<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000 COMMISSION FILE NUMBER 0-15734
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2604669
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1070 EAST MAIN STREET, OWOSSO, MICHIGAN 48867
(Address of principal executive offices)
(517) 725-7337
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock Outstanding as of April 30, 2000:
Common Stock, $5 Par Value ......................... 45,079,927 Shares
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 ............................................................. 3
Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999............................................... 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999............................................... 5
Notes to Consolidated Financial Statements......................................... 6 - 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition...................................... 9 - 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 20
Item 2. Changes in Securities.............................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders................................ 20
Item 6. Exhibits and Reports on Form 8-K................................................... 20
SIGNATURE............................................................................................ 21
EXHIBIT.............................................................................................. 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................... $ 71,687 $ 83,761
Mortgage loans held for sale ............................ 430,497 459,059
Securities available for sale (amortized cost of
$209,677 and $210,385, respectively) ................. 205,491 206,459
Loans ................................................... 3,535,549 3,373,425
Less allowance for loan losses ....................... (27,951) (27,128)
----------- -----------
Net loans ............................................... 3,507,598 3,346,297
----------- -----------
Premises and equipment, net of depreciation ............. 39,085 40,025
Mortgage servicing rights ............................... 60,450 67,290
Other assets ............................................ 93,103 98,724
----------- -----------
Total assets ....................................... $ 4,407,911 $ 4,301,615
=========== ===========
LIABILITIES
Noninterest-bearing deposits ............................ $ 208,565 $ 206,990
Interest-bearing deposits ............................... 2,374,822 2,406,060
----------- -----------
Total deposits ..................................... 2,583,387 2,613,050
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings .... 64,103 57,243
FHLB advances ........................................... 1,282,154 1,172,211
Accrued expenses and other liabilities .................. 129,015 115,356
Long-term debt .......................................... 47,500 47,500
----------- -----------
Total liabilities .................................. 4,106,159 4,005,360
Minority interest ....................................... 883 1,095
Preferred stock of subsidiary ........................... 28,719 28,719
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, 75,000,000 shares
authorized; 45,135,000 and 45,285,745 shares
issued and outstanding, respectively ................. 225,675 226,429
Capital surplus ......................................... 38,340 39,163
Retained earnings ....................................... 10,856 3,401
Accumulated other comprehensive loss .................... (2,721) (2,552)
----------- -----------
Total shareholders' equity ......................... 272,150 266,441
----------- -----------
Total liabilities and shareholders' equity ......... $ 4,407,911 $ 4,301,615
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands, except per share data) 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees ............................. $76,480 $60,631
Investment securities ............................. 3,758 10,386
------- -------
Total interest income ...................... 80,238 71,017
------- -------
INTEREST EXPENSE:
Deposits .......................................... 27,819 27,453
Short-term borrowings ............................. 1,095 1,267
FHLB advances ..................................... 17,754 12,436
Long-term debt .................................... 859 977
------- -------
Total interest expense ..................... 47,527 42,133
------- -------
Net interest income ............................... 32,711 28,884
Provision for loan losses ......................... 1,600 1,525
------- -------
Net interest income after provision for loan losses 31,111 27,359
------- -------
NONINTEREST INCOME:
Service charges ................................... 1,779 1,704
Mortgage loan production and servicing revenue .... 18,699 24,898
Gain on sale of securities ........................ 107 649
Other noninterest income .......................... 913 1,096
------- -------
Total noninterest income ................... 21,498 28,347
------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits .................... 19,822 21,603
Occupancy expense of premises ..................... 3,535 3,336
Equipment expense ................................. 2,253 1,783
Other noninterest expense ......................... 9,183 12,619
------- -------
Total noninterest expense .................. 34,793 39,341
------- -------
Income before income taxes ........................ 17,816 16,365
Provision for income taxes ........................ 5,843 5,529
------- -------
Income before preferred stock dividends ........... 11,973 10,836
Preferred stock dividends ......................... 681 681
------- -------
NET INCOME ........................................ $11,292 $10,155
======= =======
Basic earnings per share .......................... $ .25 $ .23
======= =======
Diluted earnings per share ........................ $ .25 $ .22
======= =======
Average common shares outstanding - diluted ....... 45,578 45,604
======= =======
Cash dividends declared per common share .......... $ .085 $ .082
======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31 (In thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 11,292 $ 10,155
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ......................................... 2,356 991
Amortization and impairment of mortgage servicing rights .............. 1,762 4,485
Net gains on sale of mortgage servicing rights ........................ (8,181) (9,897)
Net gains on sale of securities available for sale .................... (107) (649)
Net gains on sale of loans ............................................ (124) (451)
Proceeds from sale of mortgage loans held for sale .................... 768,375 1,426,421
Origination of mortgage loans held for sale ........................... (739,813) (1,238,015)
(Increase) decrease in other assets ................................... 7,339 (4,051)
Increase (decrease) in other liabilities .............................. 13,446 (3,113)
Other, net ............................................................ (2,694) 1,510
----------- -----------
Total adjustments ................................................... 42,359 177,231
----------- -----------
Net cash provided by operating activities ........................... 53,651 187,386
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of mortgage servicing rights ............................ 22,179 16,583
Additions to mortgage servicing rights ..................................... (10,064) (12,377)
Proceeds from sale of securities available for sale ........................ 1,328 41,613
Proceeds from maturities/principal payments of securities
available for sale......................................................... 3,138 208,681
Purchase of securities available for sale .................................. (3,759) (165,450)
Purchase of securities held to maturity .................................... -- (111,575)
Proceeds from sale of loans ................................................ 44,344 41,964
Net increase in loans made to customers .................................... (206,203) (81,060)
Proceeds from sale of fixed assets ......................................... 1,673 50
----------- -----------
Net cash used in investing activities ................................. (147,364) (61,571)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in total deposits .................................. (29,663) 8,478
Net increase in short-term borrowings ...................................... 6,860 33,764
Net decrease in short-term FHLB advances ................................... (148,000) (143,000)
Proceeds from long-term FHLB advances ...................................... 375,000 60,000
Payments on long-term FHLB advances ........................................ (117,057) (62,560)
Payments on long-term debt ................................................. -- (372)
Net proceeds from issuance of common shares ................................ 1,298 2,822
Repurchase of common shares ................................................ (2,927) (1,598)
Dividends paid ............................................................. (3,872) (2,367)
----------- -----------
Net cash provided by (used in) financing activities ............. 81,639 (104,833)
----------- -----------
Net (decrease) increase in cash and cash equivalents ....................... (12,074) 20,982
Cash and cash equivalents at beginning of period ........................... 83,761 47,712
----------- -----------
Cash and cash equivalents at end of period ................................. $ 71,687 $ 68,694
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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, 1999.
Certain amounts in prior periods have been reclassified to conform to the
current year's presentation. The primary reclassification from the prior year
is the deduction of mortgage loan commission expense against mortgage loan
production and servicing revenue.
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 (including its subsidiaries Republic Banc Mortgage Corporation and
Market Street Mortgage Corporation) and D&N Bank (including its wholly-owned
subsidiaries D&N Capital Corporation and Quincy Investment Services, Inc.).
Republic Banc Mortgage Corporation, including its division, Home Banc Mortgage
Corporation, is a wholly-owned mortgage company subsidiary and Market Street
Mortgage Corporation is an 80% majority-owned mortgage company subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 3 - MERGER INTEGRATION AND RESTRUCTURING CHARGE
In connection with the merger of D&N Financial Corporation on May 17, 1999, the
Company recorded $31.5 million ($22.0 million after tax) in merger integration
and restructuring charges in the second quarter of 1999. Actions incorporated in
the business combination and restructuring plan are targeted for implementation
over a 12 - 18 month period following the merger. The merger integration and
restructuring costs include appropriate accruals, reserves and charges for
severance and employee benefit accruals, professional fees, branch closings and
real estate transactions, systems and other charges.
Severance and employee benefit accruals consisted primarily of severance and
benefits costs for separated employees that resulted from the elimination of
duplicate functions such as finance, investor relations, human resources,
operations and marketing. The expected net reduction of approximately 125
full-time positions represents 14% of the combined workforce of Republic Bank
and D&N Bank. As of March 31, 2000, 85 positions had been eliminated under the
merger integration and restructuring plan. Professional fees represent
investment banking fees and accounting and legal fees associated with the merger
transaction. Branch closings and real estate transactions primarily represent
the costs associated with the closing of 7 offices and the divestiture of
identified banking facilities related to the consolidation of operations. The
Company also recorded write-downs of certain fixed assets in conjunction with
the merger. The impairment of these assets was included in the $8.7 million
charge for branch closings and real estate transactions. Systems charges include
the expenses expected from the integration of the two banking systems which is
expected to be completed in the fourth quarter of 2000. Other merger-related
costs include various transaction costs.
6
<PAGE>
The following table provides details of the pre-tax merger integration and
restructuring charge by type of cost recorded in the second quarter of 1999 and
the reserve balance remaining at March 31, 2000:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Initial Amount Reserve
(In thousands) Reserve Utilized Balance
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Type of Costs:
Severance and employee benefit accruals $ 10,446 $ 8,549 $ 1,897
Professional fees 5,133 5,069 64
Branch closings and real estate transactions 8,652 6,140 2,512
Systems 2,201 68 2,133
Other 5,089 5,089 --
--------- -------- -------
Total merger integration and restructuring charge $ 31,521 $ 24,915 $ 6,606
========= ======== =======
</TABLE>
- ------------------------------------------------------------------------------
NOTE 4 - CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information for the three months ended
March 31, include:
(In thousands) 2000 1999
- -------------------------------------------------------------
Cash paid during the period for:
Interest .................. $45,973 $40,388
Income taxes .............. $ 2,500 $ 1,058
Non-cash investing activities:
Loan charge-offs .......... $ 1,101 $ 958
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 2000 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net income ........................................... $ 11,292 $ 10,155
Denominator for basic earnings per share-
weighted-average shares ................................ 45,216,228 44,897,636
Effect of dilutive securities:
Employee stock options ............................... 115,195 656,131
Warrants ............................................. 246,712 50,542
----------- -----------
Dilutive potential common shares ................. 361,907 706,673
----------- -----------
Denominator for diluted earnings per share-
adjusted weighted-average shares for assumed conversions 45,578,135 45,604,309
=========== ===========
Basic earnings per share .................................. $ .25 $ .23
=========== ===========
Diluted earnings per share ................................ $ .25 $ .22
=========== ===========
</TABLE>
7
<PAGE>
NOTE 6 - COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(In thousands) 2000 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income ............................................. $ 11,292 $ 10,155
Unrealized holding losses on securities, net of tax $ (99) $ (1,409)
Reclassification adjustment for gains included
in net income, net of tax ......................... (70) (422)
-------- --------
Net unrealized losses on securities, net
of tax.................................... (169) (1,831)
-------- --------
Comprehensive income ................................... $ 11,123 $ 8,324
======== ========
- ------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7 - SEGMENT INFORMATION
The Company's operations are managed as two major business segments: (1)
commercial and retail banking and (2) mortgage banking. The commercial and
retail banking segment consists of commercial lending to small- and medium-sized
companies, primarily in the form of commercial real estate and Small Business
Administration (SBA) loans; mortgage portfolio lending; home equity lending; and
the deposit-gathering function. The mortgage banking segment is comprised of
mortgage loan production and mortgage loan servicing.
The following table presents the financial results of each business segment for
the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
COMMERCIAL AND
RETAIL BANKING MORTGAGE BANKING CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED, THREE MONTHS ENDED, THREE MONTHS ENDED,
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
(IN THOUSANDS) 2000 1999 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 71,688 $ 60,659 $ 8,550 $ 10,358 $ 80,238 $ 71,017
Interest expense 39,732 33,143 7,795 8,990 47,527 42,133
--------- --------- -------- --------- -------- --------
Net interest income(1) 31,956 27,516 755 1,368 32,711 28,884
Provision for loan losses 1,600 1,525 - - 1,600 1,525
Noninterest income 2,799 3,449 18,699 24,898 21,498 28,347
Noninterest expense 16,589 17,701 18,204 21,640 34,793 39,341
--------- --------- -------- --------- -------- --------
Income before taxes $ 16,566 $ 11,739 $ 1,250 $ 4,626 $ 17,816 $16,365
========= ========= ======== ========= ======== =======
Preferred stock dividend $ 681 $ 681 $ - $ - $ 681 $ 681
Income taxes $ 5,405 $ 3,888 $ 438 $ 1,641 $ 5,843 $ 5,529
Depreciation and amortization $ 1,354 $ 86 $ 2,764 $ 5,390 $ 4,118 $ 5,476
Capital expenditures $ 192 $ 2,176 $ 2,997 $ 950 $ 3,189 $ 3,126
Identifiable assets
(in millions) $ 3,855 $ 3,344 $ 553 $ 770 $ 4,408 $ 4,114
Efficiency ratio 47.88% 58.39% 93.57% 82.39% 64.31% 69.53%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net interest income for the mortgage banking segment is generated from the
interest earned on mortgage loans held for sale, less the interest
expense incurred to fund loan production and servicing acquisitions.
8
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
EARNINGS PERFORMANCE
The Company reported net income of $11.3 million for the quarter ended March 31,
2000, an increase of 11% over the $10.2 million reported in the first quarter of
1999. Fully diluted earnings per share for the first quarter of 2000 were $0.25,
up 11% from $0.22 a year ago. Return on average shareholders' equity was 16.75%
and return on average assets was 1.05% for the quarter, compared to 15.04% and
1.00%, respectively, in 1999.
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 $851 million in single-family residential mortgage loans in
the first quarter of 2000 compared to $1.3 billion closed in the same period a
year ago. The decrease in origination volumes in 2000 was primarily the result
of a continued increasing interest rate environment in the first quarter, which
resulted in a lower level of refinance activity. Refinances totaled $105 million
for the first quarter of 2000, representing 12% of total closings, compared to
$587 million, or 43% of total closings in the first quarter of 1999. The
Company's mortgage loan pipeline of applications in process was $1.1 billion at
March 31, 2000.
The following table summarizes the Company's income from mortgage banking
activities:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan production revenue (1)................................... $14,722 $ 24,283
Net mortgage loan servicing revenue(2)................................. 2,877 615
Gain on sale of bulk servicing......................................... 1,100 -
------- --------
Total mortgage banking revenue................................... $18,699 $ 24,898
======= ========
</TABLE>
(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, net of commissions paid to loan originators.
(2) Includes servicing fees, late fees and other ancillary charges, net of
amortization and charges for impairment of mortgage servicing rights, if
any.
For the three months ended March 31, 2000, mortgage banking revenue decreased
$6.2 million, or 25%, to $18.7 million from $24.9 million a year earlier,
primarily as the result of a decrease in mortgage loan production revenue.
Mortgage loan production revenue decreased 39% as a result of the decrease in
mortgage loan closing volume discussed above. The decrease in mortgage loan
production revenue was partially offset by an increase in net mortgage loan
servicing revenue and gain on sale of bulk servicing.
Net mortgage loan servicing revenue was $2.9 million for the quarter ended March
30, 2000 compared to $615,000 for the first quarter of 1999. The increase was
primarily the result of a decrease of $2.7 million in amortization expense of
mortgage servicing rights.
9
<PAGE>
The increase in net mortgage loan servicing revenue was offset slightly by a
decrease in the average loans serviced. Loans serviced for others averaged $3.0
billion for the first quarter of 2000, compared to $3.6 billion during the first
quarter of 1999.
Amortization of mortgage servicing rights totaled $1.8 million for the first
quarter of 2000 compared to $4.5 million for the same quarter last year. The
decrease in amortization expense was a result of the decline in residential
mortgage loan refinance activity in the first quarter of 2000 and a
corresponding decline in mortgage prepayments compared to the first quarter of
1999.
The Company evaluates its mortgage servicing rights for impairment on a
quarterly basis and as of March 31, 2000, had recorded $2.1 million in
impairment reserves, a decrease of $340,000 from December 31, 1999. The
impairment reserves were reduced as a result of the bulk sale of mortgage
servicing rights during the first quarter of 2000.
The Company may elect to sell mortgage servicing rights concurrently with the
sale of the underlying loans or retain the servicing rights. Any servicing
rights retained may subsequently be sold in bulk form. The level of bulk
servicing sales is dependent upon the Company's strategy to either build or
reduce the servicing portfolio and is further based upon current market
conditions. In the first quarter of 2000, bulk sales of mortgage servicing
rights for loans with principal balances of $361 million, resulted in a gain of
$1.1 million. The Company did not have any bulk sales of mortgage servicing
rights in the first quarter of 1999.
COMMERCIAL AND RETAIL BANKING
The remaining disclosures and analyses within Management's Discussion and
Analysis regarding the Company's results of operations and financial condition
relate principally to the commercial and retail banking line of business.
Net Interest Income
The following discussion should be read in conjunction with Table I on the
following page, which provides detailed analysis of the components impacting net
interest income for the three months ended March 31, 2000 and 1999.
Net interest income, on a fully taxable equivalent (FTE) basis, was $32.7
million for the first quarter of 2000, an increase of $3.8 million, or 13%, over
the first quarter of 1999. The increase was primarily the result of a $883
million, or 35%, increase in average portfolio loans during the first quarter of
2000 compared to 1999, which reflects a $270.1 million, or 42% increase in
average commercial loans, a $503.1 million, or 39% increase in residential
mortgage loans, and a $109.8 million, or 18% increase in installment loans.
Primarily funding the growth in portfolio loans was a reduction in the average
balance of investment securities and mortgage loans held for sale, as well as an
increase in FHLB advances. In order to reduce interest rate risk and improve
future net interest income, the Company sold $400 million of low-yielding fixed
rate investment securities in the second and third quarters of 1999. The
proceeds from the sale were redeployed into higher yielding commercial and
residential mortgage loans.
The net interest margin (FTE) was 3.21% for the quarter ended March 31, 2000, an
increase of 22 basis points from 2.99% a year ago. The increase in the margin
was due to an improved mix of earning assets from low-yielding fixed rate
investment securities toward higher-yielding loan products, which was partially
offset by an increase in the Company's cost of funds resulting from increases in
the Company's short-term and FHLB advances borrowing rates during the first
quarter of 2000.
10
<PAGE>
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
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............................ $ 2,743 $ 36 5.26% $ 26,504 $ 171 2.62%
Mortgage loans held for sale...................... 429,520 8,697 8.12 637,676 10,426 6.63
Investment securities............................. 210,773 3,742 7.10 653,899 10,233 6.26
Portfolio loans(1):
Commercial loans............................... 917,924 20,004 8.74 647,792 13,843 8.67
Real estate mortgage loans..................... 1,782,894 32,068 7.19 1,279,807 23,272 7.27
Installment loans.............................. 729,686 15,711 8.64 619,932 13,090 8.56
---------- ------- ------ ----------- -------- ------
Total loans, net of unearned income........ 3,430,504 67,783 7.92 2,547,531 50,205 7.94
---------- ------- ------ ----------- -------- ------
Total interest-earning assets.............. 4,073,540 80,258 7.89 3,865,610 71,035 7.40
Allowance for loan losses......................... (27,672) (21,823)
Cash and due from banks........................... 60,586 30,801
Other assets...................................... 190,928 184,777
---------- -----------
Total assets................................. $4,297,382 $ 4,059,365
========== ===========
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand deposits.................. $ 109,482 442 1.62 $ 103,616 448 1.75
Savings deposits.................................. 711,070 5,324 3.00 786,840 5,744 2.96
Time deposits..................................... 1,582,490 22,053 5.59 1,558,702 21,261 5.53
---------- ------- ----- ----------- -------- ------
Total interest-bearing deposits................ 2,403,042 27,819 4.64 2,449,158 27,453 4.55
Short-term borrowings............................. 74,971 1,095 5.86 98,641 1,267 4.90
FHLB advances.................................... 1,213,665 17,754 5.87 884,987 12,436 5.72
Long-term debt.................................... 47,500 859 7.23 53,797 977 7.46
---------- ------- ----- ----------- ---------- ------
Total interest-bearing liabilities........... 3,739,178 47,527 5.10 3,486,583 42,133 4.90
------- ----- -------- ------
Noninterest-bearing deposits...................... 184,607 188,728
Other liabilities................................. 75,168 85,171
---------- -----------
Total liabilities............................ 3,998,953 3,760,482
Preferred stock of subsidiary..................... 28,719 28,719
Shareholders' equity.............................. 269,710 270,164
---------- -----------
Total liabilities and shareholders' equity... $4,297,382 $ 4,059,365
========== ===========
Net interest income/Rate spread (FTE)............. $ 32,731 2.79% $ 28,902 2.50%
======== ========
FTE adjustment.................................... $ 20 $ 18
======= ========
Impact of net noninterest bearing
sources of funds................................ .42 .49
----- ------
Net interest margin (FTE)......................... 3.21% 2.99%
===== ======
</TABLE>
<TABLE>
<CAPTION>
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term investments ............. $ (229) $ 94 $ (135)
Mortgage loans held for sale ....... (3,837) 2,108 (1,729)
Investment securities .............. (7,710) 1,219 (6,491)
Portfolio loans(1):
Commercial loans ................ 6,044 117 6,161
Real estate mortgage loans ...... 9,055 (259) 8,796
Installment loans ............... 2,490 131 2,621
-------- -------- --------
Total loans, net of
unearned income ............ 17,588 (10) 17,578
-------- -------- --------
Total interest income ........ 5,812 3,411 9,223
Interest-bearing demand deposits ... 27 (33) (6)
Savings deposits ................... (507) 87 (420)
Time deposits ...................... 463 329 792
-------- -------- --------
Total interest-bearing deposits (17) 383 366
Short-term borrowings .............. (355) 183 (172)
FHLB advances ...................... 4,967 351 5,318
Long-term debt ..................... (93) (25) (118)
-------- -------- --------
Total interest expense ........ 4,501 893 5,394
-------- -------- --------
Net interest income ........... $ 1,311 $ 2,518 $ 3,829
======== ======== ========
</TABLE>
(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.
11
<PAGE>
Noninterest Expense
For the quarter ended March 31, 2000, total noninterest expense decreased $4.5
million, or 12%, to $34.8 million from $39.3 million a year earlier. The
decrease in noninterest expense primarily reflects decreases in salaries and
employee benefits and other non-interest expense. These decreases reflect the
reduced levels of mortgage loan production and the decrease of 11 mortgage loan
production offices at March 31, 2000 compared to a year ago.
BALANCE SHEET ANALYSIS
ASSETS
At March 31, 2000, the Company had $4.4 billion in total assets compared to $4.3
billion at December 31, 1999. The increase is primarily the result of increases
in the Company's portfolio of commercial and residential real estate mortgage
loans.
Securities
Investment securities available for sale declined $968,000, to $205.5 million,
representing 4.7% of total assets at March 31, 2000. At December 31, 1999, the
investment securities portfolio totaled $206.5 million, or 4.8% of total assets.
During the first quarter of 2000, the Company sold $1.2 million of investment
securities and realized gross gains on sales of available-for-sale securities of
$107,000.
The Company's investment securities portfolio, while serving as a source of
earnings and liquidity risk, carries relatively minimal principal risk and
contributes to the management of interest rate risk. The portfolio is comprised
primarily of U.S. Government agency obligations, obligations collateralized by
U.S. Government sponsored agencies, mainly in the form of mortgage-backed
securities and collateralized mortgage obligations. The maturity structure of
the securities portfolio is generally short-term in nature or indexed to
variable rates. The Company's equity securities portfolio consists primarily of
Federal Home Loan Bank stock.
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at March 31, 2000:
<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. Treasury and Government agency securities... $44,652 $ -- $ 911 $ 43,741
Collateralized mortgage obligations .............. 66,293 -- 2,587 63,706
Interest-only certificates ....................... 75 -- -- 75
Mortgage-backed securities ....................... 16,341 -- 709 15,632
Municipal and other securities ................... 3,195 31 10 3,216
-------- -------- -------- --------
Total debt securities .......................... 130,556 31 4,217 126,370
Equity securities and investment in FHLB ......... 79,121 -- -- 79,121
-------- -------- -------- --------
Total securities available for sale ............ $209,677 $ 31 $ 4,217 $205,491
======== ======== ======== ========
</TABLE>
Certain securities with a carrying value of approximately $11.3 million and
$25.3 million at March 31, 2000 and December 31, 1999, respectively, were
pledged to secure certain securities sold under agreements to repurchase and
public deposits as required by law.
12
<PAGE>
Mortgage Loans Held for Sale
Mortgage loans held for sale were $430.5 million at March 31, 2000, a decrease
of $28.6 million, or 6%, from $459.1 million at December 31, 1999. This decrease
was caused by the decrease in residential mortgage loan closings during the
first quarter of 2000 over the fourth quarter of 1999 (loans closed generally
remain in loans held for sale for 30 to 60 days after closing) and due to a
higher percentage of residential mortgage loan closings being held in the
residential real estate mortgage loan portfolio.
Portfolio Loans
Total portfolio loans were $3.54 billion at March 31, 2000, an increase of
$162.1 million, or 5%, compared to $3.37 billion at December 31, 1999. This
increase resulted from increases in the commercial, residential real estate
mortgage and installment loan portfolios. The residential mortgage portfolio
loan balance increased $62.7 million, or 4%, since year-end 1999 to $1.84
billion at March 31, 2000. The increase in residential mortgage loans resulted
from the Company holding a higher percentage of variable rate residential
loan closings in its portfolio.
The commercial portfolio loan balance increased $66.9 million during the first
quarter of 2000, for an annualized growth rate of 30%, reflecting continued
strong demand for real estate-secured lending in markets served by the Company.
During the first quarter of 2000, the Company closed $7.8 million in Small
Business Administration (SBA) loans, a 31% increase from the first quarter of
1999. The Company sold $756,000 and $3.1 million, of the guaranteed portion of
SBA loans in the first quarters of 2000 and 1999, respectively, resulting in
corresponding gains of $49,000 and $237,000.
The following table provides further information regarding the Company's loan
portfolio:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------------------- ----------------------------
(Dollars in thousands) Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans:
Commercial and industrial......................... $ 84,851 2.4% $ 88,370 2.6%
Real estate construction.......................... 218,517 6.2 149,480 4.4
Commercial real estate mortgage .................. 651,992 18.4 650,642 19.3
------------- ------ ------------- ------
Total commercial loans....................... 955,360 27.0 888,492 26.3
Residential real estate mortgages.................... 1,836,453 51.9 1,773,795 52.6
Installment loans.................................... 743,736 21.1 711,138 21.1
------------- ------- ------------- ------
Total portfolio loans........................ $ 3,535,549 100.0% $ 3,373,425 100.0%
============= ======= ============= ======
</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 loans, residential real estate mortgage loans, commercial real
estate construction loans, commercial real estate mortgage loans, and home
equity loans). As of March 31, 2000, such loans comprised approximately 83% 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 75% 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 Freddie Mac, 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 D&N
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.
13
<PAGE>
Non-Performing Assets
Non-performing assets consist of non-accrual loans and other real estate owned
(OREO). OREO represents real estate properties acquired by the Company through
foreclosure or by deed in lieu of foreclosure. Commercial loans, residential
real estate mortgage loans and installment loans are generally placed on
non-accrual status when principal or interest is 90 days or more past due,
unless the loans are well-secured and in the process of collection. In all
cases, loans may be placed on non-accrual status earlier when, in the opinion of
management, reasonable doubt exists as to the full, timely collection of
interest or principal.
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans:
Commercial ........................................... $ 3,829 $ 4,651
Residential real estate mortgages .................... 11,466 10,449
Installment .......................................... 2,162 2,419
------- -------
Total non-performing loans ......................... 17,457 17,519
Other real estate owned ............................ 4,071 4,743
------- -------
Total non-performing assets ........................ $21,528 $22,262
======= =======
Non-performing assets as a percentage of:
Portfolio loans and OREO ............................. .61% .66%
Portfolio loans, mortgage loans held for
sale and OREO ................................... .54% .58%
Total assets ......................................... .49% .52%
Loans past due 90 days or more and still accruing interest:
Commercial ............................................. $ 17 $ 100
Residential real estate ................................ -- --
Installment ............................................ -- --
------- -------
Total loans past due 90 days or more ............... $ 17 $ 100
======= =======
</TABLE>
At March 31, 2000, approximately $29.8 million, or .75% of total portfolio loans
were 30-89 days delinquent, compared to $34.5 million, or 1.02%, at December 31,
1999.
Provision and Allowance for Loan Losses
The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the loan portfolio that have been
incurred as of the balance sheet date. The allowance for loan losses is
maintained at an adequate level through additions to the provision for loan
losses. An appropriate level of the general allowance is determined based on the
application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. Management also considers other factors when
determining the unallocated allowance, including loan quality, changes in the
size and character of the loan portfolio, consultation with regulatory
authorities, amount of nonperforming loans, delinquency trends and economic
conditions and industry trends.
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by
SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the contractual
terms of the original loan agreement. Consistent with this definition, all
non-accrual and
14
<PAGE>
restructured loans (with the exception of residential mortgage and consumer
installment loans) are impaired. An impaired loan for which it is deemed
necessary to record a specific allowance is, typically, written down to the fair
value of the underlying collateral at the time it is placed on non-accrual
status via a direct charge-off against the allowance for loan losses.
Consequently, those impaired loans not requiring a specific allowance represent
loans for which the fair value of the underlying collateral equaled or exceeded
the recorded investment in the loan. All impaired loans were evaluated using the
fair value of the underlying collateral as the measurement method.
It must be understood, however, that inherent risks and uncertainties related to
the operation of a financial institution require management to depend on
estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial prospects
of borrowers may result in abrupt changes to the estimates, appraisals or
evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Gross loan charge-offs increased $143,000 to $1,101,000 in the first quarter of
2000 compared to 1999. The ratio of net loan charge-offs to average loans,
including loans held for sale, was .08% for the first quarter of 2000, compared
to .11% for the first quarter of 1999.
The following table provides an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses:
Balance at January 1 ............................................. $ 27,128 $ 21,446
Loans charged off ............................................. (1,101) (958)
Recoveries of loans previously charged off .................... 324 114
-------- --------
Net charge-offs ............................................. (777) (844)
Provision charged to expense .................................. 1,600 1,525
-------- --------
Balance at March 31 .............................................. $ 27,951 $ 22,127
======== ========
Annualized net charge-offs as a percentage of average portfolio
loans (including loans held for sale) ....................... .08% .11%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end ................................... .79 .87
Allowance for loan losses as a percentage of non-performing
loans ....................................................... 160.11 113.36
</TABLE>
The Company's policy for charging off loans varies with respect to the category
of and specific circumstances surrounding each loan under consideration.
Installment loans are generally charged off when deemed to be uncollectible or
180 days past due, whichever comes first. Charge-offs of commercial loans and
residential real estate mortgage loans are made on the basis of management's
ongoing evaluation of non-performing loans.
15
<PAGE>
Off-Balance Sheet Instruments
At March 31, 2000, the Company had outstanding $411.0 million of commitments to
fund residential real estate loan applications with agreed-upon rates.
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 March 31, 2000, the Company had outstanding mandatory forward commitments to
sell $731.1 million of residential mortgage loans, of which $370.4 million
covered mortgage loans held for sale and $360.7 million covered commitments to
fund residential real estate loan applications with agreed-upon rates. These
outstanding forward commitments to sell mortgage loans are expected to settle in
the second quarter of 2000 without producing any material gains or losses. At
March 31, 2000, the mortgage loans held for sale balance included $60.1 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 $40.0 million, or 67%, of these loans were loans that
had been committed for bulk sale to third parties prior to March 31, 2000 or
were floating rate residential loans.
LIABILITIES.
Total liabilities were $4.1 billion at March 31, 2000, a increase of $100.8
million, or 3%, from $4.0 billion at December 31, 1999. This increase was
primarily due to an increase in FHLB advances corresponding to the $133.6
million increase in total loans.
Deposits
Total deposits remained relatively flat during the first quarter of 2000,
decreasing $29.7 million, or 1%, to $2.58 billion at March 31, 2000 compared to
December 31, 1999.
Short-Term Borrowings
Short-term borrowings with maturities of less than one year, along with the
related average balances and interest rates for the three months ended March 31,
2000 and the year ended December 31, 1999, were as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
----------------------------------------- -------------------------------------
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..................... $ 61,500 $ 73,422 5.86% $ 54,700 $ 61,320 5.41%
Other short-term borrowings................. 2,603 1,549 5.16 2,543 1,838 5.06
---------- ---------- ---- -------- ---------- ----
Total short-term borrowings.............. $ 64,103 $ 74,971 5.86% $ 57,243 $ 63,158 5.40%
========== ========== ==== ======== ========== ====
</TABLE>
At March 31, 2000 and December 31, 1999, other short-term borrowings consisted
of treasury, tax and loan (TT&L) demand notes.
FHLB Advances
Republic Bank and D&N Bank routinely borrows 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.
16
<PAGE>
FHLB advances outstanding at March 31, 2000 and December 31, 1999, were as
follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------ ---------------------------
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............................ $ 609,000 6.36% $ 757,000 5.52%
Long-term FHLB advances.............................. 673,154 5.78 415,211 5.69
----------- ---- ---------- ----
Total........................................... $ 1,282,154 6.06% $1,172,211 5.58%
=========== ==== ========== ====
</TABLE>
The long-term FHLB advances have original maturities ranging from June 2000 to
March 2010.
Long-Term Debt
Obligations with original maturities of more than one year consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
<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 $272.2 million at March 31, 2000, a $5.7 million, or
2%, increase from $266.4 million at December 31, 1999. This increase primarily
resulted from the retention of $7.5 million in earnings after the payment of
dividends and the repurchase of 347,000 shares of common stock during the first
quarter of 2000.
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by regulators that, if undertaken, could have an effect on the
Company's financial statements. Capital adequacy guidelines require minimum
capital ratios of 8.00% for Total risk-based capital, 4.00% for Tier 1
risk-based capital and 3.00% for Tier 1 leverage. To be considered
well-capitalized under the regulatory framework for prompt corrective action,
minimum capital ratios of 10.00% for Total risk-based capital, 6.00% for Tier 1
risk-based capital and 5.00% for Tier 1 leverage must be maintained.
As of March 31, 2000, 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>
March 31, December 31,
2000 1999
------------- -----------
<S> <C> <C> <C>
Total capital to risk-weighted assets (1).............................. 10.32% 10.60%
Tier 1 capital to risk-weighted assets (1)............................. 9.41 9.67
Tier 1 capital to average assets (1)................................... 6.70 6.59
</TABLE>
(1) As defined by the regulations.
As of March 31, 2000, the Company's total risk-based capital was $314.6 million
and Tier 1 risk-based capital was $286.6 million, an excess of $9.9 million and
$103.8 million, respectively, over the minimum guidelines prescribed by
regulatory agencies for a well-capitalized institution. In addition, Republic
Bank and D&N Bank have regulatory capital ratios in excess of the minimum levels
established for well-capitalized institutions.
17
<PAGE>
Forward-Looking Statements
The section that follows entitled "Market Risk Management" 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.
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.
The primary objective of asset and liability management is to maintain stability
in the level of net interest income by producing the optimal yield and maturity
mix of assets and liabilities within the interest rate risk limits set by the
Company's Asset and Liability Management Committee (ALCO) and consistent with
projected liquidity needs and capital adequacy requirements.
The Company's ALCO, which meets weekly, is responsible for reviewing the
interest rate sensitivity position of the Company and establishing policies to
monitor and limit exposure to interest rate risk. Senior management at each of
the Company's subsidiaries is responsible for ensuring that the subsidiary asset
and liability management procedures adhere to corporate policies and risk limits
established by its respective board of directors.
The Company utilizes two complementary quantitative tools to measure and monitor
interest rate risk: static gap analysis and earnings simulation modeling. Each
of these interest rate risk measurements has limitations, but when evaluated
together, they provide a reasonably comprehensive view of the exposure the
Company has to interest rate risk.
Static Gap Analysis: Static gap analysis is utilized at the end of each month to
measure the amount of interest rate risk embedded in the balance sheet as of a
point in time. It does this by comparing the differences in the repricing
characteristics of interest-earning assets and interest-bearing liabilities. A
gap is defined as the difference between the principal amount of
interest-earning assets and interest-bearing liabilities that reprice within a
specified time period. This gap provides a general indication of the sensitivity
of the Company's net interest income to interest rate changes. Consequently, if
more assets than liabilities reprice or mature in a given period, resulting in
an asset sensitive position or positive gap, increases in market interest rates
will generally benefit net interest income because earning asset rates will
reflect the changes more quickly. Alternatively, where interest-bearing
liabilities reprice more quickly than interest-earning assets, resulting in a
liability sensitive position or negative gap, increases in market interest rates
will generally have an adverse impact on net interest income. At March 31, 2000,
the Company's cumulative one-year gap was a negative 10.56% of total earning
assets.
The Company's current policy is to maintain a mix of asset and liabilities with
repricing and maturity characteristics that permit a moderate amount of
short-term interest rate risk based on current interest rate projections,
customer credit demands and deposit preferences. The Company generally operates
in a range of plus or minus 15% of total earning assets for the cumulative
one-year gap. Management believes that this range reduces the vulnerability of
net interest income to large shifts in market interest rates while allowing the
Company to take advantage of fluctuations in current short-term rates.
18
<PAGE>
Earnings Simulation Modeling: On a monthly basis, the earnings simulation model
is used to quantify the effects of various hypothetical changes in interest
rates on the Company's projected net interest income over the ensuing
twelve-month period. The model permits management to evaluate the effects of
various parallel shifts of the U.S. Treasury yield curve, upward and downward,
on net interest income expected in a stable interest rate environment (i.e.,
base net interest income).
As of March 31, 2000, the earnings simulation model projects net interest income
would decrease by 9.8% of base net interest income, assuming an immediate
parallel shift upward in market interest rates by 200 basis points. If market
interest rates fall by 200 basis points, the model projects net interest income
would increase by 8.9%. These projected levels are well within the Company's
policy limits. These results portray the Company's interest rate risk position
as liability-sensitive for the one-year horizon. The earnings simulation model
assumes that current balance sheet totals remain constant and all maturities and
prepayments of interest-earning assets and interest-bearing liabilities are
reinvested at current market rates.
Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which was amended
in June 1999 by Statement No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
and is required to be adopted by the Company in years beginning after June 15,
2000. The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement 133 will be on
the earnings and financial position of the Company.
19
<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 February 17, 2000, the Board of Directors declared a $0.085
cash dividend per share, payable April 3, 2000 to shareholders of
record March 10, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
Republic Bancorp Inc. held its 2000 Annual Meeting of Shareholders
on April 26, 2000. The following directors were elected at the
annual meeting to serve until the next annual meeting:
<TABLE>
<CAPTION>
Director For Against Abstentions Broker Non-Votes
-------- --- ------- ----------- ----------------
<S> <C> <C> <C> <C>
Jerry D. Campbell 38,750,019 0 1,646,976 0
Dana M. Cluckey 38,596,045 0 1,646,976 0
George J. Butvilas 38,644,968 0 1,646,976 0
Mary P. Cauley 38,579,052 0 1,646,976 0
Steven Coleman 38,579,486 0 1,646,976 0
Richard J. Cramer, Sr. 38,579,663 0 1,646,976 0
Dr. George A. Eastman 38,587,875 0 1,646,976 0
Howard J. Hulsman 38,588,486 0 1,646,976 0
Gary Hurand 38,579,663 0 1,646,976 0
Dennis J. Ibold 38,578,875 0 1,646,976 0
Stanley A. Jacobson 38,588,875 0 1,646,976 0
John J. Lennon 38,579,486 0 1,646,976 0
Sam H. McGoun 38,579,486 0 1,646,976 0
Kelly E. Miller 38,578,875 0 1,646,976 0
Joe D. Pentecost 38,589,486 0 1,646,976 0
Randolph P. Piper 38,579,486 0 1,646,976 0
Dr. Isaac J. Powell 38,579,052 0 1,646,976 0
B. Thomas M. Smith, Jr. 38,579,663 0 1,646,976 0
Dr. Jeoffrey K. Stross 38,578,875 0 1,646,976 0
Peter Van Pelt 38,579,486 0 1,646,976 0
Steven E. Zack 38,581,530 0 1,646,976 0
</TABLE>
A proposal to approve an amendment to the Republic Bancorp Inc.
1998 Stock Option Plan to increase the maximum number of shares
that could be issued under the plan, including shares issued under
the plan to date, to 2,375,000 was submitted to shareholders for
approval. The amendment was approved at the annual meeting by the
following votes: 33,340,048 for; 6,572,879 against; 327,308
abstentions; and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first
quarter of 2000.
20
<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: May 15, 2000 BY: /s/ Thomas F. Menacher
-----------------------
Thomas F. Menacher
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000, CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000, SCHEDULES AND OTHER REQUIRED
DISCLOSURES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 69,716
<INT-BEARING-DEPOSITS> 1,971
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 205,491
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,535,549
<ALLOWANCE> 27,951
<TOTAL-ASSETS> 4,407,911
<DEPOSITS> 2,583,387
<SHORT-TERM> 64,103
<LIABILITIES-OTHER> 1,411,169
<LONG-TERM> 47,500
0
0
<COMMON> 225,675
<OTHER-SE> (2,721)
<TOTAL-LIABILITIES-AND-EQUITY> 4,407,911
<INTEREST-LOAN> 76,480
<INTEREST-INVEST> 3,758
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 80,238
<INTEREST-DEPOSIT> 27,819
<INTEREST-EXPENSE> 47,527
<INTEREST-INCOME-NET> 32,711
<LOAN-LOSSES> 1,600
<SECURITIES-GAINS> 107
<EXPENSE-OTHER> 34,793
<INCOME-PRETAX> 17,816
<INCOME-PRE-EXTRAORDINARY> 17,816
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,292
<EPS-BASIC> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 3.21
<LOANS-NON> 17,457
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,486
<ALLOWANCE-OPEN> 27,128
<CHARGE-OFFS> 1,101
<RECOVERIES> 324
<ALLOWANCE-CLOSE> 27,951
<ALLOWANCE-DOMESTIC> 27,951
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,478
</TABLE>
