SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1998 Commission File Number 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2604669
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices)
(517) 725-7337
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES ____ X ____ NO _______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock Outstanding as of October 31, 1998:
Common Stock, $5 Par Value ............................ 23,697,383 Shares
<PAGE>
<TABLE>
<CAPTION>
INDEX
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 ........................................ 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997...................... 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997...................... 5
Notes to Consolidated Financial Statements.................... 6 - 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition................. 8 - 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 22
Item 2. Changes in Securities......................................... 22
Item 6. Exhibits and Reports on Form 8-K.............................. 22
SIGNATURE ................................................................... 23
EXHIBITS..................................................................... 24 - 25
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
<TABLE>
<CAPTION>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31,
(Dollars in thousands) 1998 1997
- - ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................... $ 30,159 $ 29,668
Mortgage loans held for sale ............................ 694,862 513,533
Securities available for sale (amortized cost of
$23,182 and $102,336, respectively) .................. 22,889 101,108
Loans ................................................... 1,156,485 1,095,744
Less allowance for loan losses ....................... (10,130) (7,334)
----------- -----------
Net loans ............................................... 1,146,355 1,088,410
----------- -----------
Premises and equipment, net of depreciation ............. 16,023 12,505
Mortgage servicing rights ............................... 68,454 58,413
Federal Home Loan Bank stock ............................ 25,190 18,773
Other assets ............................................ 67,518 50,483
----------- -----------
Total assets ....................................... $ 2,071,450 $ 1,872,893
=========== ===========
LIABILITIES
Noninterest-bearing deposits ............................ $ 127,070 $ 96,644
Interest-bearing deposits ............................... 1,290,967 1,080,649
----------- -----------
Total deposits ..................................... 1,418,037 1,177,293
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings .... 36,546 58,274
Short-term FHLB advances ................................ 45,000 156,000
Long-term FHLB advances ................................. 253,568 210,632
Accrued expenses and other liabilities .................. 123,219 91,142
Long-term debt .......................................... 47,500 47,500
----------- -----------
Total liabilities .................................. 1,923,870 1,740,841
Minority interest ....................................... 1,061 964
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $25 stated value: $2.25 cumulative
and convertible; 5,000,000 shares authorized,
none issued and outstanding .......................... -- --
Common stock, $5 par value, 30,000,000 shares
authorized; 23,717,853 and 23,347,802 shares
issued and outstanding, respectively ................. 118,589 116,739
Capital surplus ......................................... 28,106 13,873
Retained earnings ....................................... 14 1,274
Net unrealized losses on securities available for sale .. (190) (798)
----------- -----------
Total shareholders' equity ......................... 146,519 131,088
----------- -----------
Total liabilities and shareholders' equity ......... $ 2,071,450 $ 1,872,893
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 1998 1997 1998 1997
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees ............................. $ 35,930 $ 28,396 $ 103,526 $ 74,315
Investment securities ............................. 938 3,293 3,694 10,611
--------- --------- --------- ---------
Total interest income ...................... 36,868 31,689 107,220 84,926
--------- --------- --------- ---------
Interest Expense:
Demand deposits ................................... 167 252 447 853
Savings and time deposits ......................... 15,386 12,457 43,516 34,523
Short-term borrowings ............................. 472 1,975 1,964 5,034
FHLB advances ..................................... 5,112 3,833 15,797 8,425
Long-term debt .................................... 859 858 2,576 2,604
--------- --------- --------- ---------
Total interest expense ..................... 21,996 19,375 64,300 51,439
--------- --------- --------- ---------
Net interest income ............................... 14,872 12,314 42,920 33,487
Provision for loan losses ......................... 750 136 3,475 2,621
--------- --------- --------- ---------
Net interest income after provision for loan losses 14,122 12,178 39,445 30,866
--------- --------- --------- ---------
Noninterest Income:
Service charges ................................... 371 376 1,094 1,087
Mortgage banking .................................. 35,584 26,041 95,755 66,232
Gains (losses) on sale of securities .............. (77) 136 (221) (509)
Gains on sale of SBA loans ........................ 759 231 1,855 706
Gain on sale of bank branches and deposits ........ -- -- -- 4,442
Other noninterest income .......................... 380 604 1,059 1,871
--------- --------- --------- ---------
Total noninterest income ................... 37,017 27,388 99,542 73,829
--------- --------- --------- ---------
Noninterest Expense:
Salaries and employee benefits .................... 14,114 12,243 36,828 33,800
Mortgage loan commissions and incentives .......... 14,950 8,619 39,249 20,743
Occupancy expense of premises ..................... 2,104 1,735 5,901 5,273
Equipment expense ................................. 1,246 1,150 3,826 3,348
Other noninterest expense ......................... 8,909 7,470 25,831 20,139
--------- --------- --------- ---------
Total noninterest expense .................. 41,323 31,217 111,635 83,303
--------- --------- --------- ---------
Income before income taxes ........................ 9,816 8,349 27,352 21,392
Provision for income taxes ........................ 3,550 2,974 9,777 7,349
--------- --------- --------- ---------
Net Income ........................................ $ 6,266 $ 5,375 $ 17,575 $ 14,043
========= ========= ========= =========
Basic earnings per share .......................... $ .26 $ .23 $ .75 $ .60
========= ========= ========= =========
Diluted earnings per share ........................ $ .26 $ .23 $ .74 $ .59
========= ========= ========= =========
Average common shares outstanding - diluted ....... 23,962 23,721 23,868 23,830
========= ========= ========= =========
Cash dividends declared per common share .......... $ .08 $ .07 $ .24 $ .22
========= ========= ========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30 (In thousands) 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ....................................................... $ 17,575 $ 14,043
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 4,016 3,622
Amortization of mortgage servicing rights ................... 10,635 4,695
Net losses on sales of securities available for sale ........ 221 509
Net gains on sales of mortgage servicing rights ............. (25,359) (22,504)
Net gains on sale of loans .................................. (3,750) (3,333)
Origination of mortgage loans held for sale ................. (4,163,363) (2,513,016)
Proceeds from sales of mortgage loans held for sale ......... 3,982,033 2,377,049
Net (increase) decrease in other assets ..................... (24,399) 10,130
Net increase in other liabilities ........................... 33,138 27,201
Other, net .................................................. (3,701) (137)
----------- -----------
Total adjustments ......................................... (190,529) (115,784)
----------- -----------
Net cash used in operating activities ..................... (172,954) (101,741)
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale ............. 58,033 129,090
Proceeds from maturities/payments of securities available for sale 20,043 27,527
Purchases of securities available for sale and FHLB stock ........ (6,148) (110,358)
Proceeds from sale of loans ...................................... 177,450 156,091
Net increase in loans made to customers .......................... (233,853) (382,625)
Proceeds from sale of fixed assets ............................... 208 4,156
Proceeds from sale of mortgage servicing rights .................. 36,484 19,491
Additions to mortgage servicing rights ........................... (27,205) (19,881)
----------- -----------
Net cash provided by (used in) investing activities ... 25,012 (176,509)
----------- -----------
Cash Flows From Financing Activities:
Net increase in deposits ......................................... 240,744 175,469
Sale of bank branch deposits ..................................... -- (52,136)
Net decrease in short-term borrowings ............................ (21,729) (31,545)
Net (decrease) increase in short-term FHLB advances .............. (111,000) 112,000
Net increase in long-term FHLB advances .......................... 69,936 116,432
Payments on long-term FHLB advances .............................. (27,000) (36,000)
Payments on long-term debt ....................................... -- (1,689)
Net proceeds from issuance of common shares ...................... 3,814 1,546
Repurchase of common shares ...................................... (675) (6,827)
Dividends paid ................................................... (5,657) (5,113)
----------- -----------
Net cash provided by financing activities ............. 148,433 272,137
----------- -----------
Net increase (decrease) in cash and cash equivalents ............. 491 (6,113)
Cash and cash equivalents at beginning of period ................. 29,668 40,114
----------- -----------
Cash and cash equivalents at end of period ....................... $ 30,159 $ 34,001
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Republic
Bancorp Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes necessary for a comprehensive presentation of financial
position, results of operations and statement of cash flows required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal recurring adjustments necessary
for a fair presentation of results have been included. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Certain amounts in prior periods have been reclassified to conform to the
current year's presentation.
Note 2 - Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company, Republic Bancorp Inc., and its wholly-owned banking subsidiaries,
Republic Bank and Republic Savings Bank. Republic Bank has three mortgage
company subsidiaries: Republic Bancorp Mortgage Inc., including its three
divisions, Home Funding, Inc., Unlimited Mortgage Services, Inc., and
Exchange Mortgage Corporation; CUB Funding Corporation, including its
division, Leader Financial; and Market Street Mortgage Corporation. Republic
Bank has an 80%- majority ownership interest in Market Street Mortgage, while
Republic Bancorp Mortgage and CUB Funding are wholly-owned. All material
intercompany transactions and balances have been eliminated in consolidation.
Note 3 - Consolidated Statements of Cash Flows
Supplemental disclosures of cash flow information for the nine months ended
September 30, include:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest .................. $62,892 $49,972
Income taxes .............. $ 6,918 $ 4,806
Non-cash investing activities:
Loan charge-offs .......... $ 809 $ 191
</TABLE>
6
<PAGE>
Note4 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands, except per share data) 1998 1997 1998 1997
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net income ................................... $ 6,266 $ 5,375 $ 17,575 $ 14,043
Denominator:
Denominator for basic earnings per share-
weighted-average shares ................... 23,695,823 23,253,476 23,533,819 23,356,727
Effect of dilutive securities:
Employee stock options .................... 180,861 246,639 220,407 265,037
Warrants .................................. 85,422 220,552 113,598 208,167
----------- ----------- ----------- -----------
Dilutive potential common shares ........ 266,283 467,191 334,005 473,204
----------- ----------- ----------- -----------
Denominator for diluted earnings per share-
adjusted weighted-average shares for
assumed conversions ....................... 23,962,106 23,720,667 23,867,824 23,829,931
=========== =========== =========== ===========
Basic earnings per share .......................... $ .26 $ .23 $ .75 $ .60
=========== =========== =========== ===========
Diluted earnings per share ........................ $ .26 $ .23 $ .74 $ .59
=========== =========== =========== ===========
</TABLE>
Note 5 - Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on
the Company's net income or shareholders' equity. This Statement requires
unrealized gains or losses on the Company's available-for-sale securities,
which prior to adoption were reported separately in shareholders' equity, to
be included in comprehensive income.
For the third quarter of 1998 and 1997, total comprehensive income amounted
to $6.3 million and $5.6 million, respectively. For the nine months ended
September 30, 1998 and 1997, total comprehensive income amounted to $18.2
million and $15.1 million, respectively.
7
<PAGE>
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
EARNINGS PERFORMANCE
The Company reported net income of $6.3 million for the quarter ended
September 30, 1998, an increase of 17% over the $5.4 million reported in the
third quarter of 1997. Fully diluted earnings per share for the third quarter
of 1998 were $0.26, up 15% from $0.23 for the same period last year. Return
on average shareholders' equity was 17.40% and return on average assets was
1.27% for the quarter, compared to 17.23% and 1.26%, respectively, in 1997.
For the nine months ended September 30, 1998, the Company earned $17.6
million, an increase of 25% over the $14.0 million reported for the
corresponding period in 1997. Fully diluted earnings per share were $.74, up
25% from $.59 for the first nine months of 1997. Return on average
shareholders' equity was 16.89% and return on average assets was 1.20% for
the first nine months of 1998, compared to 15.31% and 1.20%, respectively, in
1997.
RESULTS OF OPERATIONS
Mortgage Banking
The following discussion provides information that relates specifically to
the Company's mortgage banking line of business, which generates revenue from
mortgage loan production and mortgage loan servicing activities. Mortgage
banking revenue represents the largest component of the Company's total
noninterest income.
The Company closed $1.5 billion in single-family residential mortgage loans
in the third quarter of 1998, a 37% increase from $1.1 billion closed in the
same period a year ago. For the nine months ended September 30, 1998,
mortgage loan closings were $4.3 billion, compared to $2.8 billion for the
comparable period in 1997. Retail mortgage loan volumes during the first nine
months of 1998 were favorably impacted by relatively low mortgage interest
rates which has resulted in a higher level of refinance activity.
Refinancings for the third quarter of 1998 represented 33% of total closings
compared to 27% in the third quarter of 1997. During the nine months ended
September 30, 1998, refinancings represented 39% of total closings compared
to 23% for the same period of 1997.
The following table summarizes the Company's income from mortgage banking
activities:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 1998 1997 1998 1997
- - ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage loan production income (1) ..... $34,602 $23,948 $94,134 $59,489
Net mortgage loan servicing income(2) ... 364 1,580 1,003 5,126
Gains on bulk sales of mortgage servicing 618 513 618 1,617
------- ------- ------- -------
Total mortgage banking income ..... $35,584 $26,041 $95,755 $66,232
======= ======= ======= =======
<FN>
(1) Includes fee revenue derived from the loan origination process (i.e.,
points collected), gains on the sale of mortgage loans and gains on the
sale of mortgage servicing rights released concurrently with the
underlying loans sold.
(2) Includes servicing fees, late fees and other ancillary charges, net of
amortization and charges for impairment of mortgage servicing rights, if
any.
</TABLE>
8
<PAGE>
For the three months ended September 30, 1998, mortgage banking income
increased $9.6 million, or 37%, to $35.6 million from $26.0 million a year
earlier, as relatively low mortgage interest rates contributed to the growth
in mortgage loan production income that was more than offset by a decline in
mortgage servicing revenue. Mortgage loan production income grew primarily as
a result of significant increases in origination fee income and gains on the
sale of mortgages. The Company sold $1.5 billion of single-family residential
mortgage loans in the third quarter of 1998, which included $36.7 million of
residential portfolio loans. In the third quarter of 1997, the Company sold
$981 million of residential mortgage loans, which included $144.3 million of
residential protfolio loans.
For the nine months ended September 30, 1998, mortgage banking income
increased $29.5 million, or 45%, compared to the same period a year ago,
reflecting increased origination fee income and gains on the sale of
mortgages. This increase in mortgage banking income was a result of the record
level of production volumes in 1998. Mortgage loan sales totaled $4.1 billion
for the first nine months of 1998, compared to $2.5 billion in 1997.
The Company serviced $3.3 billion, or 40,000 loans, for the benefit of others
at September 30, 1998, compared to $3.1 billion at December 31, 1997 and $3.0
billion at September 30, 1997. Changes in the size of the Company's servicing
portfolio over the past year reflects the net result of additions from loan
production and reductions from prepayments, partial prepayments and scheduled
amortization of mortgage loans. Net mortgage loan servicing income declined
77% for the third quarter of 1998 reflecting $3.8 million in mortgage
servicing rights amortization and changes for impairment of mortgage
servicing rights compared to $1.6 million in 1997. For the nine months ended
September 30, 1998, net mortgage servicing income declined 80% reflecting
$10.6 million in mortgage servicing amortization and changes for impairment
of mortgage servicing rights compared to $4.6 million for the nine months
ended September 30, 1997. These increases in amortization reflect an increase
in the level of prepayments associated with the mortgage servicing portfolio.
Significant changes in the interest rates directly impact the amount of
revenue generated by the servicing portfolio.
The Company periodically sells, in bulk form, mortgage servicing rights that
were previously retained. For the quarter and nine months ended September 30,
1998, mortgage servicing rights for loans with a principal balance of $243
million were sold, resulting in a net gain of $618,000. For the quarter ended
September 30, 1997, mortgage servicing rights for loans with a principal
balance of $98 million were sold, resulting in a net gain of $513,000. During
the first nine months of 1997, mortgage servicing rights for loans with a
principal balance of $345 million were sold in bulk form, resulting in a net
gain of $1.6 million.
Commercial and Retail Banking
The remaining disclosures and analyses within Management's Discussion and
Analysis regarding the Company's results of operations and financial
condition relate principally to the commercial and retail banking line of
business.
Net Interest Income
The following discussion should be read in conjunction with Tables I and II
on the following pages, which provide detailed analyses of the components
impacting net interest income for the three months and nine months ended
September 30, 1998 and 1997.
Net interest income, on a fully taxable equivalent (FTE) basis, was $14.9
million for the third quarter of 1998, an increase of $2.6 million, or 21%,
over the third quarter of 1997. The increase was primarily the result of a
$258 million, or 76%, increase in average mortgage loans held for sale and a
$139 million, or 51%, increase in average commercial loans during the third
quarter of 1998 compared to 1997. Funding the growth in mortgage loans held
for sale and commercial loans was a reduction in the average balance of
investment securities and increases in average deposits. Net interest income
growth was partially offset by the interest expense associated with a $284
million, or 29%, increase in average interest-bearing deposits.
9
<PAGE>
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
- - -----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Short-term investments ........................ $ 10,490 $ 135 5.11% $ 2,441 $ 36 5.85%
Mortgage loans held for sale .................. 595,017 10,933 7.29 337,191 6,532 7.75
Investment securities and FHLB stock .......... 48,870 821 6.72 200,673 3,297 6.57
Portfolio loans(1):
Commercial loans ........................... 407,987 9,407 9.15 269,424 6,490 9.56
Real estate mortgage loans ................. 663,233 12,851 7.75 674,347 12,911 7.66
Installment loans .......................... 106,444 2,739 10.21 95,856 2,463 10.19
----------- ----------- ----- ----------- ----------- -----
Total loans, net of unearned income ...... 1,177,664 24,997 8.46 1,039,627 21,864 8.38
----------- ----------- ----- ----------- ----------- -----
Total interest-earning assets ............ 1,832,041 36,886 8.01 1,579,932 31,729 8.01
Allowance for loan losses ..................... (10,041) (7,183)
Cash and due from banks ....................... 25,939 25,308
Other assets .................................. 131,885 107,286
----------- -----------
Total assets ............................. $ 1,979,824 $ 1,705,343
=========== ===========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits .............. $ 23,917 167 2.77 $ 46,226 251 2.15
Savings deposits .............................. 450,725 4,070 3.58 277,679 3,120 4.46
Time deposits ................................. 771,658 11,316 5.82 638,562 9,337 5.80
----------- ----------- ----- ----------- ----------- -----
Total interest-bearing deposits .......... 1,246,300 15,553 4.95 962,467 12,708 5.24
Short-term borrowings ......................... 32,776 472 5.71 135,961 1,975 5.76
FHLB advances ................................. 352,142 5,112 5.76 259,678 3,834 5.86
Long-term debt ................................ 47,500 859 7.23 47,500 858 7.23
----------- ----------- ----- ----------- ----------- -----
Total interest-bearing liabilities ....... 1,678,718 21,996 5.20 1,405,606 19,375 5.47
----------- ----- ----------- -----
Noninterest-bearing deposits .................. 97,150 123,720
Other liabilities ............................. 59,880 51,269
----------- -----------
Total liabilities ........................ 1,835,748 1,580,595
Shareholders' equity .......................... 144,076 124,748
----------- -----------
Total liabilities and shareholders' equity $ 1,979,824 $ 1,705,343
=========== ===========
Net interest income/Rate spread (FTE) ......... $ 14,890 2.81% $ 12,354 2.54%
=========== ===== =========== =====
Net interest margin (FTE) ..................... 3.25% 3.15%
===== =====
<CAPTION>
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term investments ................. $ 105 $ (6) $ 99
Mortgage loans held for sale ........... 4,804 (403) 4,401
Investment securities and FHLB stock ... (2,549) 73 (2,476)
Portfolio loans(1):
Commercial loans .................... 3,202 (285) 2,917
Real estate mortgage loans .......... (212) 152 (60)
Installment loans ................... 271 5 276
------- ------- -------
Total loans, net of unearned income 3,261 (128) 3,133
------- ------- -------
Total interest income ............. 5,621 (464) 5,157
Interest-bearing demand deposits ....... (143) 59 (84)
Savings deposits ....................... 1,650 (700) 950
Time deposits .......................... 1,947 32 1,979
------- ------- -------
Total interest-bearing deposits ... 3,454 (609) 2,845
Short-term borrowings .................. (1,486) (17) (1,503)
FHLB advances .......................... 1,344 (66) 1,278
Long-term debt ......................... 1 -- 1
------- ------- -------
Total interest expense ............ 3,313 (692) 2,621
------- ------- -------
Net interest income ............... $ 2,308 $ 228 $ 2,536
======= ======= =======
<FN>
(1) Non-accrual loans and overdrafts are included in average balances.
(2) Variances attributable jointly to volume and rate changes are allocated
to volume and rate in proportion to the relationship of the absolute
dollar amount of the change in each.
</TABLE>
10
Table II - Year-to-Date Net Interest Income and Rate/Volume Analysis (FTE)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
- - -------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Short-term investments............................ $ 6,542 $ 276 5.64% $ 6,824 $ 220 4.31%
Mortgage loans held for sale...................... 548,327 30,239 7.37 278,917 16,279 7.78
Investment securities and FHLB stock.............. 72,357 3,472 6.40 220,671 10,705 6.47
Portfolio loans(1):
Commercial loans............................... 376,002 26,032 9.26 232,890 16,789 9.64
Real estate mortgage loans..................... 691,906 39,303 7.57 604,912 34,457 7.59
Installment loans.............................. 104,074 7,953 10.22 89,886 6,790 10.10
------------- ---------- ----- ------------- --------- -----
Total loans, net of unearned income.......... 1,171,982 73,288 8.35 927,688 58,036 8.35
------------- ---------- ----- ------------- --------- -----
Total interest-earning assets................ 1,799,208 107,275 7.96 1,434,100 85,240 7.93
Allowance for loan losses......................... (8,864) (5,935)
Cash and due from banks........................... 23,464 22,736
Other assets...................................... 134,544 104,558
------------- -------------
Total assets................................. $ 1,948,352 $ 1,555,459
============= =============
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits.................. $ 24,315 447 2.46 $ 52,238 853 2.18
Savings deposits ................................. 429,993 11,419 3.55 269,622 8,948 4.44
Time deposits..................................... 734,718 32,097 5.84 597,396 25,575 5.72
------------- --------- ----- ------------- --------- -----
Total interest-bearing deposits.............. 1,189,026 43,963 4.94 919,256 35,376 5.15
Short-term borrowings............................. 45,514 1,964 5.77 116,365 5,034 5.78
FHLB advances.................................... 369,226 15,797 5.72 192,315 8,425 5.86
Long-term debt.................................... 47,500 2,576 7.23 48,097 2,604 7.22
------------- --------- ----- ------------- --------- -----
Total interest-bearing liabilities........... 1,651,266 64,300 5.21 1,276,033 51,439 5.39
--------- ----- --------- -----
Noninterest-bearing deposits...................... 92,380 118,245
Other liabilities................................. 65,974 38,867
------------- -------------
Total liabilities............................ 1,809,620 1,433,145
Shareholders' equity.............................. 138,732 122,314
------------- -------------
Total liabilities and shareholders' equity... $ 1,948,352 $ 1,555,459
============= =============
Net interest income/Rate spread (FTE)............. $ 42,975 2.76% $ 33,801 2.54%
========= ===== ========= =====
Net interest margin............................... 3.19% 3.14%
===== =====
<CAPTION>
Increase (decrease) due to change in: Volume(2) Rate(2) Net Inc(Dec)
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term investments .................. $ (9) $ 65 $ 56
Mortgage loans held for sale ............ 14,865 (905) 13,960
Investment securities and FHLB stock .... (7,118) (115) (7,233)
Portfolio loans(1):
Commercial loans ..................... 9,934 (691) 9,243
Real estate mortgage loans ........... 4,937 (91) 4,846
Installment loans .................... 1,082 81 1,163
-------- -------- --------
Total loans, net of unearned income 15,953 (701) 15,252
-------- -------- --------
Total interest income .............. 23,691 (1,656) 22,035
Interest-bearing demand deposits ........ (505) 99 (406)
Savings deposits ........................ 1,373 1,098 2,471
Time deposits ........................... 5,976 546 6,522
-------- -------- --------
Total interest-bearing deposits .... 6,844 1,743 8,587
Short-term borrowings ................... (3,061) (9) (3,070)
FHLB advances ........................... 7,579 (207) 7,372
Long-term debt .......................... (32) 4 (28)
-------- -------- --------
Total interest expense ............. 11,330 1,531 12,861
-------- -------- --------
Net interest income ................ $ 12,361 $ (3,187) $ 9,174
======== ======== ========
<FN>
(1) Non-accrual loans and overdrafts are included in average balances.
(2) Variances attributable jointly to volume and rate changes are allocated
to volume and rate in proportion to the relationship of the absolute
dollar amount of the change in each.
</TABLE>
11
<PAGE>
The net interest margin (FTE) was 3.25% for the quarter ended September 30,
1998, an increase of 10 basis points from 3.15% a year ago. The increase in
the margin was primarily a result of a reduction in the Company's cost of
funds.
For the nine months ended September 30, 1998, net interest income (FTE) was
$43.0 million, an increase of $9.2 million, or 27%, over the first nine
months of 1997. The increase in net interest income was due to the continued
growth in earning assets and the improved mix of earning assets as
lower-yielding investment securities have been sold and reinvested in higher
yielding commercial loans and mortgage loans held for sale.
The net interest margin (FTE) for the nine months ended September 30, 1998,
rose 5 basis points to 3.19% from 3.14% for the comparable period in 1997,
primarily due to a favorable shift in the mix of earning assets toward
higher-yielding loan products and a reduction in the Company's cost of
funds.
Noninterest Expense
For the quarter ended September 30, 1998, total noninterest expense increased
$10.1 million, or 32%, to $41.3 million from $31.2 million a year earlier. On
a year-to-date basis, total noninterest expense was $111.6 million, up $28.3
million, or 34%, over the first nine months of 1997. The rise in noninterest
expense primarily reflects an increase in commissions expense accompanying
the higher level of retail mortgage loans closed during 1998 compared to the
first nine months of 1997. The opening of 12 additional retail bank and loan
production offices, including the acquisition of Exchange Mortgage, during
the past twelve months also contributed to the increase in noninterest
expense.
BALANCE SHEET ANALYSIS
ASSETS
At September 30, 1998, the Company had $2.1 billion in total assets, an
increase of $198.6 million, or 11%, from $1.9 billion at December 31, 1997.
Asset growth primarily resulted from increases in portfolio loans and
mortgage loans held for sale.
Securities
Investment securities available for sale declined $78.2 million, or 77%, to
$22.9 million, representing 1% of total assets at September 30, 1998. At
December 31, 1997, the investment securities portfolio totaled $101.1
million, or 5.4% of total assets. This decrease resulted from sales and
maturities of securities during the first nine months of 1998, primarily to
fund growth in mortgage loans held for sale. During the third quarter of
1998, the Company sold $916,000 of investment securities. Gross realized
losses on sales of available-for-sale securities were $77,000 for the quarter
ended September 30, 1998. For the first nine months of 1998, gross realized
gains and losses totaled $390,000 and $611,000, respectively.
The Company's securities portfolio serves as a source of liquidity and
earnings, carries relatively minimal principal risk and contributes to the
management of interest rate risk. The debt securities portfolio is comprised
primarily of U.S. Government agency securities, obligations collateralized by
U.S. Government agencies, mainly in the form of mortgage-backed securities
and collateralized mortgage obligations, and municipal obligations. With the
exception of municipal obligations, the maturity structure of the debt
securities portfolio is generally short-term in nature or indexed to variable
rates.
12
<PAGE>
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at September 30, 1998:
<TABLE>
<CAPTION>
Available-for-Sale Securities
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Government agency securities ... $ 6,642 $ -- $ 11 $ 6,631
Collateralized mortgage obligations . 1,745 31 9 1,767
Mortgage-backed securities .......... 6,511 1 43 6,469
Municipal and other securities ...... 3,010 182 -- 3,192
------- ------- ------- -------
Total Debt Securities ............. 17,908 214 63 18,059
Equity securities ...................... 5,274 -- 444 4,830
------- ------- ------- -------
Total Securities Available for Sale $23,182 $ 214 $ 507 $22,889
======= ======= ======= =======
</TABLE>
Certain securities having a carrying value of approximately $11.0 million and
$30.9 million at September 30, 1998 and December 31, 1997, respectively, were
pledged to secure certain securities sold under agreements to repurchase and
public deposits as required by law.
Mortgage Loans Held for Sale
Mortgage loans held for sale were $694.9 million at September 30, 1998, an
increase of $181.3 million, or 35%, from $513.5 million at December 31, 1997.
This growth was caused by the $371 million increase in residential mortgage
loan closings during the third quarter of 1998 over the fourth quarter of
1997. A portion of such closings are included in mortgage loans held for
sale at September 30, 1998.
Portfolio Loans
Total portfolio loans were $1.16 billion at September 30, 1998, an increase
of $60.7 million, or 5.5%, from $1.10 billion at December 31, 1997. This
increase primarily resulted from the net increase in the commercial loan
portfolio, which was partially offset by a decline in residential real estate
mortgage loans. The residential mortgage portfolio loan balance decreased
$39.7 million, or 6%, since year-end 1997 to $629.5 million at September 30,
1998. The installment portfolio loan balance, which is predominantly
comprised of home equity loans grew 8% since year-end 1997 to $112.5 million
at September 30, 1998.
The commercial portfolio loan balance increased $92.0 million during the
first nine months of 1998, for an annualized growth rate of 38%, reflecting
continued strong demand for real estate-secured lending in markets served by
the Company. During the third quarter of 1998, the Company closed $11.4
million in Small Business Administration (SBA) loans, a 32% increase from the
$8.7 million closed in the third quarter of 1997. For the nine months ended
September 30, 1998 and 1997, SBA loan closings were $26.1 million and $18.9
million, respectively. The Company sold $24.6 million and $8.5 million, of
the guaranteed portion of SBA loans in the first nine months of 1998 and
1997, respectively, resulting in corresponding gains of $1,855,000 and
$706,000. The Company sold $9.6 million and $2.5 million, of the guaranteed
portion of SBA loans in the third quarters of 1998 and 1997, respectively,
resulting in corresponding gains of $759,000 and $231,000.
13
<PAGE>
The following table provides further information regarding the Company's loan
portfolio:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- ---------------------
(Dollars in thousands) Amount Percent Amount Percent
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans:
Commercial and industrial ..... $ 38,668 3.3% $ 41,095 3.7%
Real estate construction ...... 66,495 5.8 48,346 4.4
Commercial real estate mortgage 309,323 26.7 233,078 21.3
---------- ----- ---------- -----
Total commercial loans ... 414,486 35.8 322,519 29.4
Residential real estate mortgages 629,460 54.5 669,203 61.1
Installment loans ................ 112,539 9.7 104,022 9.5
---------- ----- ---------- -----
Total portfolio loans ..... $1,156,485 100.0% $1,095,744 100.0%
========== ===== ========== =====
</TABLE>
Credit Quality
The Company attempts to minimize credit risk in the loan portfolio by
focusing primarily on real estate-secured lending (i.e., residential real
estate construction, residential real estate mortgage loans, commercial real
estate construction, commercial real estate mortgage loans, and home equity
loans). As of September 30, 1998, such loans comprised approximately 94.5% of
total portfolio loans. The Company's general policy is to originate
conventional residential real estate mortgages with loan-to-value ratios of
80% or less and SBA-secured loans or real estate-secured commercial loans
with loan-to-value ratios of 80% or less.
The substantial majority of the Company's residential mortgage loan
production is underwritten in compliance with the requirements for sale to or
conversion to mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal National Mortgage Association
(FNMA), or the Government National Mortgage Association (GNMA). The majority
of the Company's commercial loans is secured by real estate and is generally
made to small and medium-size businesses. These loans are made at rates based
on the prevailing prime interest rates of Republic Bank and Republic Savings
Bank, as well as fixed rates for terms generally ranging from three to five
years. Management's emphasis on real estate-secured lending and adherence to
conservative underwriting standards is reflected in the Company's
historically low net charge-offs.
Non-Performing Assets
Non-performing assets consist of non-accrual loans and other real estate
owned (OREO). OREO represents real estate properties acquired through
foreclosure or by deed in lieu of foreclosure and is classified as other
assets on the balance sheet until such time as the property is sold.
Commercial loans, residential real estate loans and installment loans are
generally placed on non-accrual status when principal or interest is 90 days
or more past due, unless the loans are well-secured and in the process of
collection. Loans may be placed on non-accrual status earlier when, in the
opinion of management, reasonable doubt exists as to the full, timely
collection of interest or principal.
14
<PAGE>
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1998 1997
- - ---------------------------------------------------------------------------------------
<S> <C> <C>
Non-Performing Assets:
Non-accrual loans:
Commercial ........................................... $ 1,675 $ 1,457
Residential real estate mortgages .................... 10,952 9,217
Installment .......................................... 427 307
------- -------
Total non-accrual loans ............................ 13,054 10,981
Restructured loans ..................................... -- --
------- -------
Total non-performing loans ........................... 13,054 10,981
Other real estate owned ................................ 4,590 1,671
------- -------
Total non-performing assets ........................ $17,644 $12,652
======= =======
Non-performing assets as a percentage of:
Portfolio loans and OREO ............................. 1.52% 1.15%
Portfolio loans, mortgage loans held for
sale and OREO ................................... .95% .79%
Total assets ......................................... .85% .68%
Loans past due 90 days or more and still accruing interest:
Commercial ............................................. $ 200 $ --
Residential real estate ................................ 500 228
Installment ............................................ 5 6
------- -------
Total loans past due 90 days or more ............... $ 705 $ 234
======= =======
</TABLE>
At September 30, 1998, approximately $8.5 million, or .73% of total portfolio
loans were 30-89 days delinquent, compared to $8.2 million, or .75%, at
December 31, 1997.
Non-performing assets rose $5.0 million since year-end 1997. The increases in
non-accrual residential real estate mortgage loans and other residential real
estate owned account for $4.4 million, or 89%, of the overall increase in
non-performing assets. Historically, credit losses on loans secured by
residential property have been minimal as demonstrated by the Company's low
level of net charge-offs. The Company's actual losses have, generally, been
limited to forgone interest and costs related to the foreclosure process,
which may take several months to complete.
Allowance for Loan Losses
Management is responsible for maintaining an adequate allowance for loan
losses. An appropriate level of the allowance is determined based on the
application of projected loss percentages to risk-rated loans, both
individually and by category. The projected loss percentages were developed
giving consideration to actual loan loss experience, adjusted for current and
prospective economic conditions. Management also considers
15
<PAGE>
other factors when assessing the adequacy of the allowance for loan losses,
including loan quality, changes in the size and character of the loan
portfolio and consultation with regulatory agencies. In addition, specific
reserves are established for individual loans when deemed necessary by
management.
Management believes the allowance for loan losses is adequate to meet
potential losses in the loan portfolio that can be reasonably anticipated
based on current conditions. It must be understood, however, that inherent
risks and uncertainties related to the operation of a financial institution
require management to depend on estimates, appraisals and evaluations of
loans to prepare the Company's financial statements. Changes in economic
conditions and the financial prospects of borrowers may result in abrupt
changes to the estimates, appraisals or evaluations used. In addition, if
actual circumstances and losses differ substantially from management's
assumptions and estimates, the allowance for loan losses may not be
sufficient to absorb all future losses, and net income could be significantly
and adversely affected.
The following table provides an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Dollars in thousands) 1998 1997
- - ----------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses:
Balance at January 1 ............................................. $ 7,334 $ 4,709
Loans charged off ............................................. (809) (191)
Recoveries of loans previously charged off .................... 130 128
-------- --------
Net charge-offs ............................................. (679) (63)
Provision charged to expense .................................. 3,475 2,621
-------- --------
Balance at September 30 .......................................... $ 10,130 $ 7,267
======== ========
Annualized net charge-offs as a percentage of average portfolio
loans (including loans held for sale) ....................... .05% .01%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end ................................... .88 .72
Allowance for loan losses as a percentage of non-performing
loans ....................................................... 77.60 79.86
</TABLE>
Off-Balance Sheet Instruments
Unused commitments to extend credit totaled $948.7 million for residential
real estate loans and $90.8 million for commercial real estate loans at
September 30, 1998.
At September 30, 1998, the Company had outstanding $419.6 million of
commitments to fund residential real estate loan applications with
agreed-upon rates, including $51.3 million of residential portfolio loans.
Committing to fund residential real estate loan applications at specified
rates and holding residential mortgage loans for sale to the secondary market
exposes the Company to interest rate risk during the period from application
to when the loans are sold to investors. To minimize this exposure to
interest rate risk, the Company enters into firm commitments to sell such
mortgage loans at specified future dates to various third parties.
At September 30, 1998, the Company had outstanding mandatory forward
commitments to sell $937.7 million of residential mortgage loans, of which
$642.5 million covered mortgage loans held for sale and $295.2 million
covered commitments to fund residential real estate loan applications with
agreed-upon rates. These outstanding forward commitments to sell mortgage
loans are expected to settle in the fourth quarter of 1998 without
16
<PAGE>
producing any material gains or losses. At September 30, 1998, the mortgage
loans held for sale balance included $52.4 million of loan products for which
the Company did not enter into mandatory forward commitments. The Company's
exposure to market risk was not significantly increased, however, since $46.3
million, or 88%, of these loans were loans that had been committed for bulk
sale to third parties prior to September 30, 1998 or were floating rate
residential loans.
LIABILITIES.
Total liabilities were $1.92 billion at September 30, 1998, an increase of
$183.0 million, or 11%, from $1.74 billion at December 31, 1997. This
increase was primarily due to increases in deposits, FHLB advances and other
liabilities.
Deposits
Total deposits grew $240.7 million, or 20%, to $1.42 billion at September 30,
1998 from $1.18 billion at December 31, 1997. This increase reflects positive
consumer response to special promotions for the Company's Diamond Savings
account product as well as growth in retail and municipal certificates of
deposit.
Short-Term Borrowings
Short-term borrowings with maturities of less than one year, along with the
related average balances and interest rates for the nine months ended
September 30, 1998 and the year ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
---------------------------------- ---------------------------------
Average Average
Ending Average Rate During Ending Average Rate During
(Dollars in thousands) Balance Balance Period Balance Balance Period
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased ........ $ 34,500 $ 35,148 5.85% $ 32,000 $ 38,091 5.75%
Securities sold under agreements
to repurchase ............... -- 7,199 5.78 20,770 62,163 5.67
Other short-term borrowings .... 2,046 3,167 5.18 5,504 7,017 6.64
-------- -------- ---- -------- -------- ----
Total short-term borrowings . $ 36,546 $ 45,514 5.77% $ 58,274 $107,271 5.76%
======== ======== ==== ======== ======== ====
</TABLE>
At September 30, 1998 and December 31, 1997, other short-term borrowings
consisted of treasury, tax and loan (TT&L) demand notes.
FHLB Advances
Republic Bank and Republic Savings Bank routinely borrow short- and long-term
advances from the Federal Home Loan Bank (FHLB) to provide liquidity for
mortgage loan originations and to minimize the interest rate risk associated
with certain fixed rate commercial and residential mortgage portfolio loans.
These advances are generally secured under a blanket security agreement by
first mortgage loans with an aggregate book value equal to at least 150% of
the advances.
FHLB advances outstanding at September 30, 1998 and December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- ----------------------
Average Average
Ending Rate At Ending Rate At
(Dollars in thousands) Balance Period-End Balance Period-End
- - --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term FHLB advances $ 45,000 5.67% $156,000 5.93%
Long-term FHLB advances . 253,568 5.66 210,632 5.75
-------- ---- -------- ----
Total .............. $298,568 5.66% $366,632 5.83%
======== ==== ======== ====
</TABLE>
The long-term FHLB advances have original maturities ranging from November
1998 to July 2008.
17
<PAGE>
Long-Term Debt
Obligations with original maturities of more than one year consisted of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1998 1997
- - -------------------------------------------------------------
<S> <C> <C>
7.17% Senior Debentures due 2001 $25,000 $25,000
6.75% Senior Debentures due 2001 9,000 9,000
6.95% Senior Debentures due 2003 13,500 13,500
------- -------
Total long-term debt .... $47,500 $47,500
======= =======
</TABLE>
CAPITAL
Shareholders' equity was $146.5 million at September 30, 1998, a $15.4
million, or 11.8%, increase from $131.1 million at December 31, 1997. This
increase primarily resulted from the retention of $11.9 million in earnings
after the payment of dividends, an increase of $3.8 million in common stock
outstanding and a $608,000 decrease in net unrealized losses on securities
available for sale.
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by regulators that, if undertaken, could have an effect on
the Company's financial statements. Capital adequacy guidelines require
minimum capital ratios of 8.00% for Total risk-based capital, 4.00% for Tier
1 risk-based capital and 3.00% for Tier 1 leverage. To be considered
well-capitalized under the regulatory framework for prompt corrective action,
minimum capital ratios of 10.00% for Total risk-based capital, 6.00% for Tier
1 risk-based capital and 5.00% for Tier 1 leverage must be maintained.
As of September 30, 1998, the Company met all capital adequacy requirements
to which it is subject and management does not anticipate any difficulty in
meeting these requirements on an ongoing basis. The Company's capital ratios
were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Total capital to risk-weighted assets (1) ...... 10.47% 10.35%
Tier 1 capital to risk-weighted assets (1) ..... 9.73 9.75
Tier 1 capital to average assets (1) ........... 6.76 6.58
<FN>
(1) As defined by the regulations.
</TABLE>
As of September 30, 1998, the Company's Total risk-based capital was $143.0
million and Tier 1 risk-based capital was $132.9 million, an excess of $6.7
million and $33.9 million, respectively, over the minimum guidelines
prescribed by regulatory agencies for a well-capitalized institution. In
addition, Republic Bank and Republic Savings Bank had regulatory capital
ratios in excess of the minimum levels established for well-capitalized
institutions.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, foreign
exchange rates and equity prices. The Company's market risk exposure is
composed entirely of interest rate risk. Interest rate risk arises in the
normal course of business to the extent that there is a difference between
the amount of the Company's interest-earning assets and interest-bearing
liabilities that are prepaid/withdrawn, reprice or mature in specified
periods.
18
<PAGE>
The Company's Asset and Liability Management Committee (ALCO) regularly
reviews the interest rate sensitivity position of the Company to ensure
compliance with policies established to limit interest rate risk exposure.
Two complimentary quantitative tools are utilized to measure and monitor
interest rate risk: static gap analysis and earnings simulation modeling.
Each of these interest rate risk measurements has limitations, but when
evaluated together, they provide a reasonably comprehensive view of the
exposure the Company has to interest rate risk.
Static Gap Analysis: This measurement provides a general indication of the
sensitivity of net interest income to interest rate changes. If the gap is
positive, meaning more assets than liabilities reprice or mature in a given
period, increases in market interest rates will generally benefit net
interest income because earning asset rates will reflect the changes more
quickly. If the gap is negative, increases in market interest rates will
generally have an adverse impact on net interest income. At September 30,
1998, the Company's cumulative one-year gap was a positive 10.94% of total
earning assets.
Earnings Simulation Modeling: This measurement is used to quantify the
effects of various hypothetical changes in interest rates on the Company's
projected net interest income over the ensuing twelve-month period. The model
permits the evaluation of the effects of various immediate parallel shifts of
the U.S. Treasury yield curve, upward and downward, on the amount of net
interest income expected in a stable interest rate environment (i.e., base
net interest income). As of September 30, 1998, the earnings simulation model
projects net interest income would increase by 9.7% if market interest rates
rose by 200 basis points and decrease by 12.3% assuming market interest rates
fell by 200 basis points. These results are within the Company's policy
limits.
Forward-Looking Statements
The section that follows entitled "Impact of Year 2000" contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve
certain risks, uncertainties, estimates and assumptions by management, which
may cause actual results to differ materially from those contemplated by such
statements.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company initiated the process of preparing its computer systems and
applications for the year 2000 in June 1997. Management of the Company has
developed and maintains a Year 2000 Compliance Plan that is reviewed
quarterly by the Company's Board of Directors. This Plan contains
requirements for assessing the impact of the Year 2000 on critical computer
systems and applications and for modifying, replacing and testing certain
hardware and software maintained by the Company so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The Company's computer systems are typically standard hardware from national
computer hardware vendors. The Company's computer software is typically
purchased software from national vendors, and is installed and operated
without major modifications.
The Company has completed both the assessment and remediation phases of the
Year 2000 Compliance Plan. As a part of the assessment phase, certain
ancillary applications have been identified which will not be Year 2000
compliant and must be replaced. These systems are off-the-shelf products
which will be purchased and implemented within the next six months. The
assessment of hardware compliance has found all major systems compliant, with
the exception of one mortgage banking hardware platform which has been
replaced, and with
19
<PAGE>
only minimal personal computer equipment not compliant. This personal
computer equipment will be replaced during the normal course of business. In
addition, due to the Company's business operating needs, certain banking and
mortgage banking computer systems are expected to be converted to new systems
over the next six months.
The Company is also evaluating its significant suppliers and loan customers,
as well as other financial institutions, to determine the extent to which the
Company is at risk if those third parties' fail to remediate their own Year
2000 issues. There is no guarantee that the systems of those third parties
will be Year 2000 compliant. Failure of those third parties to remediate
could have an adverse effect on the Company's operations, liquidity and
capital resources.
The Company is expected to complete the validation/testing phase by March 31,
1999 and is expected to complete the Year 2000 project no later than June 30,
1999. The total Year 2000 project cost for the Company is estimated at $1.5
million and is being funded through operating cash flows. To date, the
Company has incurred approximately $300,000 ($50,000 expensed and $250,000
capitalized for a new mortgage banking hardware platform). The remaining $1.2
million relates principally to validation/testing and repair to software and
is not expected to have a material effect on the Company's results of
operations, liquidity or capital resources.
The Company has developed a contingency plan that outlines how it will
continue to conduct its business in the event that one or more of its systems
is not made Year 2000 compliant, including dates when contingency plans must
be put into action. As a major component of its contingency plan, the Company
will use the separate data processing platforms of its subsidiaries to
perform common transaction processes.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. In the
event that the Company does not complete any additional phases, the Company
could be unable to process customer loan and deposit transactions, perform
interest computations or collect payments. In addition, disruptions in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation for
equipment shutdown or failure to properly date customer records. The amount
of potential liability and lost revenue cannot be reasonably estimated at
this time.
Accounting Developments
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Statement's new
"management approach" to segment reporting requires disclosure of financial
and descriptive information about an enterprise's operating segments in both
annual and interim financial reports issued to shareholders. An operating
segment is defined as a revenue-producing component of the enterprise for
which separate financial information is produced internally and is subject to
evaluation by the chief operating decision maker in deciding how to allocate
resources to segments. The Statement is effective beginning January 1, 1998,
however, it is not required to be applied to interim reporting in the initial
year of application. The Company is currently evaluating the impact of the
Statement's provisions relating to financial and descriptive information on
current disclosures in the Company's annual and interim financial reports.
The composition of the Company's segments is not expected to change as a
result of adopting the Statement.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair
20
<PAGE>
value of derivatives will either be offset against the change in fair value
of the hedged assets, liabilities, or firm commitments through earnings or
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999, with earlier application permitted. The impact of this Statement on the
Company's financial statements has not yet been determined.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and its
subsidiaries are parties to certain routine litigation. In the
opinion of management, the aggregate liabilities, if any,
arising from such legal proceedings would not have a material
adverse effect on the Company's consolidated financial
position, results of operations and liquidity.
Item 2. Changes in Securities
On July 17, 1998, the Board of Directors declared a 5 for 4
stock split, payable September 11, 1998 to shareholders of
record August 14, 1998.
On July 17, 1998, the Board of Directors declared a $0.08
cash dividend per share (post-split basis), payable October 9,
1998 to shareholders of record September 4, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the third
quarter of 1998.
22
<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 16, 1998 BY: /s/ Thomas F. Menacher
-----------------------
Thomas F. Menacher
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit Number Exhibit Page Number
- - -------------- ------- -----------
27 Financial Data Schedule 25
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information
extracted from the consolidated balance sheet as of
September 30, 1998, consolidated statement of income for
the nine months ended September 30, 1998, schedules and
other required disclosures and is qualified in its entirety
by reference to the Company's September 30, 1998 Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> $ 28,819
<INT-BEARING-DEPOSITS> 1,340
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,889
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,851,347
<ALLOWANCE> 10,130
<TOTAL-ASSETS> 2,071,450
<DEPOSITS> 1,418,037
<SHORT-TERM> 81,546
<LIABILITIES-OTHER> 376,787
<LONG-TERM> 47,500
0
0
<COMMON> 146,695
<OTHER-SE> (176)
<TOTAL-LIABILITIES-AND-EQUITY> 2,071,450
<INTEREST-LOAN> 103,526
<INTEREST-INVEST> 3,694
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 107,220
<INTEREST-DEPOSIT> 43,963
<INTEREST-EXPENSE> 64,300
<INTEREST-INCOME-NET> 42,920
<LOAN-LOSSES> 3,475
<SECURITIES-GAINS> (221)
<EXPENSE-OTHER> 111,635
<INCOME-PRETAX> 27,352
<INCOME-PRE-EXTRAORDINARY> 17,575
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,575
<EPS-PRIMARY> .75
<EPS-DILUTED> .74
<YIELD-ACTUAL> 3.19
<LOANS-NON> 13,054
<LOANS-PAST> 705
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,490
<ALLOWANCE-OPEN> 7,334
<CHARGE-OFFS> 809
<RECOVERIES> 130
<ALLOWANCE-CLOSE> 10,130
<ALLOWANCE-DOMESTIC> 6,822
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,308
</TABLE>
