousands) 1998 1997
- --------------------------------------------------------------------
7.17% Senior Debentures due 2001 $ 25,000 $ 25,000
6.75% Senior Debentures due 2001 9,000 9,000
6.95% Senior Debentures due 2003 13,500 13,500
--------- ---------
Total long-term debt $ 47,500 $ 47,500
========= =========
- --------------------------------------------------------------------
7.17% Senior Debentures Due 2001
These senior debentures were issued through a private offering in March
1994 and mature April 1, 2001. Interest is payable at a stated rate
semi-annually on April 1 and October 1 of each year.
6.75% and 6.95% Senior Debentures Due 2001 and 2003
In January 1996, the Company completed a private offering of $22.5 million
of Senior Debentures with $9.0 million maturing on January 15, 2001 and $13.5
million maturing on January 15, 2003. Interest is payable at the stated rate
semi-annually on April 1 and October 1 of each year. Proceeds of the offering
were used to redeem $17.25 million of 9.0% Subordinated Notes and for general
corporate purposes. The early redemption of the 9.0% Subordinated Notes resulted
in the recognition of an extraordinary loss of $388,000 after the related income
tax effect of $209,000.
The principal maturities of long-term debt outstanding at December 31, 1998 are
as follows:
- ---------------------------------------------------
(In thousands) Amount
- ---------------------------------------------------
1999 $ -
2000 -
2001 34,000
2002 -
2003 13,500
2004 and thereafter -
---------
Total $ 47,500
=========
- --------------------------------------------------
50
Notes to Consolidated Financial Statements
Note 11. Shareholders' Equity
On July 17, 1998 the Board of Directors declared a 5 for 4 stock split (in the
form of a stock dividend) distributed on September 11, 1998 to shareholders of
record on August 14, 1998. On September 21, 1997, the Board of Directors
declared a 10% stock dividend distributed on December 5, 1997 to shareholders of
record on November 7, 1997. A 10% stock dividend was also distributed on
December 2, 1996 to shareholders of record November 4, 1996.
The Company repurchased 77,250 and 624,100 shares of common stock in 1998
and 1997, respectively. None of these shares were reissued in conjunction with
the 1998 5 for 4 stock split (in the form of a stock dividend) or the 1997 10%
stock dividend. In 1996, repurchases totaled 1,193,000 shares, of which
1,049,000 shares were reissued in conjunction with the 1996 10% stock dividend.
On December 1, 1998, prior to the announcement of the Company's merger with
D&N Financial, the Board of Directors formerly rescinded the Company's stock
repurchase program.
Note 12. 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) 1998(1) 1997(1) 1996(1)
- ---------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Income before extraordinary item $ 22,890 $ 18,789 $ 15,066
Extraordinary item -- -- (388)
------------ ------------ ------------
Net income $ 22,890 $ 18,789 $ 14,678
============ ============ ============
Denominator:
Denominator for basic earnings per share-
weighted-average shares 23,585,110 23,349,721 24,183,933
Effect of dilutive securities:
Employee stock options 210,603 277,873 436,163
Warrants 98,135 209,079 173,912
------------ ------------ ------------
Dilutive potential common shares 308,738 486,952 610,075
Denominator for diluted earnings per share-
adjusted weighted-average shares for
assumed conversions 23,893,848 23,836,673 24,794,008
============ ============ ============
Basic earnings per share:
Income before extraordinary item $ .97 $ .80 $ .63
Extraordinary item -- -- (.02)
------------ ------------ ------------
Net income $ .97 $ .80 $ .61
============ ============ ============
Diluted earnings per share:
Income before extraordinary item $ .96 $ .79 $ .61
Extraordinary item -- -- (.02)
------------ ------------ ------------
Net income $ .96 $ .79 $ .59
============ ============ ============
- ---------------------------------------------------------------------------------------------------
(1) Share amounts for all periods presented have been adjusted to reflect the
issuance of stock dividends.
51
Notes to Consolidated Financial Statements
Note 13. 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, authorizes the
issuance of up to 1,250,000 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 1,250,000 options to purchase common shares under the 1998 Stock Option
Plan, up to 1,000,000 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, 1998, options available for
future grant under the 1998 Stock Option Plan totaled 1,051,928. Options
available for future grant under the 1997 Stock Option Plan totaled 525,413 at
December 31, 1998. At December 31, 1997, options available for future grant
under the 1997 Stock Option Plan totaled 748,412. There were no options
available for grant at December 31, 1996 under the previous Non-Qualified Stock
Option Plan, which concluded in accordance with its terms in 1996.
The following table presents stock option activity for the years indicated:
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
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 621,117 $ 6.83 734,187 $ 3.87 1,073,173 $ 3.36
Granted 427,010 15.14 282,838 9.47 -- --
Exercised (134,975) 6.96 (395,908) 3.94 (312,121) 3.07
Canceled (1,875) 15.67 -- -- (26,865) 6.77
---------- ------ ---------- -------- --------- ------
Outstanding at end of year 911,277 $10.69 621,117 $ 6.83 734,187 $ 3.87
========== ====== ========== ======== ========= ======
- -----------------------------------------------------------------------------------------------------------------
Additional information regarding stock options outstanding and exercisable
at December 31, 1998 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
- ----------------------------------------------------------------------------------
$ 2.41 - $ 5.00 145,647 2.1 $ 2.97
$ 5.00 - $ 8.00 111,199 5.1 6.60
$ 8.00 - $ 11.00 232,773 8.3 9.44
$11.00 - $ 14.00 47,887 9.8 13.55
$14.00 - $ 17.00 373,771 9.2 15.32
- ----------------------------------------------------------------------------------
$ 2.41 - $ 17.00 911,277 7.4 $ 10.69
==================================================================================
52
Notes to Consolidated Financial Statements
Note 13. Stock-Based Compensation (Continued)
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
125,000 common shares per year for sale as program shares, subject to an overall
maximum of 500,000 shares while the Program is in effect. Consequently, an
annual maximum of 250,000 common shares is authorized for tandem stock options
(subject to an overall maximum of 1,000,000 stock option shares). The
participant's purchased shares may not be sold, transferred, encumbered or
otherwise disposed of for a three year period so long as employed by the
Company. Options granted pursuant to the Voluntary Management Stock Accumulation
Program fully vest and are exercisable only after the lapsing of the third
anniversary of the option grant date. All options have a maximum contractual
life of ten years form the date of grant. At December 31, 1998, common shares
and tandem stock options available for future grant totaled 435,045 and 870,096,
respectively.
Stock Warrants
The Company has a Director Compensation Plan that provides for its ability to
issue 1,500 warrants annually to each of the Company's outside directors. Stock
warrants granted are immediately exercisable and have maximum contractual lives
of ten years. In 1998, 24,375 warrants were issued, compared to 24,750 warrants
in 1997 and 27,225 warrants in 1996. At December 31, 1998, 161,457 warrants were
outstanding with exercise prices ranging from $2.52 to $16.95.
Restricted Stock Plan
The Company's Restricted 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, 1998, the maximum
number of authorized shares allowed for grant totaled 1,187,658. Restriction
periods for these shares exist for a period of three or four years, depending on
whether the shares were issued before or after January 16, 1997. Restricted
shares are forfeited if employment is terminated before the restriction period
expires. As of December 31, 1998 and 1997, 357,126 and 302,543 common shares
have been awarded and are still subject to restrictions under the restricted
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 $982,000
in 1998, $632,000 in 1997 and $513,000 in 1996. The unamortized portion of
restricted stock is included as a component of shareholders' equity in the
consolidated balance sheets. In 1998, 108,255 restricted shares were issued,
compared to 158,611 in 1997 and 109,725 in 1996. The weighted average grant-date
fair value of restricted shares issued in 1998 was $15.15.
Pro Forma Disclosures
For purposes of providing the pro forma disclosures of net income and earnings
per share required by SFAS No. 123, the fair value of stock options and stock
warrants was estimated as of the grant date using the Black-Scholes option
pricing model. The following weighted average assumptions were used in the
option pricing model: an expected volatility factor of 25.1%; an expected
dividend yield of 3.60%; a risk-free interest rate of 5.38%; and an expected
life of the option of 5.5 years. The weighted average grant-date fair value of
stock options and stock warrants granted during 1998 was $3.01 and $2.21 for
1997 and 1996.
53
Notes to Consolidated Financial Statements
Note 13. Stock-Based Compensation (Continued)
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) 1998 1997 1996(1)
- ---------------------------------------------------------------------------------------
Net income (as reported) $ 22,890 $ 18,789 $ 14,678
Net income (pro forma) 22,105 18,347 14,639
Basic earnings per share (as reported) $ .97 $ .80 $ .61
Basic earnings per share (pro forma) .94 .79 .61
Diluted earnings per share (as reported) $ .96 $ .79 $ .59
Diluted earnings per share (pro forma) .93 .77 .59
- ---------------------------------------------------------------------------------------
(1) 1996 amounts are subsequent to the extraordinary item of $388,000, net of
tax, or $.02 per share.
Note 14. 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, 1998,
1997 and 1996 totaled $1.7 million, $1.2 million, and $693,000, respectively.
Note 15. Other Noninterest Expense
The three largest components of other noninterest expense were as follows:
- ----------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997 1996
- ----------------------------------------------------
Telephone $3,958 $3,379 $3,120
Advertising 2,558 1,833 1,679
Legal fees 2,398 1,513 975
- ----------------------------------------------------
54
Notes to Consolidated Financial Statements
Note 16. Income Taxes
The current and deferred components of the provision for Federal income tax
expense for the years ended December 31, 1998, 1997, and 1996 are as follows.
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current income tax expense $ 9,695 $ 6,906 $ 7,315
Deferred income tax expense (benefit) 3,031 2,987 194
------- ------- -------
Total income tax expense $12,726 $ 9,893 $ 7,509
======= ======= =======
- --------------------------------------------------------------------------------
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, 1998 and 1997 were as follows:
- --------------------------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
Deferred Deferred
Asset Liability Asset Liability
- --------------------------------------------------------------------------------------------------
Allowance for loan losses $ 3,742 $ -- $ 1,869 $ --
Mortgage servicing rights amortization 454 -- 997 --
Originated mortgage servicing rights -- 9,850 -- 6,159
Deferred loan origination fees and costs, net -- 4,741 -- 2,811
Impairment reserve for mortgage servicing rights 691 -- -- --
Deferred compensation contributions 1,145 -- -- --
Restricted stock amortization 575 -- -- --
Depreciation/amortization 15 -- 717 --
Stock dividends on FHLB stock -- 957 -- 777
Purchase accounting adjustment amortization -- 134 719 --
Unrealized loss on securities available for sale 128 -- 430 --
Loan mark-to-market adjustment 1,998 -- 752 --
Other temporary differences 279 384 1,240 683
------- ------- ------- -------
Total deferred taxes $ 9,027 $16,066 $ 6,724 $10,430
======= ======= ======= =======
- --------------------------------------------------------------------------------------------------
Items causing differences between the statutory tax rate and the effective
tax rate are summarized as follows:
- -----------------------------------------------------------------------------------------------------------
Year ended December 31
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------
Statutory tax rate $ 12,466 35.0% $ 10,039 35.0% $ 7,765 35.0%
Amortization of goodwill 88 .2 87 .3 88 .4
Net tax exempt interest income (147) (.4) (240) (.8) (521) (2.4)
Other, net 319 .9 7 -- 177 .8
-------- ------ -------- ---- -------- ----
Provision for income taxes $ 12,726 35.7% $ 9,893 34.5% $ 7,509 33.8%
======== ====== ======== ==== ======== ====
- ------------------------------------------------------------------------------------------------------------
55
Notes to Consolidated Financial Statements
Note 17. 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, results of
operations or liquidity.
Note 18. 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 party loan activity follows:
- --------------------------------------------------------------------------------
Year Ended December 31
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 3,009 $ 1,685
Loans and advances to employees 906 1,211
Loans to current directors and officers 2,331 937
Repayments (1,627) (824)
------- -------
Balance at end of year $ 4,619 $ 3,009
======= =======
- --------------------------------------------------------------------------------
Note 19. Segment Information
The Company's operations are managed as two major business segments: (1)
commercial and retail banking and (2) mortgage banking. The Commercial and
Retail Banking segment consists of commercial lending to small- and medium-sized
companies, primarily in the form of commercial real estate and Small Business
Administration (SBA) loans; mortgage portfolio lending; home equity lending; and
the deposit-gathering function. Deposits and loan products are offered through
the 40 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. Mortgage loan production
is conducted in all of the Company's 134 offices. The majority of the Company's
mortgage loan servicing is performed primarily by Market Street Mortgage. The
Company evaluates performance and allocates resources based on profit or loss
from operations before income taxes. Business segment performance is determined
based on the Company's management accounting process, in which the accounting
policies of the reportable segments are primarily the same as those described in
the summary of significant accounting policies. The accounting process assigns
revenue, expenses and assets to a business segment using specific identification
and an allocation methodology. Changes in the allocation methodology may result
in changes in allocations and assignments. In that case, however, results for
prior periods would be restated to allow comparability between periods.
The Company's internal management reporting system allocates interest
income and interest expense items by matching the earning asset with the related
funding source. In addition, Republic Bank provides funding to its three
mortgage banking subsidiaries by granting operating lines of credit and lines of
credit to fund mortgage loans held for sale. The commercial and retail banking
segment receives interest income on these lines of credit by charging interest
rates based on LIBOR and prime lending rates. Noninterest income and expenses
directly attributable to a business segment's operations are assigned to that
business segment. Expenses supporting more than one business segment are
allocated to each segment based on the number of employees dedicated to the
segment's operations.
56
Notes to Consolidated Financial Statements
Note 19. Segment Information (Continued)
The following table presents the financial results of each business segment
for the last three years.
- ----------------------------------------------------------------------------------------------------------
Commercial and
Retail Banking Mortgage Banking
- ----------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Interest income $101,838 $ 93,730 $ 72,706 $ 44,167 $ 25,122 $ 26,441
Interest expense 47,584 49,052 40,812 38,780 22,860 21,615
-------- -------- -------- -------- -------- --------
Net interest income(1) 54,254 44,678 31,894 5,387 2,262 4,826
Provision for loan losses 4,000 3,031 290 -- -- --
Noninterest income (3) 4,841 8,102 4,469 132,600 94,413 86,377
Noninterest expense(2) 34,859 28,585 21,221 122,607 89,157 83,271
-------- -------- -------- -------- -------- --------
Income before taxes $ 20,236 $ 21,164 $ 14,852 $ 15,380 $ 7,518 $ 7,932
======== ======== ======== ======== ======== ========
Income taxes $ 7,203 $ 7,270 $ 4,847 $ 5,523 $ 2,623 $ 2,871
Depreciation and
amortization $ 2,531 $ 2,422 $ 2,265 $ 19,486 $ 9,595 $ 10,609
Capital expenditures $ 5,010 $ 1,640 $ 2,298 $ 4,710 $ 2,360 $ 1,544
(In millions)
Identifiable assets $ 1,312 $ 1,261 $ 1,072 $ 884 $ 612 $ 418
- ----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------
Consolidated
- -----------------------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------
Interest income $146,005 $118,852 $ 99,147
Interest expense 86,364 71,912 62,427
-------- -------- --------
Net interest income(1) 59,641 46,940 36,720
Provision for loan losses 4,000 3,031 290
Noninterest income (3) 137,441 102,515 90,846
Noninterest expense(2) 157,466 117,742 104,492
-------- -------- --------
Income before taxes $ 35,616 $ 28,682 $ 22,784
======== ======== ========
Income taxes $ 12,726 $ 9,893 $ 7,718
Depreciation and
amortization $ 22,017 $ 12,017 $ 12,874
Capital expenditures $ 9,720 $ 4,000 $ 3,842
(In millions)
Identifiable assets $ 2,196 $ 1,873 $ 1,490
- -----------------------------------------------------------------
(1)Net interest income for the mortgage banking segment is generated from the
interest earned on mortgage loans held for sale, less the interest expense
incurred on short-term borrowings used to fund loan production and servicing
acquisitions.
(2)Noninterest expense for the commercial and retail banking segment in 1996
includes the $1.5 million, pre-tax, SAIF assessment.
(3)Noninterest income for the commercial and retail banking segment in 1997
includes a gain of $4.4 million on the sale of bank branches and deposits.
Note 20. 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.
57
Notes to Consolidated Financial Statements
Note 20. Off-Balance Sheet Transactions (Continued)
At December 31, 1998, the Company had outstanding $298.6 million of commitments
to fund residential real estate loan applications with agreed-upon rates,
including $51.9 million of portfolio residential mortgage loans.
At December 31, 1998, the Company had outstanding mandatory forward
commitments to sell $923.1 million of residential mortgage loans, of which
$710.5 million covered the mortgage loans held for sale balance and $212.6
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 first quarter of 1999
without producing any material gains or losses. At December 31, 1998, the
mortgage loans held for sale balance included $50.7 million of loans for
which the Company did not enter into mandatory forward commitments. The
Company's exposure to market risk was not significantly increased, however,
since $45.0 million, or 89%, of these loans were loans that had been committed
for bulk sale to third parties prior to year-end or were floating rate
residential construction loans.
At December 31, 1997, outstanding forward commitments to sell mortgage
loans totaled $536.1 million, of which $389.8 million covered the mortgage loans
held for sale balance and $146.3 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 is
required to be adopted in years beginning after June 15, 1999. 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 No. 133 will be on the earnings and
financial position of the Company.
The following table presents the contractual amounts of the Company's
off-balance sheet financial instruments outstanding at December 31, 1998 and
1997:
- --------------------------------------------------------------------------------------------------------------------
December 31
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to fund residential real estate loans $ 868,635 $ 575,005
Commitments to fund commercial real estate loans 111,508 101,531
Other unused commitments to extend credit 49,483 41,116
Standby letters of credit 329 3,254
Financial instruments subject to interest rate risk:
Residential real estate loan applications with agreed-upon rates $ 298,580 $ 220,919
Forward commitments to sell residential real estate mortgage loans 923,082 536,120
- --------------------------------------------------------------------------------------------------------------------
Note 21. 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.
58
Notes to Consolidated Financial Statements
Note 21. 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 is 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 and Securities Sold Under Agreements to Repurchase:
Fair value approximates the carrying value since the majority of these
instruments were entered into at or near December 31, 1998 and 1997.
Other Short-Term Borrowings:
The carrying amount is a reasonable estimate of fair value of other
short-term borrowings as these financial instruments are tied to floating rate
indices such as prime and LIBOR, and reprice frequently.
FHLB Advances and Long-Term Debt:
Fair value is estimated based on the present value of future estimated cash
flows using current rates offered to the Company for debt with similar terms.
Off-Balance Sheet Financial Instruments:
The Company's off-balance sheet financial instruments are detailed in Note
20 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, 1998 and
1997 were not material.
59
Notes to Consolidated Financial Statements
Note 21. Estimated Fair Value of Financial Instruments (Continued)
The following table presents the estimated fair values of the Company's
financial instruments:
- -------------------------------------------------------------------------------------------------------------------
1998 1997
December 31 Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
- -------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 31,733 $ 31,733 $ 29,668 $ 29,668
Mortgage loans held for sale 761,227 766,936 513,533 515,683
Securities available for sale 47,269 47,269 119,881 119,881
Loans, net of the allowance for loan losses 1,201,979 1,220,465 1,088,410 1,111,414
Liabilities:
Noninterest-bearing deposits 134,147 134,147 96,644 96,644
NOW, savings and money market accounts 480,223 480,223 388,723 388,723
Certificates of deposit maturing in:
Six months or less 446,578 447,619 327,517 328,312
Over six months to one year 218,053 219,916 70,039 70,235
Over one year to three years 75,123 76,371 175,627 176,600
Over three years 24,567 25,221 118,743 119,618
----------- ----------- ----------- -----------
Total deposits 1,378,691 1,383,497 1,177,293 1,180,132
Federal funds purchased and securities sold
under agreements to repurchase 48,000 48,000 52,770 52,770
Other short-term borrowings 5,500 5,500 5,504 5,504
FHLB advances 456,568 457,949 366,632 365,431
Long-term debt 47,500 49,565 47,500 48,890
- -------------------------------------------------------------------------------------------------------------------
Note 22. Regulatory Matters
The Company's bank subsidiary is required by law to maintain average cash
reserve balances with the Federal Reserve Bank based on a percentage of
deposits. At December 31, 1998 and 1997, these reserves totaled $5.7 million and
$3.5 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
this state chartered financial institution may declare to the parent company in
any calendar year. On December 31, 1998, $68.5 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, 1998, that the Company met all
capital adequacy requirements to which it is subject. In addition, the bank
subsidiaries had regulatory capital ratios in excess of the levels established
for well capitalized institutions.
60
Notes to Consolidated Financial Statements
Note 22. Regulatory Matters (Continued)
As of December 31, 1998, the Federal Reserve Bank of Chicago considers the
Company to be "well capitalized" under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Company's category.
Presented in the table below are the capital amounts and ratios for the
Company and each of its banking subsidiaries, Republic Bank and Republic Savings
Bank at December 31, 1998, along with a comparison to the year-end capital
amounts and ratios established by the regulators. Republic Savings Bank was
merged with and into Republic Bank effective January 1, 1999.
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Actual Adequately Capitalized Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
As of December 31, 1998
Total capital
(to risk weighted assets)(1):
Consolidated $ 148,314 10.20% $ 116,284 8.00% $ 145,355 10.00%
Republic Bank 129,831 11.96 86,819 8.00 108,523 10.00
Republic Savings Bank 45,069 12.09 29,819 8.00 37,274 10.00
Tier 1 capital
(to risk weighted assets)(1):
Consolidated $ 137,863 9.48% $ 58,142 4.00% $ 87,213 6.00%
Republic Bank 122,634 11.30 43,409 4.00 65,114 6.00
Republic Savings Bank 39,315 10.55 14,910 4.00 22,365 6.00
Tier 1 capital
(to average assets)(1):
Consolidated $ 137,863 6.56% $ 63,094 3.00% $ 105,156 5.00%
Republic Bank 122,634 6.96 52,822 3.00 88,037 5.00
Republic Savings Bank 39,315 7.22 16,344 3.00 27,240 5.00
- -------------------------------------------------------------------------------------------------------------------
As of December 31, 1997
Total capital
(to risk weighted assets)(1):
Consolidated $ 126,519 10.35% $ 97,541 8.00% $ 121,926 10.00%
Republic Bank 104,182 11.52 72,353 8.00 90,441 10.00
Republic Savings Bank 38,086 12.49 24,400 8.00 30,501 10.00
Tier 1 capital
(to risk weighted assets)(1):
Consolidated $ 118,825 9.75% $ 48,771 4.00% $ 73,156 6.00%
Republic Bank 99,294 10.98 36,176 4.00 54,265 6.00
Republic Savings Bank 33,139 10.87 12,200 4.00 18,300 6.00
Tier 1 capital
(to average assets)(1):
Consolidated $ 118,825 6.58% $ 54,208 3.00% $ 90,346 5.00%
Republic Bank 99,294 8.12 36,689 3.00 61,149 5.00
Republic Savings Bank 33,139 6.59 15,096 3.00 25,159 5.00
- -------------------------------------------------------------------------------------------------------------------
(1) As defined in the regulations
61
Notes to Consolidated Financial Statements
Note 23. 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) 1998 1997
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 833 $ 743
Interest earning deposits 27,987 35,154
-------- --------
Cash and cash equivalents 28,820 35,897
Investment in subsidiaries 173,453 144,274
Notes and advances receivable from subsidiaries 2,970 3,147
Furniture and equipment 196 130
Other assets 5,996 4,588
-------- --------
Total assets $211,435 $188,036
======== ========
Liabilities and Shareholders' Equity:
Accrued expenses and other liabilities $ 13,518 $ 9,448
Long-term debt 47,500 47,500
-------- --------
Total liabilities 61,018 56,948
Total shareholders' equity 150,417 131,088
-------- --------
Total liabilities and shareholders' equity $211,435 $188,036
======== ========
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Parent Company Only Income Statements
Year Ended December 31 (In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Interest income $ 1,597 $ 2,544 $ 3,323
Dividends from subsidiaries 612 13,646 12,579
-------- -------- --------
Total income 2,209 16,190 15,902
Interest expense 3,435 3,739 3,637
Salaries and employee benefits 4,804 4,305 2,229
Other expenses 2,968 1,824 1,382
-------- -------- --------
Total expenses 11,207 9,868 7,248
-------- -------- --------
Income (loss) before income taxes, extraordinary item and
excess (deficiency) of undistributed earnings of
subsidiaries over dividends (8,998) 6,322 8,654
Income tax credits (3,270) (2,532) (1,307)
-------- -------- --------
Income (loss) before extraordinary item and excess
(deficiency) of undistributed earnings of
subsidiaries over dividends (5,728) 8,854 9,961
Extraordinary item - loss on early redemption
of debt, net of tax -- -- (388)
Excess of undistributed earnings of
subsidiaries over dividends 28,618 9,935 5,105
-------- -------- --------
Net income $ 22,890 $ 18,789 $ 14,678
======== ======== ========
- ----------------------------------------------------------------------------------------------------
62
Notes to Consolidated Financial Statements
Note 23. Parent Company Financial Information (Continued)
- ---------------------------------------------------------------------------------------------------------
Parent Company Only Statements of Cash Flows
Year Ended December 31 (In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 22,890 $ 18,789 $ 14,678
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 573 557 475
Excess of undistributed earnings of
subsidiaries over dividends (28,618) (9,935) (5,105)
Increase in other assets (1,719) (382) (3,495)
Increase in other liabilities 4,039 2,708 1,590
Other, net -- -- 1,389
-------- -------- --------
Total adjustments (25,725) (7,052) (5,146)
-------- -------- --------
Net cash (used in) provided by operating activities (2,835) 11,737 9,532
Cash Flows from Investing Activities:
Return of capital from (capital investment in) subsidiaries -- (430) 4,000
Equipment expenditures (115) (74) --
Decrease in notes and advances receivable
from subsidiaries 177 35,422 6,062
-------- -------- --------
Net cash provided by investing activities 62 34,918 10,062
Cash Flows from Financing Activities:
Net proceeds from issuance of common shares through
exercise of stock options and stock warrants 4,470 1,755 1,040
Repurchase of common shares (1,219) (6,320) (13,020)
Dividends paid on common shares (7,555) (6,802) (6,305)
Net decrease in short-term borrowings -- (1,875) (6,250)
Issuance of senior debentures, net of issuance costs -- (30) 22,233
Repayment of subordinated notes -- -- (17,250)
-------- -------- --------
Net cash (used in) provided by financing activities (4,304) (13,272) (19,552)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (7,077) 33,383 42
Cash and cash equivalents at beginning of year 35,897 2,514 2,472
-------- -------- --------
Cash and cash equivalents at end of year $ 28,820 $ 35,897 $ 2,514
======== ======== ========
- ---------------------------------------------------------------------------------------------------------
63
Report of Management
The 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 generally accepted accounting principles and include the amounts
based on management's estimates and judgments where appropriate. Financial
information appearing throughout the Annual Report on Form 10-K is consistent
with the financial statements.
Management is responsible for the integrity and objectivity of the
consolidated financial statements. Established accounting procedures are
designed to provide financial records and accounts which fairly reflect the
transactions of the Company. The training of qualified personnel and the
assignment of duties are intended to provide an internal control structure at a
cost consistent with management's evaluation of the risks involved. Such
controls are monitored by an internal audit staff to provide reasonable
assurances that transactions are executed in accordance with management's
authorization and that adequate accountability for the Company's assets is
maintained.
The 1998 financial statements have been audited by Ernst & Young LLP,
independent auditors, and their report follows.
The Audit Committee of the Board of Directors is composed of outside
directors who meet with management, internal auditors, independent auditors and
regulatory examiners to review matters relating to financial reporting and
internal controls. The internal auditors, independent auditors and regulatory
examiners have direct access to the Audit Committee.
/s/ Jerry D. Campbell /s/ Thomas F. Menacher
- --------------------------- -------------------------------------
Jerry D. Campbell Thomas F. Menacher, CPA
Chairman of the Board and Senior Vice President, Treasurer and
Chief Executive Officer Chief Financial Officer
64
Independent Auditors' Report
Republic Bancorp Inc. Board of Directors
We have audited the accompanying consolidated balance sheets of Republic Bancorp
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1998. 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. The financial statements of Republic Bancorp Inc. for the period
ended December 31, 1996 were audited by other auditors whose report dated
January 16, 1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a 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 1998 and 1997 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Republic Bancorp Inc. and subsidiaries at December 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
January 15, 1999
65
INDEPENDENT AUDITORS' REPORT
Board of Directors
Republic Bancorp Inc.
We have audited the accompanying statements of operations, stockholders' equity,
and cash flows for the year ended December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
year ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Detroit, Michigan
January 16, 1997
66
Quarterly Data (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
years 1998 and 1997:
- -------------------------------------------------------------------------------------------------------------------
Full
(Dollars in thousands, except per share data) 1Q 2Q 3Q 4Q Year
- -------------------------------------------------------------------------------------------------------------------
1998
Earnings Summary
Interest income $ 33,875 $ 36,477 $ 36,868 $ 38,785 $ 146,005
Interest expense 20,673 21,631 21,996 22,064 86,364
Net interest income 13,202 14,846 14,872 16,721 59,641
Provision for loan losses 1,225 1,500 750 525 4,000
Mortgage banking revenue 27,947 32,224 35,584 36,845 132,600
Investment securities losses (98) (46) (77) (84) (305)
Other noninterest income 1,278 1,220 1,510 1,138 5,146
Noninterest expense 32,743 37,569 41,323 45,831 157,466
Income before taxes 8,361 9,175 9,816 8,264 35,616
Net income 5,409 5,900 6,266 5,315 22,890
Per Common Share
Basic earnings $ .24 $ .25 $ .26 $ .22 $ .97
Diluted earnings .23 .25 .26 .22 .96
Cash dividends declared .08 .08 .08 .08 .32
- -------------------------------------------------------------------------------------------------------------------
1997
Earnings Summary
Interest income $ 25,046 $ 28,191 $ 31,689 $ 33,926 $ 118,852
Interest expense 15,057 17,007 19,375 20,473 71,912
Net interest income 9,989 11,184 12,314 13,453 46,940
Provision for loan losses 297 2,188 136 410 3,031
Mortgage banking revenue 18,950 21,241 26,041 27,468 93,700
Investment securities gains (losses) 37 (682) 136 12 (497)
Other noninterest income 1,349 5,546 1,211 1,206 9,312
Noninterest expense 24,153 27,933 31,217 34,439 117,742
Income before taxes 5,875 7,168 8,349 7,290 28,682
Net income 3,956 4,712 5,375 4,746 18,789
Per Common Share
Basic earnings $ .17 $ .20 $ .23 $ .20 $ .80
Diluted earnings .16 .20 .23 .20 .79
Cash dividends declared .07 .07 .08 .08 .30
- -------------------------------------------------------------------------------------------------------------------
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item relating to a change in accountants
was previously reported in the Registrant's Form 8-K/A dated June 20, 1997 filed
with the Securities and Exchange Commission.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information set forth under the caption "Management and Operations
after the Merger - Directors" of the Registrant's 1999 Joint 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 "Additional Information
Regarding the Republic Annual Meeting Compensation Committee Report" and
"Additional Information Regarding the Republic Annual Meeting - Executive
Officer Compensation" of the Registrant's 1999 Joint Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Additional Information
Regarding the Republic Annual Meeting Voting Securities and Certain Holders
Thereof" of the Registrant's 1999 Joint Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Additional Information
Regarding the Republic Annual Meeting Certain Relationships and Related
Transactions" of the Registrant's 1999 Joint Proxy Statement is incorporated
herein by reference.
68
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, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
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
(2)(a)/(10)(a) Agreement and Plan of Merger dated as of December 1,
1998 by and between the Company and D&N Financial
Corporation (incorporated by reference to Exhibit 2
of the Company's Current Report on Form 8-K dated
December 4, 1998 filed with the Securities and
Exchange Commission on December 4, 1998 (file no.
0-15734)).
(3)(a)/(4)(a) First Restated Articles of Incorporation of the
Company. *
(3)(b)/(4)(b) Bylaws, of the Company (incorporated by reference to
Exhibit 3(b) to Registration Statement on Form S-4
filed with the Securities and Exchange Commission on
March 1, 1990 (registration no. 33-33811)).
(4)(c) Debenture Purchase Agreement dated as of March 30,
1994, between the Company and Scudder, Steven &
Clark, Inc., Business Men's Assurance Company of
America, Columbus Life insurance Company and Mutual
of America Life Insurance Company, related to 7.17%
Senior Debentures due 20001 (incorporated by
reference to Exhibit 4(p) of the Company's Annual
Report on Form 10-K for the year ended December 31,
1994 filed with the Securities and Exchange
Commission on March 27, 1995 (file no. 0-15734)).
(4)(d) Debenture Purchase Agreement dated as of January 29,
1996, between the Company and American United Life
Insurance, State Life Insurance Co., Mutual of
America Life Insurance Co., GNA, Mega Life & Health
Insurance Co. and Provident Mutual Life Insurance
Company, related to 6.75% Senior Debentures due
January 15, 2001 and 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)).
69
(10)(b) 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)(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) 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)(e) Restricted Stock Plan of the Company, (incorporated
by reference to Exhibit 10(d) 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)(f) 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)(g) 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)(h) Deferred 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, 1993 filed with the Securities and
Exchange Commission on March 17, 1994 (file no.
0-15734)).
(10)(i) 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)).
(12) No statement is required to be filed because the
computations can be clearly determined from the
materials contained in the Annual Report on Form
10-K.
(21) Subsidiaries of the Company. *
(23)(a) Consent of independent auditors, Ernst & Young LLP. *
(23)(b) Consent of independent auditors, Deloitte & Touche
LLP. *
(24) Powers of Attorney *
(27) Financial Data Schedule *
*Filed herewith
70
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)(b) 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)(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) 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)(e) Restricted Stock Plan of the Company, (incorporated
by reference to Exhibit 10(d) 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)(f) 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)(g) 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)(h) Deferred 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, 1993 filed with the Securities and
Exchange Commission on March 17, 1994 (file no.
0-15734)).
(10)(i) 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)).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on December 4, 1998 with
respect to an Agreement and Plan of Merger dated as of December 1, 1998
between the Company and D&N Financial Corporation, a Deleware
Corporation ("D&N Financial"), whereby D&N Financial will merge with
and into the Company and the Company will be the surviving entity.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 16th day of
March 1999.
REPUBLIC BANCORP INC.
By: /s/ JERRY D. CAMPBELL
-----------------------------------
Jerry D. Campbell
Chairman of the Board 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 16th day of March 1999.
Signature Title Date
/s/ JERRY D. CAMPBELL Chairman of the Board and March 16, 1999
- ----------------------------- Chief Executive Officer
Jerry D. Campbell
/s/ THOMAS F. MENACHER Senior Vice President, Treasurer March 16, 1999
- ----------------------------- and Chief Financial Officer
Thomas F. Menacher (Principal Financial Officer and
Principal Accounting Officer)
DIRECTORS *
Dana M. Cluckey Howard J. Hulsman Sam H. McGoun George B. Smith
Bruce L. Cook Gary Hurand Kelly E. Miller Jeoffrey K. Stross
Richard J. Cramer Dennis J. Ibold Joe D. Pentecost
George A. Eastman John J. Lennon Isaac J. Powell
* By: /s/ THOMAS F. MENACHER
--------------------------
Attorney in Fact
72
EXHIBIT INDEX
(3)(a)/(4)(a) First Restated Articles of Incorporation of the Company
(21) Subsidiaries of the Company
(23)(a) Consent of Ernst & Young LLP
(23)(b) Consent of Deloitte & Touche LLP
(24) Powers of Attorney
(27) Financial Data Schedule