SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1999 Commission File Number 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2604669
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices)
(517) 725-7337
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock Outstanding as of April 30, 1999:
Common Stock, $5 Par Value.............................. 23,797,418 Shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998.............................. 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998............... 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998............... 5
Notes to Consolidated Financial Statements......... 6 - 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition...... 8 - 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 21
Item 2. Changes in Securities.............................. 21
Item 4. Submission of Matters to a Vote of
Security Holders................................... 21
Item 6. Exhibits and Reports on Form 8-K................... 22
SIGNATURE........................................................ 23
EXHIBITS......................................................... 24 - 25
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents.................................. $ 31,635 $ 31,733
Mortgage loans held for sale............................... 620,670 761,227
Securities available for sale (amortized cost of
$45,512 and $47,633, respectively)........................ 45,150 47,269
Loans...................................................... 1,214,115 1,212,430
Less allowance for loan losses............................ (11,083) (10,451)
---------- ----------
Net loans.................................................. 1,203,032 1,201,979
---------- ----------
Premises and equipment, net of depreciation................ 19,029 18,180
Mortgage servicing rights.................................. 55,873 59,445
Other assets............................................... 83,804 75,779
---------- ----------
Total assets............................................. $2,059,193 $2,195,612
========== ==========
LIABILITIES
Noninterest-bearing deposits............................... $ 127,978 $ 134,147
Interest-bearing deposits.................................. 1,250,944 1,244,544
---------- ----------
Total deposits........................................... 1,378,922 1,378,691
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings........... 52,653 53,500
Short-term FHLB advances................................... 65,000 208,000
Long-term FHLB advances.................................... 247,008 248,568
Accrued expenses and other liabilities..................... 112,452 108,009
Long-term debt............................................. 47,500 47,500
---------- ----------
Total liabilities........................................ 1,903,535 2,044,268
Minority interest.......................................... 973 927
---------- ----------
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; 23,778,686 and 23,753,165 shares
issued and outstanding, respectively...................... 118,893 118,766
Capital surplus............................................ 28,601 28,456
Retained earnings.......................................... 7,426 3,432
Accumulated other comprehensive income (loss).............. (235) (237)
---------- ----------
Total shareholders' equity............................... 154,685 150,417
---------- ----------
Total liabilities and shareholders' equity............... $2,059,193 $2,195,612
========== ==========
See notes to consolidated financial statements.
3
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
March 31,
(In thousands, except per share data) 1999 1998
- ----------------------------------------------------------------------------------------
Interest Income:
Loans, including fees...................................... $34,761 $32,159
Investment securities...................................... 757 1,716
------- -------
Total interest income................................... 35,518 33,875
------- -------
Interest Expense:
Demand deposits............................................ 114 126
Savings and time deposits.................................. 13,973 13,728
Short-term borrowings...................................... 444 786
FHLB advances.............................................. 4,853 5,174
Long-term debt............................................. 859 859
------- -------
Total interest expense.................................. 20,243 20,673
------- -------
Net interest income........................................ 15,275 13,202
Provision for loan losses.................................. 850 1,225
------- -------
Net interest income after provision for loan losses........ 14,425 11,977
------- -------
Noninterest Income:
Service charges............................................ 367 361
Mortgage banking........................................... 35,861 27,947
Investment securities losses............................... (88) (98)
Gain on sale of SBA loans.................................. 237 619
Other noninterest income................................... 396 298
Total noninterest income 36,773 29,127
------- -------
Noninterest Expense:
Salaries and employee benefits............................. 15,525 9,925
Mortgage loan commissions and incentives................... 11,751 12,544
Occupancy expense of premises.............................. 2,361 1,858
Equipment expense.......................................... 1,558 1,267
Other noninterest expense.................................. 10,489 7,149
------- -------
Total noninterest expense............................... 41,684 32,743
------- -------
Income before income taxes................................. 9,514 8,361
Provision for income taxes................................. 3,378 2,952
------- -------
Net Income................................................. $ 6,136 $ 5,409
======= =======
Basic earnings per share................................... $ .26 $ .23
======= =======
Diluted earnings per share................................. $ .26 $ .23
======= =======
Average common shares outstanding - diluted................ 23,999 23,923
======= =======
Cash dividends declared per common share................... $ .09 $ .08
======= =======
See notes to consolidated financial statements.
4
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31 (In thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income........................................................................................... $ 6,136 $ 5,409
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization...................................................................... 1,507 1,445
Amortization and impairment of mortgage servicing rights........................................... 4,235 3,121
Net gains on sales of mortgage servicing rights.................................................... (9,897) (7,333)
Net losses on sales of securities available for sale............................................... 88 98
Net gains on sale of loans......................................................................... (451) (1,378)
Proceeds from sales of mortgage loans held for sale................................................ 1,362,045 1,234,664
Origination of mortgage loans held for sale........................................................ (1,221,488) (1,426,835)
Decrease in other assets........................................................................... (3,374) (4,798)
Increase in other liabilities...................................................................... 4,443 15,962
Other, net......................................................................................... (1,393) (129)
----------- -----------
Total adjustments................................................................................. 135,715 (185,183)
----------- -----------
Net cash provided by (used in) operating activities............................................... 141,851 (179,774)
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of mortgage servicing rights...................................................... 16,583 7,483
Additions to mortgage servicing rights............................................................... (12,377) (9,743)
Proceeds from sales of securities available for sale................................................. 828 49,475
Proceeds from maturities/principal payments of securities available for sale......................... 1,766 4,814
Purchases of securities available for sale........................................................... (650) (5,548)
Proceeds from sale of loans.......................................................................... 41,964 48,532
Net increase in loans made to customers.............................................................. (43,272) (28,367)
Proceeds from sale of fixed assets................................................................... 50 201
----------- -----------
Net cash provided by (used in) investing activities................................................ 4,892 66,847
----------- -----------
Cash Flows From Financing Activities:
Net increase in total deposits....................................................................... 231 118,269
Net increase (decrease) in short-term borrowings..................................................... (847) 745
Net decrease in short-term FHLB advances............................................................. (143,000) (24,000)
Proceeds from long-term FHLB advances................................................................ - 54,936
Payments on long-term FHLB advances.................................................................. (1,560) (25,000)
Net proceeds from issuance of common shares.......................................................... 1,830 1,547
Repurchase of common shares.......................................................................... (1,598) (289)
Dividends paid....................................................................................... (1,897) (1,867)
----------- -----------
Net cash provided by (used in) financing activities............................................ (146,841) 124,341
----------- -----------
Net increase (decrease) in cash and cash equivalents................................................. (98) 11,414
Cash and cash equivalents at beginning of period..................................................... 31,733 29,668
----------- -----------
Cash and cash equivalents at end of period........................................................... $ 31,635 $ 41,082
=========== ===========
See notes to consolidated financial statements.
5
REPUBLIC BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Republic Bancorp
Inc. and Subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes necessary
for a comprehensive presentation of financial position, results of operations
and statement of cash flows required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all normal
recurring adjustments necessary for a fair presentation of results have been
included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
Note 2 - Principles of Consolidation
The consolidated financial statements 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. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Note 3 - Consolidated Statements of Cash Flows
Supplemental disclosures of cash flow information for the three months ended
March 31, include:
(In thousands) 1999 1998
------- -------
Cash paid during the period for:
Interest................................................. $20,469 $19,548
Income taxes............................................. $ 58 $ -
Non-cash investing activities:
Loan charge-offs......................................... $ 229 $ 145
6
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
March 31,
(Dollars in thousands, except per share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net income................................................ $ 6,136 $ 5,409
Denominator:
Denominator for basic earnings per
share-weighted-average shares............................ 23,786,198 23,372,770
Effect of dilutive securities:
Employee stock options................................. 167,159 347,590
Warrants............................................... 45,948 202,464
----------- -----------
Dilutive potential common shares.................... 213,107 550,054
----------- -----------
Denominator for diluted earnings per
share-adjusted weighted-average shares for
assumed conversions...................................... 23,999,305 23,922,824
=========== ===========
Basic earnings per share...................................... $ .26 $ .23
=========== ===========
Diluted earnings per share.................................... $ .26 $ .23
=========== ===========
Note 5 Segment Information
The following table presents the financial results of each business segment for the
three months ended March 31, 1999 and 1998.
Commercial and
Retail Banking Mortgage Banking Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended, Three Months Ended, Three Months Ended,
March 31, March 31, March 31, March 31, March 31, March 31,
(In thousands) 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 25,160 $ 25,393 $ 10,358 $ 8,482 $35,518 $33,875
Interest expense 11,253 12,746 8,990 7,927 20,243 20,673
--------- --------- ---------- ----------- ------- -------
Net interest income(1) 13,907 12,647 1,368 555 15,275 13,202
Provision for loan losses 850 1,225 - - 850 1,225
Noninterest income 912 1,180 35,861 27,947 36,773 29,127
Noninterest expense 8,976 7,407 32,708 25,336 41,684 32,743
--------- --------- ---------- ----------- ------- -------
Income before taxes $ 4,993 $ 5,195 $ 4,521 $ 3,166 $ 9,514 $ 8,361
========= ========= ========== =========== ======= =======
Income taxes $ 1,773 $ 1,834 $ 1,605 $ 1,118 $ 3,378 $ 2,952
Depreciation and amortization $ 604 $ 426 $ 5,138 $ 3,842 $ 5,742 $ 4,268
Capital expenditures $ 1,186 $ 581 $ 841 $ 621 $ 2,027 $ 1,202
Identifiable assets (in millions) $ 1,299 $ 1,187 $ 760 $ 830 $ 2,059 $ 2,017
Efficiency ratio 60.21% 53.19% 87.86% 88.89% 79.95% 77.17%
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
- ------------------------------------------------------------------------------------------------------------------------------------
7
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
EARNINGS PERFORMANCE
The Company reported net income of $6.1 million for the quarter ended March 31,
1999, an increase of 13% over the $5.4 million reported in the first quarter of
1998. Fully diluted earnings per share for the first quarter of 1999 were
$0.26, up 13% from $0.23 a year ago. Return on average shareholders' equity was
16.00% and return on average assets was 1.21% for the quarter, compared to
16.22% and 1.14%, respectively, in 1998.
RESULTS OF OPERATIONS
Mortgage Banking
The following discussion provides information that relates specifically to the
Company's mortgage banking line of business, which generates revenue from
mortgage loan production and mortgage loan servicing activities. Mortgage
banking revenue represents the largest component of the Company's total
noninterest income.
The Company closed $1.3 billion in single-family residential mortgage loans in
the first quarter of 1999 compared to $1.4 billion closed in the same period a
year ago due to a decrease in refinance activity. Refinancings for the first
quarter of 1999 represented 39% of total closings compared to 53% in the first
quarter of 1998. The Company's mortgage loan pipeline of applications in process
was $1.2 billion at March 31, 1999.
The following table summarizes the Company's income from mortgage banking
activities:
Three Months Ended
March 31,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------
Mortgage loan production income (1).............. $35,681 $27,215
Net mortgage loan servicing income(2)............ 180 732
Gains on bulk sales of mortgage servicing........ - -
------- -------
Total mortgage banking income................. $35,861 $27,947
======= =======
(1) Includes fee revenue derived from the loan origination process (i.e., points
collected), gain 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.
For the three months ended March 31, 1999, mortgage banking income increased
$7.9 million, or 28%, to $35.9 million from $27.9 million a year earlier.
Mortgage loan production income grew primarily as a result of significant
increases in gain on the sale of mortgages and the related mortgage servicing
rights sold concurrently with the underlying loans. The Company sold $1.4
billion of single-family residential mortgage loans in the first quarter of
1999, which included $64.8 million of residential portfolio loans. In the first
quarter of 1998, the Company sold $1.3 billion of residential mortgage loans,
which included $211 million of residential mortgage portfolio loans.
8
Net mortgage loan servicing income was $180,000 for the first quarter of 1999
compared to $732,000 for the first quarter of 1998. The decrease was primarily
the result of an increase in amortization expense and reserves for impairment of
mortgage servicing rights, and a decrease in the average loans serviced. Loans
serviced for others averaged $2.9 billion during the first quarter of 1999, a
9.8% decrease from $3.2 billion during the first quarter of 1998.
Amortization of mortgage servicing rights totaled $4.2 million for the first
quarter of 1999 compared to $3.1 million for the first quarter of 1998. The
Company evaluates its mortgage servicing rights for impairment on a quarterly
basis and as of March 31, 1999, had recorded $2.4 million in impairment
reserves, an increase of $463,000 from December 31, 1998. There were no
significant changes in the Company's assumptions used in the valuation of
mortgage servicing rights since December 31, 1998
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. There were no bulk sales of servicing in the first
quarters of 1999 or 1998.
Commercial and Retail Banking
The remaining disclosures and analyses within Management's Discussion and
Analysis regarding the Company's results of operations and financial condition
relate principally to the commercial and retail banking line of business.
Net Interest Income
The following discussion should be read in conjunction with Table I on the
following page, which provides detailed analysis of the components impacting net
interest income for the three months ended March 31, 1999 and 1998.
Net interest income, on a fully taxable equivalent (FTE) basis, was $15.3
million for the first quarter of 1999, an increase of $2.1 million, or 16%, over
the first quarter of 1998. The increase was primarily the result of a $167
million, or 36%, increase in average mortgage loans held for sale and a $132
million, or 38%, increase in average commercial loans during the first quarter
of 1999 compared to 1998. Funding the growth in mortgage loans held for sale and
commercial loans was a reduction in the average balance of investment securities
and real estate mortgage portfolio loans and an increase in average deposits.
Net interest income growth was partially offset by the interest expense
associated with a $109 million, or 10%, increase in average interest-bearing
deposits.
The net interest margin (FTE) was 3.23% for the quarter ended March 31, 1999, an
increase of 17 basis points from 3.06% a year ago. The increase in the margin
was due to a favorable shift in the mix of earning assets toward higher-yielding
commercial loans, a reduction in the Company's cost of funds, and a $27.3
million increase in the average balance of noninterest-bearing deposits over the
first quarter of 1998.
Noninterest Expense
For the quarter ended March 31, 1999, total noninterest expense increased $8.9
million, or 27%, to $41.7 million from $32.7 million a year earlier. The rise in
noninterest expense primarily reflects an increase in salaries and employee
benefits and other expenses due to the decrease in deferred loan origination
costs (resulting from the decrease in the mortgage loans held for sale balance
from December 31, 1998). The increase also reflects additional expenses
associated with 5 new commercial and retail banking offices and 17 new mortgage
loan production offices at March 31, 1999 compared to a year ago.
9
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments......................... $ 5,286 $ 48 3.68% $ 3,708 $ 53 5.80%
Mortgage loans held for sale................... 631,475 10,281 6.60 464,460 8,255 7.21
Investment securities and FHLB stock........... 46,839 727 6.21 105,412 1,681 6.38
Portfolio loans(1):
Commercial loans............................ 474,132 10,150 8.68 342,383 7,863 9.31
Real estate mortgage loans.................. 627,707 11,615 7.40 711,071 13,481 7.58
Installment loans........................... 115,112 2,715 9.57 102,952 2,560 10.08
---------- ------- ------- ---------- ------- -----
Total loans, net of unearned income..... 1,216,951 24,480 8.11 1,156,406 23,904 8.32
---------- ------- ------- ---------- ------- -----
Total interest-earning assets............... 1,900,551 35,536 7.55 1,729,986 33,893 7.90
Allowance for loan losses...................... (10,813) (7,628)
Cash and due from banks........................ 14,199 26,548
Other assets................................... 125,440 149,998
---------- ----------
Total assets................................. $2,029,377 $1,898,904
========== ==========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits............... $ 21,079 114 2.19 $ 23,962 126 2.13
Savings deposits............................... 426,550 3,143 2.99 407,149 3,490 3.48
Time deposits.................................. 799,493 10,830 5.49 706,737 10,238 5.87
---------- ------- ------- ---------- ------- -----
Total interest-bearing deposits............. 1,247,122 14,087 4.58 1,137,848 13,854 4.94
Short-term borrowings.......................... 33,280 396 4.83 54,857 786 5.81
FHLB advances.................................. 362,386 4,901 5.49 370,501 5,174 5.64
Long-term debt................................. 47,500 859 7.23 47,500 859 7.23
---------- ------- ------- ---------- ------- -----
Total interest-bearing liabilities........... 1,690,288 20,243 4.85 1,610,706 20,673 5.20
------- ------- ------- -----
Noninterest-bearing deposits................... 115,616 88,275
Other liabilities.............................. 70,060 66,521
---------- ----------
Total liabilities............................ 1,875,964 1,765,502
Shareholders' equity........................... 153,413 133,402
---------- ----------
Total liabilities and shareholders' equity... $2,029,377 $1,898,904
========== ==========
Net interest income/Rate spread (FTE).......... $15,293 2.70% $13,220 2.70%
======= ======= ======= =====
Net interest margin (FTE)...................... 3.23% 3.06%
======= =====
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
--------------------------------------------------------------------------------------------------------
Short-term investments.................... $ 19 $ (24) $ (5)
Mortgage loans held for sale.............. 2,787 (761) 2,026
Investment securities and FHLB stock...... (910) (44) (954)
Portfolio loans(1):
Commercial loans....................... 2,862 (575) 2,287
Real estate mortgage loans............. (1,552) (314) (1,866)
Installment loans...................... 292 (137) 155
---------- ------- ----------
Total loans, net of unearned income... 1,602 (1,026) 576
---------- ------- ----------
Total interest income................... 3,498 (1,855) 1,643
Interest-bearing demand deposits.......... (16) 4 (12)
Savings deposits.......................... 165 (512) (347)
Time deposits............................. 1,295 (703) 592
---------- ------- -------
Total interest-bearing deposits........ 1,444 (1,211) 233
Short-term borrowings..................... (273) (117) (390)
FHLB advances............................. (95) (178) (273)
Long-term debt............................ - - -
---------- ------- -------
Total interest expense.................. 1,076 (1,506) (430)
---------- ------- -------
Net interest income..................... $ 2,422 $ (349) $ 2,073
========== ======= =======
(1) Non-accrual loans and overdrafts are included in average balances.
(2) 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.
10
BALANCE SHEET ANALYSIS
ASSETS
At March 31, 1999, the Company had $2.1 billion in total assets compared to $2.2
billion at December 31, 1998. The decrease is primarily a result of the
decrease in mortgage loans held for sale described below.
Securities
Investment securities available for sale declined $2.1 million, or 4%, to $45.2
million, representing 2.2% of total assets at March 31, 1999. At December 31,
1998, the investment securities portfolio totaled $47.3 million, or 2.2% of
total assets from December 31, 1998. The decrease from year-end resulted from
sales and maturities of securities during the first quarter of 1999. During the
first quarter of 1999, the Company sold $916,000 of investment securities and
gross realized losses on sales of available-for-sale securities were $88,000.
The Company's securities portfolio serves as a source of liquidity and earnings,
carries relatively minimal principal risk and contributes to the management of
interest rate risk. The debt securities portfolio is comprised primarily of
U.S. Government agency securities, obligations collateralized by U.S. Government
agencies, mainly in the form of mortgage-backed securities and collateralized
mortgage obligations, and municipal obligations. With the exception of
municipal obligations, the maturity structure of the debt securities portfolio
is generally short-term in nature or indexed to variable rates.
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at March 31, 1999:
Available-for-Sale Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------- --------- ---------- ---------- ---------
Debt Securities:
U.S. Government agency securities.................. $ 4,181 $ - $100 $ 4,081
Collateralized mortgage obligations............... 969 - 8 961
Mortgage-backed securities......................... 5,984 1 79 5,906
Municipal and other securities..................... 3,009 163 - 3,172
------- ---- ---- -------
Total Debt Securities............................. 14,143 164 187 14,120
Equity securities................................... 31,369 - 339 31,030
------ ---- ---- -------
Total Securities Available for Sale............... $45,512 $164 $526 $45,150
======= ==== ==== =======
Certain securities having a carrying value of approximately $7.3 million and
$8.8 million at March 31, 1999 and December 31, 1998, respectively, were pledged
to secure certain securities sold under agreements to repurchase and public
deposits as required by law.
Mortgage Loans Held for Sale
Mortgage loans held for sale were $620.7 million at March 31, 1999, decrease of
$140.6 million, or 18%, from $761.2 million at December 31, 1998. This decrease
was caused by the $500 million decrease in residential mortgage loan
originations during the first quarter of 1999 compared to the fourth quarter of
1998. Mortgage loans originated are generally sold within a period of 30 to 60
days after closing.
Portfolio Loans
Total portfolio loans remained $1.2 billion at March 31, 1999 compared to
December 31, 1998. However, the commercial and installment loan portfolios,
increased 6% and 8%, respectively from December 31, 1998. The residential
mortgage portfolio loan balance decreased 6% since year-end 1998.
11
The commercial portfolio loan balance increased $29.1 million during the first
quarter of 1999, for an annualized growth rate of 25%, reflecting continued
strong demand for real estate-secured lending in markets served by the Company.
During the first quarter of 1999, the Company closed $6.0 million in Small
Business Administration (SBA) loans, and had a pipeline of SBA loans in process
of $56 million at March 31, 1999. The Company sold $3.1 million and $6.9
million, of the guaranteed portion of SBA loans in the first quarters of 1999
and 1998, respectively, resulting in corresponding gains of $237,000 and
$619,000, respectively.
Residential real estate mortgage loans decreased $35.8 million, to $606.3
million at March 31, 1999. Customers continued to select fixed rate residential
mortgage loans during the first quarter of 1999, resulting in a lower percentage
of variable rate residential real estate loans retained compared to prior years.
Installment loans increased $8.4 million, to $118.9 million at March 31, 1999,
reflecting the continued success of specifically targeted sales and marketing
efforts for home equity lending.
The following table provides further information regarding the Company's loan
portfolio:
March 31, 1999 December 31, 1998
--------------------- ---------------------
(Dollars in thousands) Amount Percent Amount Percent
- ----------------------------------- ----------- -------- ----------- --------
Commercial loans:
Commercial and industrial......... $ 33,863 2.8% $ 31,786 2.6%
Real estate construction.......... 115,203 9.5 84,767 7.0
Commercial real estate mortgage... 339,806 28.0 343,171 28.3
---------- ----- ---------- -----
Total commercial loans.......... 488,872 40.3 459,724 37.9
Residential real estate mortgages.. 606,309 49.9 642,129 53.0
Installment loans.................. 118,934 9.8 110,577 9.1
---------- ----- ---------- -----
Total portfolio loans........... $1,214,115 100.0% $1,212,430 100.0%
========== ===== ========== =====
Credit Quality
The Company attempts to minimize credit risk in the loan portfolio by focusing
primarily on real estate-secured lending (i.e., residential real estate
construction, residential real estate mortgage loans, commercial real estate
construction, commercial real estate mortgage loans, and home equity loans). As
of March 31, 1999, such loans comprised approximately 94.1% of total portfolio
loans. The Company's general policy is to originate conventional residential
real estate mortgages with loan-to-value ratios of 80% or less and SBA-secured
loans or real estate-secured commercial loans with loan-to-value ratios of 80%
or less.
The substantial majority of the Company's residential mortgage loan production
is underwritten in compliance with the requirements for sale to or conversion to
mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation
(FHLMC), the Federal National Mortgage Association (FNMA), or the Government
National Mortgage Association (GNMA). The majority of the Company's commercial
loans is secured by real estate and is generally made to small and medium-size
businesses. These loans are made at rates based on the prevailing prime
interest rates of Republic Bank, as well as fixed rates for terms generally
ranging from three to five years. Management's emphasis on real estate-secured
lending and adherence to conservative underwriting standards is reflected in the
Company's historically low net charge-offs.
Non-Performing Assets
Non-performing assets consist of non-accrual loans and other real estate owned
(OREO). OREO represents real estate properties acquired through foreclosure or
by deed in lieu of foreclosure and is classified as other assets on the balance
sheet until such time as the property is sold. Commercial loans, residential
real estate 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. 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.
12
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
March 31, December 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------- ---------- -------------
Non-Performing Assets:
Non-accrual loans:
Commercial................................ $ 3,115 $ 1,083
Residential real estate mortgages......... 8,030 10,581
Installment............................... 1,047 448
------- -------
Total non-accrual loans.................. 12,192 12,112
Restructured loans......................... - -
------- -------
Total non-performing loans 12,192 12,112
Other real estate owned.................... 3,721 4,276
------- -------
Total non-performing assets.............. $15,913 $16,388
======= =======
Non-performing assets as a percentage of:
Portfolio loans and OREO.................. 1.31% 1.35%
Portfolio loans, mortgage loans held for
sale and OREO.......................... .87% .83%
Total assets.............................. .77% .75%
Loans past due 90 days or more and still
accruing interest:
Commercial................................. $ - $ 74
Residential real estate.................... - -
Installment................................ 103 -
------- -------
Total loans past due 90 days or more..... $ 103 $ 74
======= =======
At March 31, 1999, approximately $13.6 million, or 1.12% of total portfolio
loans were 30-89 days delinquent, compared to $11.7 million, or .96%, at
December 31, 1998.
Non-performing assets decreased $475,000 since year-end 1998. The net decrease
was the result of a $3.1 million decrease in non-performing residential real
estate mortgages and other real estate owned, which was offset by an increase in
non-accrual commercial loans of $2.0 million and installment loans of $599,000.
The increase in non-performing commercial loans is primarily due to the addition
of a $1.6 million commercial real-estate secured loan in the first quarter of
1999. Based on the real estate collateral, no material loss is expected on this
loan. Historically, credit losses on loans secured by residential property loan
have been minimal as demonstrated by the Company's low level of net 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.
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.
13
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 $84,000 to $229,000 in the first quarter of
1999 compared to 1998. The ratio of net loan charge-offs to average loans,
including loans held for sale, was .05% for the first quarter of 1999, compared
to .03% for the first quarter of 1998.
The following table provides an analysis of the allowance for loan losses:
Three Months Ended
March 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------- ------- ------
Allowance for loan losses:
Balance at January 1................................................ $10,451 $7,334
Loans charged off.................................................. (229) (145)
Recoveries of loans previously charged off......................... 11 44
------- ------
Net charge-offs................................................... (218) (101)
Provision charged to expense....................................... 850 1,225
------- -------
Balance at March 31................................................. $11,083 $8,458
======= ======
Annualized net charge-offs as a percentage of average portfolio
loans (including loans held for sale)............................. . 05% .03%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end......................................... .91 .79
Allowance for loan losses as a percentage of non-performing
loans............................................................. 90.90 56.26
14
Off-Balance Sheet Instruments
Unused commitments to extend credit totaled $884.3 million for residential real
estate loans and $156.2 million for commercial real estate loans at March 31,
1999.
At March 31, 1999, the Company had outstanding $461.4 million of commitments to
fund residential real estate loan applications with agreed-upon rates, including
$118.7 million of residential portfolio loans. Commitments to fund residential
real estate loan applications with agreed-upon rates subject the Company to
market risk due to fluctuations in interest rates. To minimize this exposure to
interest rate risk, the Company enters into firm commitments to sell such
mortgage loans at specified future dates to various third parties.
At March 31, 1999, the Company had outstanding mandatory forward commitments to
sell $872.1 million of residential mortgage loans, of which $568.4 million
covered mortgage loans held for sale and $303.7 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 second quarter of 1999 without producing any material gains or losses. At
March 31, 1999, the mortgage loans held for sale balance included $52.3 million
of loan products for which the Company did not enter into mandatory forward
commitments. The Company's exposure to market risk was not significantly
increased, however, since $47.8 million, or 91%, of these loans were loans that
had been committed for bulk sale to third parties prior to March 31, 1999 or
were floating rate residential loans.
LIABILITIES.
Total liabilities were $1.9 billion at March 31, 1999, a decrease of $140.7
million, or 7%, from $2.04 billion at December 31, 1998. This decrease was
primarily due to a decrease of total FHLB advances totalling $144.6 million,
which corresponds to the $140.6 million decrease in mortgage loans held for
sale.
Deposits
Total deposits remained relatively flat during the first quarter of 1999,
increasing $231,000 to $1.38 billion at March 31, 1999.
Short-Term Borrowings
Short-term borrowings with maturities of less than one year, along with the
related average balances and interest rates for the three months ended March 31,
1999 and the year ended December 31, 1998, were as follows:
March 31, 1999 December 31, 1998
--------------------- ----------------------
Ending Average Average Rate During Ending Average Average Rate During
(Dollars in thousands) Balance Balance Period Balance Balance Year
- ---------------------------------- -------- -------------- ---------- -------- -------- -----------------
Federal funds purchased........... $51,000 $31,668 4.75% $48,000 $35,717 5.59%
Securities sold under agreements
to repurchase.................... - - - - 5,393 5.75
Other short-term borrowings....... 1,653 1,612 4.96 5,500 3,077 5.03
------- ------- ---- ------- ------ -------
Total short-term borrowings...... $52,653 $33,280 4.83% $53,500 $44,187 5.57%
======= ======= ==== ======= ======= =======
At March 31, 1999 and December 31, 1998, other short-term borrowings consisted
of treasury, tax and loan (TT&L) demand notes.
FHLB Advances
Republic Bank routinely borrows short- and long-term advances from the Federal
Home Loan Bank (FHLB) to 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 with an aggregate book value equal to
at least 150% of the advances.
15
FHLB advances outstanding at March 31, 1999 and December 31, 1998, were as
follows:
March 31, 1999 December 31, 1998
---------------------- ---------------------
Average Average
Ending Rate At Ending Rate At
(Dollars in thousands) Balance Period-End Balance Year End
- --------------------------- --------- ----------- --------- -----------
Short-term FHLB advances.. $ 65,000 5.23% $208,000 5.01%
Long-term FHLB advances.... 247,008 5.65 248,568 5.65
-------- ---- -------- ------
Total.................... $312,008 5.56% $456,568 5.36%
======== ==== ======== =======
The long-term FHLB advances have original maturities ranging from May 1999 to
July 2008.
Long-Term Debt
Obligations with original maturities of more than one year consisted of the
following:
March 31, December 31,
(Dollars in thousands) 1999 1998
- ---------------------------------- --------- ------------
7.17% Senior Debentures due 2001.. $25,000 $25,000
6.75% Senior Debentures due 2001.. 9,000 9,000
6.95% Senior Debentures due 2003.. 13,500 13,500
------- -------
Total long-term debt...... $47,500 $47,500
======= =======
CAPITAL
Shareholders' equity was $154.7 million at March 31, 1999, a $4.3 million, or
3%, increase from $150.4 million at December 31, 1998. This increase primarily
resulted from the retention of $4.0 million in earnings after the 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 3.00% for tier 1 leverage. To be considered well-capitalized
under the regulatory framework for prompt corrective action, minimum capital
ratios of 10.00% for total risk-based capital, 6.00% for tier 1 risk-based
capital and 5.00% for tier 1 leverage must be maintained.
As of March 31, 1999, the Company met all capital adequacy requirements to which
it is subject and management does not anticipate any difficulty in meeting these
requirements on an ongoing basis. The Company's capital ratios were as follows:
March 31, December 31,
1999 1998
---------- ------------
Total capital to risk-weighted assets (1)... 10.50% 10.20%
Tier 1 capital to risk-weighted assets(1)... 9.75 9.48
Tier 1 capital to average assets (1)........ 7.08 6.56
(1) As defined by the regulations.
16
As of March 31, 1999, the Company's Total risk-based capital was $153.9 million
and Tier 1 risk-based capital was $142.8 million, an excess of $7.4 million and
$54.9 million, respectively, over the minimum guidelines prescribed by
regulatory agencies for a well-capitalized institution. In addition, Republic
Bank has regulatory capital ratios in excess of the minimum levels established
for well-capitalized institutions.
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, and as such, future financial performance may
differ from current expectations due to a variety of market place factors. These
factors include, without limitation, those disclosed in the Company's 1998
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Market Risk and Asset/Liability 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 interest-bearing liabilities
that are prepaid/withdrawn, reprice or mature in specified periods.
The primary objective of asset and liability management is to maintain stability
in the level of net interest income by producing the optimal yield and maturity
mix of assets and liabilities within the interest rate risk limits set by the
Company's Asset and Liability Management Committee (ALCO) and consistent with
projected liquidity needs and capital adequacy requirements.
The Company's ALCO, which meets weekly, is responsible for reviewing the
interest rate sensitivity position of the Company and establishing policies to
monitor and limit exposure to interest rate risk. Senior management at each of
the Company's subsidiaries is responsible for ensuring that the subsidiary asset
and liability management procedures adhere to corporate policies and risk limits
established by its respective board of directors.
The Company utilizes two complementary quantitative tools to measure and monitor
interest rate risk: static gap analysis and earnings simulation modeling. Each
of these interest rate risk measurements has limitations, but when evaluated
together, they provide a reasonably comprehensive view of the exposure the
Company has to interest rate risk.
Static Gap Analysis: Static gap analysis is utilized at the end of each month to
measure the amount of interest rate risk embedded in the balance sheet as of a
point in time. It does this by comparing the differences in the repricing
characteristics of interest-earning assets and interest-bearing liabilities. A
gap is defined as the difference between the principal amount of interest-
earning assets and interest-bearing liabilities that reprice within a specified
time period. This gap provides a general indication of the sensitivity of the
Company's net interest income to interest rate changes. For example, 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 March 31,
1999, the Company's cumulative one-year gap was a positive 6.26% of total
earning assets.
17
The Company's current policy is to maintain a mix of asset and liabilities with
repricing and maturity characteristics that permit a moderate amount of short-
term interest rate risk based on current interest rate projections, customer
credit demands and deposit preferences. The Company generally operates in a
range of plus or minus 10% of total earning assets for the cumulative one-year
gap. Management believes that this range reduces the vulnerability of net
interest income to large shifts in market interest rates while allowing the
Company to take advantage of fluctuations in current short-term rates.
Earnings Simulation Modeling: On a quarterly basis, the earnings simulation
model is used to quantify the effects of various hypothetical changes in
interest rates on the Company's projected net interest income over the ensuing
twelve-month period. The model permits management to evaluate the effects of
various parallel shifts of the U.S. Treasury yield curve, upward and downward,
on net interest income expected in a stable interest rate environment (i.e.,
base net interest income).
As of March 31, 1999, the earnings simulation model projects net interest income
would increase by 3.2% of base net interest income, 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 5.5%. 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 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 is
being reviewed monthly by either the Board of Directors or its Executive
Committee. 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 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.
18
The testing of mission critical third party hardware and software systems was
completed during the first quarter of 1999, noting no Year 2000 compliance
issues. The Company expects to complete the Year 2000 project no later than June
30, 1999. The total Year 2000 project cost for the Company is estimated at $1.2
million and is being funded through operating cash flows. To date, the Company
has incurred approximately $560,000 ($200,000 expensed and $360,000 capitalized
for new systems hardware and software). The remaining $640,000 relates
principally to capitalization of equipment and software and implementation and
testing of contingency plans 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 were 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 in the event 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.
19
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 the remaining phases, under the most
reasonably likely worst case scenario, the Company could be unable to process
customer loan and deposit transactions, perform 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 Developments
In June 1998, the Financial Accounting Standards Board issued SFAS 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 to Statement 133 will be on the earnings
and financial position of the Company.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and its subsidiaries
are parties to certain routine litigation. In the opinion of
management, the aggregate liabilities, if any, arising from such legal
proceedings would not have a material adverse effect on the Company's
consolidated financial position, results of operations and liquidity.
Item 2. Changes in Securities
On February 18, 1999, the Board of Directors declared a $0.09 cash
dividend per share, payable April 2, 1999 to shareholders of record
March 5, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
Republic Bancorp Inc. held its 1999 Annual Meeting of Shareholders on
April 28, 1999. The following directors were elected at the annual
meeting to serve until the next annual meeting:
Director For Against Abstentions Broker Non-Votes
-------- --- ------- ----------- ----------------
Jerry D. Campbell 20,966,993 0 607,041 0
Dana M. Cluckey 20,741,265 0 607,041 0
Bruce L. Cook 20,742,047 0 607,041 0
Richard J. Cramer 20,742,630 0 607,041 0
Dr. George A. Eastman 20,738,708 0 607,041 0
Howard J. Hulsman 20,267,109 0 607,041 0
Gary Hurand 20,740,094 0 607,041 0
Dennis J. Ibold 20,719,897 0 607,041 0
John J. Lennon 20,811,185 0 607,041 0
Sam H. McGoun 20,747,574 0 607,041 0
Kelly E. Miller 20,743,130 0 607,041 0
Joe D. Pentecost 20,748,802 0 607,041 0
Dr. Isaac J. Powell 20,743,316 0 607,041 0
George B. Smith 20,726,682 0 607,041 0
Dr. Jeoffrey K. Stross 20,734,817 0 607,041 0
A proposal to approve the Agreement and Plan of Merger dated as of
December 1, 1998 between Republic and D&N Financial Corporation was
submitted to shareholders for approval. The merger agreement provides
for the merger of D&N and Republic. Under terms of the agreement, D&N
stockholders will receive 1.82 shares of Republic common stock for each
share of D&N common stock that they own. Republic stockholders will
continue to own their existing shares of Republic common stock after the
merger. The merger will be tax-free to Republic, D&N and their
stockholders for federal income tax purposes. The Agreement and Plan of
Merger was approved at the Annual Meeting by the following votes:
15,722,166 for; 237,920 against; 101,514 abstentions; and 5,274,077
broker non-votes.
A proposal to approve an amendment to Article III of the First Restated
Articles of Incorporation of Republic to increase the total authorized
capital stock of Republic from 35,000,000 shares to 80,000,000 shares was
submitted to shareholders for approval. The amendment was approved at
the Annual Meeting by the following votes: 20,241,345 for; 795,547
against; 134,451 abstentions; and 164,334 broker non-votes.
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first quarter of
1999.
22
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC BANCORP INC.
---------------------
(Registrant)
Date: May 17, 1999 BY: /s/ Thomas F. Menacher
-----------------------
Thomas F. Menacher
Executive Vice President,
Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
EXHIBIT INDEX
Sequential
Exhibit Number Exhibit Page Number
-------------- ------- -----------
27 Financial Data Schedule 25
24