REPUBLIC BANCSHARES INC
10-Q, 1999-11-02
STATE COMMERCIAL BANKS
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Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1999

  [  ] 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 0-27652

REPUBLIC BANCSHARES, INC.

(Exact Name of Registrant As Specified In Its Charter)
     
FLORIDA 59-3347653
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
 
111 2nd Avenue N.E., St. Petersburg, FL 33701
(Address of Principal Office) Zip Code

(727) 823-7300

(Registrant’s Telephone Number, Including Area Code)

N/A

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

      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 [   ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

      Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [   ] No [   ]

APPLICABLE ONLY TO CORPORATE ISSUERS

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 
Common stock par value $2.00 per share 10,533,919 shares outstanding at October 22, 1999

TABLE OF CONTENTS

REPUBLIC BANCSHARES, INC. INDEX
Part 1.   FINANCIAL INFORMATION
Item 1.   Financial Statements
CONSOLIDATED BALANCE SHEETS -- SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED QUARTERLY FINANCIAL AND OTHER DATA
QUARTERLY NONPERFORMING ASSET TREND
QUARTERLY CREDIT LOSS EXPERIENCE
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Sale of the Savings Bank
Item 3. Exhibits and Reports on Form 8-K
SIGNATURES

REPUBLIC BANCSHARES, INC.

INDEX

             
Page
Part I. FINANCIAL INFORMATION (all financial information for prior periods has been restated for the mergers with Lochaven Federal Savings and Loan Association and Bankers Savings Bank, F.S.B.)
Item 1. Financial Statements
Consolidated Balance Sheets —   September 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Operations —   Three and nine month periods ended September 30, 1999 and 1998
  (all unaudited)		 2
Consolidated Statements of Stockholders’ Equity —   Year ended December 31, 1998 and Nine months ended September 30, 1999
  (unaudited)		 3
Consolidated Statements of Comprehensive Income

  Nine month periods ended September 30, 1999 and 1998 (all unaudited)		 4
Consolidated Statements of Cash Flows —
  Three and nine month periods ended September 30, 1999 and 1998
  (all unaudited)		 5
Notes to Consolidated Financial Statements (unaudited) 6
Selected Quarterly Financial and Other Data (unaudited) 12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Sale of the Savings Bank 28
Item 3. Exhibits and Reports on Form 8-K 28
SIGNATURES 29

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REPUBLIC BANCSHARES, INC.

 
CONSOLIDATED BALANCE SHEETS — SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
($ in thousands, except share data)
                       
September 30, December 31,
1999 1998
(unaudited)
ASSETS
Cash and due from banks $ 62,654 $ 46,143
Interest bearing deposits in banks 4,908 3,467
Federal funds sold 85,140 93,000
Investment securities (all available for sale) 40,717 31,003
Mortgage-backed and mortgage-related securities:
Available for sale 277,039 32,713
Trading 39,883 66,067
FHLB stock 13,816 11,152
Loans held for sale — 184,176
Loans, net of allowance for loan losses 1,839,198 1,868,212
Premises and equipment, net 54,030 60,274
Other real estate acquired through foreclosure, net 5,847 4,951
Accrued interest receivable 14,483 13,452
Goodwill and premium on deposits 33,791 36,916
Other assets 45,001 53,591
Total assets $ 2,516,507 $ 2,505,117
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest bearing checking $ 122,533 $ 138,934
Interest checking 184,358 189,392
Money market 220,734 159,868
Savings 336,747 366,817
Time deposits 1,360,242 1,332,401
Total deposits 2,224,614 2,187,412
Securities sold under agreements to repurchase 37,701 36,640
FHLB advances — 25,000
Holding company senior debt 10,000 25,000
Convertible subordinated debt 14,683 —
Term subordinated debt 2,750 —
Holding company unsecured notes — 7,000
Other liabilities 28,465 31,718
Total liabilities $ 2,318,213 $ 2,312,770
Company-obligated mandatorily redeemable preferred securities of subsidiary trust solely holding junior subordinated debentures of the Company 28,750 28,750
Stockholders’ equity:
Perpetual preferred convertible stock ($20.00 par, 100,000 shares authorized 75,000 shares issued and outstanding. Liquidation preference $6.6 million at September 30, 1999 and December 31, 1998.) 1,500 1,500
Common stock ($2.00 par, 20,000,000 shares authorized, 10,514,479 and 10,323,194 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively.) 21,029 20,646
Capital surplus 128,027 125,364
Retained earnings 24,810 16,103
Net unrealized (loss) on available for sale securities, net of tax effect (5,822 ) (16 )
Total stockholders’ equity 169,544 163,597
Total liabilities and stockholders’ equity $ 2,516,507 $ 2,505,117

The accompanying notes are an integral part of these consolidated statements.

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REPUBLIC BANCSHARES, INC.

 
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except share data)
                                     
For the Three Months For the Nine Months
Ended Sept. 30, Ended Sept. 30,
1999 1998 1999 1998
(unaudited)
(unaudited)
INTEREST INCOME:
Interest and fees on loans $ 41,089 $ 46,627 $ 125,122 $ 118,064
Interest on investment securities 498 644 1,524 1,828
Interest on mortgage-backed securities 4,232 229 8,151 1,215
Interest on trading securities 293 1,254 1,932 2,270
Interest on federal funds sold 1,645 1,793 4,009 2,990
Interest on other investments 401 230 1,064 692
Total interest income 48,158 50,777 141,802 127,059
INTEREST EXPENSE:
Interest on deposits 23,766 22,618 70,039 56,835
Interest on FHLB advances — 1,260 157 6,084
Interest on senior debt 434 26 1,267 26
Interest on subordinated debt 26 — 26 —
Interest on term subordinated debt 6 — 6 —
Interest on unsecured notes 128 — 396 —
Interest on other borrowings 435 541 1,362 1,360
Total interest expense 24,795 24,445 73,253 64,305
Net interest income 23,363 26,332 68,549 62,754
PROVISIONS FOR LOAN LOSSES 3,871 4,340 6,803 5,956
Net interest income after provision for loan losses 19,492 21,992 61,746 56,798
NONINTEREST INCOME:
Service charges on deposit accounts 1,393 1,258 3,688 3,107
Loan service fees 1,412 520 5,014 1,179
Other loan fee income 1,235 652 3,188 1,959
Gain on sale of loans, net 316 1,161 3,574 3,126
Income from mortgage banking activities — 21,100 — 39,513
Gain (loss) on securities, net — (229 ) (245 ) 514
Other operating income 3,265 1,303 5,565 3,335
Total noninterest income 7,621 25,765 20,784 52,733
NONINTEREST EXPENSES:
General & administrative (“G&A”) expenses 20,615 34,615 63,648 91,803
Merger expenses — 375 — 798
Provision for losses on ORE — 120 — 160
Other ORE (income) expense, net 76 (40 ) (412 ) (48 )
Amortization of goodwill & premium on deposits 967 767 2,945 1,086
Total noninterest expenses 21,658 35,837 66,181 93,799
Income (loss) before income taxes & minority interest 5,455 11,920 16,349 15,732
Income tax (provision) benefit (1,968 ) (4,371 ) (6,178 ) (5,790 )
Income (loss) before minority interest 3,487 7,549 10,171 9,942
Minority interest in income from subsidiary trust (net of tax) (424 ) (424 ) (1,266 ) (1,266 )
NET INCOME (LOSS) $ 3,063 $ 7,125 $ 8,905 $ 8,676
PER SHARE DATA:
Net income (loss) per common and common equivalent share — diluted $ .27 $ .63 $ .79 $ .87
Weighted average common & common equivalent shares outstanding — diluted 11,309,550 11,238,535 11,310,126 9,930,938
Net income (loss) per common share — basic $ .29 $ .69 $ .85 $ .97
Weighted average common shares outstanding — basic 10,510,415 10,307,777 10,463,369 8,939,144

The accompanying notes are an integral part of these consolidated statements.

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REPUBLIC BANCSHARES, INC.

 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Year Ended December 31, 1998 and
the Nine Months Ended September 30, 1999 (Unaudited)
($ in thousands except share data)
                                                                 
Perpetual
Preferred Net
Convertible Unrealized
Stock Common Stock Gains/(Losses)
on Available
Shares Shares Capital Retained for Sale
Issued Amount Issued Amount Surplus Earnings Securities Total
Balance, December 31, 1997 75,000 $ 1,500 7,602,992 $ 15,206 $ 56,553 $ 28,789 $ 482 $ 102,530
Net loss for the twelve months ended December 31, 1998 — — — — — (12,421 ) — (12,421 )
Net unrealized losses on available for sale securities, net of tax effect — — — — — — (498 ) (498 )
Exercise of stock options — — 78,052 156 662 — — 818
Issuance of common stock — — 2,642,150 5,284 67,598 — — 72,882
Additional paid-in capital from performance stock options — — — — 551 — — 551
Dividends on preferred stock — — — — — (265 ) — (265 )
Balance, December 31, 1998 75,000 1,500 10,323,194 20,646 125,364 16,103 (16 ) 163,597
Net income for the nine months ended Sept. 30, 1999 — — — — — 8,905 — 8,905
Net unrealized loss on available for sale securities, net of tax — — — — — — (5,806 ) (5,806 )
Exercise of stock options — — 191,285 383 2,338 — 2,721
Additional paid-in capital from nonqualified/performance stock options — — — — 325 — — 325
Dividends on preferred stock — — — — — (198 ) — (198 )
Balance, Sept. 30, 1999 75,000 $ 1,500 10,514,479 $ 21,029 $ 128,027 $ 24,810 $ (5,822 ) $ 169,544

The accompanying notes are an integral part of these consolidated statements.

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REPUBLIC BANCSHARES, INC.

 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
($ in thousands)
                   
For the Nine
Months Ended
Sept. 30,
1999 1998
Net income $ 8,905 $ 8,676
Unrealized losses on securities:
Unrealized holding losses, net of tax effect during period (5,806 ) 632
Less reclassification adjustment for gains realized in net income — (835 )
Net unrealized losses (5,806 ) (203 )
Comprehensive income $ 3,099 $ 8,473

The accompanying notes are an integral part of these consolidated statements.

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REPUBLIC BANCSHARES, INC.

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
                                     
For the Three Months For the Nine Months
Ended Sept. 30, Ended Sept. 30,
1999 1998 1999 1998
(unaudited) (unaudited)
OPERATING ACTIVITIES:
Net income (loss) $ 3,063 $ 7,125 $ 8,905 $ 8,676
Reconciliation of net income to net cash provided by (used in):
Provision for loan and ORE losses 3,871 4,460 6,803 6,116
Depreciation and amortization, net (6,080 ) (6,027 ) 3,309 (627 )
Amortization of premium (accretion) of fair value, net 1,797 178 6,978 370
(Gain)/loss on sale of loans (316 ) (22,261 ) (3,574 ) (42,639 )
Loss/(Gain) on sale of investment securities — (414 ) 244 (1,156 )
(Gain)/loss on sale of ORE (33 ) (143 ) (695 ) (254 )
Capitalization of mortgage servicing/residual interest (437 ) (18,121 ) (3,887 ) (39,338 )
Net (increase) decrease in deferred tax asset 973 (86 ) 1,733 (24 )
Loss/(Gain) on disposal of premises & equipment (804 ) (472 ) (594 ) (474 )
Net decrease (increase) in other assets 1,050 (789 ) 5,713 (5,480 )
Net increase (decrease) in other liabilities (1,451 ) (18,797 ) (3,253 ) 15,271
Net cash provided by (used in) operating activities 1,633 (55,347 ) 21,682 (59,559 )
INVESTING ACTIVITIES:
Net decrease (increase) in loans (2,266 ) 123,278 114,364 (239,803 )
Proceeds from excess of deposit liabilities assumed over assets acquired (net) — 206,623 — 253,236
Proceeds from sales and maturities of:
Investment securities held-to-maturity — (2,000 ) — —
Investment securities available for sale — (750 ) 131,500 6,500
Mortgage-backed securities available for sale — 13,557 1,552 50,612
Mortgage-backed securities in trading portfolio — (260 ) — 8,119
Purchase of investment securities HTM (1 ) — (1,900 ) (998 )
Purchase of investment securities AFS — 6,000 (134,868 ) (21,152 )
Purchase of mortgage-backed securities AFS (21,066 ) (1,224 ) (177,006 ) (1,224 )
Purchase of MBS in trading portfolio — — — (12,000 )
Principal repayment on mortgage-backed securities 12,641 (7,101 ) 26,731 1,244
Principal repayment on revenue bonds 405 245 405 245
(Purchase) redemption of FHLB stock 115 (142 ) (2,664 ) (2,136 )
Disposal/(purchase) of premises & equipment, net 12,370 1,211 12,260 (6,032 )
Proceeds from sale of ORE 754 1,623 5,701 3,758
Investment in other real estate owned, net 153 1,210 475 635
Net cash used in investing activities 3,105 342,270 (23,450 ) 41,004
FINANCING ACTIVITIES:
Net increase in deposits (48,728 ) 61,920 37,517 244,258
Net (decrease) increase in repurchase agreements (4,405 ) (1,205 ) 1,061 23,236
(Repayment) proceeds from FHLB advances, net — (125,300 ) (25,000 ) (37,800 )
Proceeds from issuance of common stock 162 155 3,046 74,222
Proceeds from holding company debt (4,567 ) 25,000 (4,567 ) 25,000
Dividends on perpetual preferred stock (66 ) (66 ) (198 ) (198 )
Net cash provided by (used in) financing activities (57,604 ) (39,496 ) 11,859 328,718
Net increase (decrease) in cash and cash equivalents (52,866 ) 247,427 10,091 310,163
Cash and cash equivalents, beginning of period 205,567 150,806 142,610 88,070
Cash and cash equivalents, end of period $ 152,701 $ 398,233 $ 152,701 $ 398,233
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest 25,237 23,811 88,727 58,741
Income taxes (refunded)/paid (288 ) 438 (4,827 ) 3,544

The accompanying notes are an integral part of these consolidated statements

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REPUBLIC BANCSHARES, INC.

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Organization

      In the opinion of Republic Bancshares, Inc. (the “Company”), the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly the financial position of the Company as of September 30, 1999 and the results of operations and cash flows, for the three and nine month periods ended September 30, 1999 and 1998. The December 31, 1998 statement of financial position was derived from audited financial statements. The accounting and reporting policies of the Company and its wholly-owned subsidiaries, Republic Bank (the “Bank”), RBI Capital Trust I (“RBI”) and Republic Bank, F.S.B. (the “Savings Bank”) are in conformity with generally accepted accounting principles and prevailing practices within the financial services industry. On September 10, 1999, the Company sold the Brunswick Georgia office of the Savings Bank, Republic Bank, FSB, to Sapelo National Bank. The Savings Bank was thereafter dissolved and all of its cash and other remaining assets were distributed to the Company. Consequently, the financial information of the Company includes results of operations for the Savings Bank through the September 10th dissolution date.

      The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Such estimates are subject to change in the future as additional information becomes available or previously existing circumstances are modified.

      The consolidated financial statements of the Company include the accounts of the Company, RBI, the Savings Bank, the Bank, and the Bank’s wholly-owned subsidiary, Republic Insurance Agency, Inc. All financial information for 1998 has been restated for the acquisitions of Bankers Savings Bank, F.S.B. and Lochaven Federal Savings and Loan Association, both consummated in 1998. All significant inter-company accounts and transactions have been eliminated. The Company’s primary source of income is from the Bank, which operates 81 branches throughout Florida. The Bank’s primary source of revenue has been derived from net interest income on loans and investments.

      These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report for the year ended December 31, 1998, filed with the Securities and Exchange Commission (“SEC”) on Form 10-K. The results for the nine months ended September 30, 1999, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 1999.

Reclassifications

      Certain reclassifications have been made to prior period financial statements to conform with the September 1999 financial statement presentation.

Recent Accounting Developments

  Accounting for Costs of Computer Software for Internal Use

      In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, (“SOP 98-1”) “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. SOP 98-1 provides guidance for capitalizing and expensing the costs of computer software developed or obtained for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not have a material impact on the accompanying consolidated financial statements.

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REPUBLIC BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

  Accounting for Derivative Instruments and Hedging Activities

      In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging activities — Deferral of the Effective Date of FASB Statement No. 133”, which delayed the date for implementation to all fiscal quarters beginning after June 15, 2000. Management does not believe that the adoption of SFAS No. 133 will have a material effect upon the results of operations of the Company.

2.  MORTGAGE-BACKED AND MORTGAGE-RELATED SECURITIES

      During the second quarter ended June 30, 1999, the Company reclassified its mortgage-backed securities resulting from securitization of its loans held for sale from the “trading category” to “available for sale”. As of September 30, 1999, there were $277.0 million of mortgage backed securities in the available for sale category and $38.9 million of mortgage-related securities held as trading assets. Remaining in the trading category were: (i) a $10.9 million subordinate tranche purchased from the Company’s securitization of High Loan-to-Value Loans (“High LTV Loans”) in June 1998; (ii) $24.6 million in overcollateralization and residual interests in cash flows from securitizations in December 1997 and June 1998; and (iii) $4.4 million of excess servicing interest only strips.

      The market values assigned to the mortgage-backed securities classified as available for sale were derived using market quotations at September 30, 1999. However, market value quotations for the Company’s mortgage-related securities classified as trading assets, principally retained interests in the excess cash flows from securitizing High LTV Loans, were generally not available. These retained interests were valued based on estimates of the present value of the future excess cash flows from the underlying pool or pools of loans.

      In valuing the Company’s mortgage-related securities, management has conducted surveys and analyses of current market conditions and has relied on third parties to assist in this process. The calculation of the present value of the excess cash flows principally include the following assumptions: (i) the future rate of prepayment; (ii) the discount rate used to calculate present value; and (iii) the estimate for credit losses on loans sold. The estimated life of the securitized loans depends on the assumed annual prepayment rate which is a function of estimated voluntary (full and partial) and involuntary (liquidations) prepayments. The prepayment rate used in the valuation process represents management’s expectations of future prepayment rates based on prior observed and future expected loan performance, the type of loans in the relevant pool and industry data. The rate of prepayment may be affected by a variety of economic and other factors, including prevailing interest rates, the presence of prepayment penalties, the loan-to-value ratios and the credit grades of the loans included in the securitization. Management has previously used prepayment estimates resulting in an initial average expected life of the pool of loans ranging from 4.0 to 4.5 years, cumulative lifetime default rates ranging from 9.5% to 10% and a discount rate of 15%. The prepayment and discount rate estimates are unchanged but in the third quarter of 1999, management revised the estimated cumulative default rate from a range of 9.5% to 10.0% to a range of 11.0% to 13.0%.

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REPUBLIC BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.  LOANS AND LOANS HELD FOR SALE

      Loans at September 30, 1999 and December 31, 1998, are summarized as follows (in thousands):

                       
September 30, December 31,
1999 1998
Real estate mortgage loans:
One-to-four family residential $ 831,333 $ 871,462
Nonconforming mortgages 83,393 72,980
Multifamily residential 72,625 92,209
Commercial real estate 370,043 379,797
Construction/land development 174,968 130,415
Mortgage loans secured by first liens 1,532,362 1,546,863
Commercial (business) loans 88,843 84,002
Consumer loans 30,413 43,857
Home equity loans 114,126 104,803
High LTV Loans 101,643 116,764
Total gross portfolio loans 1,867,387 1,896,289
Less-allowance for loan losses (28,189 ) (28,077 )
Total loans held for portfolio 1,839,198 1,868,212
Loans held for sale:
Residential first lien mortgage loans — 184,176
Total loans $ 1,839,198 $ 2,052,388

      Mortgage loans serviced for others remained unchanged as of September 30, 1999 and December 31, 1998 at $1.5 billion. Included in the total amount serviced for others were High LTV Loans amounting to $737.1 million and $835.0 million at September 30, 1999 and December 31, 1998, respectively. Mortgage loan servicing rights (both purchased and originated) amounted to $22.0 million and $22.9 million at September 30, 1999 and December 31, 1998, respectively. Loans on which interest was not being accrued at September 30, 1999 and December 31, 1998, totaled approximately $24.8 million and $35.6 million, respectively. Loans past due 90 days or more and still accruing interest at September 30, 1999 and December 31, 1998 totaled $1.3 million and $1.2 million, respectively.

4.  ALLOWANCES FOR LOSSES

Allowance for loan losses

      The allowance for loan losses provides for risks of losses inherent in the credit extension process. Losses and recoveries are either charged or credited to the allowance. The Company’s allowance is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. The evaluations are periodically reviewed and adjustments are recorded in the period in which changes become known.

      The allowance for loan losses as of September 30, 1999, was comprised of: (i) $25.5 million allocated to originated loans (including loans acquired through mergers and acquisitions); (ii) $547,000 allocated to loans acquired from CrossLand Savings, F.S.B. in December 1993, (the “CrossLand Portfolio”); (iii) $954,000 allocated to a pool of loans purchased in March 1995 (the “March 1995 Purchase”); (iv) $413,000 allocated to a pool of loans purchased in July 1997 (the “July 1997 Purchase”); and (v) $737,000 allocated to the other

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REPUBLIC BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

pools of purchased loans. Of the amounts allocated to the Crossland Portfolio, the March 1995 Purchase, the July 1997 Purchase and other purchased loan portfolios, $1.6 million are acquired reserves which only are available to absorb losses on the related acquired loans. In addition to amounts allocated to the allowance at September 30, 1999, the balance of unaccreted loan discount available to absorb losses on pools of portfolios of purchased loans exceeding amounts transferred to the allowance amounted to $3.5 million.

      Changes in the allowance for loan losses were as follows (in thousands):

                   
For the Nine Months
Ended Sept. 30,
1999 1998
Balance, beginning of period $ 28,077 $ 22,023
Provision for possible loan losses 6,803 5,956
Loan discount (net) allocated to (from) purchased portfolios — (4,303 )
Acquired reserve-purchased portfolios 275 —
Loans charged-off (8,279 ) (3,503 )
Recoveries of loans charged-off 1,313 357
Net charge-offs (6,966 ) (3,146 )
Balance, end of period $ 28,189 $ 20,530

      Of the $7.0 million of net charge-offs year-to-date 1999, $3.5 million resulted from losses on High LTV Loans taken into portfolio in the fourth quarter of 1998.

Allowance for Losses on Other Real Estate (“ORE”)

      The Company recognizes any estimated potential decline in the value of ORE between appraisal dates through periodic additions to the allowance for losses on ORE. Writedowns charged against this allowance are taken if the related real estate is sold at a loss.

      State banking regulations require the Bank to dispose of all ORE acquired through foreclosure within five years of acquisition, with a possibility for additional extension, each of up to five years. During the quarter ended March 31, 1999, the Bank sold a tract of land carried at $884,000 acquired through foreclosure in 1988 that had partially been developed as a shopping center site. The Bank has been granted an extension on a second piece of property, with a book value of $177,000, until December 6, 2000. This property, consisting of residential lots, is currently under contract. There are no other properties which have exceeded the five-year holding period limitation.

5.  MARKET RISK

      The market risk inherent in the Company’s market sensitive instruments is the potential loss arising from changes in interest rates and the changes in prices of marketable equity securities. One of the primary objectives of the Company is to reduce fluctuations in net interest income caused by changes in interest rates.

      To manage interest rate risk, the Board of Directors has established interest rate risk policies and procedures, which delegate to the Asset/Liability Committee the responsibility to monitor and report on interest rate risk, devise strategies to manage interest rate risk, monitor loan originations and deposit activity, and approve pricing strategies.

      Currently, all investments in the Company’s portfolio are identified as securities available for sale or as trading assets. Securities available for sale, which are those securities that may be sold prior to maturity as part of asset/liability management or in response to other factors, are carried at fair value with any valuation adjustment reported in a separate component of stockholders’ equity, net of tax effect. Trading securities

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REPUBLIC BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

include the residual interest in cash flows resulting from securitizations of High LTV Loans and the excess spread on interest only-strips receivable. The Company’s trading securities are valued based on present value techniques, which management believes reasonably approximate market values. Any unrealized gains or losses are included in the statement of operations under “Gain on sale of securities, net”.

6.  RESTRUCTURING COSTS AND OTHER RELATED CHARGES

      In the fourth quarter of 1998 the Company significantly reduced the size and scope of its mortgage banking activities. The Company ceased originating High LTV Loans and substantially reduced its originations of nonconforming first mortgage loans. The Company also closed its out-of-state lending offices and ceased all telemarketing efforts that were the source of the majority of the loan originations from its mortgage banking unit.

      In connection with this reorganization of mortgage banking activities, a restructuring charge of approximately $6.7 million was recorded, which included severance benefits payable to mortgage banking employees whose positions were eliminated, outplacement services for those employees, write-downs for abandoned assets, costs related to the consolidation of facilities and legal costs directly related to the restructuring. In addition, an $818,000 charge was recorded for legal and other costs related to the reorganization but not includable in the restructuring charge. The Company has completed the restructuring process of the mortgage banking unit.

      Expenses charged against the restructuring accrual for the nine months ended September 30, 1999 are as follows:

             
Balance at December 31, 1998 $ 6,673
Deductions:
Severance & benefits (4,274 )
Outplacement costs (200 )
Abandonment of assets (614 )
Consolidation of facilities (1,335 )
Legal costs (180 )
Ending balance at September 30, 1999 $ 70

7.  PRIOR YEAR BUSINESS SEGMENT INFORMATION

      As a result of the restructuring of the Company’s mortgage banking operation in the fourth quarter of 1998, that operation now represents an insubstantial portion of the Company’s overall business activities during 1999 and has ceased to be a reportable business segment. The Company’s operations during 1998 were divided into two business segments; commercial banking and mortgage banking. Commercial banking activities included the Company’s lending for portfolio purposes, deposit gathering through the retail branch network, investment and liquidity management. Mortgage banking activities, which operated through a separate division of the Bank, included originating and purchasing mortgage loans for sale or securitization. The Bank provided support for its mortgage banking division in areas such as secondary marketing and data processing. All funding for the mortgage banking division was provided through the Bank. The following are the prior year business segment results of operation for the nine months ended September 30, 1998. The Company elected to report its business segments without allocation of income taxes and minority interests.

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REPUBLIC BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Business Segment Data

($ in thousands)
                         
1998
Commercial Mortgage Company
Banking Banking Total
Total assets (at period-end) $ 2,136,543 $ 318,854 $ 2,455,397
Gross revenues $ 61,421 $ 54,066 $ 115,487
Net income before taxes and minority interest $ 11,251 $ 4,481 $ 15,732

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REPUBLIC BANCSHARES, INC.

 
SELECTED QUARTERLY FINANCIAL AND OTHER DATA
Five Consecutive Quarters (unaudited)
($ in thousands, except share data)
                                           
Quarters Ended
Sept. 1999 June 1999 Mar. 1999 Dec. 1998 Sept. 1998
OPERATING DATA:
Interest income $ 48,158 $ 46,965 $ 46,679 $ 45,734 $ 50,777
Interest expense 24,795 24,202 24,256 25,303 24,446
Net interest income 23,363 22,763 22,423 20,431 26,331
Loan loss provision 3,871 1,410 1,522 8,305 4,340
Net interest income after loan loss provision 19,492 21,353 20,901 12,126 21,991
Noninterest income 7,621 5,800 7,363 3,424 25,765
General & administrative (“G&A”) expenses 20,615 20,685 22,346 37,214 34,615
Other noninterest expense 1,043 840 651 11,403 1,222
Net income (loss) before income taxes & minority interest 5,455 5,628 5,267 (33,067 ) 11,919
Income tax (provision) benefit (1,968 ) (2,219 ) (1,991 ) 12,391 (4,370 )
Minority interest in income from subsidiary trust (424 ) (421 ) (421 ) (421 ) (424 )
Net income (loss) $ 3,063 $ 2,988 $ 2,855 $ (21,097 ) $ 7,125
PER SHARE DATA:
Earnings per share — diluted $ .27 $ .26 $ .25 $ (2.04 ) $ .63
Weighted average shares outstanding — diluted 11,309,550 11,359,392 11,246,636 10,322,263 11,238,535
Earnings per share — basic $ .29 $ .28 $ .27 $ (2.04 ) $ .69
Weighted average shares outstanding — basic 10,510,415 10,493,214 10,386,952 10,322,263 10,307,777
BALANCE SHEET DATA (at period-end):
Total assets $ 2,516,507 $ 2,573,825 $ 2,493,425 $ 2,505,117 $ 2,455,397
Investment & mortgage-backed securities 356,639 345,128 355,024 129,783 115,891
Loans held for sale — — 80,915 184,176 318,854
Portfolio loans, net of unearned income 1,867,387 1,876,982 1,836,355 1,896,289 1,477,124
Nonperforming assets 32,633 39,205 41,863 42,785 36,374
Allowance for loan losses 28,189 26,209 27,442 28,077 20,530
Goodwill & premium on deposits 33,791 34,936 35,906 36,916 37,880
Deposits 2,224,614 2,273,443 2,188,470 2,187,412 2,138,970
Stockholders’ equity 169,544 167,608 168,448 163,597 185,028
Book value per share (dollars) 15.05 14.89 15.01 14.77 16.71

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REPUBLIC BANCSHARES, INC.

SELECTED QUARTERLY FINANCIAL AND OTHER DATA — (Continued)

                                         
Quarters Ended
Sept. 1999 June 1999 Mar. 1999 Dec. 1998 Sept. 1998
SELECTED FINANCIAL RATIOS:
Return on average assets .47 % .48 % .47 % (3.37 )% 1.20 %
Return on average equity 7.14 7.23 7.11 (45.03 ) 14.32
Equity to assets 6.73 6.51 6.76 6.53 7.54
Equity and minority interest in preferred subsidiary to assets 7.88 7.63 7.91 7.68 8.71
Portfolio loans/deposit ratio 83.94 82.56 83.91 86.69 69.06
Net interest spread 3.50 3.53 3.46 3.17 4.38
Net interest margin 3.85 3.87 3.81 3.59 4.80
G & A expense to average assets(1) 3.38 3.30 3.61 2.78 2.75
G & A efficiency ratio(1) 70.89 72.42 75.02 73.75 63.83
Loan loss allowance to portfolio loans 1.51 1.40 1.49 1.48 1.39
Loan loss allowance to nonperforming loans 108.32 77.11 79.16 74.21 68.26
CAPITAL RATIOS:
Tier 1 (leverage) — Company 5.97 5.83 5.76 5.49 6.13
Tier 1 (leverage) — Bank 6.88 6.96 6.85 6.66 7.10
Tier 1/risk-assets — Company 9.28 8.91 8.72 7.72 9.51
Tier 1/risk assets — Bank 10.64 10.59 10.35 9.27 11.07
Risk-based capital — Company 11.66 10.21 10.02 9.01 10.75
Risk-based capital — Bank 11.94 11.88 11.65 10.56 12.32
OTHER DATA (at period-end):
Number of branch banking offices 81 83 70 62 58
Number of full-time equivalent employees 1,019 1,151 1,297 1,733 1,702

(1)  Ratios prior to 1999 include the commercial banking segment only; non-recurring items not included.

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REPUBLIC BANCSHARES, INC.

 
QUARTERLY NONPERFORMING ASSET TREND
(unaudited) ($ in thousands)
                                           
Quarters Ended
Sept. 1999 June 1999 Mar. 1999 Dec. 1998 Sept. 1998
Non-performing loans:
Residential first lien $ 20,326 $ 25,621 $ 26,398 $ 24,714 $ 20,797
Commercial real estate 3,749 5,483 4,764 9,699 6,647
Multifamily residential — 182 409 183 186
Commercial (business) 178 950 1,386 1,312 649
Home equity 440 872 1,085 713 320
Consumer & other 83 72 160 203 351
High LTV 1,249 808 464 — 290
Total nonperforming loans(1) 26,025 33,988 34,666 36,824 29,240
Total nonperforming other assets 761 820 901 1,010 1,091
Other real estate:
Residential 3,568 3,176 3,567 3,069 3,058
Commercial — build & sell — — 620 884 2,004
Commercial — bulk sale 2,279 1,221 2,109 998 981
Total ORE 5,847 4,397 6,296 4,951 6,043
Total nonperforming assets $ 32,633 $ 39,205 $ 41,863 $ 42,785 $ 36,374

(1)  Represents all loans on nonaccrual and all loans 90 days and over past due

                                             
Memorandum:
Past due 90+ days — still accruing (incl. above) $ 1,273 $ 41 $ 289 $ 1,232 $ 266
Nonperforming loans/portfolio loans 1.39 % 1.81 % 1.89 % 1.94 % 2.04 %
Nonperforming assets/assets 1.30 1.52 1.68 1.71 1.48
ORE/assets .23 0.17 0.25 0.20 0.25
Loan loss allowance to nonperforming loans:
Originated portfolio 121.52 % 85.79 % 80.87 % 74.71 % 71.32 %
July 1997 Purchase 35.21 34.03 27.01 35.70 35.22
March 1995 Purchase 153.85 128.73 111.62 108.06 111.62
CrossLand portfolio 42.90 43.31 41.65 43.50 50.80
Other purchased portfolios 36.56 26.92 79.86 113.69 45.08
Total 108.32 % 77.11 % 79.16 % 74.21 % 68.26 %
Other loan delinquency data
30-89 days past due:
Residential $ 14,180 $ 13,782 $ 12,553 $ 17,032 $ 18,496
Commercial real estate/multifamily 314 4,140 6,958 7,128 7,583
Commercial (business) 1,535 1,872 1,540 2,082 1,101
Home equity 1,399 3,082 1,228 1,218 598
Consumer & other 491 293 453 720 519
High LTV 2,253 1,265 1,935 1,485 1,231
Total $ 20,172 $ 24,434 $ 24,667 $ 29,665 $ 29,528

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REPUBLIC BANCSHARES, INC.

 
QUARTERLY CREDIT LOSS EXPERIENCE
(unaudited) ($ in thousands)
                                           
Quarters Ended
Sept. 1999 June 1999 Mar. 1999 Dec. 1998 Sept. 1998
Daily average loans outstanding:
Residential $ 853,691 $ 880,883 $ 976,233 $ 962,492 $ 883,735
Commercial real estate/multifamily 641,950 622,678 629,870 592,009 556,171
Commercial (business) 186,616 180,263 197,055 188,348 152,522
Home equity 65,318 69,511 72,702 67,858 53,280
Consumer & other 30,193 30,254 32,476 34,576 29,795
High LTV 102,674 106,168 113,113 107,379 230,937
Total $ 1,880,442 $ 1,889,757 $ 2,021,449 $ 1,952,662 $ 1,906,440
Allowance for loan losses at beginning of period $ 26,209 $ 27,442 $ 28,077 $ 20,530 $ 21,505
Loan discount (net) allocated to (from) purchased portfolios — — — — (3,262 )
Provision for loan losses 3,871 1,410 1,522 8,305 4,340
Acquired reserve — purchased loans — 275 — — —
Charge-offs:
Residential (794 ) (678 ) (709 ) (328 ) (772 )
Commercial real estate/multifamily (20 ) (634 ) (17 ) — —
Commercial (business) (78 ) (176 ) (6 ) (129 ) (1,057 )
Home equity (312 ) (433 ) (32 ) (6 ) —
Consumer (96 ) (140 ) (188 ) (160 ) (181 )
Other (77 ) (35 ) (160 ) (268 ) (104 )
High LTV (820 ) (1,468 ) (1,406 ) — —
Total (2,197 ) (3,564 ) (2,518 ) (891 ) (2,114 )
Recoveries:
Residential 110 559 25 55 17
Commercial real estate/multifamily 2 3 5 — —
Commercial (business) 44 16 111 7 19
Home equity 21 6 — 12 —
Consumer 29 35 43 36 18
Other 16 7 80 23 7
High LTV 84 20 97 — —
Total 306 646 361 133 61
Net (charge-offs) recoveries:
Residential (684 ) (119 ) (684 ) (273 ) (755 )
Commercial real estate/multifamily (18 ) (631 ) (12 ) — —
Commercial (business) (34 ) (160 ) 105 (122 ) (1,038 )
Home equity (291 ) (427 ) (32 ) 6 —
Consumer (67 ) (105 ) (145 ) (124 ) (163 )
Other (61 ) (28 ) (80 ) (245 ) (97 )
High LTV (736 ) (1,448 ) (1,309 ) — —
Total (1,891 ) (2,918 ) (2,157 ) (758 ) (2,053 )
Allowance for loan losses at end of period $ 28,189 $ 26,209 $ 27,442 $ 28,077 $ 20,530

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REPUBLIC BANCSHARES, INC.

QUARTERLY CREDIT LOSS EXPERIENCE — (Continued)

                                           
Quarters Ended
Sept. 1999 June 1999 Mar. 1999 Dec. 1998 Sept. 1998
Net charge-offs (recoveries) to average loans — annualized:
Residential .32 % .05 % .28 % .12 % .36 %
Commercial real estate/multifamily .01 .47 .01 — —
Commercial (business) .07 .36 (.20 ) .24 .03
Home equity 1.78 2.46 .16 (.04 ) —
Consumer & other .89 1.39 1.80 1.44 2.20
High LTV 2.87 5.46 4.64 — —
Total .40 % .62 % .44 % .16 % .44 %

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Item  2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Comparison of Balance Sheets at September 30, 1999 and December 31, 1998

  Overview

      Total assets were $2.5 billion at September 30, 1999, a $11.4 million increase from the amount at December 31, 1998. The mix of the Company’s asset base changed substantially as the Company sold its December 1998 inventory of loans held for sale and reinvested those funds into U.S. Treasury and mortgage-backed securities. At September 30, 1999, the Company no longer maintained an inventory of loans held for sale.

      In September 1999, the Company completed a private placement to accredited investors of $15.0 million of its 7.0% convertible subordinated debentures (the “Debentures”). Each $1,000 principal amount of the Debentures are convertible at any time by the holder into 55.55556 shares of the Company’s $2.00 par value common stock. The resulting conversion price of $18.00 per share represented a premium of approximately 22% over the $14.75 September 22, 1999 closing price of the Company’s common stock on the Nasdaq National Market. The Debentures are redeemable by the Company at any time after October 1, 2004 at a premium of 106% with the premium declining 1% per year thereafter. The Debentures may also be redeemed at the Company’s option if the closing price of the Company’s common stock equals or exceeds $23.40 for 20 consecutive trading days.

      In addition, the Company refinanced its $7.0 million of debt to its directors. Approximately $4.3 million of the Debentures were issued to the Company’s directors in exchange for an equal amount of the pre-existing debt, with the balance of the Debentures being sold to third-party accredited investors. The $2.7 million balance of the $7.0 million debt to directors not converted into the Debentures was exchanged for an equal principal amount of non-convertible term subordinated debt (the “Term Debt”). Both the Debentures and the Term Debt issued by the Company qualifies as Tier 2 capital under applicable regulatory capital guidelines.

      The Company paid down the principal amount of its $25.0 million loan from SunTrust Bank, N.A. by $15 million to a balance of $10 million. The $10.9 million of net proceeds from sale of the Debentures, after deducting offering costs, and the cash received from dissolution of the Savings Bank, were used to repay principal on the SunTrust loan. In connection with the paydown, SunTrust agreed to extend the remaining portion of its loan to the Company through March 31, 2001.

  Mortgage-Backed and Mortgage-Related Securities

      In the nine months ended September 30, 1999, the Company increased its mortgage securities in the available for sale category by $244.3 million through the reclassification of $89.3 million of securities from trading assets and by purchases of securities issued by the Government National Mortgage Association (“GNMA”). Mortgage securities remaining in the trading category include: (i) a $10.9 million subordinate tranche purchased from the Company’s securitization of High LTV Loans in June 1998; (ii) $24.6 million in overcollateralization and residual interests in cash flows from securitizations in December 1997 and June 1998; and (iii) $4.4 million excess servicing interest-only strips.

  Loans and Loans Held for Sale

      Total loans (including held for portfolio and held for sale) declined by $213.1 million from $2.08 billion at the prior year-end to $1.87 billion at September 30, 1999. At September 30, 1999, the Company had either sold or transferred to portfolio the $184.2 million of loans held for sale at December 31, 1998 and no longer maintained an inventory of loans held for sale. Mortgage loans secured by first liens decreased $198.7 million as a result of repayments and loan sales exceeding new lending activity and repayments to High LTV Loans reduced that category $15.1 million. The percentage of portfolio loans and loans held for sale to total assets was 74.2% and 83.0% at September 30, 1999 and December 31, 1998, respectively.

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  Allowance for Loan Losses

      The allowance for loan losses amounted to $28.2 million (1.51% of portfolio loans) at September 30, 1999, compared with $28.1 million (1.48% of portfolio loans) at December 31, 1998. Activity relating to the allowance in 1999 included provisions for loan losses of $6.8 million, and loan charge-offs (net of recoveries) of $7.0 million. Of the net amount of charge-offs, $3.5 million resulted from High LTV Loans taken into portfolio in the fourth quarter of 1998.

  Nonperforming Assets

      Nonperforming assets amounted to $32.6 million (1.30% of total assets) at September 30, 1999, compared with $42.8 million (1.71% of total assets) at December 31, 1998. Nonperforming loans totaled $26.0 million at September 30, 1999, a decrease of $10.8 million from the prior year-end total of $36.8 million. Nonperforming residential mortgage loans decreased by $5.2 million. Nonperforming commercial real estate and commercial (business) nonperforming loans decreased $8.7 million while High LTV nonperformers and nonperforming subprime mortgages increased $1.2 million and $2.5 million, respectively. ORE balances increased $896,000 to $5.8 million, primarily from residential loans taken into foreclosure.

  Deposits

      Total deposits were $2.2 billion at September 30, 1999, a $37.2 million increase from the prior year-end. Checking accounts (including non-retail deposits such as official checks) decreased by $21.4 million and savings deposits decreased by $30.1 million, while certificates of deposit grew by $27.8 million and money market accounts increased by $60.9 million. Total deposits from the 24 new branches which comprise the Company’s 1998 and 1999 branch expansion program have increased by $153.5 million from $900,000 at the end of 1998 to $154.4 million at September 30, 1999.

  Stockholders’ Equity

      Stockholders’ equity was $169.5 million at September 30, 1999, or 6.73% of total assets, compared to $163.6 million or 6.53% of total assets at December 31, 1998. At September 30, 1999, the Bank’s Tier 1 (leverage) Capital ratio was 6.88%, its Tier 1 (risk-based) Capital ratio was 10.64%, and its Total Risk-Based Capital ratio was 11.94%, all in excess of minimum FDIC guidelines for an institution to be considered a “well-capitalized” bank. The same ratios for the Company were 5.97%, 9.28%, and 11.66%, respectively.

Comparison of Results of Operations for the Three Months Ended September 30, 1999 and 1998

  Overview

      Net income for the third quarter of 1999 was $3.1 million, or $.27 per share (on a diluted basis), compared with $7.1 million, or $.63 per share, on the same basis for the same period in 1998. Management estimates that in the third quarter of 1999, the cost of the Company’s branch expansion program and the cost associated with discontinuing mortgage production activities reduced per share earnings by $.06 and $.07, respectively. Discontinued mortgage production activities contributed $.28 per share to 1998 earnings.

      An analysis of the Company’s net income for the quarterly periods is as follows, using these after-tax components: (i) base net income (which excludes items ii-iv); (ii) the contribution from the 24 new branches

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opened in late 1998 and 1999; (iii) direct costs of mortgage production activities, net of gains on loans held for sale; and (iv) other unusual or infrequently occurring items; ($ in thousands, net of tax effect).
                   
Quarters Ended
Sept. 30,
1999 1998
(unaudited)
Base after-tax net income detail:
Net interest income $ 14,216 $ 16,676
Loan loss provision (2,474 ) (2,749 )
Noninterest income 3,097 2,219
G & A expense (10,518 ) (11,660 )
Amortization of goodwill & premium on deposits (618 ) (486 )
After-tax base net income 3,703 4,000
Other after-tax net income (loss) components:
New branches (693 ) —
Mortgage production activities (828 ) 3,103
Sale of portfolio loans 202 734
Gain on sale of branch deposits 685 —
Gain on branch relocation(s) 804 —
ORE & other non-operating items (386 ) (288 )
Net income before minority interest 3,487 7,549
Minority interest (net of tax) (424 ) (424 )
Net income $ 3,063 $ 7,125

  Analysis of Net Interest Income (see table on page 16)

      Net interest income for the three months ended September 30, 1999 was $23.4 million compared with $26.3 million for the same period last year, a $2.9 million (11.3%) decrease. The primary reason for the decrease was reduced holdings of High LTV Loans, which typically bear an interest rate in the range of 13%-15%. Interest income was $48.2 million for the third quarter of 1999, a decrease of $2.6 million over the same period in 1998. Interest expense increased by $350,000. Average asset yield decreased by 125 basis points from 9.23% for the same period of 1998 to 7.98% for 1999, primarily as a result of a higher investment in securities and federal funds sold relative to total earning assets. The average cost of interest-bearing liabilities also declined by 38 basis points from 4.86% to 4.48%, primarily due to reduced reliance on outside borrowings and lower costs for certificate of deposits. Net interest spread decreased from 4.37% for 1998 to 3.50% for 1999 and, net interest margin, which includes the benefit of noninterest bearing funds, declined from 4.79% for 1998 to 3.85% for 1999.

  Noninterest Income (see table on page 17)

      Noninterest income for the three months ended September 30, 1999 was $6.6 million compared with $25.8 million for the same period of 1998, a decrease of $19.1 million. In 1998, income from mortgage banking operations and gains on sale of portfolio loans were $21.1 million and $1.2 million, respectively. In 1999, gains on sale of loans was $316,000, a $1.1 million gain was recorded on sale of branch deposits and a $1.3 million gain was recorded on relocation of two branch offices. Excluding those items from 1998 and 1999, noninterest income was $4.9 million for the third quarter of 1999 compared to $3.5 million for the same period last year, an increase of $1.4 million. Loan service fees increased $892,000, other loan fee income increased $583,000 and service charges on deposit accounts and other deposit-related fee income sources increased $248,000. The following table summarizes the average yields earned on interest-earning assets and the average rates paid on interest-bearing liabilities for the three months ended September 30, 1999 and 1998 (in thousands):

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Three Months Ended September 30,
1999 1998
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Summary of Average Rates
Interest earning assets:
Loans, net $ 1,880,442 $ 41,089 8.62 % $ 1,906,395 $ 46,627 9.73 %
Investment securities 37,771 498 5.24 41,122 644 5.50
Mortgage-backed securities 271,973 4,232 6.22 11,055 229 8.28
Trading securities 39,974 293 2.93 77,240 1,254 6.49
Interest bearing deposits in banks 10,934 138 5.01 4,764 23 1.90
FHLB stock 13,926 263 7.48 11,058 207 7.44
Federal funds sold 127,947 1,645 5.03 130,809 1,793 5.36
Total interest earning assets 2,382,967 48,158 7.98 2,182,443 50,777 9.23
Noninterest earning assets 165,204 167,653
Total assets $ 2,548,171 $ 2,350,096
Interest bearing liabilities:
Interest checking $ 175,110 $ 333 .76 % $ 162,406 $ 555 1.36 %
Money market 214,635 2,024 3.74 126,428 921 2.89
Savings 67,822 279 1.63 73,669 416 2.24
Passbook Gold 277,739 2,892 4.13 274,040 3,396 4.92
Time deposits 1,391,715 18,238 5.20 1,227,114 17,330 5.60
FHLB advances — — — 87,074 1,260 5.74
Other borrowings 69,274 1,029 5.89 43,509 567 5.18
Total interest bearing liabilities 2,196,295 24,795 4.48 1,994,240 24,445 4.86
Noninterest bearing liabilities 180,115 158,513
Stockholders’ equity 171,761 197,343
Total liabilities and equity $ 2,548,171 $ 2,350,096
Net interest income/net interest spread $ 23,363 3.50 % $ 26,332 4.37 %
Net interest margin 3.85 % 4.79 %

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Increase (Decrease) Due to
Volume Rate Total
Changes in Net Interest Income
Interest earning assets:
Loans, net $ (1,309 ) $ (4,229 ) $ (5,538 )
Investment securities (116 ) (30 ) (146 )
Mortgage-backed securities 4,074 (71 ) 4,003
Trading securities (449 ) (512 ) (961 )
Interest bearing deposits in banks 51 64 115
FHLB stock 55 1 56
Federal funds sold (39 ) (109 ) (148 )
Total change in interest income 2,267 (4,886 ) (2,619 )
Interest bearing liabilities:
Interest checking 40 (262 ) (222 )
Money market 776 327 1,103
Savings (31 ) (106 ) (137 )
Passbook Gold 45 (549 ) (504 )
Time deposits 2,523 (1,615 ) 908
FHLB advances (630 ) (630 ) (1,260 )
Other borrowings 511 (49 ) 462
Total change in interest expense 3,234 (2,884 ) 350
Increase (decrease) in net interest income $ (967 ) $ (2,002 ) $ (2,969 )

      The following table reflects the components of noninterest income for the three months ended September 30, 1999, and 1998 (in thousands):

                           
For the Three Months Ended
Sept. 30,
Increase
1999 1998 (Decrease)
Service charges on deposit accounts $ 1,393 $ 1,258 135
Loan servicing fees 1,412 520 892
Other loan fee income 1,235 652 583
Gains on sales of loans, net 316 1,161 (845 )
Income from mortgage banking operations — 21,100 (21,100 )
Income from special purpose corporation — 434 (434 )
Gain on sale of securities, net — 92 (92 )
Net trading account (loss) gain — (321 ) 321
Generations Gold fee income 379 266 113
Foreign exchange income 26 32 (6 )
Gain on sale of branch deposits 1,098 — 1,098
Gain on branch relocation(s) 1,289 — 1,289
Other income 473 571 (98 )
Total noninterest income $ 7,621 $ 25,765 $ (18,144 )

  Noninterest Expense

      G & A expenses for the third quarter of 1999 were $20.6 million compared with $34.6 million for the same period last year, a decrease of $14.0 million. Mortgage production expenses declined $14.9 million and expenses from other areas of the Company’s operation declined $1.5 million, while costs associated with the branch expansion program were $2.2 million. Total noninterest expenses, which include G & A expense, were $21.7 million for the three months ended September 30, 1999 compared with $35.8 million for the same period last year.

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      The following table reflects the components of noninterest expense for the three months ended September 30, 1999 and 1998 (in thousands):

                           
For the Three Months
Ended Sept. 30,
Increase
1999 1998 (Decrease)
Salaries and benefits $ 9,779 $ 13,743 $ (3,964 )
Net occupancy expense 4,268 3,845 423
Advertising 222 4,875 (4,653 )
Data processing fees 1,295 882 413
FDIC and state assessments 479 305 174
Telephone expense 406 721 (315 )
Legal and professional 445 1,013 (568 )
Postage and supplies 921 6,466 (5,545 )
Other operating expense 2,800 2,765 35
Total G & A expenses 20,615 34,615 (14,000 )
Merger expenses — 375 (375 )
Provision for losses on ORE — 120 (120 )
ORE expense, net of ORE income 76 (40 ) 116
Amortization of premium on deposits and goodwill 967 767 200
Total noninterest expense $ 21,658 $ 35,837 $ (14,179 )

      Noninterest expenses by business function for the three month periods were as follows:

                           
For the Three Months
Ended Sept. 30,
(Decrease)
1999 1998 Increase
New branches $ 2,208 $ — $ 2,208
Mortgage loan production 1,294 16,202 (14,908 )
All other units 18,156 19,635 (1,479 )
Total $ 21,658 $ 35,837 $ (14,179 )

Comparison of Results of Operations for the Nine Months Ended September 30, 1999 and 1998

  Overview

      Net income for the nine months ended September 30, 1999 was $8.9 million, or $.79 per share (on a diluted basis), compared with net income of $8.7 million, or $.87 per share, on the same basis for the same period in 1998. Management estimates that the cost of the Company’s branch expansion program and costs associated with discontinuing mortgage production activities reduced per share earnings by $.22 and $.38 per share, respectively. Discontinued mortgage activities reduced per share earnings by $.16 in 1998.

      The Company’s net income for the nine month periods was as follows, using these components: (i) base net income (which excludes items ii – iv); (ii) the contribution from new branches opened in late 1998 and 1999; (iii) direct costs of mortgage production activities, net of gains on loans held for sale; and (iv) other unusual or infrequently occurring items; ($ in thousands, net of tax effect).

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Nine Months Ended
Sept. 30,
1999 1998
(unaudited)
Base net income detail:
Net interest income $ 41,405 $ 38,794
Loan loss provision (4,275 ) (3,726 )
Noninterest income 9,131 6,223
G & A expense (31,033 ) (30,445 )
Amortization of goodwill & premium on deposits (1,834 ) (680 )
After-tax base net income 13,394 10,166
Other after-tax net income (loss) components:
New branches (2,467 ) —
Mortgage production activities (4,251 ) (1,592 )
Sale of portfolio loans 2,220 1,927
Gain on sale of branch deposits 685 —
Gain on branch relocation 804 —
ORE & other non-operating items (215 ) (558 )
Net income before minority interest 10,170 9,943
Minority interest (net of tax) (1,265 ) (1,267 )
Net income $ 8,905 $ 8,676

  Analysis of Net Interest Income (see table on page 19)

      Net interest income for the nine months ended September 30, 1999 was $68.6 million compared with $62.8 million for the same period last year, a $5.8 million (9.2%) increase. Interest income was $141.8 million for the first nine months of 1999, an increase of $14.7 million over the same period in 1998. Interest expense increased by $8.9 million. Average asset yield decreased by 78 basis points from 8.81% for the same period in 1998 to 8.03% for 1999, primarily as a result of a change in asset mix to a higher investment in securities and federal funds and a lesser concentration in residential and High LTV Loans held-for-sale. The average cost of interest-bearing liabilities also declined by 36 basis points from 4.89% to 4.53%, primarily due to reduced reliance on outside borrowings and lower costs for certificates of deposits. As a result, net interest spread decreased 42 basis points from 3.92% for 1998 to 3.50% for 1999 and net interest margin, which includes the benefit of noninterest bearing funds, declined by 47 basis points from 4.32% for 1998 to 3.85% for 1999.

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      The following table summarizes the average yields earned on interest-earning assets and the average rates paid on interest-bearing liabilities for the nine months ended September 30, 1999 and 1998 (in thousands):

                                                     
Nine Months Ended September 30,
1999 1998
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Summary of Average Rates
Interest earning assets:
Loans, net $ 1,930,517 $ 125,122 8.59 % $ 1,713,715 $ 118,064 9.15 %
Investment securities 39,177 1,524 5.20 38,855 1,828 6.29
Mortgage-backed securities 177,418 8,151 6.13 23,133 1,215 7.00
Trading securities 62,838 1,932 4.10 49,539 2,270 6.11
Interest bearing deposits in banks 9,706 334 4.61 2,859 65 3.04
FHLB stock 13,108 730 7.45 11,399 627 7.36
Federal funds sold 109,856 4,009 4.81 75,463 2,990 5.22
Total interest earning assets 2,342,620 141,802 8.03 1,914,963 127,059 8.81
Noninterest earning assets 169,208 128,851
Total assets $ 2,511,828 $ 2,043,814
Interest bearing liabilities:
Interest checking $ 177,951 $ 1,017 .76 % $ 146,216 $ 1,720 1.57 %
Money market 194,755 5,463 3.75 84,202 1,417 2.25
Savings 70,427 881 1.67 61,527 1,003 2.18
Passbook Gold 285,644 8,924 4.18 263,918 9,702 4.92
Time deposits 1,356,837 53,754 5.30 1,024,632 42,993 5.61
FHLB advances 4,231 157 4.95 139,840 6,084 5.82
Other borrowings 73,047 3,057 5.59 36,327 1,386 5.10
Total interest bearing liabilities 2,162,892 73,253 4.53 1,756,662 64,306 4.89
Noninterest bearing liabilities 182,474 141,481
Stockholders’ equity 166,462 145,671
Total liabilities and equity $ 2,511,828 $ 2,043,814
Net interest income/net interest spread $ 68,549 3.50 % $ 62,754 3.92 %
Net interest margin 3.85 % 4.32 %
                             
Increase (Decrease) Due to
Volume Rate Total
Changes in Net Interest Income
Interest earning assets:
Loans, net $ 11,669 $ (4,611 ) $ 7,058
Investment securities 196 (500 ) (304 )
Mortgage-backed securities 7,107 (171 ) 6,936
Trading securities 520 (858 ) (338 )
Interest bearing deposits in banks 221 48 269
FHLB stock 95 8 103
Federal funds sold 1,271 (252 ) 1,019
Total change in interest income 21,079 (6,336 ) 14,743
Interest bearing liabilities:
Interest checking 316 (1,019 ) (703 )
Money market 2,682 1,364 4,046
Savings 133 (255 ) (122 )
Passbook Gold 757 (1,535 ) (778 )
Time deposits 13,975 (3,214 ) 10,761
FHLB advances (3,399 ) (2,528 ) (5,927 )
Other borrowings 1,886 (215 ) 1,671
Total change in interest expense 16,350 (7,402 ) 8,948
Increase (decrease) in net interest income $ 4,729 $ 1,066 $ 5,795

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Noninterest Income

      Noninterest income for the nine months ended September 30, 1999 was $20.8 million compared with $52.7 million for the same period in 1998, a decrease of $31.9 million. In 1998, income from mortgage banking operations was $39.5 million and gains on sale of portfolio loans were $3.1 million, respectively. In 1999, gains on sale of loans was $3.6 million, a $1.1 million gain was recorded on sale of branch deposits and a $1.3 million gain was recorded on relocations of two branches. Excluding those items from 1998 and 1999, noninterest income was $14.8 million for 1999 compared to $10.1 million for the same period last year. Loan service fees increased $3.8 million, other loan fee income increased $1.2 million and service charges on deposit accounts and other deposit-related fee income sources increased by $946,000.

      The following table reflects the components of noninterest income for the nine months ended September 30, 1999, and 1998 (in thousands):

                           
For the Nine Months Ended
September 30,
Increase
1999 1998 (Decrease)
Service charges on deposit accounts $ 3,688 $ 3,107 $ 581
Loan service fees 5,014 1,179 3,835
Other loan fee income 3,188 1,959 1,229
Gains on sales of loans, net 3,574 3,126 448
Income from mortgage banking operations — 39,513 (39,513 )
Income from special purpose corporation — 434 (434 )
Gain on sale of securities, net — 835 (835 )
Net trading account (loss) gain (245 ) (321 ) 76
Generations Gold fee income 1,047 682 365
Foreign exchange income 83 88 (5 )
Gain on sale of branch deposits 1,098 — 1,098
Gain on branch relocation(s) 1,289 — 1,289
Other income 2,048 2,131 (83 )
Total noninterest income $ 20,784 $ 52,733 $ (31,949 )

Noninterest Expense

      G & A expenses for the first nine months of 1999 were $63.6 million compared with $91.8 million for the same period last year, a decrease of $28.2 million. Of this decrease, $35.6 million was attributable to the reduced operating expenses associated with the Company’s restructured mortgage activities which more than offset the $6.0 million additional expenses related to new branch openings. Total noninterest expenses, which include G & A expense, were $66.2 million for the nine months ended September 30, 1999, compared with $93.8 million for the same period last year.

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      The following table reflects the components of noninterest expense for the nine months ended September 30, 1999 and 1998 (in thousands):

                           
For the Nine Months Ended
September 30,
Increase
1999 1998 (Decrease)
Salaries and benefits $ 32,211 $ 36,542 $ (4,331 )
Net occupancy expense 11,866 9,666 2,200
Advertising 815 15,446 (14,631 )
Data processing fees 3,489 2,456 1,033
FDIC and state assessments 1,113 853 260
Telephone expense 1,412 1,878 (466 )
Legal and professional 1,219 2,546 (1,327 )
Postage and supplies 3,311 16,127 (12,816 )
Other operating expense 8,212 6,289 1,923
Total G & A expenses 63,648 91,803 (28,155 )
Merger expenses — 798 (798 )
Provision for losses on ORE — 160 (160 )
ORE expense, net of ORE income (412 ) (48 ) (364 )
Amortization of premium on deposits and goodwill 2,945 1,086 1,859
Total noninterest expense $ 66,181 $ 93,799 $ (27,618 )

      Noninterest expenses by business function for the nine month periods were as follows:

                           
For the Nine Months Ended
September 30,
Increase
1999 1998 (Decrease)
New branches $ 5,999 $ — $ 5,999
Mortgage loan production 6,847 42,435 (35,588 )
All other units 53,335 51,364 1,971
Total $ 66,181 $ 93,799 $ (27,618 )

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Year 2000 Issues

      Many companies, including financial institutions such as the Company, have faced potentially serious risks associated with the inability of existing data processing hardware and software to appropriately recognize calendar dates beginning in the year 2000. Many computer programs that can only distinguish the final two digits of the year entered may read entries for the year 2000 as the year 1900 and compute payment, interest or delinquency based on the wrong date. If a company’s critical internal systems do not correctly recognize and process data information beyond the year 1999, there could be a material adverse impact on business and operations.

      The Company, and its principal subsidiary, the Bank, believe that their Year 2000 compliance effort has been completed, including hardware replacement and the remediation of software applications. Application testing of all “Mission Critical” and “Important” software has been completed. The Company, and the Bank, have been successful in meeting target dates set by its Board of Directors and by the FDIC. The critical internal systems of all merged and acquired entities have been converted to the principal loan and deposit application systems, (“ALLTEL”), and the item processing and lockbox functions have been converted to an outside servicer.

      The Company has formulated a contingency plan for the remote possibility that ALLTEL will not be year 2000 ready. The Company has also formulated contingency plans for all branches and departments and will continue to monitor year 2000 readiness throughout the remainder of 1999.

      The Company originally estimated that the operating costs associated with replacing non-compliant hardware and software would be approximately $800,000, and that $600,000 in capital expenditures would be required, the majority of which would be incurred in the normal course of upgrading the Company’s computer systems. The Company now expects the operating costs to be approximately $900,000, a $100,000 increase over the initial estimate. For the fiscal year ending December 31, 1998, the Company’s Year 2000 compliance expenditures had totaled $345,000. For the first nine months of 1999, the Company had additional expenditures of $515,000, for a total of $860,000 on a cumulative basis. The Company estimates the amount of remaining Year 2000 compliance expenditures to be less than $100,000. The Company’s capital expenditures in 1999 related to Year 2000 compliance have not been material because of reduced equipment needs following the reduction in size of mortgage activities.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

      Certain of the statements contained in this Quarterly Report on Form 10-Q (other than the financial statements and statements of historical fact), including, without limitation, statements as to management expectations and beliefs presented under the caption, “Management’s Discussion and Analysis,” may constitute forward-looking statements. Forward-looking statements are made based upon management’s expectations and beliefs concerning future development and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management’s expectations or that the effect of future developments on the Company will be those anticipated by management.

      The Company wishes to caution readers that the assumptions which form the basis for forward-looking statements with respect to or that may impact earnings for the year ended December 31, 1999, and thereafter include many factors that are beyond the Company’s ability to control or estimate precisely. These risks and uncertainties include, but are not limited to, the market demand and acceptance of the Company’s existing and new, loan and deposit products, the impact of competitive products, the Company’s ability to achieve the desired consolidation efficiencies from its planned acquisitions, and changes in economic conditions, such as inflation or fluctuations in interest rates.

      While the Company periodically reassesses material trends and uncertainties affecting the Company’s results of operations and financial condition in connection with its preparation of management’s discussion and analysis contained in its Quarterly Report, the Company does not intend to review or revise any particular forward-looking statement referenced herein in light of future events.

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Part II.  Other Information

Item 1.  Legal Proceedings

      In January 1999, the Company filed a lawsuit against a former vendor that provided printing and direct mailing services for the Company’s mortgage banking operation to invalidate a term contract executed by the former manager of the High LTV Loan origination unit who was not an officer of the Company or the Bank at the time the contract was executed. The lawsuit also alleges civil conspiracy and fraud in connection with the execution of the contract. The vendor has, at this same time, filed an arbitration proceeding against the Company relating to the same issues. The vendor has asserted alleged damages in a range from $2.0 million to $4.7 million. The case is in the preliminary stages of discovery; however, based on consultation with legal counsel, the Company’s management believes there is no merit in the plaintiffs’ claims and intends to defend such action vigorously.

      The Company is also subject to various legal proceedings in the ordinary course of its business. Based on information presently available, management does not believe that the ultimate outcome in such proceedings, in the aggregate, would have a material adverse effect on the Company’s financial position or results of operation.

Item 2.  Sale of the Savings Bank

      On September 10, 1999, the Company sold its Brunswick, Georgia office of the Savings Bank to Sapelo National Bank (“Sapelo”). Sapelo acquired all of the associated deposits at the Brunswick office. This sale also included lease rights on the building where the Brunswick office was located and all fixed assets associated with the property. In connection its voluntary dissolution, the Savings Bank also sold its loan portfolio to the Bank on September 3, 1999. The Savings Bank has been dissolved.

Item 3.  Exhibits and Reports on Form 8-K

         
a. Exhibits:
27.0 Financial Data Schedule
b. Reports filed on Form 8-K:
(1) On July 8, 1999, the Company filed a report on Form 8-K disclosing the text of a press release that the Company’s Board of Directors had completed its evaluation of strategic alternatives and determined that it was in the best interest of the shareholders to remain independent for the foreseeable future.
(2) On October 4, 1999, the Company filed a report on Form 8-K disclosing the text of a press release that the Company had: (i) completed a private placement of $15.0 million of Subordinated Debt; (ii) refinanced its $7.0 million of debt to its directors; (iii) completed the sale of the Georgia office of its thrift subsidiary, subsequently dissolving its thrift subsidiary; and (iv) paid down the principal amount of its $25.0 million loan from SunTrust, N.A. by $15.0 million.

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      Pursuant to the requirements of Section 13 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.

  REPUBLIC BANCSHARES, INC.

     
Date: November 1, 1999 /s/ ALFRED T. MAY
Alfred T. May
President and Chief Executive Officer
(principal executive officer)
 
Date: November 1, 1999 /s/ WILLIAM R. FALZONE
William R. Falzone
Treasurer (principal financial and
accounting officer)

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