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 Quarter Ended September 30, 1995 Commission File Number 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 38-260-4669
(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)
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 November 13, 1995:
Common Stock, $5 Par Value ............................... 15,073,523 Shares
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1995
and December 31, 1994 ................................. 1
Consolidated Statements of Income for the Three
Months and Nine Months Ended September 30, 1995
and 1994............................................... 2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1995 and 1994............... 3
Notes to Unaudited Consolidated Financial
Statements............................................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 21
Item 2. Changes in Securities.................................. 21
Item 3. Defaults upon Senior Securities........................ 21
Item 4. Submission of Matters to a Vote of Security Holders.... 21
Item 5. Other Information...................................... 21
Item 6. Exhibit and Reports on Form 8-K........................ 21
SIGNATURE............................................................. 22
EXHIBITS.............................................................. 23-24
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands) Sept. 30, Dec. 31
1995 1994
--------- -------
<S> <C> <C>
ASSETS
Cash and due from banks................................... $ 23,813 $ 22,518
Other cash investments.................................... 3,538 779
----------- -----------
Cash and cash equivalents................................. 27,351 23,297
Mortgage loans held for sale.............................. 492,439 152,138
Securities:
Held-to-maturity (aggregate market value of
$254,996, 1994)..................................... - 269,701
Available-for-sale (amortized cost of
$325,022, 1995 and $204,614, 1994................... 320,974 196,502
Loans..................................................... 572,976 605,089
Less allowance for loan losses........................ 5,061 5,544
----------- -----------
Net loans................................................. 567,915 599,545
Premises and equipment, net............................... 14,940 15,484
Mortgage servicing rights................................. 55,125 57,183
Other assets.............................................. 55,200 49,764
----------- -----------
Total assets........................................ $ 1,533,944 $ 1,363,614
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing.................................. $ 133,178 $ 111,425
Interest bearing...................................... 770,603 707,317
----------- -----------
Total deposits...................................... 903,781 818,742
Federal funds purchased and reverse
repurchase agreements................................. 135,137 217,124
Short-term borrowings..................................... 202,296 39,822
FHLB advances............................................. 46,000 69,950
Accrued and other liabilities............................. 52,032 43,077
Long-term debt............................................ 68,668 56,379
----------- -----------
Total liabilities................................... 1,407,914 1,245,094
----------- -----------
Minority Interest......................................... 902 606
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $25 stated value;
5,000,000 shares authorized, none issued
and outstanding....................................... - -
Common stock, $5 par value, 20,000,000 shares
authorized; 15,073,523 and 15,246,134 shares
issued and outstanding, respectively.................. 75,368 76,231
Capital surplus........................................... 32,874 35,636
Market value adjustment for securities available-for-sale. (2,631) (5,273)
Retained earnings......................................... 19,517 11,320
----------- -----------
Total shareholders' equity............................ 125,128 117,914
----------- -----------
Total liabilities and shareholders' equity.......... $ 1,533,944 $ 1,363,614
=========== ===========
</TABLE>
1
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<TABLE>
<CAPTION>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1995 1994 1995 1994
-------- -------- -------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees................................... $ 19,006 $ 13,998 $ 51,084 $ 39,840
Securities:
Held-to-maturity.................................... - 4,111 8,084 8,750
Available-for-sale.................................. 5,283 3,446 10,599 7,859
Money market investments................................ 319 65 790 399
--------- ---------- --------- ---------
Total interest income............................. 24,608 21,620 70,557 56,848
--------- --------- --------- ---------
INTEREST EXPENSE
Demand deposits......................................... 371 568 1,205 1,762
Savings and time deposits............................... 9,896 6,663 27,424 18,424
Short-term borrowings................................... 5,036 3,828 13,789 7,532
FHLB advances........................................... 545 559 1,411 1,552
Long-term debt.......................................... 1,389 912 4,045 2,286
--------- --------- --------- ---------
Total interest expense............................ 17,237 12,530 47,874 31,556
--------- --------- --------- ---------
Net interest income..................................... 7,371 9,090 22,683 25,292
Provision for loan losses............................... - 20 24 84
--------- --------- --------- ---------
Net interest income after provision for loan losses..... 7,371 9,070 22,659 25,208
--------- --------- -------- --------
NON-INTEREST INCOME
Service charges......................................... 344 337 969 1,006
Mortgage banking........................................ 19,295 13,704 52,297 58,527
Gain on sale of securities.............................. 1,136 49 1,054 568
Gain on sale of SBA loans............................... 204 212 803 593
Other................................................... 231 114 770 879
--------- --------- --------- ---------
Total non-interest income......................... 21,210 14,416 55,893 61,573
--------- --------- --------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits.......................... 13,782 10,366 34,646 37,088
Occupancy expense of premises........................... 1,332 1,514 3,878 4,157
Equipment expense....................................... 1,139 933 3,238 3,011
Other................................................... 5,871 6,080 16,911 21,228
Minority interest....................................... 91 - 619 -
--------- --------- --------- ---------
Total non-interest expense........................ 22,215 18,893 59,292 65,484
--------- --------- --------- ---------
Income before income taxes.............................. 6,366 4,593 19,260 21,297
Provision for income taxes.............................. 2,252 1,568 7,016 7,183
--------- --------- --------- ---------
NET INCOME.............................................. $ 4,114 $ 3,025 $ 12,244 $ 14,114
========= ========= ========= =========
Net income per common share outstanding
- primary and fully diluted......................... $ .27 $ .19 $ .79 $ .90
========= ========= ========= =========
Average common shares outstanding - fully diluted....... 15,455 15,802 15,445 15,753
========= ========= ========= =========
Cash dividends declared per common share................ $ .09 $ .07 $ .27 $ .22
========= ========= ========= =========
</TABLE>
2
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<TABLE>
<CAPTION>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
Sept. 30,
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 12,244 $ 14,114
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization.......................... 3,459 3,079
Amortization of purchased mortgage servicing rights.... 5,265 3,465
Provision for loan losses.............................. 24 84
Gain on sale of securities available-for-sale.......... (1,054) (569)
Gain on sale of mortgage servicing rights.............. (20,438) (29,128)
Gain on sale of loans.................................. (1,694) (2,503)
Increase in interest receivable........................ (1,977) (3,476)
Increase in interest payable........................... 2,199 1,328
Decrease in deferred loans fees........................ (414) (1,482)
Net premium amortization on securities................. 573 565
Increase in other assets............................... (4,924) (365)
Increase in other liabilities.......................... 6,089 11,145
Proceeds from sale of loans held for sale.............. 1,397,335 2,555,421
Origination of loans held for sale..................... (1,752,335) (2,232,373)
Other, net............................................. 119 (349)
---------- ----------
Total adjustments................................... (367,773) 304,842
---------- ----------
Net cash provided by/(used in) operating activities.......... (355,529) 318,956
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights........................ (25,446) (52,688)
Proceeds from sale of mortgage servicing rights.............. 42,678 41,988
Proceeds from sale of securities available-for-sale.......... 194,336 61,310
Proceeds from maturities/principal payments of
securities available-for-sale............................ 60,900 40,326
Proceeds from maturities/principal payments of
securities held-to-maturity.............................. 11,691 13,956
Purchase of securities available-for-sale.................... (117,152) (238,926)
Purchase of securities held-to-maturity...................... - (250,950)
Proceeds from sale of loans.................................. 195,101 66,469
Net increase in loans made to customers...................... (146,689) (176,021)
Premises and equipment expenditures.......................... (2,903) (2,469)
---------- ----------
Net cash provided by/(used in) investing activities.......... 212,516 (497,005)
---------- ----------
</TABLE>
3
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<TABLE>
<CAPTION>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
Sept. 30,
(continued) 1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in demand deposits,
NOW accounts and savings accounts........................ (2,162) 8,628
Net increase in certificates of deposit...................... 66,705 44,494
Purchase of Standard Federal Bank demand deposits,
NOW accounts and savings accounts........................ 6,701 -
Purchase of Standard Federal Bank certificates of deposit.... 13,796 -
Net increase in short-term borrowings........................ 60,338 95,897
Net proceeds from issuance of common shares.................. 1,068 1,049
Repurchase of common shares.................................. (3,821) -
Dividends paid............................................... (4,047) (3,320)
Payments on long-term debt................................... (16,115) (620)
Increase in long-term debt................................... 24,604 4,000
Proceeds from issuance of senior debentures, net of
issuance cost............................................ - 24,712
--------- ---------
Net cash provided by financing activities.................... 147,067 174,840
--------- ---------
Net increase/(decrease) in cash and cash equivalents......... 4,054 (3,209)
Cash and cash equivalents at beginning of period............. 23,297 28,025
--------- ---------
Cash and cash equivalents at end of period................... $ 27,351 $ 24,816
========= =========
Cash paid during the period for:
Interest................................................. $ 45,675 $ 30,228
Income taxes............................................. $ 6,105 $ 9,780
</TABLE>
Non-cash investing activities:
-During the nine months ended September 30, 1995 and 1994, the Company
incurred charge-offs on portfolio loans of $731,000 and $1,267,000,
respectively.
-During the nine months ended September 30, 1995, the Company securitized
residential real estate portfolio loans into mortgage-backed securities
of $72.0 million.
-During the nine months ended September 30, 1995, the Company reclassified
$257.2 million of securities classified as held-to-maturity to
available-for-sale status. The reclassified securities had a market value
of $255.9 million at time of transfer.
4
<PAGE>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Nine Months Ended September 30, 1995 and 1994
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements of Republic Bancorp Inc.
("Republic" or the "Company") and subsidiaries are prepared in accordance with
generally accepted accounting principles for interim financial information,
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal, recurring adjustments necessary to
present fairly the consolidated operating results of the Company and its
subsidiaries for the three months and nine months ended September 30, 1995 and
1994 as well as the financial position at September 30, 1995 and cash flows
for the nine months ended September 30, 1995 and 1994.
Certain reclassifications have been made in the consolidated financial
statements for 1994 to conform with the 1995 presentation.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Republic Bancorp
Inc., and the accounts of three wholly owned subsidiaries: Republic Bank,
Republic Bancorp Mortgage Inc. and Republic Savings Bank (formerly Horizon
Savings Bank). The consolidated financial statements also include the accounts
of Market Street Mortgage Corporation and CUB Funding Corporation, of which
the Company owns an 80% majority interest in both entities. Republic Bancorp
Mortgage Inc. operates Home Funding, Inc., which was acquired in October 1994,
and AmeriFirst Home Mortgage, which was acquired in February 1995, as
divisions. CUB Funding Corporation operates R.S.L. Mortgage, which was
acquired in August 1995, as a division. All significant intercompany
transactions and balances have been eliminated in consolidation.
3. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993. Under SFAS 115, all affected debt and
equity securities must be classified as held-to-maturity, trading or
available-for-sale. Classification is critical because it affects the carrying
amount of the security, as well as the timing of gain or loss recognition in
the income statement. The Company does not currently maintain a trading
account classification. The Company adopted SFAS 115 for the financial period
beginning January 1, 1994.
Management determines the appropriate classification for debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. In accordance with SFAS 115, securities held-to-maturity include only
those securities which the Company has the positive intent and ability to hold
until maturity. Such securities are carried at cost adjusted for amortization
of premium and accretion of discount, computed in a manner which approximates
the effective interest method. In order to more effectively respond to
liquidity needs primarily related to funding mortgage loans held for sale, the
Company reclassified the entire held-to-maturity investment portfolio to
available-for-sale at June 30, 1995. At September 30, 1995 the Company had no
securities held to maturity.
In July 1995, subsequent to the reclassification of the held-to-maturity
investment portfolio to available-for-sale status at June 30, 1995, the
Company sold $143.4 million of U.S. Treasury obligations, U.S.
5
<PAGE>
Government Agency obligations and collateralized mortgage obligations
resulting in a realized gain on sale of $677,000 net of tax. Proceeds from the
sale were used primarily to fund the increased levels of mortgage loans held
for sale.
The available-for-sale securities portfolio is stated at fair value, with the
market value adjustment, net of tax, reported as a separate component of
shareholders' equity. The amortized cost of debt securities classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities and
collateralized mortgage obligations, over the estimated life of the security.
Interest and dividends are included in interest income from investments.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in gains or losses on sales of securities.
The cost of securities sold is based on the specific identification method.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Available-for-Sale Securities
--------------------------------------------------
September 30, 1995 Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury Obligations $ 62,434 $ 1 $ 25 $ 62,410
U.S. Government Agency Obligations 28,690 156 118 28,728
Collateralized Mortgage Obligations 88,554 1 1,863 86,692
Mortgage-Backed Securities 124,736 64 1,581 123,219
Other Securities 1,029 19 - 1,048
-------- ---- ------ --------
Total Debt Securities 305,443 241 3,587 302,097
Equity Securities 19,579 - 702 18,877
-------- ---- ------ --------
Total Available-for-Sale Securities $325,022 $241 $4,289 $320,974
======== ==== ====== ========
</TABLE>
The gross realized gains and losses on sales of available-for-sale securities
totaled $1,492,000 and $356,000, respectively, for the quarter ended September
30, 1995, and $1,513,000 and $459,000, respectively, for the nine months ended
September 30, 1995.
The following table details the components of securities available-for-sale,
and the amortized cost and market value of the portfolio classified by
maturity at September 30, 1995. Expected maturities will differ from
contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
Maturity Distribution
(Dollars in thousands)
September 30, 1995
Due Within One to Five to After
One Year Five Years Ten Years Ten Years Total
------------------- ------------------- ------------------- ------------------- -------------------
Estimated Estimated Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value Cost Value
--------- ------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government
Agency Obligations ...... $ 62,434 $ 62,410 $ 588 $ 586 $ 2,435 $ 2,354 $ 25,667 $ 25,788 $ 91,124 $ 91,138
Mortgage-Backed Securities . -- -- 4,260 4,188 7,078 6,934 113,398 112,097 124,736 123,219
Collateralized Mortgage
Obligations ............. -- -- -- -- 8,127 8,039 80,427 78,653 88,554 86,692
Other Debt Securities ...... 430 434 120 126 159 168 320 320 1,029 1,048
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Available-For-Sale
Debt Securities ...... 62,864 62,844 4,968 4,900 17,799 17,495 219,812 216,858 305,443 302,097
Equity Securities .......... 19,579 18,877 -- -- -- -- -- -- 19,579 18,877
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Available-for-Sale
Securities ........... $ 82,443 $ 81,721 $ 4,968 $ 4,900 $ 17,799 $ 17,495 $219,812 $216,858 $325,022 $320,974
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
6
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4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
Sept. 30, December 31,
(In thousands) 1995 1994
--------- ------------
<S> <C> <C>
Commercial loans:
Secured by real estate $ 83,571 $ 81,922
Other (generally secured) 25,031 15,989
-------- --------
Total Commercial loans 108,602 97,911
Residential real estate mortgages 403,006 457,755
Installment loans 61,368 49,423
-------- --------
Total loans 572,976 605,089
Allowance for estimated loan losses (5,061) (5,544)
-------- --------
Net loans $567,915 $599,545
======== ========
</TABLE>
The company adopted SFAS 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," on January 1, 1995. Accordingly, loans
are classified as impaired when, based on current information and events, it
is probable that the Company will be unable to collect all principal and
interest due under the contractual terms of the loan agreement. Impaired loans
are measured based on the present value of expected future cash flows
discounted at the loans effective interest rate or, as a practical expedient,
at a loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Impairment is recognized by adjusting the
allowance for estimated loan losses for the impaired loan with a corresponding
charge to provision for estimated loan losses. The adoption of SFAS 114 by the
Company did not result in any additional charge to the allowance for estimated
loan losses or provision for estimated loan losses. Additionally, adoption of
SFAS 118 did not result in any change to the recognition of income on impaired
loans.
SFAS 114 amends SFAS 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructuring," to clarify that substantive repossession accounting is
applicable in circumstances where the debtor surrenders the collateral to the
creditor and the creditor receives physical possession of the collateral.
Therefore, a loan for which foreclosure is probable, as in the case of
in-substance foreclosed (ISF) assets, should continue to be accounted for as a
loan. The impact of this change did not result in any reclassifications of ISF
assets by the Company.
<TABLE>
<CAPTION>
Impaired Loans: (In Thousands)
Sept 30,
1995
--------
<S> <C>
Gross recorded investment in impaired loans $ 1,095
Specific allowance for estimated loan losses 495
-------
Total net impaired loans $ 600
=======
(In Thousands)
Average impaired loans outstanding $ 1,600
=======
Interest income recognized $ 81
=======
</TABLE>
7
<PAGE>
5. MORTGAGE BANKING
In May, 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights," amending SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities." This statement eliminates the accounting distinction
between rights to service mortgage loans that are acquired through origination
activities and those acquired through purchase. The Company adopted this
Standard effective April 1, 1995. Subsequent to the adoption, the Company
capitalized $1.4 million of originated mortgage servicing rights, on $91.4
million of loans originated.
8
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Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MORTGAGE BANKING
During the third quarter and nine month period of 1995, the Company closed
$894 million and $1.9 billion, respectively, in single-family, owner occupied,
residential mortgage loans, compared to $556 million and $2.4 billion closed
during the third quarter of 1994 and nine months of 1994, respectively. The
overall decrease in mortgage loan closings for the nine months ended September
30, 1995 compared to the same period in 1994 is primarily attributable to the
higher interest rate environment that existed in the first quarter of 1995,
when compared to the same period in 1994, which has significantly reduced the
number of refinanced mortgages from 1994 levels. For the quarter ended
September 30, 1995, the Company's increase in mortgage loan closings is due to
a lower interest rate environment when compared to the third quarter of 1994,
and the impact of the Company's acquisition of Home Funding, Inc. and R.S.L.
Mortgage.
The decrease in mortgage loan volume resulted in a decrease in mortgage
banking income of $6.2 million, from $58.5 million in the first nine months of
1994 to $52.3 million in 1995. During the third quarter of 1995, mortgage
banking income increased by $5.6 million over the same period of 1994. This
increase was primarily due to a higher level of originations, higher mortgage
loan servicing fees resulting from a larger mortgage loan servicing portfolio,
and increased gains from sale of servicing due to a higher level of
originations over the comparable period. A breakdown of income from mortgage
banking activities is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net mortgage loan servicing fees........... $ 2,142 $ 1,779 $ 7,329 $ 4,769
Origination fee income..................... 8,016 5,576 18,713 21,124
Gain on sale of mortgages.................. 2,986 1,342 5,817 3,506
Gain on sale of servicing.................. 6,151 5,007 20,438 29,128
------- ------- ------- -------
Total mortgage banking income......... $19,295 $13,704 $52,297 $58,527
======= ======= ======= =======
</TABLE>
The Company generates origination fee income primarily through its retail
mortgage loan operation. The Company's retail mortgage loan closings were
$1.36 billion for the nine month period of 1995, compared to $1.42 billion for
1994, resulting in a decrease in origination fee income of $2.4 million from
the nine months of 1994. Retail mortgage loan closings for the third quarter
of 1995 were $592 million, compared to $403 million for the third quarter of
1994, resulting in a higher level of origination fee income for the quarter.
The majority of the Company's residential mortgage production during 1995 has
been long-term fixed rate mortgages. The Company typically sells all of its
long-term fixed rate and a significant portion of its variable rate mortgages
to the secondary market. During the third quarter and nine month period of
1995, the Company's gain on sale of mortgages totaled $3.0 million and $5.8
million, respectively, compared to $1.3 million and $3.5 million,
respectively, for the same periods in 1994. The increase in the gain on sale
of mortgages was due to the higher levels of mortgage loan closings for the
third quarter of 1995 compared to the prior year, and a small improvement in
margins.
During the third quarters of 1995 and 1994, the Company sold both purchased
and originated mortgage servicing rights on loans with principal balances of
$713 million and $589 million, respectively, resulting in gains of $6.2
million and $5.0 million, respectively. During the first nine months of 1995
and 1994, the Company sold mortgage servicing rights on loans with principal
balances of $3.6 billion and $4.0 billion, respectively, resulting in gains of
$20.4 million and $29.1 million, respectively.
9
<PAGE>
In May, 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights," amending SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities." This statement eliminates the accounting distinction
between rights to service mortgage loans that are acquired through origination
activities and those acquired through purchase. The Company adopted this
Standard effective April 1, 1995. Subsequent to the adoption, the Company
capitalized $1.4 million of originated mortgage servicing rights, on $91.4
million of loans originated. The remainder of the Management's Discussion and
Analysis provides various disclosures and analyses relating principally to the
commercial banking segment.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income totaled $7.4 million and $22.7 million for the third
quarter and nine month period of 1995, respectively, compared to $9.1 million
and $25.3 million, respectively, for the same periods in 1994. The decrease in
net interest income was comprised of increases in interest income with larger
offsetting increases in interest expense for both periods. The increases in
both interest income and interest expense were due primarily to general
increases in interest rates earned on interest earning assets and the lagging
effect of interest rates paid on interest bearing liabilities over the last
twelve months. The mix in interest bearing liabilities shifted to a higher
percentage of time deposits and warehouse lines of credit, both of which had
significant increases in average rates paid in 1995 compared to 1994. The net
interest margin for the third quarter and first nine months of 1995 decreased
to 2.25% and 2.39%, respectively, from 2.90% and 2.99%, for the same periods
in 1994.
During the third quarter of 1995 average earning balances increased $57.2
million, or 4.6%, to $1.312 billion, from $1.255 billion during the 1994 third
quarter. Also impacting interest income growth was an increase in the yield on
interest earning assets to 7.50% during the third quarter of 1995, from 6.89%
during the third quarter of 1994. The most significant contributor to the
increase in interest income on earning assets was a $180 million increase in
average mortgages held for sale with an improved yield of 9 basis points over
the prior period. The increase in loans held for sale and total loans was
funded by a decrease in investment securities as discussed previously in the
Notes to the Financial Statements.
Average earning balances increased by 12%, or $134.4 million, to $1.264
billion during the first nine months of 1995, from $1.129 billion during the
first nine months of 1994. In addition, the yield on average earning assets
increased to 7.45% from 6.71%, resulting in a net increase of $13.7 million in
interest income. Primary factors in the increase in yield on interest earning
assets were a 67 basis point increase in average rates earned on the
securities portfolio, and a $148 million increase in average balances of
portfolio loans with an improved yield of 43 basis points over the prior
period.
The cost of funding assets in the third quarter of 1995 increased to 5.94%,
from 4.59% in the third quarter of 1994, with the average balance of interest
bearing liabilities increasing by $68.3 million, or 6.3%, to $1.161 billion,
from $1.092 billion during the 1994 third quarter. Warehouse borrowings, used
to fund mortgage loans held for sale, and time deposits represented the
largest growth categories, increasing by $100.1 million and $115.3 million,
respectively, with the average rate increasing by 143 basis points and 142
basis points, respectively.
Interest expense for the nine months ended September 30, 1995 increased by
$16.3 million over the same period in 1994. The increase was primarily the
result of the increase in the average balance of other short-term borrowings
and time deposits, which increased by $48.1 million and $106.4 million,
respectively. The average rate paid on short-term borrowings and time deposits
increased from 4.51% and 4.59% in 1994, respectively, to 6.19% and 5.82%,
respectively, in 1995.
10
<PAGE>
The following tables present an analysis of average balances and rates for the
three month and nine month periods ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Sept. 30, 1995 Sept. 30, 1994
------------------------------ -----------------------------
Average Average Average Average
Balance(1) Interest Rate Balance(1) Interest Rate
---------- ------- ------ ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Money market investments................. $ 22,285 $ 310 5.56% $ 5,641 $ 65 4.61%
Mortgage loans held for sale............. 354,508 6,787 7.66 174,763 3,308 7.57
Securities............................... 351,476 5,292 6.02 540,737 7,557 5.59
Commercial loans......................... 109,788 2,774 10.11 109,777 2,705 9.86
Real estate mortgage loans............... 415,271 7,845 7.56 372,354 6,844 7.35
Installment loans........................ 58,440 1,600 10.95 51,323 1,141 8.89
---------- ------- ------ ---------- ------- ------
Total loans, net of unearned income.. 583,499 12,219 8.38 533,454 10,690 8.02
---------- ------- ------ ---------- ------- ------
Total interest earning assets........ 1,311,768 24,608 7.50 1,254,595 21,620 6.89
------- ------ ------- ------
Allowance for loan losses................ (5,069) (5,892)
Cash and due from banks.................. 24,741 20,043
Other assets............................. 115,373 98,700
---------- ----------
Total assets......................... $1,446,813 $1,367,446
========== ==========
AVERAGE LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits:
Interest bearing demand deposits..... $ 62,114 371 2.39 $ 85,976 568 2.64
Savings deposits..................... 173,143 1,595 3.68 193,615 1,634 3.38
Time deposits........................ 539,378 8,303 6.16 424,054 5,029 4.74
---------- ------- ------ ---------- ------- ------
Total interest bearing deposits.. 774,635 10,269 5.30 703,645 7,231 4.11
Warehousing lines of credit.............. 150,918 2,872 7.61 50,769 784 6.18
Other short-term borrowings.............. 132,627 2,086 6.29 251,753 3,044 4.84
FHLB advances............................ 35,744 545 6.10 41,619 559 5.37
Long-term debt........................... 66,768 1,465 8.78 44,604 912 8.18
---------- ------- ------ ---------- ------- ------
Total interest bearing liabilities... 1,160,692 17,237 5.94 1,092,390 12,530 4.59
------- ------ ------- ------
Non-interest bearing deposits............ 137,656 117,515
Other liabilities........................ 25,226 38,534
---------- ----------
Total liabilities.................... 1,323,574 1,248,439
---------- ----------
Shareholders' equity..................... 123,239 119,007
---------- ----------
Total liabilities and shareholders'
equity............................. $1,446,813 $1,367,446
========== ==========
Net interest income...................... $ 7,371 $ 9,090
======= =======
Net interest spread...................... 1.56% 2.30%
====== ======
Net interest margin...................... 2.25% 2.90%
====== ======
<FN>
(1) Non-accrual loans and overdrafts are included in average balances. No
significant amounts of tax-exempt income were earned by the Company or
its subsidiaries during 1995 or 1994.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
Sept. 30, 1995 Sept. 30, 1994
------------------------------ -----------------------------
Average Average Average Average
Balance(1) Interest Rate Balance(1) Interest Rate
---------- ------- ------ ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Money market investments................. $ 18,849 $ 767 5.43% $ 15,856 $ 370 3.11%
Mortgage loans held for sale............. 218,564 13,123 8.01 236,221 12,525 7.07
Securities............................... 409,881 18,707 6.09 409,153 16,638 5.42
Commercial loans......................... 105,899 7,872 9.91 118,572 8,256 9.28
Real estate mortgage loans............... 456,014 25,778 7.54 299,964 15,869 7.05
Installment loans........................ 54,335 4,310 10.58 49,401 3,189 8.61
---------- ------- ------ ---------- ------- ------
Total loans, net of unearned income.. 616,248 37,960 8.21 467,937 27,314 7.78
---------- ------- ------ ---------- ------- ------
Total interest earning assets........ 1,263,542 70,557 7.45 1,129,167 56,847 6.71
------- ------ ------- ------
Allowance for loan losses................ (5,347) (6,515)
Cash and due from banks.................. 24,857 25,640
Other assets............................. 129,846 96,076
---------- ----------
Total assets......................... $1,412,898 $1,244,368
========== ==========
AVERAGE LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits:
Interest bearing demand deposits..... $ 64,611 1,205 2.49 $ 89,009 1,762 2.64
Savings deposits..................... 177,122 4,949 3.73 183,953 4,375 3.17
Time deposits........................ 514,519 22,477 5.82 408,156 14,049 4.59
---------- ------- ------ ---------- ------- ------
Total interest bearing deposits.......... 756,252 28,631 5.05 681,118 20,186 3.95
Warehousing lines of credit.............. 86,275 5,068 7.83 61,165 2,789 6.08
Other short-term borrowings.............. 188,245 8,745 6.19 140,123 4,743 4.51
FHLB advances............................ 30,428 1,411 6.18 41,839 1,552 4.95
Long-term debt........................... 61,925 4,020 8.66 36,916 2,285 8.25
---------- ------- ------ ---------- ------- ------
Total interest bearing liabilities... 1,123,125 47,875 5.68 961,161 31,555 4.38
------- ------ ------- ------
Non-interest bearing deposits............ 127,773 123,696
Other liabilities........................ 41,647 42,933
---------- ----------
Total liabilities.................... 1,292,545 1,127,790
---------- ----------
Shareholders' equity..................... 120,353 116,578
---------- ----------
Total liabilities and
shareholders' equity................. $1,412,898 $1,244,368
========== ==========
Net interest income...................... $22,682 $25,292
======= =======
Net interest spread...................... 1.77% 2.33%
====== ======
Net interest margin...................... 2.39% 2.99%
====== ======
<FN>
(1) Non-accrual loans and overdrafts are included in average balances. No
significant amounts of tax-exempt income were earned by the Company or
its subsidiaries during 1995 or 1994.
</TABLE>
12
<PAGE>
Net interest income can be analyzed in terms of the impact of changing rates
and changing volumes of interest earning assets and interest bearing
liabilities. The following table sets forth certain information regarding
changes in net interest income due to changes in the average balance of
interest earning assets and interest bearing liabilities and due to changes in
average rates for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1995 versus 1994 1995 versus 1994
Inc/(Dec) Due to Change in: Inc/(Dec) Due to Change in:
------------------------------- --------------------------------
Average Average Net Average Average Net
Balance(1) Rate(1) Change Balance(1) Rate(1) Change
--------- ------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Money market investments ................. $ 229 $ 16 $ 245 $ 80 $ 317 $ 397
Mortgage loans held for sale ............. 3,441 38 3,479 (981) 1,579 598
Securities ............................... (2,813) 548 (2,265) 30 2,039 2,069
Loans, net of unearned income (2) ........ 1,033 496 1,529 9,065 1,581 10,646
------- ------- ------- ------- ------- --------
Total interest income ............... 1,890 1,098 2,988 8,194 5,516 13,710
------- ------- ------- ------- ------- --------
Interest expense:
Interest bearing demand deposits ......... (146) (51) (197) (460) (97) (557)
Savings deposits ......................... (181) 142 (39) (167) 741 574
Time deposits ............................ 1,561 1,713 3,274 4,146 4,282 8,428
------- ------- ------- ------- ------- --------
Total interest bearing deposits ..... 1,234 1,804 3,038 3,519 4,926 8,445
Warehousing lines of credit .............. 1,868 220 2,088 1,339 940 2,279
Other short-term borrowings .............. (1,705) 747 (958) 1,920 2,082 4,002
FHLB advances ............................ (84) 70 (14) (479) 338 (141)
Long-term debt ........................... 482 71 553 1,618 117 1,735
------- ------- ------- ------- ------- --------
Total interest expense .............. 1,795 2,912 4,707 7,917 8,403 16,320
------- ------- ------- ------- ------- --------
Net interest income ................. $ 95 $(1,814) $(1,719) $ 277 $(2,887) $ (2,610)
======= ======= ======= ======= ======= ========
<FN>
(1) Any variance attributable jointly to volume and rate changes is allocated
to volume and rate in proportion to the relationship of the absolute
dollar amount of the change in each.
(2) Non-accrual loans are included in average balances.
</TABLE>
13
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense for the third quarter and the nine month period of 1995
was $22.2 million and $59.3 million, respectively, compared with $18.9 million
and $65.5 million for the same periods in 1994. Salaries and employee benefits
are the largest portion of non-interest expense, totaling $13.8 million and
$34.6 million for the three month and nine month periods of 1995,
respectively. Salaries and employee benefits increased to $13.8 million,
compared with $10.4 million for the third quarter of 1994. Salaries and
employee benefits decreased by $2.4 million for the nine month period of 1995
compared to the same period in 1994, primarily as a result of lower
commissions and incentives paid on decreased mortgage loan volume.
FINANCIAL CONDITION
ASSETS
Total assets at September 30, 1995 were $1.53 billion, which represents an
increase of $170 million over $1.36 billion at December 31, 1994. The increase
in assets since December 31, 1994 was primarily in mortgage loans held for
sale, partially offset by declines in securities and portfolio mortgage loans.
The increase in mortgage loans held for sale was primarily a result of a
continuing increase in residential loan closings for the quarter ended
September 30, 1995. The corresponding decrease in securities was mainly a
result of selling a portion of longer-term lower interest earning securities
in order to fund shorter-term, higher interest earning mortgage loans held for
sale balances.
LOANS
Total loans, excluding loans held for sale, at September 30, 1995 decreased by
$32.1 million to $573.0 million, from $605.1 million at December 31, 1994.
Residential real estate loans decreased by $54.7 million to 70.3% of total
loans at September 30, 1995, from 75.7% at December 31, 1994, due in part to
the Company redeploying a portion of longer-term lower interest earning loans
into shorter-term, higher interest earning mortgage loans held for sale
balances. Commercial loans, including commercial loans secured by real estate,
increased to $108.6 million, or 19.0%, of total loans at September 30, 1995.
The increase was due to an emphasis by the Company on the origination of high
quality commercial credits. Mortgage loans held for sale increased to $492.4
million at September 30, 1995, from $152.1 million at December 31, 1994.
During the third quarter and first nine months of 1995, the Company closed
$4.4 million and $14.2 million, respectively, of Small Business Administration
(SBA) loans. The Company sold $9.2 million of SBA loans during the first nine
months of the year, resulting in gains of $803,000.
The Company attempts to minimize credit risk in its loan portfolio by focusing
primarily on residential real estate mortgages and real estate-secured
commercial lending. As of September 30, 1995, these loans comprised 84.9% of
the total loan portfolio, excluding loans held for sale. The Company's general
policy is to originate conventional residential real estate mortgages with
loan to value ratios of 80% or less and real estate-secured commercial loans
with loan to value ratios of 70% or less. The substantial majority of the
Company's mortgage loans comply with the requirements for sale to or
conversion to mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA")
or Government National Mortgage Association ("GNMA").
The majority of the Company's commercial loans are secured by real estate and
are made to small and medium-sized businesses. These loans or lines of credit
are generally made at rates based on the prevailing prime interest rates of
the subsidiary banks and are adjusted periodically. The focus of the Company
on real estate-secured lending with lower loan to value ratios is generally
reflected in the low net charge-off ratio percentages.
14
<PAGE>
The Company has not emphasized installment loans and, excluding home equity
loans, does not intend to emphasize these loans in the future. The following
table summarizes the composition of the Company's loan portfolio:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------------- -------------------
Amount Percent Amount Percent
(Dollars in thousands) -------- ------- -------- -------
<S> <C> <C> <C> <C>
Commercial loans:
Secured by real estate ............ $ 83,571 14.6% $ 81,922 13.5%
Other (generally secured) ......... 25,031 4.4 15,989 2.6
-------- ----- -------- -----
Total commercial loans ........ 108,602 19.0 97,911 16.1
Residential real estate mortgages ..... 403,006 70.3 457,755 75.7
Installment loans ..................... 61,368 10.7 49,423 8.2
-------- ----- -------- -----
Total portfolio loans ......... $572,976 100.0% $605,089 100.0%
======== ===== ======== =====
</TABLE>
At September 30, 1995, the Company had commitments to fund residential real
estate loans of $317 million. These commitments are expected to result in
mortgage loan closings during the next 30 to 60 days. Offsetting the interest
rate risk associated with these commitments, as well as mortgage loans held
for sale of $492.4 million, the Company had firm commitments to sell forward
$652 million of residential real estate loans. These commitments to sell
forward, which are expected to settle in the fourth quarter of 1995, will not
produce any material gain or loss.
NON-PERFORMING ASSETS
Loans held in portfolio are reviewed on a regular basis and are placed on
non-accrual status when, in the opinion of management, reasonable doubt exists
as to the full, timely collection of interest or principal. Real estate
acquired by the Company as a result of foreclosure or by deed in lieu of
foreclosure is classified as other real estate owned ("OREO") until such time
as it is sold. The following table provides information with respect to the
Company's past due loans and the components of non-performing assets at the
dates indicated.
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994
(Dollars in thousands) -------- ------- --------
<S> <C> <C> <C>
Loans past due 90 days or more and still
accruing interest:
Commercial ................................ $ 326 $ 104 $ 729
Residential real estate mortgages ......... -- -- --
Installment ............................... 165 35 66
------ ------ ------
Total ................................. $ 491 $ 139 $ 795
====== ====== ======
Non-accrual loans:
Commercial ................................ $ 415 $ 982 $1,431
Residential real estate mortgages ......... 333 1,304 1,084
Installment ............................... 117 79 121
------ ------ ------
Total ................................. 865 2,365 2,636
Restructured loans ........................ 794 1,130 1,536
Other real estate owned ................... 1,299 586 1,058
------ ------ ------
Total non-performing assets ........... $2,958 $4,081 $5,230
====== ====== ======
Non performing assets as a percentage of:
Total portfolio loans and OREO (1) ........ 0.52% 0.67% 1.01%
Total loans and OREO (2) .................. 0.28% 0.54% 0.74%
Total assets .............................. 0.19% 0.30% 0.38%
<FN>
(1) Excluding mortgage loans held for sale.
(2) Including mortgage loans held for sale.
</TABLE>
At September 30, 1995, approximately $3.6 million, or .62% of portfolio loans
were 30-89 days delinquent.
15
<PAGE>
ALLOWANCE FOR ESTIMATED LOAN LOSSES
Management is responsible for maintaining an adequate allowance for estimated
loan losses. The appropriate level of the allowance for estimated loan losses
is determined by systematically reviewing the loan portfolio quality,
analyzing economic changes, consulting with regulatory agencies and reviewing
historical loan loss experience. Actual net losses are charged against this
allowance. If actual circumstances and losses differ substantially from
management's assumptions and estimates, such reserves for loan losses may not
be sufficient to absorb all future losses, and net earnings could be
significantly and adversely affected.
Management is of the opinion that the allowance for estimated loan losses is
adequate to meet potential losses in the loan portfolio. It must be
understood, however, that there are inherent risks and uncertainties related
to the operation of a financial institution. By necessity, the Company's
financial statements are dependent upon estimates, appraisals and evaluations
of loans. Therefore, the possibility exists that abrupt changes in such
estimates, appraisals and evaluations might be required because of changing
economic conditions and the economic prospects of borrowers.
As of September 30, 1995, the allowance for estimated loan losses was $5.1
million, or .88%, of total loans, excluding mortgage loans held for sale,
compared with $5.5 million, or .92%, as of December 31, 1994. The allowance
for estimated loan losses as a percentage of non-performing loans was 305% at
September 30, 1995, versus 159% at December 31, 1994.
An analysis of the allowance for estimated loan losses, the amount of loans
charged off, and the recoveries on loans previously charged off is summarized
in the following table:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1995 1994
------- -------
<S> <C> <C>
Allowance for estimated loan losses:
Balance at January 1 ............................... $ 5,544 $ 7,214
Loans charged off .............................. (731) (1,267)
Recoveries of loans previously charged off ..... 224 170
------- -------
Net charge offs .................................... (507) (1,097)
Provision charged to expense ....................... 24 84
Reduction due to sale of commercial loans .......... -- (350)
------- -------
Balance at September 30 ............................ $ 5,061 $ 5,851
======= =======
</TABLE>
SECURITIES
The securities portfolio serves as a source of earnings with relatively
minimal principal risk. As a result, the Company's portfolio is comprised
primarily of U.S. Treasuries, U.S. Government agency obligations and
obligations collateralized by U.S. Government agencies, primarily in the form
of collateralized mortgage obligations and mortgage-backed securities. The
maturity structure of the portfolio is generally short-term, with an estimated
average maturity of less than three years, or at adjustable rates. The
securities portfolio, constituted 20.9% of the Company's assets at September
30, 1995, compared to 34.2% at December 31, 1994. The decrease in the
securities portfolio is primarily a result of selling available-for-sale
securities to provide liquidity to fund higher interest earning asset
balances, mainly in the form of mortgage loans held for sale.
In order to more effectively respond to liquidity needs primarily related to
funding mortgage loans held for sale, the Company reclassified the entire
held-to-maturity investment portfolio to available-for-sale at June 30, 1995.
16
<PAGE>
Certain securities, with a carrying value of approximately $149.4 million and
$235.3 million at September 30, 1995 and December 31, 1994, respectively, were
pledged to secure reverse repurchase agreements, FHLB advances, and other
deposits as required by law.
See Note 3 to the consolidated financial statements for further discussion of
the securities portfolio.
LIABILITIES
DEPOSITS
Non-interest bearing deposits increased by $21.8 million, or 19.6%, from
$111.4 million at December 31, 1994 to $133.2 million at September 30, 1995,
primarily due to an increase in mortgage escrow balances of $6.0 million and
mortgage loan drafts outstanding used to fund mortgage loans held for sale of
$12.8 million. Interest bearing deposits increased by $63.3 million, or 8.9% ,
from $707.3 million at December 31, 1994, to $770.6 million at September 30,
1995, due primarily to an increase of $66.7 million in certificates of deposit
as well as the acquisition of $20.2 million in interest bearing deposits
through the acquisition of deposits of three Michigan based Standard Federal
Bank branches in February 1995. These increases were partially offset by a
decrease in other interest bearing deposit accounts of $2.2 million.
On February 24, 1995, the Company completed the acquisition of the Standard
Federal Bank branches in Owosso and Flushing, Michigan, as well as the deposit
accounts of the Flint branch of Standard Federal Bank. Through the
acquisition, the Company added $20.2 million of interest bearing and $300,000
of non-interest bearing deposits. The Owosso and Flushing branches were opened
as Republic Bank offices on February 27, 1995.
SHORT-TERM BORROWINGS
As of September 30, 1995, the Company had $119.1 million of securities sold
under agreements to repurchase, at an average rate for the quarter of 6.34%.
Such agreements, which have stated maturities of 30 days to two years are
secured by certain securities with a carrying value of $120.6 million. The
proceeds from the reverse repurchase agreements are used to fund mortgage
loans held for sale.
On May 22, 1995, Market Street Mortgage Corporation entered into a $75 million
warehousing line of credit agreement with Residential Funding Corporation used
for the purpose of funding the purchase or origination of mortgage loans by
Market Street. The line of credit, which is payable on demand, is secured by
various real estate mortgage loans and expires August 31, 1996. Market Street
is required to pay interest on the unpaid principal amount of each advance at
1.50% above the monthly average LIBOR rate. Borrowings under this warehousing
line of credit at September 30, 1995, totaled $45.8 million. During the third
quarter of 1995, the average borrowing and interest rate paid on this
warehousing line were $50.8 million and 7.41%, respectively.
Republic Bancorp Mortgage Inc. has a $25 million warehousing line of credit
with NBD Bank, N.A. used to fund the acquisition or origination of mortgage
loans by Republic Bancorp Mortgage. The line of credit, which is payable on
demand, is secured by various real estate mortgage loans and expires in July,
1996. Republic Bancorp Mortgage is required to pay interest on the unpaid
principal amount of each advance in a range of federal funds sold plus 1.0%,
to Wall Street Journal Prime, based on the document status of each loan as
applicable to such advance. Borrowings under this warehousing line of credit
at September 30, 1995 totaled $24.6 million. During the third quarter of 1995,
the average borrowing and interest rate paid on this line were $20.0 million
and 8.05%, respectively.
17
<PAGE>
CUB Funding Corporation has a $25 million warehousing line of credit agreement
with Prudential Home Mortgage Company, used for funding the purchase or
origination of mortgage loans by CUB Funding. Interest, which is payable
monthly, is computed based upon the 30 day commercial paper index plus various
indexes ranging from 1.00% to 2.75%, based on the document status of each
loan. Borrowings under this line of credit were $24.5 million at September 30,
1995. During the third quarter of 1995, the average interest rate was 7.15%
and the average balance outstanding was $35.8 million. The line of credit,
which is payable on demand, is secured by various real estate mortgage loans
and expires in May, 1996.
On May 22, 1995, Market Street Mortgage Corporation entered into a $4 million
working capital revolving line of credit with Residential Funding Corporation.
Interest is calculated at a floating rate of interest which is equal to 1.0%
over the prime lending rate. Borrowings under this revolving line of credit at
September 30, 1995, were $3.7 million at a borrowing rate of 9.75%. The
working capital revolving credit agreement expires August 31, 1996.
In May 1995, CUB Funding Corporation entered into a $4 million mortgage
servicing acquisition line of credit with Prudential Home Mortgage Company
used for the acquisition of mortgage servicing rights. Interest is calculated
based on the 30-day commercial paper index plus 2.75%. At September 30, 1995,
$4.0 million was outstanding under this line of credit, at an average
borrowing rate of 8.59%. The line of credit expires May, 1996.
In March 1995, CUB Funding Corporation entered into a revolving gestation
repurchase agreement with Paine Webber Inc. as a funding source for mortgage
loan originations. Security for this borrowing agreement includes various real
estate mortgage notes and expires at the option of either party. Interest is
calculated at various rates depending on loan document status and ranges from
federal funds plus .60% to 30 day LIBOR plus .90% to 1.75%. Borrowings under
this agreement at September 30, 1995, were $74.0 million. During the third
quarter of 1995, the average borrowing and interest rate paid for this
agreement were $17.3 million and 7.41%, respectively.
In August, 1995, Republic Bancorp Mortgage Inc., entered into a revolving
gestation repurchase agreement with Paine Webber, as a source of funding for
mortgage loan originations. Security for the agreement includes various real
estate mortgage notes, and expires at the option of either party. Interest is
calculated at LIBOR plus .90%. Borrowing under this agreement at September 30,
1995, were $9.4 million. The average borrowing and interest rate paid on this
agreement for the third quarter of 1995 were $3.9 million and 6.58%,
respectively.
The Company has an $18 million revolving Credit Agreement with Firstar Bank
Milwaukee, N.A. with proceeds to be utilized for working capital purposes. The
agreement provides for borrowings with interest at the prime rate, less .25%,
or LIBOR plus 1.75%. At September 30, 1995, $15.9 million was outstanding
under this Credit Agreement. During the third quarter of 1995, the average
borrowing and interest rate paid for this credit agreement were $14.0 million
and 8.49%, respectively.
FHLB ADVANCES
Republic Savings Bank has five outstanding advances with the Federal Home Loan
Bank ("FHLB"); a $10 million advance with an interest rate of 7.15%, maturing
in February 1997, a $5 million advance with an interest rate of 4.45%, maturing
in December 1995, a $5 million advance with an interest rate of 6.0%, maturing
in June 1997, a $5 million advance with a floating interest rate flat to the
three month LIBOR index and adjusting quarterly, maturing in June 2000, and a
$5 million advance at a fixed rate of 5.875%, maturing in September, 2000.
Republic Bank has an FHLB advance of $11,000,000 outstanding, at a fixed rate of
18
<PAGE>
5.79%, maturing July, 1997. These advances are generally secured by
first mortgage loans equal to at least 150% of the advances under a blanket
security agreement and investment securities equal to at least 110% of the
advances under a specific security agreement with interest payable monthly for
all advances.
In order to provide liquidity needs for mortgage loan originations, Republic
Savings also has a $50 million line of credit with the FHLB. As of September
30, 1995, borrowing under this line totaled $5 million, at an overnight
interest rate of 6.25%.
LONG-TERM DEBT
Republic Bancorp Mortgage has a mortgage loan in the amount of $1.91 million
with Firstar Bank Milwaukee, N.A. Principal and interest with a fixed rate of
6.99% is payable quarterly, with a final maturity date of October 1, 2000. As
of September 30, 1995, $96,000 of the total $1.91 million is classified as
short-term borrowings.
On May 22, 1995, Market Street Mortgage Corporation entered into a $26 million
term loan agreement with Residential Funding Corporation used for the purpose
of (1) refinancing then existing term loans to Market Street from G.E. Capital
Mortgage Services, Inc., Bank United of Texas, F.S.B. and Poughkeepsie Savings
Bank, and (2) to finance mortgage loan servicing acquisitions. Interest is
calculated at a floating rate which is equal to 1.0% over the prime lending
rate. The outstanding principal balance of all term loan advances outstanding
as of August 31, 1996 will be due in quarterly installments, on the last day
of each November, February, May and August, beginning with November 1996, each
in an amount equal to five percent of the outstanding principal amount of term
loan advances. The final payment of any remaining principal amount outstanding
will be due on August 31, 2000. Borrowings under this line of credit at
September 30, 1995 were $24.6 million at a borrowing rate of 9.75%.
The Company has $17.25 million of 9% Subordinated Notes outstanding which
mature February 1, 2003. Interest on the notes is payable monthly at 9%. The
notes are redeemable in whole or in part by the Company, subject to Federal
Reserve Board approval at par plus accrued interest at any time after February
1, 1996. The Subordinated Notes qualify as Tier 2 Capital for the calculation
of Total Risk-Based Capital under Federal Reserve Board guidelines. Republic
also has $25 million of 7.17% senior debentures which mature April 2001, with
interest on the notes payable semiannually.
CAPITAL RESOURCES
Total shareholders' equity at September 30, 1995 was $125.1 million, compared
with $117.9 million at December 31, 1994. The increase of $7.2 million during
the first nine months of 1995 was due to earnings net of dividends and a
decrease in the unfavorable market valuation adjustment on securities
available-for-sale; partially offset by the repurchase of 429,166 Republic
Bancorp Inc. common shares under the stock repurchase program.
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. At September 30, 1995, Republic's Tier 1 Capital and Total
risk-based capital ratios were 15.50% and 18.39%, respectively, versus 17.65%
and 21.14%, respectively at December 31, 1994. These ratios exceed minimum
guidelines prescribed by regulatory agencies. As of September 30, 1995, total
risk-based capital was $142.3 million, an excess of $80.4 million over the
minimum guidelines prescribed by regulatory agencies.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. Republic's Tier 1 Capital leverage
ratio at September 30, 1995 was 8.34%, versus 8.47% at December 31, 1994.
19
<PAGE>
The Company is committed to maintaining a strong capital position. As of
September 30, 1995, Republic Bank and Republic Savings Bank's Total capital to
risk-weighted assets ratio, and Tier 1 Capital to risk-weighted assets ratio
were in excess of all minimum regulatory requirements. It is management's
opinion that the Company and its subsidiaries' capital structure is adequate
and the Company does not anticipate any difficulty in meeting these
requirements on an ongoing basis.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Republic and its subsidiaries are parties to certain ordinary
routine litigation incidental to Republic's business. In the
opinion of management, liabilities arising from such litigation
would not have a material effect on Republic's consolidated
financial statements.
Item 2. Changes in Securities
At the August 17, 1995 meeting, the Board of Directors declared a
quarterly cash dividend of $.09 per share on common stock, payable
on October 6, 1995 to shareholders of record on September 8, 1995.
In addition, at the September 21, 1995 meeting, the Board of
Directors approved a 10% stock dividend to be issued December 1,
1995 to shareholders of record November 3, 1995.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to Vote of Security Holders
During the interim period covered by this report, there were no
matters submitted to a vote of security holders.
Item 5. Other Information
Not applicable.
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits
11. Statement RE: Computation of per share earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
During the interim period covered by this report, there were
no reports filed by the Company on Form 8-K.
21
<PAGE>
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: November 13, 1995 BY: /s/Thomas F. Menacher
---------------------------------
Thomas F. Menacher
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
EXHIBIT 11
STATEMENT RE COMPUTATION OF
PER SHARE EARNINGS
Primary earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding and common equivalent
shares with a dilutive effect. Common equivalent shares are shares which may
be issuable upon exercise of outstanding stock options and warrants. Stock
options and warrants were included in earnings per primary common share
computations for 1995 and 1994.
Fully diluted earnings per common share are determined on the assumption that
the weighted average number of common shares and common equivalent shares
outstanding is further increased by the effect of the end of period market
price on stock options and stock warrants. Stock options and stock warrants
were included in earnings per fully diluted common share computations for 1995
and 1994.
The following table presents information necessary for the computation of
earnings per share, on both primary and fully diluted basis, for the three and
nine months ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average number of
common shares
outstanding ............................ 14,970,569 15,314,569 14,985,870 15,226,965
Common share equivalents
on stock options and stock
warrants based on average
market price ........................... 453,283 487,295 444,951 524,415
---------- ---------- ---------- ----------
Average number of common
shares outstanding to compute
primary earnings per share ............. 15,423,852 15,801,864 15,430,821 15,751,380
Incremental common share
equivalent on stock options
and stock warrants based on
end of period market price ............. 31,087 -- 14,014 1,538
---------- ---------- ---------- ----------
Average number of common
shares outstanding to compute
fully diluted earnings per share ....... 15,454,939 15,801,864 15,444,835 15,752,918
========== ========== ========== ==========
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted
from the consolidated balance sheet as of September 30, 1995 and
consolidated statements of income for the nine months ended
September 30, 1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 23,813
<INT-BEARING-DEPOSITS> 3,538
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 320,974
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,065,415
<ALLOWANCE> 5,061
<TOTAL-ASSETS> 1,533,944
<DEPOSITS> 903,781
<SHORT-TERM> 347,433
<LIABILITIES-OTHER> 52,032
<LONG-TERM> 104,668
0
0
<COMMON> 75,368
<OTHER-SE> 49,760
<TOTAL-LIABILITIES-AND-EQUITY> 1,533,944
<INTEREST-LOAN> 51,084
<INTEREST-INVEST> 19,473
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 70,557
<INTEREST-DEPOSIT> 28,629
<INTEREST-EXPENSE> 47,874
<INTEREST-INCOME-NET> 22,683
<LOAN-LOSSES> 24
<SECURITIES-GAINS> 1,054
<EXPENSE-OTHER> 59,292
<INCOME-PRETAX> 19,260
<INCOME-PRE-EXTRAORDINARY> 19,260
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,244
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 2.39
<LOANS-NON> 865
<LOANS-PAST> 491
<LOANS-TROUBLED> 794
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,544
<CHARGE-OFFS> 731
<RECOVERIES> 224
<ALLOWANCE-CLOSE> 5,061
<ALLOWANCE-DOMESTIC> 2,670
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,391
</TABLE>
