SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 2001 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 October 31, 2001:
Common Stock, $5 Par Value ............................ 48,918,000 Shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 ................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2001 and 2000................. 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000................. 5
Notes to Consolidated Financial Statements............... 6 - 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............ 10 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 23
Item 2. Changes in Securities.................................... 23
Item 6. Exhibits and Reports on Form 8-K......................... 23
SIGNATURE............................................................... 24
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31,
(Dollars in thousands) 2001 2000
-------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ............................. $ 67,784 $ 82,377
Mortgage loans held for sale .......................... 350,738 385,207
Securities available for sale (amortized cost of
$382,042 and $212,183, respectively) ............... 379,867 211,860
Loans ................................................. 3,565,312 3,771,676
Less allowance for loan losses ..................... (28,990) (28,450)
----------- -----------
Net loans ............................................. 3,536,322 3,743,226
----------- -----------
Premises and equipment ................................ 31,458 36,094
Mortgage servicing rights ............................. 2,216 51,796
Other assets .......................................... 76,376 100,081
----------- -----------
Total assets ....................................... $ 4,444,761 $ 4,610,641
=========== ===========
LIABILITIES
Noninterest-bearing deposits .......................... $ 248,053 $ 267,509
Interest-bearing deposits:
NOW accounts ..................................... 143,711 150,476
Savings and money market accounts ................ 800,312 590,056
Certificates of deposit .......................... 1,505,906 1,720,485
----------- -----------
Total interest-bearing deposits .................. 2,449,929 2,461,017
----------- -----------
Total deposits ................................... 2,697,982 2,728,526
Federal funds purchased and other short-term borrowings 142,000 1,729
FHLB advances ......................................... 1,182,218 1,383,513
Accrued expenses and other liabilities ................ 68,229 125,790
Long-term debt ........................................ 13,500 47,500
----------- -----------
Total liabilities ................................ 4,103,929 4,287,058
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; 49,261,000 and 49,424,000 shares
issued and outstanding, respectively ............... 246,304 247,119
Capital surplus ....................................... 41,236 44,961
Retained earnings ..................................... 25,987 2,994
Accumulated other comprehensive loss .................. (1,414) (210)
----------- -----------
Total shareholders' equity ......................... 312,113 294,864
----------- -----------
Total liabilities and shareholders' equity ....... $ 4,444,761 $ 4,610,641
=========== ===========
See notes to consolidated financial statements.
3
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------
Interest Income:
Loans, including fees ............................. $ 74,971 $ 87,218 $ 244,737 $ 247,299
Investment securities ............................. 4,584 3,633 12,282 10,966
--------- --------- --------- ---------
Total interest income ...................... 79,555 90,851 257,019 258,265
--------- --------- --------- ---------
Interest Expense:
Deposits .......................................... 27,453 33,098 91,263 90,056
Short-term borrowings ............................. 1,076 447 2,535 2,848
FHLB advances ..................................... 15,727 22,867 55,320 61,916
Long-term debt .................................... 241 859 1,209 2,576
--------- --------- --------- ---------
Total interest expense ..................... 44,497 57,271 150,327 157,396
--------- --------- --------- ---------
Net interest income ............................... 35,058 33,580 106,692 100,869
Provision for loan losses ......................... 2,000 1,600 6,300 4,800
--------- --------- --------- ---------
Net interest income after provision for loan losses 33,058 31,980 100,392 96,069
--------- --------- --------- ---------
Noninterest Income:
Service charges ................................... 2,232 2,073 5,775 5,749
Mortgage production revenue ....................... 6,013 13,441 40,520 42,179
Net mortgage servicing (expense) revenue .......... 153 1,372 (281) 8,134
Gain on sale of securities ........................ 404 -- 934 97
Other noninterest income .......................... 1,176 1,083 2,540 3,119
Gain on sale of subsidiary ........................ -- -- 12,000 --
--------- --------- --------- ---------
Total noninterest income ................... 9,978 17,969 61,488 59,278
--------- --------- --------- ---------
Noninterest Expense:
Salaries and employee benefits .................... 12,198 17,485 49,152 55,108
Occupancy expense of premises ..................... 2,391 3,320 9,017 10,275
Equipment expense ................................. 1,464 2,192 6,217 6,699
Other noninterest expense ......................... 6,355 9,333 23,045 28,604
Restructuring costs to exit mortgage servicing .... -- -- 19,000 --
--------- --------- --------- ---------
Total noninterest expense .................. 22,408 32,330 106,431 100,686
--------- --------- --------- ---------
Income before income taxes ........................ 20,628 17,619 55,449 54,661
Provision for income taxes ........................ 6,454 5,611 17,797 17,874
--------- --------- --------- ---------
Income before preferred stock dividends ........... 14,174 12,008 37,652 36,787
Preferred stock dividends ......................... 681 681 2,042 2,042
--------- --------- --------- ---------
Net income ........................................ $ 13,493 $ 11,327 $ 35,610 $ 34,745
========= ========= ========= =========
Basic earnings per share .......................... $ .27 $ .23 $ .72 $ .70
========= ========= ========= =========
Diluted earnings per share ........................ $ .27 $ .23 $ .71 $ .70
========= ========= ========= =========
Average common shares outstanding - diluted ....... 50,241 49,821 50,181 49,950
========= ========= ========= =========
Cash dividends declared per common share .......... $ .085 $ .077 $ .255 $ .232
========= ========= ========= =========
See notes to consolidated financial statements.
4
REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30 (In thousands) 2001 2000
----------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income ................................................................. $ 35,610 $ 34,745
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 6,020 6,723
Amortization and write-down of mortgage servicing rights .............. 20,253 5,858
Net gain on sale of mortgage servicing rights ......................... (21,521) (22,223)
Net gain on sale of securities available for sale ..................... (934) (97)
Net gain on sale of loans ............................................. (1,314) (1,021)
Net gain on sale of subsidiary ........................................ (12,000) --
Proceeds from sales of mortgage loans held for sale ................... 3,322,772 2,644,833
Origination of mortgage loans held for sale ........................... (3,505,987) (2,586,521)
Net decrease in other assets .......................................... 28,345 11,747
Net (decrease) increase in other liabilities .......................... (21,473) 18,876
Other, net ............................................................ (2,094) (3,226)
----------- -----------
Total adjustments ................................................... (187,933) 74,949
----------- -----------
Net cash (used in) provided by operating activities ............. (152,323) 109,694
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of securities available for sale ........................ 117,297 19,114
Proceeds from maturities/payments of securities available for sale ......... 6,484 9,347
Purchases of securities available for sale ................................. (274,977) (9,191)
Proceeds from sale of consumer loans ....................................... 39,485 56,400
Proceeds from sale of commercial and residential real estate loans ......... 61,533 103,383
Net decrease (increase) in loans made to customers ......................... 107,368 (522,375)
Proceeds from sale of subsidiary and payments received on related borrowings 176,184 --
Proceeds from sale of mortgage servicing rights ............................ 94,250 47,074
Additions to mortgage servicing rights ..................................... (46,754) (26,734)
----------- -----------
Net cash provided by (used in) investing activities ............. 280,870 (322,982)
----------- -----------
Cash Flows From Financing Activities:
Net (decrease) increase in deposits ........................................ (30,544) 35,462
Net increase (decrease) in short-term borrowings ........................... 140,271 (55,090)
Net decrease in short-term FHLB advances ................................... (140,000) (128,000)
Proceeds from long-term FHLB advances ...................................... 110,000 625,000
Payments on long-term FHLB advances ........................................ (171,295) (267,097)
Payments on long-term debt ................................................. (34,000) --
Net proceeds from issuance of common shares ................................ 4,384 2,129
Repurchase of common shares ................................................ (9,328) (5,821)
Dividends paid ............................................................. (12,628) (11,544)
----------- -----------
Net cash provided by (used in) financing activities ............. (143,140) 195,039
----------- -----------
Net decrease in cash and cash equivalents .................................. (14,593) (18,249)
Cash and cash equivalents at beginning of period ........................... 82,377 83,761
----------- -----------
Cash and cash equivalents at end of period ................................. $ 67,784 $ 65,512
=========== ===========
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, 2000.
Certain amounts in prior periods have been reclassified to conform to the
current year's presentation.
Note 2 - Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company, Republic Bancorp Inc., and its wholly-owned banking subsidiary,
Republic Bank (including its subsidiaries Market Street Mortgage Corporation,
D&N Capital Corporation and Quincy Investment Services, Inc.). D&N Capital
Corporation and Quincy Investment Services, Inc. are wholly-owned subsidiaries
and Market Street Mortgage Corporation was an 80% majority-owned mortgage
company subsidiary that was sold on June 29, 2001. 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 nine months ended
September 30, include:
(In thousands) 2001 2000
---- ----
Cash paid during the period for:
Interest .................................. $157,548 $156,477
Income taxes .............................. $ 6,819 14,959
Non-cash investing activities:
Loan charge-offs .......................... $ 6,498 $ 4,565
6
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands, except per share data) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net income ...................................... $ 13,493 $ 11,327 $ 35,610 $ 34,745
Denominator for basic earnings per share--
weighted-average shares ......................... 49,462,296 49,559,129 49,482,219 49,621,635
Effect of dilutive securities:
Employee stock options ....................... 727,374 244,779 652,945 308,533
Warrants ..................................... 51,327 17,456 46,062 20,050
----------- ----------- ----------- -----------
Dilutive potential common shares ..... 778,701 262,235 699,007 328,583
----------- ----------- ----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares for assumed conversions.. 50,240,997 49,821,364 50,181,226 49,950,218
=========== =========== =========== ===========
Basic earnings per share ............................. $ .27 $ .23 $ .72 $ .70
=========== =========== =========== ===========
Diluted earnings per share ..................... $ .27 $ .23 $ .71 $ .70
=========== =========== =========== ===========
Note 5 - Comprehensive Income
The following table sets forth the computation of comprehensive income:
---------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------
Net income .......................................... $ 13,493 $ 11,327 $ 35,610 $ 34,745
Unrealized holding losses on securities, net of tax.. $ (342) $ 967 $ (597) $ 678
Reclassification adjustment for gains included
in net income, net of tax ................... (263) -- (607) (63)
-------- -------- -------- --------
Net unrealized losses on securities, net of tax ..... (605) 967 (1,204) 615
-------- -------- -------- --------
Comprehensive income ................................ $ 12,888 $ 12,294 $ 34,406 $ 35,360
======== ======== ======== ========
---------------------------------------------------------------------------------------------------
7
Note 6 - 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 September 30, 2001 and 2000.
---------------------------------------------------------------------------------------------------
Commercial and
Retail Banking Mortgage Banking Consolidated
---------------------------------------------------------------------------------------------------
Three Months Ended, Three Months Ended, Three Months Ended,
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 2001 2000 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------
Interest income ................. $70,221 $79,339 $ 9,334 $11,512 $79,555 $90,851
Interest expense ................ 39,015 47,736 5,482 9,535 44,497 57,271
------- ------- ------- ------- ------- -------
Net interest income(1) .......... 31,206 31,603 3,852 1,977 35,058 33,580
Provision for loan losses ....... 2,000 1,600 -- -- 2,000 1,600
Noninterest income .............. 3,815 3,156 6,163 14,813 9,978 17,969
Noninterest expense ............. 16,909 17,117 5,499 15,213 22,408 32,330
------- ------- ------- ------- ------- -------
Income before taxes .......... $16,112 $16,042 $ 4,516 $ 1,577 $20,628 $17,619
======= ======= ======= ======= ======= =======
Preferred stock dividend ........ $ 681 $ 681 $ -- $ -- $ 681 $ 681
Income taxes .................... $ 4,873 $ 5,059 $ 1,581 $ 552 $ 6,454 $ 5,611
Depreciation and amortization ... $ 1,190 $ 1,185 $ 406 $ 3,093 $ 1,596 $ 4,278
Capital expenditures ............ $ 741 $ 2,012 $ 145 $ 256 $ 886 $ 2,268
Identifiable assets (in millions) $ 3,930 $ 4,026 $ 515 $ 526 $ 4,445 $ 4,552
Efficiency ratio ................ 48.85% 49.24% 54.91% 90.61% 50.21% 62.72%
---------------------------------------------------------------------------------------------------
The following table presents the financial results of each business segment for
the nine months ended September 30, 2001 and 2000.
--------------------------------------------------------------------------------------------------------
Commercial and
Retail Banking Mortgage Banking Consolidated
--------------------------------------------------------------------------------------------------------
Nine Months Ended, Nine Months Ended, Nine Months Ended,
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 2001 2000 2001(2) 2000 2001(2) 2000
--------------------------------------------------------------------------------------------------------
Interest income ................. $218,483 $223,801 $ 38,536 $ 34,464 $257,019 $258,265
Interest expense ................ 125,164 129,945 25,163 27,451 150,327 157,396
-------- -------- -------- -------- -------- --------
Net interest income(1) .......... 93,319 93,856 13,373 7,013 106,692 100,869
Provision for loan losses ....... 6,300 4,800 -- -- 6,300 4,800
Noninterest income .............. 9,249 8,965 40,239 50,313 49,488 59,278
Noninterest expense ............. 46,011 49,536 41,420 51,150 87,431 100,686
-------- -------- -------- -------- -------- --------
Income before taxes ............. $ 50,257 $ 48,485 $ 12,192 $ 6,176 $ 62,449 $ 54,661
======== ======== ======== ======== ======== ========
Preferred stock dividend ........ $ 2,042 $ 2,042 $ -- $ -- $ 2,042 $ 2,042
Income taxes .................... $ 15,980 $ 17,595 $ 4,267 $ 2,162 $ 20,247 $ 17,874
Depreciation and amortization ... $ 3,983 $ 3,757 $ 6,333 $ 8,824 $ 10,316 $ 12,581
Capital expenditures ............ $ 2,223 $ 2,702 $ 412 $ 3,453 $ 2,635 $ 6,155
Identifiable assets (in millions) $ 3,930 $ 4,026 $ 515 $ 526 $ 4,445 $ 4,552
Efficiency ratio ................ 45.27% 48.22 77.26% 89.23% 56.32% 62.91%
--------------------------------------------------------------------------------------------------------
(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 on short-term borrowings used to fund loan production and servicing
acquisitions. The Company's internal funds transfer pricing charges the mortgage
banking segment an interest rate based on its overall cost of funds for the
loans held for sale balances and an interest rate based on the prime rate to
fund its servicing portfolio and operations.
(2) Excludes impact of $12.0 million gain on sale of subsidiary recorded in the
second quarter and the impact of $19.0 million charge related to the exit of the
residential mortgage servicing business recorded in the first quarter.
--------------------------------------------------------------------------------
8
Note 8 - Accounting and Financial Reporting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") 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 in June 2000 by Statement No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities and is required to be adopted by the
Company in years beginning after June 15, 2000. The Statement requires companies
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 implemented Statement 133, as amended, effective January 1, 2001.
The cumulative effect of the adoption of Statement 133 was not material. For the
quarter and nine months ended September 30, 2001, the Company's hedging policies
using mandatory forward commitments, as they relate to Interest Rate Lock
Commitments and mortgage loans held for sale, were highly effective. Therefore,
the impact of Statement 133 on net income was immaterial.
In July 2001, the FASB issued Statement No. 141, Business Combinations and
Statement No. 142, Goodwill and Other Intangible Assets. These Statements
drastically change the accounting for business combinations, goodwill, and
intangible assets. Statement 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. Statement 141 further clarifies the
criteria to recognize intangible assets separately from goodwill. The
requirements of Statement 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001
(i.e., the acquisition date is July 1, 2001 or after).
Under Statement 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). The amortization provisions of
Statement 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, companies are required to adopt Statement 142 in their fiscal year
beginning after December 15, 2001.
At September 30, 2001, the Company's goodwill balance was $1.3 million. As a
result, the Company does not expect the adoption of these Statements to have a
material impact on the financial position or results of operations.
Note 9 - Subsequent Event
In October 2001, Republic Capital Trust I, a Delaware business trust and
newly-formed subsidiary of the Company, issued $50 million of 8.60% Cumulative
Trust Preferred Securities (liquidation preference of $25 per preferred
security). The trust preferred securities must be redeemed on December 31, 2031,
however, the Company has the option to redeem the securities at par any time
after December 31, 2006, subject to regulatory approval. The securities trade on
the Nasdaq Stock Market under the symbol RBNCP. The Company used the net
proceeds to repay short-term indebtedness outstanding with an unaffiliated bank
and will use the remaining proceeds for general corporate purposes, for working
capital and for repurchases of its common stock.
9
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
EARNINGS PERFORMANCE
--------------------
The Company reported record net income for the third quarter of 2001 of $13.5
million, an increase of 19% over the $11.3 million earned in 2000. Diluted
earnings per share were $0.27 for the quarter, up 17% from $0.23 earned in 2000.
Net income for the quarter generated annualized returns of 1.22% on average
assets and 17.31% on average equity. These compare with annualized returns of
0.99% on average assets and 15.93% on average equity for the third quarter of
2000.
Net operating income for the nine months ended September 30, 2001 was $40.2
million, a 16% increase over the $34.7 million earned for the same period in
2000. Net operating income for the nine months ended September 30, 2001 excludes
the $7.8 million after-tax gain on the sale of Market Street Mortgage
Corporation recorded in the second quarter and the $12.35 million after-tax
restructuring costs to exit the mortgage servicing business recorded in the
first quarter. For the nine month period ended September 30, 2001, diluted net
operating earnings per share were $0.80, an increase of 14% over the $0.70
earned in 2000. Annualized returns on average assets and shareholders' equity
for the first nine months of 2001 were 1.16% and 17.72%, 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 $858 million in single-family residential mortgage loans in
the third quarter of 2001, compared to $547 million closed in the same period
last year. During the first nine months of 2001, mortgage loan closings were
$2.75 billion, compared to $1.75 billion for the comparable period in 2000. For
comparability, residential mortgage loan closings exclude Market Street Mortgage
loan closings of $394 million for the third quarter of 2000, and $1,194 million
and $1,192 million for the nine months ended September 30, 2001 and 2000,
respectively. Mortgage loan closing volumes during the first nine months of 2001
increased primarily due to the declining interest rate environment which has
resulted in a higher level of mortgage refinance activity. Refinancings for the
third quarter of 2001 represented approximately 45% of total closings compared
to 18% in the third quarter of 2000. During the first nine months of 2001,
refinancings represented approximately 55% of total closings compared to 15% for
the same period of 2000.
The following table summarizes the Company's income from mortgage banking
activities:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
------------------------------------------------------------------------------------------------
Mortgage loan production revenue (1) .............. $ 6,013 $ 13,441 $ 40,520 $ 42,179
Net mortgage loan servicing revenue (expense) (2).. 153 1,372 (281) 5,916
Gain on sale of bulk servicing .................... -- -- -- 2,218
-------- -------- -------- --------
Total mortgage banking revenue .............. $ 6,166 $ 14,813 $ 40,239 $ 50,313
======== ======== ======== ========
(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.
10
For the three months ended September 30, 2001, mortgage banking revenue
decreased $8.6 million, or 58%, to $6.2 million from $14.8 million a year
earlier. For comparability, when excluding the impact of Market Street Mortgage
Corporation, mortgage banking revenue for the third quarter of 2000 was $6.8
million. The slight decrease is primarily due to a reduction in the Company's
gross income on loans sold. The ratio of mortgage production revenue (before
commissions) to mortgage loans sold decreased from 2.40% for the third quarter
of 2000 to 2.18% for the third quarter of 2001.
For the nine months ended September 30, 2001, mortgage banking revenue decreased
$10.1 million, or 20%, compared to the same period a year ago. For
comparability, when excluding the effects of Market Street Mortgage Corporation
for the nine months ended September 30, 2000, mortgage banking revenue increased
$540,000, which is the result of a $3.9 million increase in mortgage loan
production revenue, offset by a $3.4 million decrease in mortgage loan servicing
revenue and gains on sale of bulk servicing. The increase in mortgage loan
production revenue reflects the increase in mortgage loan closing volumes
discussed earlier.
At the end of the first quarter of 2001 the Company elected to exit the
residential mortgage servicing business and reduced mortgage servicing rights by
$16.1 million to reflect the current market value of the servicing portfolio. A
sale agreement regarding Market Street's mortgage servicing portfolio was
subsequently signed in April 2001 with an unaffiliated company. The Company
completed the sale of Market Street's mortgage servicing portfolio during the
second quarter.
For the quarter ended September 30, 2001, net mortgage loan servicing revenue
was $153,000 compared to $1.4 million for the quarter ended September 30, 2000.
For the nine months ended September 30, 2001, net mortgage loan servicing
expense was $281,000 compared to net mortgage loan servicing revenue of $5.9
million in 2000. These decreases in revenue primarily reflect a reduction in the
average mortgage loan servicing portfolio as loans serviced for others averaged
$133 million for the third quarter of 2001 compared to $2.6 billion in 2000. The
Company expects to sell all mortgage servicing rights concurrently with the sale
of the underlying loans.
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 nine months ended September 30, 2001 and
2000.
Net interest income, on a fully taxable equivalent (FTE) basis, was $36.0
million for the third quarter of 2001, an increase of $2.5 million, or 7%, over
the third quarter of 2000. This increase was primarily the result of an increase
in the net interest margin and the mix of the Company's interest-bearing
liabilities. The net interest margin (FTE) was 3.36% for the quarter ended
September 30, 2001, an increase of 29 basis points from 3.07% in 2000. 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.
Net interest income for the quarter also increased due to interest expense
declining more than interest income. Total interest expense for the quarter
declined primarily due to the reduction in the average balances of the
11
Company's higher cost interest-bearing liabilities of time deposits and FHLB
advances of $355 million compared to the third quarter of 2000. The decrease was
partially offset by increases in the average balances of lower cost
interest-bearing demand deposits, savings deposits and short-term borrowings of
$175 million. The decrease in average interest-bearing liabilities was primarily
due to the net decrease in average interest-earning assets compared to the third
quarter of 2000 of $112 million.
For the nine months ended September 30, 2001, net interest income (FTE) was
$108.6 million, an increase of $7.7 million, or 8%, over the first nine months
of 2000. The net interest margin (FTE) for the nine months ended September 30,
2001, rose 12 basis points to 3.27% from 3.15% for the comparable period in
2000. The increase in the net interest margin was primarily due to the Company's
cost of funds on interest bearing liabilities decreasing more than the decline
in yield on earning assets during the first nine months of 2001.
Noninterest Expense
-------------------
For the quarter ended September 30, 2001, total noninterest expense decreased
$9.9 million, or 31%, to $22.4 million compared to $32.3 million for the third
quarter of 2000. For comparability, when excluding the expenses of Market Street
Mortgage from the third quarter of 2000, total noninterest expense decreased
$1.7 million or 7%. The decrease reflects a $649,000, or 5%, decrease in
salaries and employee benefits expense and a decrease of $845,000, or 12%, in
other noninterest expense. Excluding the expenses of Market Street Mortgage from
the nine month periods ending September 30, 2001 and 2000, total noninterest
expense decreased $1.9 million, or 3%, to $70.4 million from $72.3 million in
2000. This decrease is primarily the result of decreases in salaries and
employee benefits expense and other noninterest expense. The decreases for the
quarter and nine months ended September 30, 2001 reflect cost savings associated
with the integration of D&N Bank and Republic Banc Mortgage into Republic Bank
which took place in December 2000.
12
Table I - Quarterly Net Interest Income and Rate/Volume Analysis (FTE)
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments ........................... $ 783 $ 7 3.53% $ 3,805 $ 59 6.15%
Mortgage loans held for sale ..................... 371,944 6,656 7.16 406,368 8,551 8.35
Investment securities ............................ 328,514 5,568 6.72 191,401 3,587 7.50
Portfolio loans(1):
Commercial loans .............................. 1,294,169 26,406 7.98 1,063,068 24,799 9.26
Real estate mortgage loans .................... 1,678,019 29,460 7.02 1,975,965 36,940 7.48
Installment loans ............................. 597,519 12,449 8.27 742,229 16,928 9.05
----------- ----------- ------ ----------- ----------- ------
Total loans, net of unearned income ..... 3,569,707 68,315 7.58 3,781,262 78,667 8.29
----------- ----------- ------ ----------- ----------- ------
Total interest-earning assets ............... 4,270,948 80,546 7.48 4,382,836 90,864 8.26
Allowance for loan losses ........................ (28,846) (28,680)
Cash and due from banks .......................... 61,085 67,588
Other assets ..................................... 104,533 177,956
----------- -----------
Total assets ................................ $ 4,407,720 $ 4,599,700
=========== ===========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits ................. $ 147,490 456 1.23 $ 101,245 438 1.72
Savings deposits ................................. 773,706 5,845 3.00 733,319 5,827 3.15
Time deposits .................................... 1,551,950 21,152 5.41 1,701,311 26,833 6.26
----------- ----------- ------ ----------- ----------- ------
Total interest-bearing deposits ............... 2,473,146 27,453 4.40 2,535,875 33,098 5.18
Short-term borrowings ............................ 115,021 1,076 3.66 26,456 447 6.70
FHLB advances .................................... 1,185,631 15,727 5.19 1,421,401 22,867 6.38
Long-term debt ................................... 13,500 241 7.14 47,500 859 7.23
----------- ----------- ------ ----------- ----------- ------
Total interest-bearing liabilities .......... 3,787,298 44,497 4.64 4,031,232 57,271 5.64
----------- ------ ----------- ------
Noninterest-bearing deposits ..................... 232,274 187,235
Other liabilities ................................ 47,702 68,072
----------- -----------
Total liabilities ........................... 4,067,274 4,286,539
Preferred stock of subsidiary .................... 28,719 28,719
Shareholders' equity ............................. 311,727 284,442
----------- -----------
Total liabilities and shareholders' equity... $ 4,407,720 $ 4,599,700
=========== ===========
Net interest income/rate spread (FTE) ............ $ 36,049 2.84% $ 33,593 2.62%
=========== ====== =========== ======
Net interest margin (FTE) ........................ 3.36% 3.07%
====== ======
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
--------------------------------------------------------------------------------------------
Short-term investments .................. $ (34) $ (18) $ (52)
Mortgage loans held for sale ............ (707) (1,188) (1,895)
Investment securities ................... 2,381 (400) 1,981
Portfolio loans(1):
Commercial loans ..................... 5,142 (3,535) 1,607
Real estate mortgage loans ........... (5,313) (2,167) (7,480)
Installment loans .................... (3,106) (1,373) (4,479)
-------- -------- --------
Total loans, net of unearned income. (3,277) (7,073) (10,352)
-------- -------- --------
Total interest income .............. (1,637) (8,681) (10,318)
Interest-bearing demand deposits ........ 164 (146) 18
Savings deposits ........................ 305 (287) 18
Time deposits ........................... (2,231) (3,450) (5,681)
-------- -------- --------
Total interest-bearing deposits ....... (1,762) (3,883) (5,645)
Short-term borrowings ................... 908 (279) 629
FHLB advances ........................... (3,361) (3,779) (7,140)
Long-term debt .......................... (607) (11) (618)
-------- -------- --------
Total interest expense ............. (4,822) (7,952) (12,774)
-------- -------- --------
Net interest income ................ $ 3,185 $ (729) $ 2,456
======== ======== ========
(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.
13
Table II - Year-to-Date Net Interest Income and Rate/Volume Analysis (FTE)
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------------------------------
Average Assets:
Short-term investments ............................ $ 2,720 $ 94 4.63% $ 2,571 $ 113 5.85%
Mortgage loans held for sale ...................... 524,455 29,383 7.47 437,199 26,726 8.14
Investment securities ............................. 262,917 14,119 7.18 198,959 10,903 7.31
Portfolio loans(1):
Commercial loans ............................... 1,234,777 78,711 8.41 987,633 66,939 9.03
Real estate mortgage loans ..................... 1,776,498 95,828 7.19 1,900,158 104,376 7.32
Installment loans .............................. 618,701 40,815 8.82 742,636 49,258 8.84
----------- ----------- ------ ----------- ----------- ------
Total loans, net of unearned income ............... 3,629,976 215,354 7.88 3,630,427 220,573 8.10
----------- ----------- ------ ----------- ----------- ------
Total interest-earning assets ................ 4,420,068 258,950 7.79 4,269,156 258,315 8.06
Allowance for loan losses ......................... (28,961) (28,188)
Cash and due from banks ........................... 66,639 63,260
Other assets ...................................... 141,889 160,492
----------- -----------
Total assets ................................. $ 4,599,635 $ 4,464,720
=========== ===========
Average Liabilities and Shareholders' Equity:
Interest-bearing demand deposits .................. $ 146,938 1, 1.52 $ 107,295 1,310 1.63
Savings deposits .................................. 696,523 18,076 3.47 722,131 16,646 3.07
Time deposits ..................................... 1,634,397 71,521 5.85 1,621,151 72,100 5.92
----------- ----------- ------ ----------- ----------- ------
Total interest-bearing deposits ................ 2,477,858 91,263 4.03 2,450,577 90,056 4.90
Short-term borrowings ............................. 77,092 2,535 4.34 61,188 2,848 6.20
FHLB advances ..................................... 1,349,438 55,320 5.41 1,339,872 61,916 6.16
Long-term debt .................................... 22,333 1,209 7.22 47,500 2,576 7.23
----------- ----------- ------ ----------- ----------- ------
Total interest-bearing liabilities ........... 3,926,721 150,327 5.09 3,899,137 157,396 5.38
----------- ------ ----------- ------
Noninterest-bearing deposits ...................... 269,676 190,769
Other liabilities ................................. 72,362 69,273
----------- -----------
Total liabilities ............................ 4,268,759 4,159,179
Preferred stock of subsidiary ..................... 28,719 28,719
Shareholders' equity .............................. 302,157 276,822
----------- -----------
Total liabilities and shareholders' equity ... $ 4,599,635 $ 4,464,720
=========== ===========
Net interest income/Rate spread (FTE) ............. $ 108,623 2.70% $ 100,919 2.68%
=========== ====== =========== ======
Net interest margin ............................... 3.27% 3.15%
====== ======
Increase (decrease) due to change in: Volume(2) Rate(2) Net Change
-----------------------------------------------------------------------------------------------
Short-term investments ..................... $ 7 $ (26) $ (19)
Mortgage loans held for sale ............... 4,992 (2,335) 2,657
Investment securities ...................... 3,415 (199) 3,216
Portfolio loans(1):
Commercial loans ........................ 16,445 (4,673) 11,772
Real estate mortgage loans .............. (6,715) (1,833) (8,548)
Installment loans ....................... (8,330) (113) (8,443)
-------- -------- --------
Total loans, net of unearned income ... 1,400 (6,619) (5,219)
-------- -------- --------
Total interest income ................. 9,814 (9,179) 635
Interest-bearing demand deposits ........... 451 (95) 356
Savings deposits ........................... (621) 2,051 1,430
Time deposits .............................. 459 (1,038) (579)
-------- -------- --------
Total interest-bearing deposits .......... 289 918 1,207
Short-term borrowings ...................... 648 (961) (313)
FHLB advances .............................. 827 (7,423) (6,596)
Long-term debt ............................. (1,627) 260 (1,367)
-------- -------- --------
Total interest expense ................ 137 (7,206) (7,069)
-------- -------- --------
Net interest income ................... $ 9,677 $ (1,973) $ 7,704
======== ======== ========
(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.
14
BALANCE SHEET ANALYSIS
----------------------
ASSETS
------
At September 30, 2001, the Company had $4.44 billion in total assets, a decrease
of $165.9 million, or 4%, from $4.61 billion at December 31, 2000. The decrease
is primarily the result of the sale of Market Street Mortgage Corporation and
its related assets and a decrease in the Company's portfolio of residential real
estate mortgage and installment loans.
Securities
----------
Investment securities available for sale increased $168.0 million, to $379.9
million, representing 8.5% of total assets at September 30, 2001. At December
31, 2000, the investment securities portfolio totaled $211.9 million, or 4.6% of
total assets. During the first nine months of 2001, the Company sold $116.4
million of investment securities and realized gross gains and losses on the
sales of available for sale securities of $963,000 and $29,000, respectively.
The Company's investment securities portfolio, while serving as a secondary
source of earnings, carries relatively minimal principal risk 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. The Company's equity securities portfolio consists
primarily of NetBank, Inc. common stock.
The following table details the composition, amortized cost and fair value of
the Company's investment securities portfolio at September 30, 2001:
Securities Available for Sale
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
--------------------------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury and Government agency securities ... $ 9,603 $ 70 $ 123 $ 9,550
Collateralized mortgage obligations .............. 75,277 154 452 74,979
Interest-only certificates ....................... 64 -- -- 64
Mortgage-backed securities ....................... 2,055 49 -- 2,104
Municipal and other securities ................... 198,369 2,269 696 199,942
-------- -------- -------- --------
Total debt securities .......................... 285,368 2,542 1,271 286,639
Equity securities ................................... 17,619 -- 3,446 14,173
Investment in FHLB .................................. 79,055 -- -- 79,055
-------- -------- -------- --------
Total securities available for sale .............. $382,042 $ 2,542 $ 4,717 $379,867
======== ======== ======== ========
Certain securities having a carrying value of approximately $10.0 million and
$58.7 million at September 30, 2001 and December 31, 2000, 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 $350.7 million at September 30, 2001 compared
to $385.2 million at December 31, 2000. Excluding Market Street Mortgage's
mortgage loans held for sale balance of $176.1 million at December 31, 2000, the
mortgage loans held for sale balance increased $141.6 million since year-end.
This increase was caused by an increase in residential mortgage loan closings
during the third quarter of 2001 over the fourth quarter of 2000 (loans closed
generally remain in loans held for sale for 30 to 60 days after closing).
15
Portfolio Loans
---------------
Total portfolio loans were $3.57 billion at September 30, 2001, a decrease of
$206.4 million, or 5%, from $3.77 billion at December 31, 2000. This decrease
was due to decreases in the residential real estate mortgage and consumer
indirect loan portfolios which were partially offset by an increase in the
commercial loan balance.
The commercial portfolio loan balance increased $188.4 million during the first
nine months of 2001, for an annualized growth rate of 22%, reflecting continued
strong demand for real estate-secured lending in markets served by the Company.
During the third quarter of 2001 and 2000, the Company closed $8.4 million and
$6.2 million, respectively, in Small Business Administration (SBA) loans. For
the first nine months of 2001 and 2000, SBA loan closings were $22.9 million and
$25.2 million, respectively. The Company sold $9.2 million and $10.3 million of
the guaranteed portion of SBA loans in the first nine months of 2001 and 2000,
respectively, resulting in gains of $424,000 and $403,000, respectively.
The residential mortgage portfolio loan balance decreased $316.1 million, or
16%, since year-end 2000 to $1.65 billion at September 30, 2001. The decrease in
residential mortgage loans was due to a significant increase of loans being
refinanced from the residential mortgage loan portfolio. The Company refinanced
a significant portion of these mortgage portfolio loans, which are subsequently
reflected as loans held for sale.
The installment loan portfolio decreased $78.6 million at September 30, 2001
compared to December 31, 2000, primarily to due to loan sales and runoff from
the indirect consumer loan portfolio. During the first nine months of 2001, the
Company sold $39 million of indirect marine and RV loans. There was no material
gain on the sale. The direct consumer loan portfolio increased $31.0 million, or
7% at September 30, 2001 compared to year-end 2000.
The following table provides further information regarding the Company's loan
portfolio:
September 30, 2001 December 31, 2000
------------------ -------------------
(Dollars in thousands) Amount Percent Amount Percent
-------------------------------------------------------------------------------
Commercial loans:
Commercial and industrial ......... $ 69,431 1.9% $ 79,544 2.1%
Commercial real estate mortgage ... 1,251,237 35.1 1,052,748 27.9
---------- ----- ---------- -----
Total commercial loans ....... 1,320,668 37.0 1,132,292 30.0
Residential real estate mortgages .... 1,648,277 46.2 1,964,394 52.1
Installment loans:
Consumer direct ................. 490,399 13.8 459,359 12.2
Consumer indirect ............... 105,968 3.0 215,631 5.7
---------- ----- ---------- -----
Total installment loans ..... 596,367 16.8 674,990 17.9
---------- ----- ---------- -----
Total portfolio loans ......... $3,565,312 100.0% $3,771,676 100.0%
========== ===== ========== =====
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
loans, commercial real estate construction loans, residential real estate
mortgage loans, residential real estate construction loans, and home equity
loans). As of September 30, 2001, such loans comprised approximately 93% 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 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).
16
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.
The following table summarizes the Company's non-performing assets and 90-day
past due loans:
September 30, December 31,
(Dollars in thousands) 2001 2000
-------------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans:
Commercial ........................................... $ 6,842 $ 5,499
Residential real estate mortgages .................... 18,920 13,429
Installment .......................................... 3,092 2,167
------- -------
Total non-performing loans ......................... 28,854 21,095
Other real estate owned ................................ 3,847 4,906
------- -------
Total non-performing assets ........................ $32,701 $26,001
======= =======
Non-performing assets as a percentage of:
Portfolio loans and OREO ............................. .92% .69%
Portfolio loans, mortgage loans held for
sale and OREO .................................. .83% .62%
Total assets ......................................... .74% .56%
Loans past due 90 days or more and still accruing interest:
Commercial ............................................. $ 16 $ 209
Residential real estate ................................ -- --
Installment ............................................ -- --
------- -------
Total loans past due 90 days or more ............... $ 16 $ 209
======= =======
At September 30, 2001, approximately $41.2 million, or 1.16% of total portfolio
loans were 30-89 days delinquent, compared to $45.2 million, or 1.20%, at
December 31, 2000.
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
17
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 allowance is, typically, written down to
the fair value of the underlying collateral at the time it is placed in
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 $1.9 million to $6.5 million for the nine
months ended September 30, 2001 compared to $4.6 million for the same period of
2000. The increase is primarily related to charge-offs of certain commercial
loans during the first nine months of 2001. The Company recorded provision for
loan losses of $6.3 million for the nine months ended September 30, 2001
compared to $4.8 million for 2000 as a result the increase in charge-offs.
The following table provides an analysis of the allowance for loan losses:
Nine Months Ended
September 30,
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at January 1 ............................................. $ 28,450 $ 27,128
Loans charged off ............................................. (6,498) (4,565)
Recoveries of loans previously charged off .................... 738 1,016
-------- --------
Net charge-offs ............................................. (5,760) (3,549)
Provision charged to expense .................................. 6,300 4,800
-------- --------
Balance at September 30 .......................................... $ 28,990 $ 28,379
======== ========
Annualized net charge-offs as a percentage of average loans
(including loans held for sale) ............................. .18% .12%
Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end ................................... .81 .76
Allowance for loan losses as a percentage of non-performing
loans ....................................................... 100.47 125.77
18
Off-Balance Sheet Instruments
-----------------------------
At September 30, 2001, the Company had outstanding $336 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 September 30, 2001, the Company had outstanding mandatory forward commitments
to sell $631 million of residential mortgage loans, of which $351 million
covered mortgage loans held for sale and $280 million covered Interest Rate Lock
Commitments. These outstanding forward commitments to sell mortgage loans are
expected to settle in the fourth quarter of 2001 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 nine
months ended September 30, 2001, the Company's hedging policies using mandatory
forward commitments, 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 $4.10 billion at September 30, 2001, a $183 million, or
4% decrease from $4.29 billion at December 31, 2000. This decrease was primarily
due to decreases in FHLB advances (used to fund mortgage loans held for sale)
and accrued expenses and other liabilities related to Market Street Mortgage.
Deposits
--------
Total deposits decreased $30.5 million, or 1%, to $2.70 billion at September 30,
2001 from $2.73 billion at December 31, 2000. Noninterest bearing deposits were
down $19 million and certificates of deposit were down $215 million at September
30, 2001 while savings and money market accounts increased $210 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 nine months ended September
30, 2001 and the year ended December 31, 2000, were as follows:
September 30, 2001 December 31, 2000
---------------------------------- ----------------------------------
Average Average
Ending Average Rate During Ending Average Rate During
(Dollars in thousands) Balance Balance Period Balance Balance Period
-------------------------------------------------------------------------------------------------------------
Federal funds purchased .......... $131,000 $ 69,639 4.22% $ -- $ 53,687 6.44%
Other short-term borrowings ...... 11,000 7,453 5.41 1,729 1,360 5.59
-------- -------- ---- -------- -------- ----
Total short-term borrowings ... $142,000 $ 77,092 4.34% $ 1,729 $ 55,047 6.42%
======== ======== ==== ======== ======== ====
At September 30, 2001, other short-term borrowings consisted of treasury, tax
and loan (TT&L) demand notes and amounts owed by the parent company under a
revolving credit agreement. At December 31, 2000, other short-term borrowings
consisted of treasury, tax and loan (TT&L) demand notes.
19
FHLB Advances
-------------
Republic Bank routinely borrows short- and long-term advances from the Federal
Home Loan Bank (FHLB) to provide fund mortgage loan originations and to minimize
the interest rate risk associated with certain fixed rate commercial and
residential mortgage portfolio loans and investment securities. 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 September 30, 2001 and December 31, 2000, were as
follows:
September 30, 2001 December 31, 2000
---------------------- -----------------------
Average Average
Ending Rate At Ending Rate At
(Dollars in thousands) Balance Period-End Balance Period-End
-------------------------------------------------------------------------------------
Short-term FHLB advances ... $ 415,000 4.12% $ 555,000 6.08%
Long-term FHLB advances ..... 767,218 5.65 828,513 5.82
---------- ---- ---------- ----
Total .................. $1,182,218 5.11% $1,383,513 5.92%
========== ==== ========== ====
The long-term FHLB advances have original maturities ranging from October 2001
to October 2017.
Long-Term Debt
Obligations with original maturities of more than one year consisted of the
following:
September 30, December 31,
(Dollars in thousands) 2001 2000
-------------------------------------------------------------------------------
7.17% Senior Debentures due 2001 ............. $ -- $25,000
6.75% Senior Debentures due 2001 ............. -- 9,000
6.95% Senior Debentures due 2003 ............. 13,500 13,500
------- -------
Total long-term debt .................. $13,500 $47,500
======= =======
The Company paid-off the 7.17% Senior Debentures and the 6.75% Senior Debentures
on April 1, 2001 and January 15, 2001, respectively, in accordance with the
terms of the debenture agreements.
CAPITAL
-------
Shareholders' equity was $312.1 million at September 30, 2001, a $17.2 million,
or 6%, increase from $294.9 million at December 31, 2000. This increase
primarily resulted from the retention of $13.7 million in earnings after the
payment of dividends and the repurchase of 703,000 shares of common stock during
the first nine months of 2001.
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.
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As of September 30, 2001, 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:
September 30, December 31,
2001 2000
------------- ------------
Total capital to risk-weighted assets (1)........... 11.40% 10.38%
Tier 1 capital to risk-weighted assets (1).......... 10.49 9.50
Tier 1 capital to average assets (1)................ 7.54 6.82
(1) As defined by the regulations.
As of September 30, 2001, the Company's total risk-based capital was $360.7
million and Tier 1 risk-based capital was $331.7 million, an excess of $44.4
million and $141.9 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 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.
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,
21
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 September 30, 2001, the Company's cumulative one-year gap was a
positive 8.15% 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 quarterly 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 September 30, 2001, the earnings simulation model projects net interest
income would decrease by 0.38% 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 0.39%. These projected levels are well within the Company's policy limits.
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.
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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 August 17, 2001, the Board of Directors declared a quarterly
cash dividend of $0.085 per share of common stock, payable on
October 8, 2001 to shareholders of record September 7, 2001.
On October 18, 2001, the Board of Directors declared a 10% stock
dividend on common stock to shareholders of record on November 9,
2001 and payable December 3, 2001.
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
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the third
quarter of 2001.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC BANCORP INC.
---------------------
(Registrant)
Date: November 14, 2001 BY: /s/ Thomas F. Menacher
-----------------------------------------
Thomas F. Menacher
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24