Back to GetFilings.com
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 June 30, 2002 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)
(989) 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 July 31, 2002:
Common Stock, $5 Par Value ............................ 52,952,000 Shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 ..................................... 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2002 and 2001 ....................... 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001 ....................... 5
Notes to Consolidated Financial Statements ................ 6 - 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ............. 9 - 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 19
Item 2. Changes in Securities ..................................... 19
Item 6. Exhibits and Reports on Form 8-K .......................... 19
SIGNATURE ............................................................ 20
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
(Dollars in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ....................................... $ 73,303 $ 76,734
Mortgage loans held for sale .................................... 197,448 748,463
Securities available for sale (amortized cost of
$464,637 and $369,492, respectively) ......................... 466,135 364,648
Loans ........................................................... 3,551,626 3,458,381
Less allowance for loan losses ............................... (29,870) (29,157)
----------- -----------
Net loans ....................................................... 3,521,756 3,429,224
----------- -----------
Premises and equipment .......................................... 29,006 30,858
Mortgage servicing rights ....................................... 2,944 2,482
Other assets .................................................... 66,558 88,196
----------- -----------
Total assets .................................................... $ 4,357,150 $ 4,740,605
=========== ===========
LIABILITIES
Noninterest-bearing deposits .................................... $ 239,680 $ 245,395
Interest-bearing deposits:
NOW accounts ............................................... 159,354 153,839
Savings and money market accounts .......................... 865,279 819,674
Certificates of deposit .................................... 1,410,075 1,534,560
----------- -----------
Total interest-bearing deposits ............................ 2,434,708 2,508,073
----------- -----------
Total deposits ............................................. 2,674,388 2,753,468
Federal funds purchased and other short-term borrowings ......... 183,500 176,500
FHLB advances ................................................... 1,017,670 1,300,718
Accrued expenses and other liabilities .......................... 61,926 112,783
Long-term debt .................................................. 13,500 13,500
----------- -----------
Total liabilities .......................................... 3,950,984 4,356,969
Trust preferred securities and preferred stock of subsidiary .... 78,719 78,719
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; 53,218,000 and 53,166,000 issued
and outstanding, respectively ................................ 266,092 265,831
Capital surplus ................................................. 37,204 38,693
Retained earnings ............................................... 23,177 3,542
Accumulated other comprehensive income (loss) ................... 974 (3,149)
----------- -----------
Total shareholders' equity ...................................... 327,447 304,917
----------- -----------
Total liabilities and shareholders' equity ................. $ 4,357,150 $ 4,740,605
=========== ===========
See notes to consolidated financial statements.
3
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans, including fees ............................................ $ 64,288 $ 84,843 $ 133,315 $ 169,766
Investment securities ............................................ 5,563 4,156 10,071 7,698
--------- --------- --------- ---------
Total interest income ..................................... 69,851 88,999 143,386 177,464
--------- --------- --------- ---------
Interest Expense:
Deposits ......................................................... 19,064 30,796 39,704 63,810
Short-term borrowings ............................................ 857 935 1,640 1,459
FHLB advances .................................................... 13,653 19,346 27,861 39,593
Long-term debt ................................................... 241 241 483 968
--------- --------- --------- ---------
Total interest expense .................................... 33,815 51,318 69,688 105,830
--------- --------- --------- ---------
Net interest income .............................................. 36,036 37,681 73,698 71,634
Provision for loan losses ........................................ 2,400 2,300 4,800 4,300
--------- --------- --------- ---------
Net interest income after provision for loan losses .............. 33,636 35,381 68,898 67,334
--------- --------- --------- ---------
Noninterest Income:
Service charges .................................................. 2,017 1,892 4,006 3,543
Mortgage production revenue ...................................... 8,140 17,857 15,386 34,507
Net mortgage servicing revenue (expense) ......................... 130 (235) 276 (434)
Gain on sale of securities ....................................... 417 163 818 530
Other noninterest income ......................................... 1,293 512 2,088 1,364
Gain on sale of subsidiary ....................................... - 12,000 - 12,000
--------- --------- --------- ---------
Total noninterest income .................................. 11,997 32,189 22,574 51,510
--------- --------- --------- ---------
Noninterest Expense:
Salaries and employee benefits ................................... 12,950 20,285 26,877 36,954
Occupancy expense of premises .................................... 2,485 3,226 4,972 6,626
Equipment expense ................................................ 1,665 2,378 3,345 4,753
Other noninterest expense ........................................ 5,757 8,729 11,460 16,690
Restructuring costs to exit mortgage servicing ................... - - - 19,000
--------- --------- --------- ---------
Total noninterest expense ................................. 22,857 34,618 46,654 84,023
--------- --------- --------- ---------
Income before income taxes ....................................... 22,776 32,952 44,818 34,821
Provision for income taxes ....................................... 6,487 10,954 12,655 11,343
--------- --------- --------- ---------
Income before preferred stock dividends .......................... 16,289 21,998 32,163 23,478
Preferred stock dividends ........................................ 1,755 680 3,511 1,361
--------- --------- --------- ---------
Net income ....................................................... $ 14,534 $ 21,318 $ 28,652 $ 22,117
========= ========= ========= =========
Basic earnings per share ......................................... $ .27 $ .39 $ .54 $ .40
========= ========= ========= =========
Diluted earnings per share ....................................... $ .27 $ .39 $ .53 $ .40
========= ========= ========= =========
Average common shares outstanding - diluted ...................... 54,147 55,202 53,970 55,166
========= ========= ========= =========
Cash dividends declared per common share ......................... $ .085 $ .077 $ .170 $ .155
========= ========= ========= =========
See notes to consolidated financial statements.
4
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30 (In thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income ..................................................................... $ 28,652 $ 22,117
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................................. 4,063 4,706
Amortization and write-down of mortgage servicing rights .................. 523 20,079
Net gain on sale of mortgage servicing rights ............................. - (21,521)
Net gain on sale of securities available for sale ......................... (818) (530)
Net gain on sale of SBA and residential real estate loans ................. (3,225) (718)
Net gain on sale of subsidiary ............................................ - (12,000)
Proceeds from sales of mortgage loans held for sale ....................... 1,437,819 2,615,500
Origination of mortgage loans held for sale ............................... (886,804) (2,878,136)
Net decrease in other assets .............................................. 13,913 30,965
Net decrease in other liabilities ......................................... (50,857) (34,678)
Other, net ................................................................ (506) (1,275)
----------- -----------
Total adjustments ....................................................... 514,108 (277,608)
----------- -----------
Net cash provided by (used in) operating activities ................. 542,760 (255,491)
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of securities available for sale ............................ 83,238 86,611
Proceeds from maturities/payments of securities available for sale ............. 14,934 4,442
Purchases of securities available for sale ..................................... (192,590) (171,610)
Proceeds from sale of consumer loans ........................................... - 39,485
Proceeds from sale of SBA and residential real estate loans .................... 115,874 28,980
Net (increase) decrease in loans made to customers ............................. (202,069) 158,710
Proceeds from sale of subsidiary and payments received on related borrowings ... - 175,184
Proceeds from sale of mortgage servicing rights ................................ - 93,882
Additions to mortgage servicing rights ......................................... (985) (46,017)
----------- -----------
Net cash (used in) provided by investing activities ................. (181,598) 369,667
----------- -----------
Cash Flows From Financing Activities:
Net (decrease) increase in deposits ............................................ (79,080) 91,516
Net increase in short-term borrowings .......................................... 7,000 9,229
Net decrease in short-term FHLB advances ....................................... (360,000) (81,500)
Proceeds from long-term FHLB advances .......................................... 76,952 60,000
Payments on long-term FHLB advances ............................................ - (118,295)
Payments on long-term debt ..................................................... - (34,000)
Net proceeds from issuance of common shares .................................... 4,310 2,925
Repurchase of common shares .................................................... (4,724) (4,205)
Dividends paid ................................................................. (9,051) (8,420)
----------- -----------
Net cash used in financing activities ............................... (364,593) (82,750)
----------- -----------
Net (decrease) increase in cash and cash equivalents ........................... (3,431) 31,426
Cash and cash equivalents at beginning of period ............................... 76,734 82,377
----------- -----------
Cash and cash equivalents at end of period ..................................... $ 73,303 $ 113,803
=========== ===========
See notes to consolidated financial statements.
5
REPUBLIC BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Republic Bancorp
Inc. and Subsidiaries (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States 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 cash flow activity required by accounting principles
generally accepted in the United States 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, 2001.
Note 2 - Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company, Republic Bancorp Inc., and its wholly-owned banking subsidiary,
Republic Bank (including its subsidiaries D&N Capital Corporation, Quincy
Investment Services, Inc., CAS Properties, Inc., Republic Bank Real Estate
Finance, LLC and Republic Management Company, Inc.) and Republic Capital Trust
I. All significant intercompany accounts and transactions have been eliminated
in consolidation.
Note 3 - Consolidated Statements of Cash Flows
Supplemental disclosures of cash flow information for the six months ended June
30, include:
(In thousands) 2002 2001
---- ----
Cash paid during the period for:
Interest ................................ $ 69,607 $ 113,872
Income taxes ............................ $ 12,984 6,819
Non-cash investing activities:
Loan charge-offs ........................ $ 4,737 $ 4,382
Note 4 - Comprehensive Income
The following table sets forth the computation of comprehensive income:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Net income ...................................................... $ 14,534 $ 21,318 $ 28,652 $ 22,117
Unrealized holding gains (losses) on securities, net of tax ..... $ 3,770 $ (580) $ 4,655 $ (254)
Reclassification adjustment for gains included
in net income, net of tax ............................... (271) (106) (532) (345)
---------- ---------- --------- ---------
Net unrealized gains (losses) on securities, net of tax ......... 3,499 (686) 4,123 (599)
---------- ---------- --------- ---------
Comprehensive income ............................................ $ 18,033 $ 20,632 $ 32,775 $ 21,518
========== ========== ========= =========
Note 5 - Intangible Assets
The following table summarizes the Company's core deposit intangible asset which
is subject to amortization:
(Dollars in thousands) June 30, 2002 Dec. 31, 2001
- --------------------------------------------------------------------------------
Core Deposit Intangible Asset:
Gross carrying amount ..................... $ 8,749 $ 8,749
Accumulated amortization .................. 2,686 2,191
----------- -----------
Net book value .......................... $ 6,063 $ 6,558
=========== ===========
Amortization expense on the core deposit intangible asset totaled $248,000 for
each of the quarters ended June 30, 2002 and 2001, and $990,000 for the year
ended December 31, 2001. The Company expects core deposit intangible
amortization expense to be $990,000 for each of the years ending December 31,
2002, 2003 and 2004. The Company expects core deposit intangible amortization
expense for the years ended December 31, 2005 and 2006 to be $945,000 and
$936,000, respectively.
6
Note 6 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net income ................................................ $ 14,534 $ 21,318 $ 28,652 $ 22,117
Denominator for basic earnings per share--
weighted-average shares ................................... 53,176,238 54,435,795 53,100,983 54,441,581
Effect of dilutive securities:
Employee stock options .............................. 904,624 716,009 807,843 676,625
Warrants ............................................ 65,968 50,687 60,911 47,725
----------- ----------- ----------- -----------
Dilutive potential common shares ............... 970,592 766,696 868,754 724,350
----------- ----------- ----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares for assumed conversions ........... 54,146,830 55,202,491 53,969,737 55,165,931
=========== =========== =========== ===========
Basic earnings per share .................................. $ .27 $ .39 $ .54 $ .40
=========== =========== =========== ===========
Diluted earnings per share ................................ $ .27 $ .39 $ .53 $ .40
=========== =========== =========== ===========
Note 7 - Segment Information
The Company's operations are managed as three major business segments: (1)
commercial banking (2) retail banking and (3) mortgage banking. The commercial
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. The retail banking segment consists of home equity
lending, other consumer lending and the deposit-gathering function. Deposits and
loan products are offered through 83 retail branch offices of Republic Bank,
which are staffed by personal bankers and loan originators. The mortgage banking
segment is comprised of mortgage loan production and mortgage loan servicing for
others. Mortgage loan production is conducted in 56 offices of Republic Bank.
Treasury and Other is comprised of balance sheet management activities that
include the securities portfolio, residential real estate mortgage portfolio
loans and non-deposit funding. Treasury and Other also includes unallocated
corporate expenses such as corporate overhead, including accounting and
operation costs.
In conjunction with the merger of Republic Bank and D&N Bank in 2000 and the
sale of Market Street Mortgage Corporation in 2001, the Company redefined its
business segments. Amounts for 2001 have been reclassified to conform to the
current year presentation.
The following tables present the financial results of each business segment for
the three and six months ended June 30, 2002 and 2001.
Treasury
(In thousands) Commercial Retail Mortgage and Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended June 30, 2002
Net interest income from external customers $ 24,157 $ (12,089) $ 6,627 $ 17,341 $ 36,036
Internal funding (10,957) 40,122 (3,311) (25,854) -
---------- ---------- ---------- ---------- ----------
Net interest income 13,200 28,033 3,316 (8,513) 36,036
Provision for loan losses 941 426 - 1,033 2,400
Noninterest income 786 2,089 6,948 2,174 11,997
Noninterest expense 2,196 7,623 6,522 6,516 22,857
---------- ---------- ---------- ---------- ----------
Income before taxes 10,849 22,073 3,742 (13,888) 22,776
Preferred stock dividend - - - 1,755 1,755
Income taxes 3,970 8,085 1,310 (6,878) 6,487
---------- ---------- ---------- ---------- ----------
Net income $ 6,879 $ 13,988 $ 2,432 $ (8,765) $ 14,534
========== ========== ========== ========== ==========
Depreciation and amortization $ 37 $ 792 $ 588 $ 1,050 $ 2,467
Capital expenditures $ 6 $ 196 $ 156 $ 501 $ 859
Net identifiable assets (in millions)/(1)/ $ 1,409 $ 2,782 $ 312 $ (146) $ 4,357
Return on equity/(2)/ 19.77% 22.02% 49.00% n/m 18.12%
Return on assets 1.98% 2.00% 2.45% n/m 1.34%
Efficiency ratio 15.70% 25.31% 63.54% n/m 48.00%
- -------------------------------------------------------------------------------------------------------------------------------
7
Note 7 - Segment Information (Continued)
Treasury
(In thousands) Commercial Retail Mortgage and Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended June 30, 2001/(3)/
Net interest income from external customers $ 26,053 $ (22,204) $ 16,767 $ 17,065 $ 37,681
Internal funding (12,999) 47,542 (9,660) (24,883) -
---------- ---------- ---------- ---------- ----------
Net interest income 13,054 25,338 7,107 (7,818) 37,681
Provision for loan losses 1,708 62 - 530 2,300
Noninterest income 259 1,929 16,793 1,208 20,189
Noninterest expense 2,559 7,517 17,203 7,339 34,618
---------- ---------- ---------- ---------- ----------
Income before taxes 9,046 19,688 6,697 (14,479) 20,952
Preferred stock dividend - - - 680 680
Income taxes 3,325 7,129 2,344 (6,044) 6,754
---------- ---------- ---------- ---------- ----------
Net operating income $ 5,721 $ 12,559 $ 4,353 $ (9,115) $ 13,518
========== ========== ========== ========== ==========
Depreciation and amortization $ 42 $ 828 $ 1,551 $ 530 $ 2,951
Capital expenditures $ 36 $ 279 $ 188 $ 236 $ 739
Net identifiable assets (in millions)/(1)/ $ 1,246 $ 2,920 $ 609 $ (295) $ 4,480
Return on equity/(2)/ 18.62% 19.20% 50.27% n/m 18.23%
Return on assets 1.86% 1.75% 2.03% n/m 1.14%
Efficiency ratio 19.22% 27.57% 71.98% n/m 60.00%
- -------------------------------------------------------------------------------------------------------------------------------
Treasury
(In thousands) Commercial Retail Mortgage and Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30, 2002
Net interest income from external customers $ 48,452 $ (25,928) $ 18,407 $ 32,767 $ 73,698
Internal funding (21,711) 82,035 (9,202) (51,122) -
---------- ---------- ---------- ---------- ----------
Net interest income 26,741 56,107 9,205 (18,355) 73,698
Provision for loan losses 2,223 730 - 1,847 4,800
Noninterest income 1,076 4,087 14,254 3,157 22,574
Noninterest expense 4,647 15,811 13,711 12,485 46,654
---------- ---------- ---------- ---------- ----------
Income before taxes 20,947 43,653 9,748 (29,530) 44,818
Preferred stock dividend - - - 3,511 3,511
Income taxes 7,504 15,638 3,412 (13,899) 12,655
---------- ---------- ---------- ----------- ----------
Net income $ 13,443 $ 28,015 $ 6,336 $ (19,142) $ 28,652
========== ========== ========== ========== ==========
Depreciation and amortization $ 71 $ 1,590 $ 1,147 $ 1,778 $ 4,586
Capital expenditures $ 18 $ 243 $ 298 $ 665 $ 1,224
Net identifiable assets (in millions)/(1)/ $ 1,409 $ 2,782 $ 312 $ (146) $ 4,357
Return on equity/(2)/ 19.58% 21.75% 44.61% n/m 18.13%
Return on assets 1.96% 1.98% 2.23% n/m 1.29%
Efficiency ratio 16.71% 26.27% 58.45% n/m 48.88%
- -------------------------------------------------------------------------------------------------------------------------------
Treasury
(In thousands) Commercial Retail Mortgage and Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30, 2001/(3)/
Net interest income from external customers $ 52,305 $ (45,453) $ 29,202 $ 35,580 $ 71,634
Internal funding (26,376) 95,577 (17,811) (51,390) -
---------- ---------- ---------- ---------- ----------
Net interest income 25,929 50,124 11,391 (15,810) 71,634
Provision for loan losses 2,376 176 - 1,748 4,300
Noninterest income 528 3,655 31,501 3,826 39,510
Noninterest expense 4,860 15,339 32,001 12,823 65,023
---------- ---------- ---------- ---------- ----------
Income before taxes 19,221 38,264 10,891 (26,555) 41,821
Preferred stock dividend - - - 1,361 1,361
Income taxes 6,886 13,631 3,812 (10,536) 13,793
---------- ---------- ---------- ---------- ----------
Net income $ 12,335 $ 24,633 $ 7,079 $ (17,380) $ 26,667
========== ========== ========== ========== ==========
Depreciation and amortization $ 85 $ 1,665 $ 5,927 $ 1,043 $ 8,720
Capital expenditures $ 84 $ 660 $ 267 $ 738 $ 1,749
Net identifiable assets (in millions)/(1)/ $ 1,246 $ 2,920 $ 609 $ (295) $ 4,480
Return on equity/(2)/ 20.49% 18.95% 40.12% n/m 17.94%
Return on assets 2.05% 1.72% 1.75% n/m 1.14%
Efficiency ratio 18.37% 28.52% 74.61% n/m 58.79%
- -------------------------------------------------------------------------------------------------------------------------------
/(1)/ Treasury and Other net identifiable assets include the securities
portfolio and residential real estate mortgage portfolio loans, net of deposits
in excess of consumer loans credited to the retail segment.
/(2)/ Capital is allocated as a percentage of assets of 10%, 10% and 5% for the
commercial, retail and mortgage banking segments, respectively.
/(3)/ Amounts exclude impact of $12.0 million pretax gain on sale of subsidiary
recorded in the second quarter and the impact of $19.0 million of pretax
restructuring costs to exit the mortgage servicing business
n/m - Not meaningful
- --------------------------------------------------------------------------------
8
Note 8 - Accounting and Financial Reporting Developments
In July 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible
Assets, which drastically changed the accounting for goodwill, and intangible
assets. Under Statement No. 142, goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives (but with no maximum life)(see Note 5). The Company's
goodwill balance was $1.2 million at June 30, 2002 and December 31, 2001. The
Company adopted the provisions of Statement No. 142 on January 1, 2002, which
had an insignificant effect on the Company's results of operations for the
quarter and six months ended June 30, 2002 compared to the quarter and six
months ended June 30, 2001.
Note 9 - Subsequent Events
On June 4, 2002, the Board of Directors of D&N Capital Corporation, a
wholly-owned subsidiary of Republic Bank, approved the redemption of its 9.0%
Noncumulative Preferred Stock, Series A (liquidation preference $25.00 per
share). The Company redeemed all 1,210,000 issued and outstanding shares at a
redemption price of $25.00 per share, plus accrued dividends of $0.1375 per
share, for cash on July 22, 2002.
On July 31, 2002, Republic Bank purchased $85 million of separate account bank
owned life insurance to fund future employee benefit costs. Future increases in
the cash surrender value resulting from investment returns will be recorded in
other income.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
EARNINGS PERFORMANCE
The Company reported net income for the second quarter of 2002 of $14.5 million,
an increase of 8% over net operating income of $13.5 million for the second
quarter of 2001. Diluted earnings per share were $0.27 for the quarter, up 8%
from $0.25 earned in 2001. Annualized returns on average assets and average
shareholders' equity were 1.34% and 18.12%, respectively, for the quarter ended
June 30, 2002. These compare with annualized returns of 1.14% on average assets
and 18.23% on average equity for the second quarter of 2001.
Net income for the six months ended June 30, 2002 was $28.7 million, a 7%
increase over net operating income of $26.7 million earned for the same period
in 2001. For the six month period ended June 30, 2002, diluted earnings per
share were $0.53, an increase of 10% over the $0.48 earned in 2001. Annualized
returns on average assets and shareholders' equity for the first six months of
2002 were 1.29% and 18.13%, respectively.
Net operating income in 2001 excludes the $12.0 million pretax gain on sale of
Market Street Mortgage Corporation and $19.0 million of pretax restructuring
costs to exit the mortgage servicing business. Including these items, the
Company reported net income of $21.3 million and $22.1 million, respectively,
for the three and six month periods ended June 30, 2001, or $0.39 and $0.40 per
share, respectively.
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 $668 million in single-family residential mortgage loans in
the second quarter of 2002, compared to $1.04 billion closed in the same period
last year. During the first half of 2002, mortgage loan closings were $1.38
billion, compared to $1.89 billion for the comparable period in 2001. For
comparability, residential mortgage loan closings exclude Market Street Mortgage
loan closings of $684 million for the second quarter of 2001 and $1.19 billion
for the six months ended June 20, 2001. Mortgage loan volumes during 2002
decreased primarily due to the increase in interest rates, which has resulted in
a lower level of mortgage refinance activity. Refinancings for the second
quarter of 2002 represented 38% of total closings compared to 53% in the second
quarter of 2001. During the first half of 2002, refinancings represented 48% of
total closings compared to 59% for the first half of 2001.
9
The following table summarizes the Company's income from mortgage banking
activities:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Mortgage loan production revenue/(1)/ ....................... $ 8,140 $ 17,857 $ 15,386 $ 34,507
Net mortgage loan servicing (expense) revenue/(2)/ .......... 130 (235) 276 (434)
-------- -------- -------- --------
Total mortgage banking revenue ........................ $ 8,270 $ 17,622 $ 15,662 $ 34,073
======== ======== ======== ========
/(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 and incentives paid of $6.5
million and $11.6 million for the second quarters of 2002 and 2001,
respectively, and $15.1 million and $18.8 million for the six months ended
June 30, 2002 and 2001, respectively. Also includes gains on sales of
mortgage portfolio loans totaling $1.9 million for the second quarter of
2002 and $2.5 million and $431,000 for the six months ended June 30, 2002
and 2001, respectively. Mortgage loan portfolio sales totaled $63.5
million for the second quarter of 2002 and $102.1 million and $24.2
million, for the six months ended June 30, 2002 and 2001, respectively.
/(2)/ Includes servicing fees, late fees and other ancillary charges, net of
amortization of mortgage servicing rights.
For the three months ended June 30, 2002, mortgage banking revenue decreased
$9.4 million, or 53%, to $8.3 million from $17.6 million a year earlier. For
comparability, excluding the results of Market Street Mortgage, total mortgage
banking revenue for the second quarter of 2001 was $8.6 million. The decrease is
primarily due to a reduction in mortgage production revenue resulting from the
decrease in production volume discussed above and a corresponding decrease in
mortgage loans held for sale fundings, offset by gains on sale of mortgage
portfolio loans.
For the six months ended June 30, 2002, mortgage banking revenue decreased $18.4
million, or 54%, to $15.7 million from $34.1 million for the same period a year
ago. For comparability, excluding the results of Market Street Mortgage, total
mortgage banking revenue for the six months ended June 30, 2001 was $17.6
million. The decrease is primarily due to a reduction in mortgage production
revenue resulting from the decrease in production volume discussed above and a
corresponding decrease in mortgage loans held for sale fundings, offset by gains
on sale of mortgage portfolio loans.
For the quarter ended June 30, 2002, net mortgage loan servicing income was
$130,000 compared to net mortgage loan servicing expense of $235,000 for the
quarter ended June 30, 2001. For the six months ended June 30, 2002, net
mortgage loan servicing revenue was $276,000 compared to net mortgage loan
servicing expense of $434,000 in 2001. These increases in revenue reflect
decreases in amortization of mortgage servicing rights as a result of the
decrease in residential mortgage loan refinance activity during 2002 and
corresponding decreases in mortgage prepayments of the Company's remaining
servicing portfolio. At the end of the first quarter of 2001, the Company
elected to exit the residential mortgage servicing business through the sale of
Market Street Mortgage's $1.8 billion mortgage loan servicing portfolio and
mortgage servicing rights were reduced by $16.1 million at March 31, 2001 to
reflect the current market value of the servicing portfolio. Loans serviced for
others averaged $229 million for the second quarter of 2002 compared to $888
million for the second quarter of 2001. For the six months ended June 30, 2002
and 2001, mortgage loans serviced for others averaged $210 million and $1.5
billion, respectively.
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 and six months ended June 30, 2002 and 2001.
Net interest income, on a fully taxable equivalent (FTE) basis, was $37.2
million for the second quarter of 2002, compared to $38.4 million for the second
quarter of 2001. The decrease was primarily the result of a decrease in the
Company's average interest-earnings assets of $447 million. The average mortgage
loans held for sale balance decreased $497 million, or 66% for the second
quarter of 2002 compared to 2001, reflecting the decreased mortgage loan closing
volume. The average portfolio loan balance decreased $115 million, or 3% during
the second quarter of 2002 compared to 2001. This decrease reflects a $177
million, or 14% increase in average commercial loans offset by a decrease of
$272 million, or 15% in average residential real estate mortgage loans and a
decrease of $20 million, or 3% in average installment loans. The decrease in
average installment loans is the result of an $81 million decrease in the
average indirect installment loan balance offset by an increase of $61 million
in the average direct installment loan balance. In addition, the average balance
of investment securities increased $168 million, or 64% for the second quarter
of 2002 compared to 2001.
The net interest margin (FTE) was 3.53% for the quarter ended June 30, 2002, an
increase of 23 basis points from 3.30% in 2001. The increase in the margin was
due to the Company's cost of funds on interest-bearing liabilities decreasing
more than the decline in yield on earning assets and the mix of the Company's
interest-bearing liabilities. Average balances of the Company's higher cost
interest-bearing liabilities of time deposits and FHLB advances decreased $637
million compared to the second quarter of 2001. The decrease was partially
offset by increases in the average balances of lower cost interest-bearing
demand deposits and short-term borrowings of $237 million.
10
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments ............................ $ 1,080 $ 4 1.32% $ 4,194 $ 40 3.84%
Mortgage loans held for sale ...................... 258,254 4,284 6.64 755,606 13,458 7.14
Investment securities ............................. 429,551 6,723 6.28 261,632 4,850 7.44
Portfolio loans/(1)/:
Commercial loans ............................... 1,412,915 24,455 6.85 1,235,790 26,053 8.34
Real estate mortgage loans ..................... 1,517,138 25,222 6.65 1,789,315 31,994 7.17
Installment loans .............................. 587,731 10,327 7.05 607,482 13,338 8.81
------------ -------- ----- ------------ -------- -----
Total loans, net of unearned income ...... 3,517,784 60,004 6.80 3,632,587 71,385 7.84
------------ -------- ----- ------------ -------- -----
Total interest-earning assets ................ 4,206,669 71,015 6.73 4,654,019 89,733 7.70
Allowance for loan losses ......................... (29,641) (29,033)
Cash and due from banks ........................... 58,175 70,281
Other assets ...................................... 99,858 43,178
------------ ------------
Total assets ................................. $ 4,335,061 $ 4,738,445
============ ============
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits .................. $ 161,398 262 .65 $ 28,696 121 1.69
Savings deposits .................................. 843,004 3,861 1.84 896,945 6,704 3.00
Time deposits ..................................... 1,418,331 14,941 4.23 1,641,912 23,971 5.86
------------ -------- ----- ------------ -------- -----
Total interest-bearing deposits ................ 2,422,733 19,064 3.16 2,567,553 30,796 4.81
Short-term borrowings ............................. 183,828 857 1.84 79,306 935 4.67
FHLB advances ..................................... 1,041,639 13,653 5.19 1,455,480 19,346 5.26
Long-term debt .................................... 13,500 241 7.15 13,500 241 7.14
------------ -------- ----- ------------ -------- -----
Total interest-bearing liabilities ........... 3,661,700 33,815 3.68 4,115,839 51,318 4.97
-------- ----- -------- -----
Noninterest-bearing deposits ...................... 230,346 215,758
Other liabilities ................................. 43,408 81,508
------------ ------------
Total liabilities ............................ 3,935,454 4,413,105
Trust preferred securities and preferred
stock of subsidiary ........................... 78,719 28,719
Shareholders' equity .............................. 320,888 296,621
------------ ------------
Total liabilities and shareholders' equity ... $ 4,335,061 $ 4,738,445
============ ============
Net interest income/rate spread (FTE) ............. $ 37,200 3.05% $ 38,415 2.73%
======== ===== ======== =====
Net interest margin (FTE) ......................... 3.53% 3.30%
===== =====
Increase (decrease) due to change in: Volume/(2)/ Rate/(2)/ Net Change
------------------------------------------------------------------------------------------------------------
Short-term investments .................... $ (19) $ (17) $ (36)
Mortgage loans held for sale .............. (8,291) (883) (9,174)
Investment securities ..................... 2,728 (855) 1,873
Portfolio loans/(1)/:
Commercial loans ....................... 3,387 (4,985) (1,598)
Real estate mortgage loans ............. (4,586) (2,186) (6,772)
Installment loans ...................... (421) (2,590) (3,011)
-------- -------- ---------
Total loans, net of unearned income .. (1,620) (9,761) (11,381)
-------- -------- ---------
Total interest income ................ (7,202) (11,516) (18,718)
Interest-bearing demand deposits .......... 257 (116) 141
Savings deposits .......................... (383) (2,460) (2,843)
Time deposits ............................. (2,967) (6,063) (9,030)
-------- -------- ---------
Total interest-bearing deposits ......... (3,093) (8,639) (11,732)
Short-term borrowings ..................... 715 (793) (78)
FHLB advances ............................. (5,438) (255) (5,693)
Long-term debt ............................ - - -
-------- -------- ---------
Total interest expense ............... (7,816) (9,687) (17,503)
-------- -------- ---------
Net interest income .................. $ 614 $ (1,829) $ (1,215)
======== ======== =========
/(1)/ Non-accrual loans and overdrafts are included in average balances.
/(2)/ Rate/volume variances are proportionately allocated to rate and volume
based on the absolute value of the change in each.
11
Table I - Year-to-Date Net Interest Income and Rate/Volume Analysis (FTE)
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments ............................ $ 924 $ 8 1.80% $ 3,689 $ 87 4.77%
Mortgage loans held for sale ...................... 411,163 13,715 6.67 600,711 22,731 7.63
Investment securities ............................. 398,415 12,451 6.30 230,118 8,551 7.49
Portfolio loans/(1)/:
Commercial loans ............................... 1,394,752 49,071 7.00 1,205,081 52,305 8.63
Real estate mortgage loans ..................... 1,505,893 49,820 6.62 1,825,738 66,366 7.33
Installment loans .............................. 586,146 20,709 7.12 629,292 28,364 9.09
------------ --------- ---- ---------- -------- ----
Total loans, net of unearned income ............ 3,486,791 119,600 6.85 3,660,111 147,035 8.06
------------ --------- ---- ---------- -------- ----
Total interest-earning assets ................ 4,297,293 145,774 6.78 4,494,629 178,404 7.97
Allowance for loan losses ......................... (29,463) (29,019)
Cash and due from banks ........................... 59,090 69,417
Other assets ...................................... 103,181 160,564
------------ ----------
Total assets ................................. $ 4,430,101 $4,695,591
=========== ==========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits .................. $ 158,834 504 0.64 $ 30,163 342 2.29
Savings deposits .................................. 838,077 7,556 1.82 854,972 13,099 3.09
Time deposits ..................................... 1,463,308 31,644 4.36 1,675,619 50,369 6.06
------------ --------- ---- ---------- -------- ----
Total interest-bearing deposits ................ 2,460,219 39,704 3.25 2,560,754 63,810 5.03
Short-term borrowings ............................. 176,597 1,640 1.85 58,145 1,459 4.99
FHLB advances ..................................... 1,111,866 27,861 4.98 1,431,342 39,593 5.50
Long-term debt .................................... 13,500 483 7.15 25,250 968 7.67
------------ --------- ---- ---------- -------- ----
Total interest-bearing liabilities ........... 3,762,182 69,688 3.71 4,075,491 105,830 5.21
--------- ---- -------- ----
Noninterest-bearing deposits ...................... 229,156 207,821
Other liabilities ................................. 43,922 86,188
------------ ----------
Total liabilities ............................ 4,035,260 4,369,500
Trust preferred securities and preferred
stock of subsidiary ............................ 78,719 28,719
Shareholders' equity .............................. 316,122 297,372
------------ ----------
Total liabilities and shareholders' equity ... $ 4,430,101 $4,695,591
============ ==========
Net interest income/Rate spread (FTE) ............. $ 76,086 3.07% $ 72,574 2.76%
========= ==== ======== ====
Net interest margin ............................... 3.53% 3.23%
==== ====
Increase (decrease) due to change in: Volume/(2)/ Rate/(2)/ Net Change
--------------------------------------------------------------------------------------------------------------
Short-term investments ................... $ (43) $ (36) $ (79)
Mortgage loans held for sale ............. (6,446) (2,570) (9,016)
Investment securities .................... 5,454 (1,554) 3,900
Portfolio loans/(1)/:
Commercial loans ...................... 7,458 (10,692) (3,234)
Real estate mortgage loans ............ (10,655) (5,891) (16,546)
Installment loans ..................... (1,840) (5,815) (7,655)
------------ -------- ----------
Total loans, net of unearned income (5,037) (22,398) (27,435)
------------ -------- ----------
Total interest income ............... (6,072) (26,558) (32,630)
Interest-bearing demand deposits ......... 565 (403) 162
Savings deposits ......................... (254) (5,289) (5,543)
Time deposits ............................ (5,826) (12,899) (18,725)
------------ -------- ----------
Total interest-bearing deposits ........ (5,515) (18,591) (24,106)
Short-term borrowings .................... 1,533 (1,352) 181
FHLB advances ............................ (8,242) (3,490) (11,732)
Long-term debt ........................... (423) (62) (485)
------------ -------- ----------
Total interest expense .............. (12,647) (23,495) (36,142)
------------ -------- ----------
Net interest income ................. $ 6,575 $ (3,063) $ 3,512
============ ======== ==========
/(1)/ Non-accrual loans and overdrafts are included in average balances.
/(2)/ Rate/volume variances are proportionately allocated to rate and volume
based on the absolute value of the change in each.
12
For the six months ended June 30, 2002, net interest income (FTE) was $76.1
million, an increase of $3.5 million, or 5%, over the first half of 2001. The
increase was primarily the result of an increase in the net interest margin. The
net interest margin (FTE) for the six months ended June 30, 2002, rose 30 basis
points to 3.53% from 3.23% for the comparable period in 2001. The increase in
the margin was due to the Company's cost of funds on interest-bearing
liabilities decreasing more than the decline in yield on earning assets and the
mix of the Company's interest-bearing liabilities.
Noninterest Expense
For comparability, excluding the noninterest expense of Market Street Mortgage
for 2001, total noninterest expense for the quarter ended June 30, 2002
decreased $2.6 million, or 10%, to $22.9 million compared to $25.5 million for
the second quarter of 2001. The decrease is primarily the result of a decrease
in salaries and employee benefits in the second quarter of 2002 compared to
2001. Excluding the $19.0 million of charges related to the exit of the mortgage
servicing business and the noninterest expense of Market Street Mortgage for
2001, total non-interest expense for the six months ended June 30, 2002,
decreased $1.4 million, or 3%, to $46.7 million compared to $48.0 million in
2001. This decrease is primarily the result of a decrease in other noninterest
expense in 2002 compared to 2001.
BALANCE SHEET ANALYSIS
ASSETS
At June 30, 2002, the Company had $4.38 billion in total assets, a decrease of
$383 million, or 8%, from $4.74 billion at December 31, 2001. The decrease is
primarily the result of the $551 million decrease in the mortgage loans held for
sale balance, partially offset by increases in securities available for sale and
portfolio loans.
Securities
Investment securities available for sale increased $101 million, to $466
million, representing 10.7% of total assets at June 30, 2002. At December 31,
2001, the investment securities portfolio totaled $365 million, or 7.7% of total
assets. During the first half of 2002, the Company sold $82.4 million of
investment securities and realized gross gains and losses on the sales of
available for sale securities of $849,000 and $31,000, respectively.
The Company's investment securities portfolio serves as a secondary source of
earnings and contributes to the management of interest rate risk and liquidity
risk. The debt securities portfolio is comprised primarily of municipal
securities and collateralized mortgage obligations. Fixed rate debt securities
within the portfolio, excluding municipal securities, totaled $128.8 million and
$12.9 million at June 30, 2002 and December 31, 2001, respectively.
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at June 30, 2002:
Securities Available for Sale
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
Debt Securities:
Government agency securities ........................... $ 51,694 $ 158 $ 58 $ 51,794
Collateralized mortgage obligations .................... 122,078 895 191 122,782
Mortgage-backed securities ............................. 6,857 94 46 6,905
Municipal and other securities ......................... 204,903 1,368 722 205,549
----------- ----------- ----------- -----------
Total debt securities ................................ 385,532 2,515 1,017 387,030
Investment in FHLB ........................................ 79,105 - - 79,105
----------- ----------- ----------- -----------
Total securities available for sale ....................... $ 464,637 $ 2,515 $ 1,017 $ 466,135
=========== =========== =========== ===========
Certain securities having a carrying value of approximately $4.8 million and
$8.4 million at June 30, 2002 and December 31, 2001, respectively, were pledged
to secure FHLB advances and public deposits as required by law.
Mortgage Loans Held for Sale
Mortgage loans held for sale were $197 million at June 30, 2002, a decrease of
$551 million, or 74%, from $748 million at December 31, 2001. The decrease was
primarily due to a decrease in residential mortgage loan closings during the
second quarter of 2002 of $668 million compared to $1.4 billion closed during
the fourth quarter of 2001 (loans closed generally remain in loans held for sale
for 30 to 60 days after closing). In addition, the Company had a higher
percentage of adjustable rate loan closings during the first six months of 2002,
which were retained as portfolio loans rather than held for sale to the
secondary market.
13
Portfolio Loans
Total portfolio loans were $3.55 billion at June 30, 2002, an increase of $93
million, or 3%, from $3.46 billion at December 31, 2001. The increase was due to
increases in the commercial real estate mortgage loan, residential real estate
mortgage loan and consumer direct installment loan balances which were offset by
a decrease in the consumer indirect loan portfolio. The commercial portfolio
loan balance increased $70 million during the first six months of 2002, for an
annualized growth rate of 10%, reflecting continued strong demand for real
estate-secured lending in markets served by the Company. During the six months
ended June 30, 2002 and 2001, the Company closed $25.1 million and $14.5 million
in Small Business Administration (SBA) loans, respectively. The Company sold
$10.5 million and $4.7 million of the guaranteed portion of SBA loans in the
first six months of 2002 and 2001, respectively, resulting in corresponding
gains of $750,000 and $257,000, respectively.
The residential mortgage portfolio loan balance increased $14 million, or 1%,
since year-end 2001 to $1.53 billion at June 30, 2002. The increase in
residential mortgage loans was due to a higher level of loan closings during the
first six months of 2002 retained as portfolio loans.
The consumer direct installment loan portfolio increased $38 million during the
first half of 2002 due to an increase in home equity loan closings. The consumer
indirect installment loan portfolio decreased $29 million during the first half
of 2002 due to the anticipated runoff of the indirect consumer loan portfolio.
The following table provides further information regarding the Company's loan
portfolio:
June 30, 2002 December 31, 2001
---------------------------- -----------------------------
(Dollars in thousands) Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial and industrial ......................... $ 60,365 1.7% $ 68,428 2.0%
Commercial real estate mortgage ................... 1,373,090 38.7 1,294,634 37.4
----------- ------- ------------ ------
Total commercial loans ....................... 1,433,455 40.4 1,363,062 39.4
Residential real estate mortgages .................... 1,526,068 42.9 1,511,831 43.7
Installment loans:
Consumeer direct .................................. 534,882 15.1 496,972 14.4
Consumer indirect ................................. 57,221 1.6 86,516 2.5
----------- ------- ------------ ------
Total installment loans ..................... 592,103 16.7 583,488 16.9
----------- ------- ------------ ------
Total portfolio loans ......................... $ 3,551,626 100.0% $ 3,458,381 100.0%
=========== ======= ============ ======
Credit Quality
The Company attempts to minimize credit risk in the loan portfolio by focusing
primarily on real estate-secured lending (i.e., commercial real estate mortgage
and construction loans, residential real estate mortgage and construction loans,
and home equity loans). As of June 30, 2002, such loans comprised approximately
95% 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 and secured by personal guarantees.
The Company originates primarily conventional mortgage loans secured by
residential properties which conform to the underwriting guidelines for sale to
the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac), or conversion to mortgage-backed securities
issued by the Government National Mortgage Association (GNMA). The majority of
the Company's commercial loans is secured by real estate and is generally made
to small and medium-size businesses. These loans are made at rates based on the
prevailing prime interest rates of Republic Bank, as well as fixed rates for
terms generally ranging from three to five years. Management's emphasis on real
estate-secured lending and adherence to conservative underwriting standards is
reflected in the Company's historically low net charge-offs.
Non-Performing Assets
Non-performing assets consist of non-accrual loans and other real estate owned
(OREO). OREO represents real estate properties acquired through foreclosure or
by deed in lieu of foreclosure. 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.
14
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
June 30, December 31,
(Dollars in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans:
Commercial ................................................... $ 13,923 $ 6,413
Residential real estate mortgages ............................ 12,486 18,808
Installment .................................................. 2,468 2,957
--------- --------
Total non-performing loans ................................. 28,877 28,178
Other real estate owned ........................................ 2,485 2,978
--------- --------
Total non-performing assets ................................ $ 31,362 $ 31,156
========= ========
Non-performing assets as a percentage of:
Portfolio loans and OREO ..................................... .88% .90%
Portfolio loans, mortgage loans held for
sale and OREO .......................................... .84% .74%
Total assets ................................................. .72% .66%
Loans past due 90 days or more and still accruing interest:
Commercial ..................................................... $ - $ 144
Residential real estate ........................................ - -
Installment .................................................... - -
--------- --------
Total loans past due 90 days or more ....................... $ - $ 144
========= ========
At June 30, 2002, approximately $28.1 million, or 0.79% of total portfolio loans
were 30-89 days delinquent, compared to $40.5 million, or 1.17%, at December 31,
2001.
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 risk allocated allowance is determined based
on the application of risk percentages to graded loans by categories. Specific
reserves are established for individual loans when deemed necessary by
management. In addition, management 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 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 allocated allowance may be written down to
the fair value of the underlying collateral via a direct charge-off against the
allowance for loan losses at the time it is determined the loan balance exceeds
the fair value of the collateral. Consequently, those impaired loans not
requiring a specific allocated 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 rely 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.
Net loan charge-offs increased $261,000 to $4.1 million for the six months ended
June 30, 2002 compared to $3.8 million for the same period of 2001. The increase
in 2002 is primarily due to an increase in the installment loan charge-offs,
which have been impacted by growth in the direct consumer loan portfolio and the
wind-down of the consumer indirect loan portfolio. Based on these factors, the
Company may have higher loss experience on such loans in the future. The Company
recorded provision for loan losses of $4.8 million for the six months ended June
30, 2002 compared to $4.3 million for 2001.
15
The following table provides an analysis of the allowance for loan losses:
Six Months Ended
June 30,
------------------------------
(Dollars in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at January 1 ................................................. $ 29,157 $ 28,450
Loans charged off ................................................. (4,737) (4,382)
Recoveries of loans previously charged off ........................ 650 556
--------- ---------
Net charge-offs ................................................. (4,087) (3,826)
Provision charged to expense ...................................... 4,800 4,300
--------- ---------
Balance at June 30 ................................................... $ 29,870 $ 28,924
========= =========
Annualized net charge-offs as a percentage of average loans
(including loans held for sale) ................................. .21% .18%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end ....................................... .84 .82
Allowance for loan losses as a percentage of non-performing
loans ........................................................... 103.44 113.49
Off-Balance Sheet Instruments
At June 30, 2002, the Company had outstanding $66 million of commitments to fund
residential real estate loan applications with agreed-upon rates (Interest Rate
Lock Commitments). Interest Rate Lock Commitments 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 loan is sold to the
investors. To minimize this exposure to interest rate risk, the Company enters
into firm commitments to sell such mortgage loans and Interest Rate Lock
Commitments at specified future dates to various third parties.
At June 30, 2002, the Company had outstanding mandatory forward commitments to
sell $164 million of residential mortgage loans and $11 million of treasury note
future contracts, of which $119 million covered mortgage loans held for sale and
$56 million covered Interest Rate Lock Commitments. These outstanding forward
commitments to sell mortgage loans are expected to settle in the third quarter
of 2002 without producing any material gains or losses.
The Company implemented FAS 133, as amended effective January 1, 2001. The
cumulative effect of the adoption of FAS 133 was not material. For the six
months ended June 30, 2002, the Company's hedging policies using mandatory
forward commitments and treasury note future contracts, as they relate to
Interest Rate Lock Commitments and mortgage loans held for sale, were highly
effective. Therefore, the impact of FAS 133 on net income was immaterial.
LIABILITIES
Total liabilities were $3.95 billion at June 30, 2002, a $406 million, or 9%
decrease from $4.36 billion at December 31, 2001. This decrease was primarily
due to a decrease in FHLB advances, which are used to fund mortgage loans held
for sale.
Deposits
Total deposits decreased $79 million, or 3%, to $2.67 billion at June 30, 2002
from $2.75 billion at December 31, 2001. Noninterest bearing deposits decreased
$6 million and certificates of deposit decreased $124 million during the first
six months of 2002, while NOW and savings and money market accounts increased
$51 million from year-end.
Short-Term Borrowings
Short-term borrowings with maturities of less than one year, along with the
related average balances and interest rates for the six months ended June 30,
2002 and the year ended December 31, 2001, were as follows:
June 30, 2002 December 31, 2001
--------------------------------------- --------------------------------------
Average Average
Ending Average Rate During Ending Average Rate During
(Dollars in thousands) Balance Balance Period Balance Balance Period
- ---------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased ................. $ 183,000 $ 176,067 1.85% $ 176,000 $ 90,290 3.47%
Other short-term borrowings ............. 500 530 1.34 500 6,140 5.28
--------- --------- ---- --------- --------- ----
Total short-term borrowings .......... $ 183,500 $ 176,597 1.85% $ 176,500 $ 96,430 3.54%
========= ========= ==== ========= ========= ====
At June 30, 2002 and December 31, 2001, other short-term borrowings consisted of
treasury, tax and loan (TT&L) demand notes.
16
FHLB Advances
Republic Bank routinely utilizes FHLB advances, both on a short- and long-term
basis, to provide funding for mortgage loans held for sale 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 145% of the advances.
FHLB advances outstanding at June 30, 2002 and December 31, 2001, were as
follows:
June 30, 2002 December 31, 2001
------------------------ ---------------------------
Average Average
Ending Rate At Ending Rate At
(Dollars in thousands) Balance Period-End Balance Period-End
- ----------------------------------------------------------------------------------------------------------------
Short-term FHLB advances .......................... $ 125,000 3.85 % $ 485,000 2.69 %
Long-term FHLB advances ........................... 892,670 5.49 815,718 5.59
----------- ---- ----------- ----
Total ........................................ $ 1,017,670 5.29 % $ 1,300,718 4.51 %
=========== ==== =========== ====
The long-term FHLB advances have original maturities ranging from July 2002 to
October 2017.
Long-Term Debt
Long-term debt at June 30, 2002 and December 31, 2001 consists of $13.5 million
of 6.95% Senior Debentures due January 15, 2003.
CAPITAL
Shareholders' equity was $327 million at June 30, 2002, a $22 million, or 7%,
increase from $305 million at December 31, 2001. This increase primarily
resulted from the retention of $19 million in earnings after the payment of
dividends and the repurchase of 369,000 shares of common stock during the first
six months of 2002.
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 June 30, 2002, 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:
June 30, December 31,
2002 2001
------------- -----------------
Total capital to risk-weighted assets /(1)/ ................................ 13.78 % 12.31 %
Tier 1 capital to risk-weighted assets /(1)/ ............................... 12.82 11.43
Tier 1 capital to average assets /(1)/ ..................................... 9.19 8.34
(1) As defined by the regulations.
As of June 30, 2002, the Company's total risk-based capital was $427 million and
Tier 1 risk-based capital was $398 million, an excess of $117 million and $212
million, respectively, over the minimum guidelines prescribed by regulatory
agencies for a well-capitalized institution. In addition, Republic Bank had
regulatory capital ratios in excess of the minimum levels established for
well-capitalized institutions.
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
17
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 is responsible for ensuring that the Bank 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 June 30, 2002,
the Company's cumulative one-year gap was a positive 9.52% 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 10% of total earning assets for the cumulative
one-year gap. Management believes that this range reduces the vulnerability of
net interest income to large shifts in market interest rates while allowing the
Company to take advantage of fluctuations in current short-term rates.
Earnings Simulation Modeling: On a 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 June 30, 2002, the earnings simulation model projects net interest income
would increase by 5.5% 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 decrease by 8.4%. These projected levels are well within the Company's
policy limits. These results portray the Company's interest rate risk position
as asset sensitive for the one-year horizon. The earnings simulation model
assumes that current balance sheet totals remain constant and all maturities and
prepayments of interest-earning assets and interest-bearing liabilities are
reinvested at current market rates.
18
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 May 16, 2002, the Board of Directors declared a quarterly cash
dividend of $0.085 per share of common stock, payable on July 1,
2002 to shareholders of record June 7, 2002.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(12) Computations of ratios of earnings to fixed charges.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second
quarter of 2002.
19
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: August 13, 2002 BY: /s/ Thomas F. Menacher
-------------------------------------
Thomas F. Menacher
Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
20