Edgar Filing: REPUBLIC BANCORP INC

e10vk

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Transition Period From ____________ to __________

Commission File Number: 0-15734

REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)


Michigan		38-2604669
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (989) 725-7337

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 Par Value
(Title of class)

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act rule 12b-2). Yes x No o

The aggregate market value of the Registrant’s common stock held by non-affiliates, based on the closing price on March 14, 2003 of $11.88, was $630.3 million.

Number of shares of Registrant’s common stock outstanding as of March 5, 2003: 57,400,302.

DOCUMENTS INCORPORATED BY REFERENCE

Part III: Portions of the Registrant’s definitive proxy statement for its 2003 Annual Meeting of Stockholders.

TABLE OF CONTENTS


Part I
	Item 1 - Business
		General Description
		Business Segments
		Competition
		Employees
		Principal Sources of Revenue
		Monetary Policy and Economic Controls
		Supervision and Regulation
		Forward-Looking Statements
		Executive Officers of the Registrant
	Item 2 - Properties
	Item 3 - Legal Proceedings
	Item 4 - Submission of Matters to a Vote of Security Holders
Part II
	Item 5 - Market for Registrant's Common Stock and Related Stockholder Matters
	Item 6 - Selected Financial Data
	ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A - Quantitative and Qualitative Disclosures about Market Risk
	Item 8 - Financial Statements and Supplementary Data
	Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Part III
	Item 10 - Directors and Executive Officers of the Registrant
	Item 11 - Executive Compensation
	Item 12 - Security Ownership of Certain Beneficial Owners and Management
	Item 13 - Certain Relationships and Related Transactions
	Item 14 - Contorls and Procedures
Part IV
	Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
	Signatures
	Certifications
Second Amendment to Revolving Credit Agreement
Management Rentention Agreement
Management Retention Agreement
Computations of Ratios of Earnings to Fixed Charge
Subsidiaries of the Company
Consent of Independent Auditors
Powers of Attorney
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

FORM 10-K TABLE OF CONTENTS


					Page

Part I
	Item 1	—	Business		2
				General Description	2
				Business Segments	3
				Competition	4
				Employees	4
				Principal Sources of Revenue	4
				Monetary Policy and Economic Controls	5
				Supervision and Regulation	5
				Forward-Looking Statements	9
				Executive Officers of the Registrant	9
	Item 2	—	Properties		10
	Item 3	—	Legal Proceedings		10
	Item 4	—	Submission of Matters to a Vote of Security Holders		10
Part II
	Item 5	—	Market for Registrant’s Common Stock and Related Stockholder Matters		10
	Item 6	—	Selected Financial Data		11
	Item 7	—	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
	Item 7A	—	Quantitative and Qualitative Disclosures about Market Risk		32
	Item 8	—	Financial Statements and Supplementary Data		33
	Item 9	—	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		62
Part III
	Item 10	—	Directors and Executive Officers of the Registrant		63
	Item 11	—	Executive Compensation		63
	Item 12	—	Security Ownership of Certain Beneficial Owners and Management		63
	Item 13	—	Certain Relationships and Related Transactions		63
	Item 14	—	Controls and Procedures		63
Part IV
	Item 15	—	Exhibits, Financial Statement Schedules and Reports on Form 8-K		64
	Signatures				69
	Certifications				70

PART I

ITEM 1. BUSINESS

General

Republic Bancorp Inc. (the “Company”) is a bank holding company incorporated under the laws of the State of Michigan in 1986. The Company’s principal office is located in Ann Arbor, Michigan. Through its wholly-owned subsidiary, Republic Bank, a Michigan banking corporation, the Company provides commercial, retail and mortgage banking products and services. Republic Bank is headquartered in Lansing, Michigan. Republic Bank exercises the power of a full-service commercial bank and operates 96 offices and 103 ATMs in 7 market areas in Michigan, in the greater Cleveland, Ohio area, as well as Indianapolis, Indiana. In addition, Republic Bank operates a loan production office in Massachusetts. At December 31, 2002 Republic Bank had $4.8 billion in assets and $2.8 billion in deposits.

On December 1, 2000, D&N Bank merged into Republic Bank to enhance customer service throughout Michigan and improve operating efficiencies.

On December 31, 2000, the assets and liabilities of Republic Banc Mortgage Corporation, a wholly-owned mortgage banking subsidiary of Republic Bank, were assigned to and assumed by Republic Bank to create additional cross-selling opportunities for products and improve operating efficiencies.

On June 29, 2001, the Company sold Market Street Mortgage Corporation (“Market Street”), which was an 80% majority-owned mortgage banking subsidiary with headquarters in Clearwater, Florida.

In October 2001, the Company formed Republic Capital Trust I, a Delaware business trust, for the purpose of issuing $50 million of 8.60% Cumulative Trust Preferred Securities (liquidation preference of $25 per preferred security). The preferred securities are treated as Tier 1 Capital by the Company and trade on The Nasdaq Stock Market® under the symbol RBNCP.

On July 22, 2002 the Company redeemed all 1,210,000 issued and outstanding shares of D&N Capital Corporation’s 9.0% Noncumulative Preferred Stock, Series A (liquidation preference $25.00 per share) at a redemption price of $25.00 per share, plus accrued dividends of $0.1375 per share, for cash. D&N Capital Corporation (“D&N Capital”), was a wholly-owned subsidiary of Republic Bank that was created for the purpose of acquiring and holding real estate assets and was a real estate investment trust (“REIT”). In 1997, D&N Capital issued 9.0% noncumulative preferred stock, Series A, $25 par value, which was traded on The Nasdaq Stock Market® under the symbol DNFCP. The preferred stock was treated as Tier-1 capital by the Company. D&N Capital Corporation was dissolved on November 15, 2002.

Republic Bank also has four wholly owned subsidiaries, Quincy Investment Services, Inc., a licensed insurance agency that could provide investment and insurance services; CAS Properties, Inc., formed to manage certain non-performing assets and Republic Bank Real Estate Finance, LLC and Republic Management Company, Inc. formed to hold certain commercial real estate loans. Quincy Investment Services, Inc. and CAS Properties, Inc. are inactive.

At December 31, 2002, Republic Bancorp Inc. had consolidated total assets of $4.8 billion, total deposits of $2.8 billion and shareholders’ equity of $332.7 million. For the year ended December 31, 2002, the Company reported net income of $56.7 million compared to $47.9 million for 2001. Net income for the year ended December 31, 2001 included an after-tax $7.8 million gain on the sale of Market Street and after-tax restructuring costs to exit the mortgage servicing business of $12.4 million. Residential mortgage loan closings, for comparable purposes, totaled $3.9 billion in 2002, compared to $4.1 billion in 2001 excluding Market Street. Commercial loan closings totaled $493 million in 2002 versus $490 million in 2001. Small Business Administration (SBA) loan closings totaled $42 million in 2002, compared to $34 million in 2001.

The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are made available free of charge through the Investor Relations section on the Company’s Internet website at www.republicbancorp.com as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

Business Segments

The Company engages in three lines of business — Commercial Banking, Retail Banking and Mortgage Banking. See Note 21 to the Consolidated Financial Statements for financial information concerning the Company’s business segments.

Commercial Banking

Republic Bank provides traditional commercial banking products and services to small and medium size businesses at 86 branch offices in Michigan, Ohio and Indiana. Products and services offered include commercial and small business loans, other types of installment loans and commercial products and deposit services. Lending activity at Republic Bank is primarily focused on real estate-secured lending to minimize credit risk (e.g., fixed and variable rate commercial real estate mortgage loans and commercial real estate construction loans). In addition, emphasis is placed on loans that are government guaranteed or insured, such as SBA loans and United States Department of Agriculture (USDA) loans. Commercial loans are typically secured by the customer’s assets, primarily real estate at a 75% or less loan-to-value ratio and by personal guarantees.

Retail Banking

Republic Bank provides traditional retail banking products and services to consumers at 82 offices in Michigan and Ohio. Products and services offered include home equity loans and lines of credit, other types of installment loans, and demand, savings and time deposit accounts. The marketing effort of Republic Bank targets a particular segment of the consumer population that is interested in receiving personalized banking service. The Company’s deposit base consists primarily of retail deposits gathered from within local markets served. At December 31, 2002, retail deposits comprised 84% of total deposits.

Mortgage Banking

Mortgage banking activities encompass mortgage loan production and in a limited capacity, mortgage loan servicing for others. Mortgage loan production involves the origination and sale of single-family residential mortgage loans and is conducted by Republic Bank, and, prior to its sale in June 2001, Market Street. All mortgage loan originations are funded by Republic Bank.

The Company’s current operating strategy for the mortgage banking segment is to continue growing mortgage banking revenue and related interest income while managing interest rate and liquidity risks as well as operating costs within Republic Bank’s Michigan, Ohio and Indiana markets. Additionally, the Company seeks to capitalize on the opportunity to cross-sell products using a shared customer base between the mortgage and retail banking business lines. To help accomplish these objectives, the Company sold its mortgage banking subsidiary, Market Street Mortgage Corporation, in June 2001 as Market Street’s offices had been located primarily in the southeast section of the United States.

Mortgage Loan Production

Retail residential mortgage loans are originated by the Company’s own sales staff at retail mortgage loan production offices and retail banking offices located in Michigan, Ohio and Indiana and a loan production office located in Massachusetts. Retail loan production offices are responsible for processing loan applications received and preparing loan documentation. Loan applications are then evaluated by the underwriting department for compliance with the Company’s underwriting criteria, including loan-to-value ratios, borrower qualifications and required insurance.

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 Federal Home Loan Mortgage Corporation (Freddie Mac). Loans guaranteed by the Department of Veterans Affairs (VA) and insured through the Federal Housing Administration (FHA) are originated in compliance with their underwriting guidelines permitting conversion of such loans into mortgage-backed securities issued by the Government National Mortgage Association (GNMA).

The Company’s residential mortgage origination business during 2002 was funded with Republic Bank’s retail deposits and short-term borrowings, including federal funds purchased and Federal Home Loan Bank (FHLB) advances. The majority of all mortgage loans originated are generally sold within a period of 30 to 60 days after

closing. These loans are classified as mortgage loans held for sale. Mortgage loans held for sale consist of loans that will be sold directly to secondary market investors or loans that are being prepared for securitization into mortgage-backed securities; however, the mortgage-backed security has not yet been formed and issued. These mortgage loans are typically sold without recourse by the Company in the event of default by the borrowers. To minimize interest rate risk, the Company obtains mandatory purchase commitments from investors prior to funding the loans.

Consistent with the Company’s strategy of managing interest rate risk, the majority of all long-term fixed rate mortgages originated are typically securitized and sold, or sold directly to secondary market investors. During 2002, the majority of variable rate mortgages were retained in the loan portfolio of Republic Bank. Such loans may be securitized at a later date and either sold or held as securities available for sale.

Mortgage Loan Servicing for Others

The mortgage loan servicing function involves the administration of loans; collection and remittance of loan payments; receipt of escrow funds for payment of taxes and insurance; counseling of delinquent mortgagors and supervision of foreclosures and property dispositions in the event of unremedied defaults. In 2001, in conjunction with the sale of Market Street, the Company sold its $1.8 billion mortgage servicing portfolio of loans serviced for others and substantially exited the servicing business.

Competition

Commercial, retail and mortgage banking are highly competitive businesses in which the Company faces numerous banking and non-banking institutions as competitors. By reason of changes in Federal law (which became effective on September 29, 1995 and March 11, 2000, respectively) and Michigan law (which became effective on November 29, 1995) the number and types of potential depository institution competitors have substantially increased. (See Interstate Banking and Branching and Gramm-Leach-Bliley on pages 5 and 6.)

In addition to competition from other banks, the Company continues to face increased competition from other types of financial services organizations. Competition from finance companies and credit unions has increased in the areas of consumer lending and deposit gathering. The Company’s mortgage banking business line also faces significant competition from numerous bank and non-bank competitors. Other competitors may have greater resources to use in making acquisitions and higher lending limits than those of Republic Bank or any banking institution that the Company could acquire. Such institutions may also provide certain non-traditional financial products and services to their customers which Republic Bank currently does not offer.

The principal factors of competition in the markets for deposits and loans are price (interest rates paid and/or fees charged) and customer service. Republic Bank competes for deposits by offering depositors a variety of checking and savings accounts, time deposits, convenient office locations, and personalized customer service. The Company competes for loans through the efficiency and quality of the services it provides to borrowers, real estate brokers, and home builders. The Company seeks to compete for loans primarily on the basis of customer service, including prompt underwriting decisions and funding of loans, and by offering a variety of loan programs as well as competitive interest rates.

Employees

As of December 31, 2002, the Company and its subsidiaries had 1,229 full-time equivalent employees. None of the Company’s employees are represented by a labor union. The Company considers its relations with its employees to be good.

Principal Sources of Revenue

The principal sources of revenue for the Company are interest income from interest and fees on loans and mortgage banking revenue. Interest and fees on loans totaled $266.4 million in 2002, a decrease of 16% from $316.3 million in 2001 and down 20% from $333.7 million in 2000. In 2002, interest and fees on loans accounted for 78% of total revenues, compared to 78% and 80% of total revenues in 2001 and 2000, respectively. Mortgage banking revenue includes mortgage loan production revenue and net mortgage servicing revenue. Mortgage banking revenue, the largest component of noninterest income, totaled $34.4 million in 2002, a decrease of 26% from $46.7 million in 2001 and down 42% from $59.2 million in 2000. Mortgage loan banking revenue represented 10% of total revenues in 2002, compared to 12% in 2001, and 14% in 2000.

Monetary Policy and Economic Controls

The earnings of Republic Bank, and, therefore, the earnings of the Company, are affected by the policies of regulatory authorities, including the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). An important function of the Federal Reserve Board is to promote orderly economic growth by influencing interest rates and the supply of money and credit. Among the methods that have been used to achieve this objective are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, interest rates on loans and securities, and rates paid for deposits.

The Federal Reserve Board’s monetary policies strongly influence the behavior of interest rates and can have a significant effect on the operating results of commercial banks and mortgage banking companies. During 2002 and 2001, the Federal Reserve Board maintained interest rates at historically low levels. The effects of the various Federal Reserve Board policies on the future business and earnings of the Company cannot be predicted. Other economic controls also have affected the Company’s operations in the past. The Company cannot predict the nature or extent of any effects that possible future governmental controls or legislation may have on its business and earnings.

Supervision and Regulation

General

Bank holding companies and banks are highly regulated at both the state and federal level. As a bank holding company, the Company is subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Under the BHC Act, the Company is prohibited from engaging in activities other than those of banking or of managing or controlling banks and from acquiring or retaining direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company, unless the activities engaged in by the Company or the company whose voting shares are acquired by the Company are activities which the Federal Reserve Board determines to be so closely related to the business of banking as to be a proper incident thereto. Subject to the provisions of Gramm-Leach-Bliley, a bank holding company may elect to become a financial holding company and thereby engage in a broader range of financially oriented products and services (see Gramm-Leach-Bliley on page 6).

Republic Bank is chartered by the State of Michigan and supervised and regulated by the Michigan Office of Financial and Insurance Services (the “OFIS”). As an insured bank chartered by state regulatory authorities, Republic Bank is also regulated by the Federal Deposit Insurance Company (“FDIC”).

The Company is a legal entity separate and distinct from its bank subsidiary. Most of the Company’s revenue results from interest earned on deposits maintained at Republic Bank and from management fees and dividends paid to it by Republic Bank. There are statutory and regulatory requirements applicable to the payment of dividends by Republic Bank to the Company as well as by the Company to its shareholders.

Under Federal Reserve Board policy, the Company is expected to act as a source of financial and managerial strength to its subsidiaries and to commit resources to support them. This support may be required at times when, in the absence of such Federal Reserve Board policy, the Company would not otherwise be required to provide it.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”), among other things: (i) permits bank holding companies to acquire control of banks in any state, subject to (a) specified maximum national state deposit concentration limits; (b) any applicable state law provisions requiring the acquired bank to be in existence for a specified period of up to five years; (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank’s assets available for call by a state sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorizes interstate mergers by banks in different states (and retention of interstate branches resulting from such mergers, subject to the provisions noted above in (i) and to any state laws that “opt-out” of the provision entirely, and (iii) authorizes states to enact legislation permitting interstate de novo branching.

The Michigan Banking Code permits, in appropriate circumstances and with notice to, or the approval of the Commissioner of the OFIS, (i) acquisition of Michigan-chartered banks (such as Republic Bank) by FDIC-insured banks, savings banks or savings and loan associations located in other states, (ii) the sale by a Michigan-chartered bank of one or more of its branches (not comprising all or substantially all of its assets) to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan-chartered bank could purchase one or more branches of the purchasing entity, (iii) the acquisition by a Michigan-chartered bank of an FDIC-insured bank, savings bank or savings and loan association located in another state, (iv) the acquisition by a Michigan-chartered bank of one or more branches (not comprising all or substantially all of the assets) of an FDIC-insured bank, savings bank or savings and loan association located in another state, (v) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states with the resulting organization chartered either by Michigan or one of such other states, (vi) the establishment by Michigan-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates, (vii) the establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia, or U.S. territories or protectorates having laws permitting a Michigan-chartered bank to establish a branch in such jurisdiction, and (viii) the establishment by foreign banks of branches located in Michigan.

Dividends

Michigan law places specific limits on the source and amount of dividends which may be paid by Republic Bank. The payment of dividends by the Company and Republic Bank are also affected by various regulatory requirements and policies, such as the requirement to maintain adequate capital above regulatory guidelines. The “prompt corrective action” provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels and, in some cases, their parent bank holding companies. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized.

The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The Federal Reserve Board has issued a policy statement providing that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

These regulations and restrictions may limit the Company’s ability to obtain funds from its subsidiary for its cash needs, including funds for acquisitions, payment of dividends, and interest and the payment of operating expenses.

USA Patriot Act

Enacted in 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) requires each financial institution to implement additional policies and procedures with respect to: money laundering; suspicious activities and currency transaction reporting; and currency crimes. The USA Patriot Act also contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

Gramm-Leach-Bliley

Enacted late in 1999, the Gramm-Leach-Bliley Act (“Gramm-Leach-Bliley”), provides some new consumer protections with respect to privacy issues and ATM usage fees, and broadens the scope of financial services that banks may offer to consumers, essentially removing the barriers erected during the Depression that separated banks and securities firms. Gramm-Leach-Bliley permits affiliations between banks, securities firms and insurance companies. A bank holding company may qualify as a financial holding company and thereby offer an expanded range of financial oriented products and services. To qualify as a financial holding company, a bank holding company’s subsidiary depository institutions must be well-managed, well-capitalized and have received a “satisfactory” rating on its latest examination under the Community Reinvestment Act. Gramm-Leach-Bliley provides for some regulatory oversight by the Securities and Exchange Commission for bank holding companies engaged in certain activities, and reaffirms that insurance activities are not to be regulated on the state level. States, however, may not prevent depository institutions and their affiliates from engaging in insurance activities. Commercial enterprises are no longer able to establish or acquire a thrift institution and thereby become a unitary thrift holding company. Thrift institutions may only be established or acquired by financial organizations. Gramm-

Leach-Bliley provides new consumer protections with respect to the transfer and use of their nonpublic personal information and generally enables financial institution customers to “opt-out” of the dissemination of their personal financial information to unaffiliated third parties. ATM operators who charge a fee to noncustomers for use of its ATMs must disclose the fee on a sign placed on the ATM and before the transaction is made as part of the on-screen display or by paper notice issued by the machine. The Company currently does not intend to apply for financial holding company status.

FIRREA

Banking legislation, including the Financial Institutions Reform and Recovery and Enforcement Act of 1989 (“FIRREA”) and FDICIA (described below), has broadened the regulatory powers of the federal bank regulatory agencies. Under FIRREA, a depository institution insured by the FDIC shall be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator or receiver and “in danger of default” is defined as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.

FDICIA

In December 1991, FDICIA was enacted, substantially revising the bank regulatory and funding provisions of the Federal Deposit Insurance Act and making revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly under capitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon where its capital levels are in relation to various relevant capital measures, which will include a risk-based capital measure and a leverage ratio capital measure, and certain other factors.

Regulations establishing the specific capital tiers provide that, for an institution to be well capitalized it must have a total risk-based capital ratio of at least 10 percent, a Tier 1 risk-based capital ratio of at least 6 percent, a Tier 1 leverage ratio of at least 5 percent, and not be subject to any specific capital order or directive. For an institution to be adequately capitalized it must have a total risk-based capital ratio of at least 8 percent, a Tier 1 risk-based capital ratio of at least 4 percent, and a Tier 1 leverage ratio of at least 4 percent (and in some cases 3 percent). Under these regulations, the Company and Republic Bank are considered to be well capitalized as of December 31, 2002.

FDICIA directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, asset quality, earnings, stock valuation and other standards as they deem appropriate. Such standards were issued jointly by the agencies on August 9, 1995, in guideline form.

FDICIA also contains a variety of other provisions that may affect the operations of depository institutions including new reporting requirements, regulatory standards for real estate lending, “truth in savings” provisions, the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch and a prohibition on the acceptance or renewal of brokered deposits by depository institutions that are not well capitalized or are adequately capitalized and have not received a waiver from the FDIC. Under regulations relating to the brokered deposit prohibition, Republic Bank is well-capitalized and may accept brokered deposits without restriction.

FDIC Insurance Assessments

Republic Bank is generally subject to FDIC deposit insurance assessments paid to the Bank Insurance Fund (“BIF”). Republic Bank is also subject to FDIC deposit insurance assessments paid to the Savings Association Insurance Fund with respect to deposits acquired from thrift institutions, including those deposits held by Republic Savings Bank prior to the January 1, 1999 merger of Republic Savings Bank with and into Republic Bank, and those deposits held by D&N Bank prior to the December 1, 2000 merger of D&N Bank with and into Republic Bank. Pursuant to FDICIA, the FDIC has implemented a risk-based assessment scheme. Under this arrangement, each depository institution is assigned to one of nine categories (based upon three categories of capital adequacy and three categories of perceived risk to the applicable insurance fund). The assessment rate applicable to the Company’s

bank subsidiary depends in part upon the risk assessment classification assigned to Republic Bank by the FDIC and in part on the BIF and SAIF assessment schedules adopted by the FDIC. FDIC regulations currently provide that premiums related to deposits assessed by the BIF and SAIF are to be assessed at a rate of between 0 cents and 27 cents per $100 of deposits.

Under the Deposit Insurance Funds Act of 1996, effective January 1, 1997, Republic Bank is required to pay, in addition to the BIF and SAIF deposit insurance assessments, if any, the Financing Corporation (“FICO”) assessment to service the interest on FICO bond obligations. FICO assessment rates may be adjusted quarterly to reflect a change in assessment bases for the BIF and SAIF. The current FICO annual assessment rate for BIF and SAIF is 1.68 cents per $100 of deposits.

Mortgage Banking Activities

The Company’s banking subsidiary, Republic Bank, is engaged in the business of originating and selling mortgage loans secured by residential real estate. In the origination of mortgage loans, Republic Bank is subject to state usury and licensing laws and to various federal statutes, such as the Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of such entities, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing.

As sellers of mortgage loans, the Company’s banking subsidiary is a participant in the secondary mortgage market with some or all of the following: private institutional investors, Fannie Mae, GNMA, Freddie Mac, VA and FHA. In its dealings with these agencies, Republic Bank is subject to various eligibility requirements prescribed by the agencies, including but not limited to net worth, quality control, bonding, financial reporting and compliance reporting requirements. The mortgage loans that they originate are subject to agency-prescribed procedures, including, without limitation, inspection and appraisal of properties, maximum loan-to-value ratios, and obtaining credit reports on prospective borrowers. On some types of loans, the agencies prescribe maximum loan amounts, interest rates and fees. When selling mortgage loans to Fannie Mae, Freddie Mac, GNMA, VA and FHA, Republic Bank represents and warrants that all such mortgage loans sold by them conform to their requirements. If the mortgage loans sold are found to be non-conforming mortgage loans, such agency may require the seller (i.e., Republic Bank) to repurchase the non-conforming mortgage loans. Additionally, Fannie Mae, Freddie Mac, GNMA, VA and FHA may require Republic Bank to indemnify them against all losses arising from their failure to perform their contractual obligations under the applicable selling or servicing contract. Certain provisions of the Housing and Community Development Act of 1992, and regulations adopted thereunder may affect the operations and programs of Fannie Mae and Freddie Mac.

Regulation of Proposed Acquisitions

In general, any direct or indirect acquisition by the Company of any voting shares of any bank which would result in the Company’s direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the Company with another bank holding company, will require the prior written approval of the Federal Reserve Board under the BHC Act. In acting on such applications, the Federal Reserve Board must consider various statutory factors, including among others, the effect of the proposed transaction on competition in relevant geographic and product markets, and each party’s financial condition, managerial resources, and record of performance under the Community Reinvestment Act.

The merger or consolidation of an existing bank subsidiary of the Company with another bank, or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability by such a subsidiary to pay any deposits in another bank, will require the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act, based upon a consideration of statutory factors similar to those outlined above with respect to the BHC Act. In addition, an application to, and the prior approval of, the Federal Reserve Board may be required under the BHC Act, in certain such cases.

Each of the foregoing types of applications is subject to public notice and comment procedures, and, in many cases, to prior notice and/or approval of Federal and State bank regulatory authorities. Adverse public comments received, or adverse considerations raised by the regulatory agencies, may delay or prevent consummation of the proposed transaction.

Community Reinvestment Act

Under the Community Reinvestment Act of 1977, as amended (the “CRA”), a financial institution is required to help meet the credit needs of its entire community, including low-income and moderate-income areas. Republic Bank’s CRA rating is determined by evaluation of its lending, service and investment performance. The Federal banking agencies may take CRA compliance into account in an agency’s review of applications for mergers, acquisitions, and to establish branches or facilities.

Forward-Looking Statements

From time to time, we may publish forward-looking statements relating to such matters as possible or assumed future results of our operations, anticipated financial performance, business prospects, new products, and similar matters. These forward-looking statements are subject to risks and uncertainties. Also, when we use any of the words “believes,” “expects,” “plans,” “anticipates,” “estimates” or similar expressions we are making forward-looking statements.

We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. We believe that our forward-looking statements are reasonable. You should not place undue reliance on any such forward-looking statements, which speak only as of the date made. You should understand that the following important factors, in addition to those discussed elsewhere in this Annual Report on Form 10-K, in our press releases, and in our public documents to which we refer, could affect our future results and performance. This could cause those results to differ materially from those expressed in our forward-looking statements. Factors that might cause such a difference include the following:

	•		significantly increased competition from banking and non-banking institutions;

	•		inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

	•		general economic conditions, either nationally or in our market areas, that are worse than expected;

	•		adverse changes in the securities markets;

	•		legislative or regulatory changes that adversely affect our business;

	•		the ability to enter new markets successfully and capitalize on growth opportunities;

	•		effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

	•		timely development of and acceptance of new products and services;

	•		changes in consumer spending, borrowing and savings habits;

	•		effect of changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board;

	•		changes in our organization, compensation and benefit plans;

	•		costs and effects of litigation and unexpected or adverse outcomes in such litigation; and

	•		our success in managing risks involved in the foregoing.

The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of all the executive officers (4) of the Company as of December 31, 2002. All of these officers are elected annually by the Board of Directors. Each of the executive officers has served as an officer of the Company for more than five years. There are no family relationships among any of the executive officers.


Name	Age		Position

Jerry D. Campbell		62	Chairman of the Board (Since 1985)
Dana M. Cluckey		42	President and Chief Executive Officer (Since 1986)
Barry J. Eckhold		56	Senior Vice President and Chief Credit Officer (Since 1990)
Thomas F. Menacher, CPA		46	Executive Vice President, Treasurer, Chief Financial
			Officer and Corporate Secretary (Since 1992)

ITEM 2. PROPERTIES

The Company’s executive offices are located at 1070 East Main Street, Owosso, Michigan 48867. At December 31, 2002, the Company had 96 commercial, retail, and mortgage banking offices in Michigan, Ohio and Indiana, of which 40 were owned and 56 were leased. Additionally, the Company has a loan production office in Massachusetts, which is leased. All of these offices are considered by management to be well maintained and adequate for the purpose intended. See Note 6 to the Consolidated Financial Statements included under Item 8 of this document for further information on properties.

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to litigation and claims arising in the normal course of their activities. Although the amount of ultimate liability, if any, with respect to such matters cannot be determined with reasonable certainty, management, after consultation with legal counsel, believes that the aggregate liability, if any, resulting from such matters would not have a material adverse effect on the Company’s consolidated financial condition. See also Note 19 to the Consolidated Financial Statements included in Item 8 of this document.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2002.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Quarterly Dividends and Market Price Summary


					Common Stock
			Dividends		Price Range ⁽¹⁾
			Declared
			Per Share ⁽¹⁾		High		Low

2002
	Fourth quarter		$	0.085	$	13.040	$	10.209
	Third quarter			0.077		13.611		10.245
	Second quarter			0.077		13.999		12.118
	First quarter			0.078		13.064		10.564

		Year	$	0.317	$	13.999	$	10.209

2001
	Fourth quarter		$	0.077	$	13.182	$	10.727
	Third quarter			0.070		13.306		9.719
	Second quarter			0.070		11.653		9.659
	First quarter			0.071		10.640		8.523

		Year	$	0.288	$	13.306	$	8.523

⁽¹⁾ Dividends and market price data have been restated to reflect the issuance of stock dividends.

The Company’s common stock is traded on The Nasdaq Stock Market® under the symbol RBNC. There were approximately 21,000 shareholders of record of the Company’s common stock as of March 5, 2003.

ITEM 6. SELECTED FINANCIAL DATA


Year Ended December 31		2002			2001				2000				1999				1998

Earnings Summary (in thousands)
Interest income		$	284,704		$	333,376			$	348,328			$	299,662			$	285,979
Interest expense			137,024			189,767				213,680				171,396				173,649
Net interest income			147,680			143,609				134,648				128,266				112,330
Provision for loan losses			16,000			8,700				6,500				11,650		⁽²⁾		6,500
Mortgage banking revenue			34,427			46,681				59,159				86,469				85,258
Other noninterest income			21,600			24,703		⁽²⁾		11,679				6,214		⁽²⁾		13,290
Noninterest expense			100,515			132,213		⁽²⁾		127,641		⁽²⁾		180,920		⁽²⁾		142,076
Income before preferred stock dividends			62,505			51,565				48,400				17,634				41,675
Net income			56,677			47,910				45,677				14,911				38,952
Per Common Share⁽¹⁾
Basic earnings		$	.97		$	.80		⁽³⁾	$	.76			$	.25		⁽³⁾	$	.66
Diluted earnings			.96			.79		⁽³⁾		.76				.25		⁽³⁾		.65
Cash dividends declared			.32			.29				.26				.25				.22
Book value (year-end)			5.79			5.21				4.93				4.42				4.46
Closing price of common stock (year-end)			11.77			12.59				8.94				9.12				9.31
Dividend payout ratio (operating)			33	%		34	%			35	%			33	%			33	%
Operating Data (in millions)
Loan closings:
	Residential mortgage loans	$	3,928		$	5,340			$	3,852			$	5,200			$	6,614
	Commercial loans		493			490				531				462				410
	SBA loans		42			34				32				44				39
	Direct consumer loans		486			438				359				291				109
	Indirect consumer loans		—			—				65				191				206
Mortgage loan servicing portfolio (year-end)			307			189				2,229				3,089				3,517
Year-End Balances (in millions)
Total assets		$	4,778		$	4,741			$	4,611			$	4,302			$	4,214
Total earning assets			4,567			4,573				4,375				4,052				3,999
Mortgage loans held for sale			661			748				385				459				770
Total portfolio loans			3,657			3,458				3,772				3,373				2,544
Total deposits			2,788			2,753				2,729				2,613				2,643
Total short-term borrowings and FHLB advances			1,517			1,477				1,385				1,229				1,084
Long-term debt			14			14				48				48				52
Shareholders’ equity			333			305				295				266				266
Ratios
Return on average assets			1.24	%		1.04	%	⁽³⁾		1.02	%			.36	%	⁽³⁾		1.00	%
Return on average equity			17.52			15.76		⁽³⁾		16.28				5.64		⁽³⁾		15.73
Net interest margin ⁽⁴⁾			3.44			3.31				3.14				3.29				3.05
Net loan charge-offs to average total loans ⁽⁵⁾			.23			.19				.13				.17				.09
Allowance for loan losses as a percentage of year-end portfolio loans			.99			.84				.75				.80				.84
Non-performing assets as a percentage of year-end total assets			.89			.66				.56				.52				.61
Operating efficiency ratio ⁽⁶⁾			50.80			56.17				64.10				65.44				68.19
Net interest income to operating expenses			146.92			126.85				105.49				70.90				74.13
Average shareholders’ equity to average assets			7.10			6.63				6.26				6.46				6.37
Tier 1 risk-based capital			11.18			11.43				9.50				9.67				9.80
Total risk-based capital			12.26			12.31				10.38				10.60				10.55
Tier 1 leverage			7.81			8.34				6.82				6.59				6.54

⁽¹⁾		All per share amounts presented have been adjusted to reflect the issuance of stock dividends or stock splits effected in the form of stock dividends.

⁽²⁾		Amounts for 2001 include a pre-tax gain of $12.0 million on the sale of Market Street Mortgage Corporation and pre-tax restructuring costs of $19.0 million to exit the mortgage servicing business. Amounts for 2000 include a pre-tax credit of $4 million associated with the completion of the D&N Financial merger integration and restructuring plan. Amounts for 1999 include a pre-tax charge of $31.5 million of merger integration and restructuring charges related to the merger with D&N Financial, a $7.6 million pre-tax loss on the sale of low-yielding fixed rate securities, and an additional $5.0 million pre-tax provision for loan losses.

⁽³⁾		Amounts for 2001 include the after-tax gain of $7.8 million on the sale of Market Street Mortgage Corporation and the after-tax restructuring costs of $12.35 million to exit the mortgage servicing business. Excluding these amounts, return on average assets was 1.14%, return on average equity was 17.25% and diluted earnings per share was $.87 in 2001. Amounts for 1999 include the after-tax impact of a $22.0 million merger integration and restructuring charge related to the merger with D&N Financial, a $4.9 million after-tax loss on the sale of low-yielding fixed rate securities, and an additional $3.3 million after-tax provision for loan losses. Excluding the charges, return on average assets was 1.10%, return on average equity was 17.07% and diluted earnings per share was $.74 in 1999.

⁽⁴⁾		Net interest income (FTE) expressed as a percentage of average interest-earnings assets.

⁽⁵⁾		Includes mortgage loans held for sale.

⁽⁶⁾		Total noninterest expense, excluding nonrecurring items for the years ended December 31, 2001, 2000 and 1999, divided by total revenue, excluding gains or losses on sale of securities and gain on sale of subsidiary..

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Net income for 2002 was $56.7 million, compared to net income of $47.9 million earned in 2001. Diluted earnings per share were $.96 in 2002, up from the $.79 earned in 2001. The results for 2001 include an after tax gain of $7.8 million on the sale of Market Street Mortgage Corporation and after tax restructuring costs of $12.4 million to exit the mortgage servicing business. Excluding these charges, the Company reported net operating income of $52.5 million and diluted earnings per share of $.87 in 2001. Net income for 2002 generated return on average assets of 1.24% and return on equity of 17.52%. These compare with return on average assets of 1.04% and return on average equity of 15.76% in 2001. Return on average assets and return on average equity based on operating earnings in 2001 were 1.14% and 17.25%, respectively.

The Company’s 2002 results of operations reflected the following trends in earnings:

	•		Net interest income increased 3% during 2002 following an increase of 7% in 2001. Increases in the net interest margin during these periods contributed to the growth in net interest income.

	•		The net interest margin expanded to 3.44% in 2002, compared to 3.31% in 2001 and 3.14% in 2000. The increase in the net margin during 2002 was due to the Company’s cost of funds on interest-bearing liabilities decreasing more than the decline in yield on earning assets.

	•		The commercial loan portfolio balance grew $106 million, or 8% over 2001 to $1.5 billion after increasing 20% in 2001, reflecting continued strong commercial real estate lending in the Company’s markets.

	•		The consumer direct loan portfolio balance grew $60 million, or 12% over 2001 to $557 million after increasing 8% in 2001, reflecting continued success of specifically targeted sales and marketing efforts in home equity lending.

Shareholders’ equity totaled $332.7 million at December 31, 2002 compared to $304.9 million at December 31, 2001, an increase of 9%. The increase in shareholder’s equity resulted primarily from net income of $56.7 million being offset by $18.4 million in cash dividends to shareholders and $18.6 million in stock repurchases. Market capitalization, which is computed by multiplying the number of shares outstanding by the closing price of the Company’s common stock at year-end, was $676.1 million at December 31, 2002. Capital ratios, by all measures, remain in excess of regulatory requirements for a well-capitalized financial institution.

Business Segments

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 82 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. As discussed earlier, the Company sold Market Street Mortgage in the second quarter of 2001 and in conjunction with the sale of Market Street, the Company substantially exited the mortgage servicing business. Mortgage loan production is now conducted in all offices of Republic Bank. See Note 21 to the Consolidated Financial Statements for further information concerning the Company’s business segments.

Mortgage Banking

The Company’s mortgage banking segment is comprised of mortgage loan production and mortgage loan servicing for others.

Table 1
Residential Mortgage Loan Closings


Year Ended December 31
(In thousands)		2002		2001		2000

Republic Bank		$	3,928,064	$	4,146,685	$	2,266,494
Market Street Mortgage			—		1,193,476		1,585,273

	Total closings	$	3,928,064	$	5,340,161	$	3,851,767

The Company’s total closings of single-family residential mortgage loans decreased $1.4 billion, or 26%, to $3.9 billion in 2002. The decrease in origination volumes in 2002 was primarily the result of the sale of Market Street Mortgage. Excluding Market Street Mortgage, origination volumes decreased $219 million, or 5%, in 2002 compared to 2001. Refinances totaled $2.5 billion, or 63% of total closings in 2002, compared to $2.9 billion, or 54% of total closings in 2001. In 2001, total mortgage loan closings increased $1.5 billion, or 39%, to $5.3 billion compared to $3.9 billion in 2000, reflecting a decreasing interest rate environment during 2001, which resulted in a higher level of refinance activity during 2001. The Company’s pipeline of mortgage loan applications in process was $545 million at December 31, 2002, compared to $611 million at December 31, 2001.

Table 2
Mortgage Banking Revenue


Year Ended December 31
(In thousands)		2002		2001			2000

Mortgage loan production revenue ⁽¹⁾		$	34,132	$	46,808		$	55,720
Net mortgage loan servicing revenue (expense) ⁽²⁾			295		(127	)		1,179
Gain on bulk sales of mortgage servicing rights			—		—			2,260

	Total mortgage banking revenue	$	34,427	$	46,681		$	59,159

⁽¹⁾		Includes fee revenue derived from the loan origination process (i.e., points collected), gains on the sale of mortgage loans and the related mortgage servicing rights released concurrently with underlying loans sold (mortgage loan production revenue), net of commissions and incentives paid and net deferred mortgage loan origination costs. Mortgage loan production revenue totaled $59.7 million, $86.2 million and $84.6 million for 2002, 2001 and 2000, respectively. Commission and incentives paid were $35.9 million, $51.2 million and $36.7 million for 2002, 2001 and 2000 respectively. For 2002, 2001 and 2000 net deferred mortgage loan origination costs totaled $10.4 million, $11.8 million and $7.9 million, respectively.

		Mortgage loan production revenue also includes gains on sales of mortgage portfolio loans totaling $5.0 million, $1.3 million and $536,000 for 2002, 2001 and 2000, respectively. Mortgage loan portfolio sales totaled $232.4 million, $163.6 million and $134.8 million for 2002, 2001 and 2000, respectively.

⁽²⁾		Includes servicing fees, late fees and other ancillary charges, net of amortization and charges for impairment of mortgage servicing rights, if any.

Mortgage banking revenue, the largest component of total noninterest income, decreased $12.3 million, or 26%, to $34.4 million in 2002, after decreasing 21%, to $46.7 million in 2001. The decreases in 2002 and 2001 were primarily the result of decreases in mortgage loan production revenue. Mortgage loan production revenue decreased $12.7 million, or 27%, in 2002 due to a reduction in the amount of mortgage loans sold. The Company sold $3.0 billion of single-family residential mortgages in 2002, compared to $4.2 billion and $3.6 billion in 2001 and 2000, respectively. The ratio of mortgage production revenue to mortgage loans sold was 2.00% in 2002, compared to 2.03% in 2001 and 2.32% in 2000.

Net mortgage loan servicing revenue was $295,000 in 2002 compared to net mortgage servicing expense of $127,000 in 2001 and net mortgage servicing revenue of $1.2 million in 2000. The decrease in 2002 and 2001 was primarily the result of substantially exiting the mortgage servicing business in June of 2001 through the sale of Market Street’s $1.8 billion mortgage loan servicing portfolio. During 2002 and the last half of 2001, the Company’s loans serviced for others portfolio averaged only $238 million and $177 million, respectively. As a result, net mortgage loan servicing revenue was immaterial and is expected to be immaterial in the future.

Amortization of mortgage servicing rights, including the write-down of mortgage servicing rights to market value and impairment reserves totaled $1.2 million in 2002, compared to $20.4 million in 2001 and $14.0 million in 2000. As discussed earlier, at the end of the first quarter of 2001, the Company elected to substantially exit the mortgage servicing business. Accordingly, the Company recorded a write-down of mortgage servicing rights at the end of the first quarter of 2001 of $16.1 million to reflect the current market value of the servicing portfolio. In addition, transaction costs associated with the servicing portfolio sale were $2.0 million and costs associated with winding down the servicing operation were $900,000. A sale agreement regarding Market Street’s mortgage servicing portfolio was subsequently signed in April 2001 with an unaffiliated company and the Company completed the sale during the second quarter of 2001. The significant decrease in the value of the servicing portfolio from December 31, 2000 to March 31, 2001 was a result of dramatic increases in the prepayment speed assumptions (PSA) during the first quarter of 2001, as well as an over 120 basis point decrease in the earnings rate received on escrow balances. These changes were a result of the decline in short-term interest rates occurring during the quarter due to the Federal Reserve Board’s action to lower the federal funds rate. After selling Market Street’s servicing portfolio, there was no impairment reserve during 2002 or at December 31, 2001.

The Company sold mortgage servicing rights concurrently with the sale of the underlying loans rather than in bulk form in 2002. The sale of Market Street’s $1.8 billion servicing portfolio completed in the second quarter of 2001 did not result in a material gain or loss. In 2000, bulk sales of mortgage servicing rights for loans with a principal balance of $796.9 million resulted in a gain of $2.3 million.

Commercial and Retail Banking

The remaining disclosures and analyses within this Management’s Discussion and Analysis of the Company’s financial condition and results of operations relate principally to the commercial and retail banking segment.

Results of Operations

Net Interest Income

Net interest income is defined as the difference between total interest income generated by earning assets and the cost of funding those assets. To permit the comparable analysis of tax-exempt and fully taxable income, net interest income is stated on a fully taxable equivalent (FTE) basis, reflecting adjustments based on a 35% tax rate made to the yields of tax-exempt investment securities included in earning assets. The net interest margin is net interest income (FTE) expressed as a percentage of average earning assets and measures how effectively the Company utilizes its earning assets in relationship to the interest cost of funding them.

Net interest income (FTE) rose 3% to $151.6 million in 2002, compared to $146.8 million in 2001, primarily due to an increase in net interest margin offsetting a slight decline in average earning assets. Net interest margin increased by 13 basis points to 3.44% in 2002 compared to 3.31% in 2001. The increase in the margin was due to the Company’s cost of funds decreasing more than the yields on average earning assets during 2002. The decrease in the Company’s cost of funds was a result of decreases paid on short-term borrowings, FHLB advances and interest bearing deposits. Average earning assets declined $20.9 million, or 0.5%, to $4.4 billion in 2002, as the reduction in average mortgage loans held for sale more than offset an increase in the average balance of investment securities.

In 2001, net interest margin increased by 17 basis points to 3.31%, compared to 3.14% in 2000. The increase in the margin was also due to the Company’s cost of funds decreasing more than the yields on average earning assets during the year.

Table 3
Analysis of Net Interest Income (FTE)


Year Ended December 31
(Dollars in thousands)			2002								2001

			Average					Avg.			Average					Avg.
			Balance			Interest		Rate			Balance			Interest		Rate

Average Assets:
Short-term investments			$	1,818		$	37		2.03	%	$	2,448		$	102		4.17	%
Mortgage loans held for sale				429,381			27,677		6.45			520,565			37,900		7.28
Investment securities				374,615			22,198		5.93			293,085			20,171		6.88
Portfolio loans: ⁽¹⁾
	Commercial loans			1,432,793			98,594		6.79			1,258,535			103,671		8.12
	Real estate mortgage loans			1,565,739			99,400		6.35			1,730,386			122,350		7.07
	Installment loans			591,417			40,761		6.89			611,619			52,371		8.56

		Total loans, net of unearned income		3,589,949			238,755		6.61			3,600,540			278,392		7.69

	Total interest-earning assets			4,395,763			288,667		6.54			4,416,638			336,565		7.59
Allowance for loan losses				(31,065	)							(28,970	)
Cash and due from banks				60,885								66,371
Other assets				133,285								132,397

	Total assets		$	4,558,868							$	4,586,436

Average Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits			$	163,191		$	1,019		0.62	%	$	147,694		$	1,967		1.33	%
Savings deposits				863,424			15,359		1.78			724,655			22,251		3.07
Time deposits				1,469,788			58,794		4.00			1,604,469			90,386		5.63

	Total interest bearing deposits			2,496,403			75,172		3.01			2,476,818			114,604		4.63
Short-term borrowings				202,129			3,582		1.75			96,430			3,460		3.54
FHLB advances				1,177,042			57,305		4.80			1,323,837			70,252		5.23
Long-term debt				13,500			965		7.15			20,125			1,451		7.21

	Total interest bearing liabilities			3,889,074			137,024		3.50			3,917,210			189,767		4.82
Noninterest-bearing deposits				240,902								262,493
Other liabilities				39,476								63,104

	Total liabilities			4,169,452								4,242,807
Trust preferred securities and preferred stock in subsidiary				65,856								39,552
Shareholders’ equity				323,560								304,077

	Total liabilities and shareholders’ equity		$	4,558,868							$	4,586,436

Net interest income/ Rate spread (FTE)						$	151,643		3.04	%				$	146,798		2.77	%

FTE adjustment						$	3,963							$	3,189

Impact of noninterest-
	bearing sources of funds								.40								.54

Net interest margin (FTE)									3.44	%							3.31	%

[Additional columns below]

[Continued from above table, first column(s) repeated]


Year Ended December 31
(Dollars in thousands)			2000

			Average					Avg.
			Balance			Interest		Rate

Average Assets:
Short-term investments			$	2,904		$	170		5.85	%
Mortgage loans held for sale				425,956			34,535		8.11
Investment securities				195,364			14,571		7.46
Portfolio loans: ⁽¹⁾
	Commercial loans			1,018,415			92,578		9.09
	Real estate mortgage loans			1,905,915			141,237		7.41
	Installment loans			735,429			65,317		8.88

		Total loans, net of unearned income		3,659,759			299,132		8.17

	Total interest-earning assets			4,283,983			348,408		8.13
Allowance for loan losses				(28,319	)
Cash and due from banks				60,022
Other assets				169,674

	Total assets		$	4,485,360

Average Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits			$	102,233		$	1,708		1.67	%
Savings deposits				723,153			22,625		3.13
Time deposits				1,634,479			98,829		6.05

	Total interest bearing deposits			2,459,865			123,162		5.01
Short-term borrowings				55,047			3,532		6.42
FHLB advances				1,339,009			83,552		6.24
Long-term debt				47,500			3,434		7.23

	Total interest bearing liabilities			3,901,421			213,680		5.48
Noninterest-bearing deposits				188,602
Other liabilities				85,981

	Total liabilities			4,176,004
Trust preferred securities and preferred stock in subsidiary				28,719
Shareholders’ equity				280,637

	Total liabilities and shareholders’ equity		$	4,485,360

Net interest income/ Rate spread (FTE)						$	134,728		2.65	%

FTE adjustment						$	80

Impact of noninterest-
	bearing sources of funds								.49

Net interest margin (FTE)									3.14	%

⁽¹⁾ Non-accrual loans and overdrafts are included in average balances.

Table 4
Rate/Volume Analysis (FTE)


				2002/2001									2001/2000

				Increase/(Decrease)									Increase/(Decrease)
				Due to Change in:									Due to Change in:

				Average			Average			Net			Average			Average			Net
(In thousands)				Balance⁽¹⁾			Rate⁽¹⁾			Change			Balance⁽¹⁾			Rate⁽¹⁾			Change

Interest Income:
	Short-term investments			$	(22	)	$	(43	)	$	(65	)	$	(24	)	$	(44	)	$	(68	)
	Mortgage loans held for sale				(6,192	)		(4,031	)		(10,223	)		7,144			(3,779	)		3,365
	Investment securities				5,076			(3,049	)		2,027			6,808			(1,208	)		5,600
	Loans, net of unearned income ⁽²⁾				243			(39,880	)		(39,637	)		(2,032	)		(18,708	)		(20,740	)

		Total interest income			(895	)		(47,003	)		(47,898	)		11,896			(23,739	)		(11,843	)
Interest Expense:
	Interest-bearing demand deposits				189			(1,137	)		(948	)		660			(401	)		259
	Savings deposits				3,695			(10,587	)		(6,892	)		48			(422	)		(374	)
	Time deposits				(7,101	)		(24,491	)		(31,592	)		(1,766	)		(6,677	)		(8,443	)

		Total interest-bearing deposits			(3,217	)		(36,215	)		(39,432	)		(1,058	)		(7,500	)		(8,558	)
	Short-term borrowings				2,446			(2,324	)		122			1,940			(2,012	)		(72	)
	FHLB advances				(7,435	)		(5,512	)		(12,947	)		(870	)		(12,430	)		(13,300	)
	Long-term debt				(474	)		(12	)		(486	)		(1,973	)		(10	)		(1,983	)

		Total interest expense			(8,680	)		(44,063	)		(52,743	)		(1,961	)		(21,952	)		(23,913	)

			Net interest income (FTE)	$	7,785		$	(2,940	)	$	4,845		$	13,857		$	(1,787	)	$	12,070

⁽¹⁾		Variances attributable jointly to volume and rate changes are allocated to volume and rate in proportion to the relationship of the absolute dollar amount of the change in each.

⁽²⁾		Non-accrual loans and overdrafts are included in average balances.

Noninterest Income

Noninterest income is a significant source of revenue for the Company, contributing 16% of total revenues in 2002, compared to 15% in 2001, excluding the gain of sale of subsidiary, and 17% in 2000. Details of the largest component of noninterest income are presented in the “Mortgage Banking” section. Exclusive of mortgage banking revenue and the gain on sale of subsidiary, noninterest income increased to $21.6 million in 2002 from $12.7 million in 2001, due to increases in service charges, investment securities gains, income from bank owned life insurance and increased gains on sale of Small Business Administration (SBA) loans.

Service charges collected on customer accounts increased to $9.2 million, or 19% during 2002. The increase was primarily due to a higher level of collection of fees for non-sufficient funds and ancillary fees.

During 2002, the Company sold $317.6 million of investment securities to fund strong mortgage origination volume resulting in a net gain of $5.9 million. During 2001, reflecting similar mortgage volume, the Company sold $175.3 million of investment securities for a net gain of $1.4 million. During 2000, the Company sold $41.3 million of investment securities for a net gain of $109,000.

During 2002, the Company purchased $85 million of separate account bank owned life insurance, which resulted in income of $2.2 million.

The guaranteed portion of SBA loans are regularly sold to investors. In 2002, the Company sold $23.8 million of the guaranteed portion of SBA loans, compared to $18.4 million in 2001 and $14.1 million in 2000, resulting in gains of $1,447,000, $882,000 and $576,000, respectively, which are included in other noninterest income.

Table 5
Noninterest Income


Year Ended December 31
(In thousands)		2002		2001			2000

Mortgage loan production revenue		$	34,132	$	46,808		$	55,720
Net mortgage servicing revenue (expense)			295		(127	)		3,439
Service charges			9,206		7,720			7,819
Investment securities gains			5,859		1,425			109
Income from banked owned life insurance			2,192		—			—
Other noninterest income			4,343		3,558			3,751
Gain on sale of subsidiary			—		12,000			—

	Total noninterest income	$	56,027	$	71,384		$	70,838

Noninterest Expense

Total noninterest expense decreased 24% in 2002 to $100.5 million, after increasing 4% in 2001. Excluding the $19.0 million in restructuring costs to exit the mortgage servicing business in 2001, noninterest expense would have decreased $12.7 million, or 11%, in 2002 and 14% in 2001. Salaries and employee benefits expense decreased $5.2 million, or 8%, in 2002, following a decrease of $8.2 million, or 11%, in 2001. The decreases in salaries and employee benefits expense in 2002 and 2001 reflect the decreases in the average number of hourly and salaried employees, primarily due to the sale of Market Street in 2001 and the completion of the combination of Republic Bank and D&N Bank in 2000.

Occupancy expense decreased 13% in 2002 and 15% in 2001, and equipment expense decreased 12% in 2002 and 14% in 2001 primarily due to the sale of Market Street Mortgage in June 2001. Other noninterest expense decreased 17% in 2002 and 19% in 2001, also primarily due to the sale of Market Street Mortgage.

Table 6
Noninterest Expense


Year Ended December 31
(In thousands)		2002		2001		2000

Salaries and employee benefits		$	59,134	$	64,377	$	72,538
Occupancy expense of premises			9,926		11,427		13,467
Equipment expense			6,903		7,847		9,090
Other noninterest expense			24,552		29,562		36,546
Restructuring costs to exit the mortgage servicing business			—		19,000		—
Merger integration and restructuring credit			—		—		(4,000	)

	Total noninterest expense	$	100,515	$	132,213	$	127,641

In the fourth quarter of 2000, the Company completed its integration and restructuring plan when its two bank subsidiaries combined charters and converted to a common computer system. The total integration and restructuring costs incurred were $4 million less than the previously estimated costs; therefore, the Company recorded a merger integration and restructuring credit of $4 million in 2000.

Income Taxes

The provision for income taxes was $24.7 million in 2002, compared to $22.5 million in 2001 and $22.9 million in 2000. The effective tax rate, computed by dividing the provision for income taxes by income before taxes was 28.3% for 2002, compared to 30.4% for 2001 and 32.2% for 2000. The effective tax rate decreased in 2002 and 2001 primarily as a result of an increase in the average outstanding balance of tax-exempt securities in the Company’s securities available for sale portfolio, an increase in dividends on trust preferred securities and preferred stock of subsidiary and the tax-exempt income from bank owned life insurance purchased in 2002.

Financial Condition

Total assets were $4.8 billion at December 31, 2002 and $4.7 billion at December 31, 2001. The increase in total assets primarily reflects the growth in total portfolio loans, which was funded primarily by increases in core deposits and decreases in mortgage loans held for sale and securities available for sale.

Assets

Portfolio Loans

The Company’s loan portfolio is comprised of domestic loans to businesses and consumers. At December 31, 2002 and 2001, there were no loans to foreign debtors outstanding and the amount of agribusiness loans outstanding were insignificant. Loans to businesses are classified as commercial loans and are further segregated as commercial and industrial loans and commercial real estate loans. Commercial and industrial loans are made to local small- and medium-sized corporations primarily to finance working capital and equipment purchases.

Commercial real estate loans represent loans secured by real estate and consist of real estate construction loans and commercial real estate mortgage loans. Real estate construction loans are made to builders or developers of real estate properties and are typically refinanced at completion, becoming either income-producing or owner-occupied properties. Commercial real estate mortgage loans are secured by owner-occupied or income-producing properties. For owner-occupied property loans, the primary source of repayment is the cash flow of the owner with the real estate serving as a secondary repayment source. Income-producing property loans are made to entities or individuals engaged in real estate investment, and the primary source of repayment is derived from the rental or sale of the property.

Loans to consumers include residential real estate mortgage loans and installment loans. Installment loans are made for various purposes, primarily home equity loans.

Table 7
Loan Portfolio Analysis


December 31
(Dollars in thousands)			2002					2001					2000

			Amount		%			Amount		%			Amount		%

Commercial loans:
	Commercial and industrial		$	48,509		1.3	%	$	68,428		2.0	%	$	79,544		2.1	%
	Real estate construction			250,546		6.9			250,040		7.2			211,754		5.6
	Commercial real estate mortgages			1,170,212		32.0			1,044,594		30.2			840,994		22.3

		Total commercial loans		1,469,267		40.2			1,363,062		39.4			1,132,292		30.0
Residential real estate mortgages				1,593,929		43.6			1,511,831		43.7			1,964,394		52.1
Installment loans:
	Consumer direct			556,507		15.2			496,972		14.4			459,359		12.2
	Consumer indirect			36,840		1.0			86,516		2.5			215,631		5.7

		Total installment loans		593,347		16.2			583,488		16.9			674,990		17.9

Total portfolio loans			$	3,656,543		100.0	%	$	3,458,381		100.0	%	$	3,771,676		100.0	%

[Additional columns below]

[Continued from above table, first column(s) repeated]


December 31
(Dollars in thousands)			1999					1998

			Amount		%			Amount		%

Commercial loans:
	Commercial and industrial		$	88,370		2.6	%	$	83,089		3.3	%
	Real estate construction			149,480		4.4			112,588		4.4
	Commercial real estate mortgages			650,642		19.3			437,014		17.2

		Total commercial loans		888,492		26.3			632,691		24.9
Residential real estate mortgages				1,773,795		52.6			1,295,484		50.9
Installment loans:
	Consumer direct			368,095		10.9			308,092		12.1
	Consumer indirect			343,043		10.2			307,505		12.1

		Total installment loans		711,138		21.1			615,597		24.2

Total portfolio loans			$	3,373,425		100.0	%	$	2,543,772		100.0	%

The total portfolio loans balance increased $198.2 million, or 6%, to $3.7 billion at December 31, 2002, after decreasing 8% in 2001. The increase in 2002 is primarily due to commercial real estate growth remaining strong in local markets served by the Company and marketing efforts directed at existing retail and mortgage customers.

Commercial loans increased $106.2 million, or 8%, to $1.5 billion at December 31, 2002, after increasing 20% in 2001. This growth, which was concentrated exclusively in commercial real estate loans, reflects the Company’s efforts to complement traditional residential mortgage lending with quality commercial real estate lending. Residential real estate mortgage loans increased $82.1 million, or 5%, to $1.6 billion at December 31, 2002, after decreasing 23% a year earlier. During 2002, the mortgage portfolio continued to experience a high rate of payoffs as a result of significant refinance activity. However, the Company more than replaced the paid-off loans with current mortgage production. Consumer direct installment loans increased $59.5 million, or 12%, to $556.5 million at December 31, 2002, after rising 8% a year ago, reflecting the continued success of specifically targeted sales and marketing efforts in home equity lending. Consumer indirect installment loans decreased $49.7 million, or 57%, to $36.8 million at December 31, 2002, after decreasing 60% in 2001. The decreases during 2002 and 2001 in the indirect loan balance were primarily a result of loan payoffs as the Company discontinued its indirect lending line of business during the first quarter of 2000.

Table 8
Maturity Distribution and Interest Rate Sensitivity of Commercial Loans


							After One
December 31, 2002					Within		But Within		After
(In thousands)					One Year		Five Years		Five Years		Total

Commercial loans:
		Commercial and industrial			$	13,935	$	21,945	$	12,629	$	48,509
		Real estate construction				169,194		43,604		37,748		250,546
		Commercial real estate mortgages				111,398		589,690		469,124		1,170,212

				Total commercial loans	$	294,527	$	655,239	$	519,501	$	1,469,267

Commercial Loans Maturing After One Year With:
	Predetermined rates						$	269,404	$	27,775
	Floating or adjustable rates							385,835		491,726

			Total				$	655,239	$	519,501

Commercial real estate loans in the office-general/professional building industry represented 11.5% of the Company’s total loan portfolio as of December 31, 2002. The remaining commercial loan portfolio did not contain loans to any other industry that exceeded 10% of total portfolio loans outstanding at December 31, 2002. The Company’s total loan portfolio is geographically concentrated primarily in Michigan, Ohio and Indiana as shown in the following table.

Table 9
Geographic Distribution of Loan Portfolio


December 31, 2002				Percent
(Dollars in thousands)		Amount		of Total

Michigan		$	2,731,750		75	%
Ohio			598,671		16
Indiana			166,467		5
Other states			159,655		4

	Total	$	3,656,543		100	%

Mortgage Loans Held for Sale

Mortgage loans held for sale decreased $87.5 million, or 12%, to $661.0 million at December 31, 2002, after increasing 94% to $748.5 million at December 31, 2001. The decrease in 2002 was due to a higher level of sales of single-family mortgages in the fourth quarter of 2002 compared to 2001. The increase in 2001 was due to a higher level of mortgage origination volumes in the fourth quarter compared to the prior year. The average mortgage loans held for sale balance in 2002 decreased 18% compared to 2001 primarily reflecting the sale of Market Street Mortgage and that company’s corresponding mortgage loan held for sales balance in June 2001.

Credit Risk Management

Extending credit to businesses and consumers exposes the Company to credit risk. Credit risk is the risk that the principal balance of a loan and any related interest will not be collected due to the inability of the borrower to repay the loan. The Company manages credit risk in the loan portfolio through adherence to consistent underwriting standards, guidelines and limitations established by senior management. Written loan policies establish underwriting standards, lending limits and other standards or limits as deemed necessary and prudent. Various approval levels, based on the amount of the loan and whether the loan is secured or unsecured, have also been established. Loan approval authority ranges from the individual loan officer to the Directors Loan Committee.

Republic Bank has established loan review and quality control functions to conduct ongoing, independent reviews of the lending process. This group ensures adherence to established policies and procedures, monitors compliance with applicable laws and regulations, provides objective measurement of the risks inherent in the loan portfolio, and ensures that proper documentation exists.

The following discussion summarizes the underwriting policies and procedures for the major categories within the loan portfolio and addresses the Company’s strategies for managing the related credit risk.

Commercial Loans

Credit risk associated with commercial loans is primarily influenced by prevailing economic conditions and the level of underwriting risk the Company is willing to assume. To manage credit risk when extending commercial credit, the Company focuses on adequately assessing the borrower’s ability to repay and by obtaining sufficient collateral. To minimize credit risk, the Company concentrates its commercial lending efforts on commercial real estate loans. At December 31, 2002, commercial real estate loans accounted for 97% of total commercial loans. Emphasis is also placed on loans that are government guaranteed, such as SBA loans. Commercial loans are generally secured by the borrower’s assets at a 75% or less loan-to-value ratio and by personal guarantees. Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that significant credit concentrations by borrower or industry do not exist.

Residential Real Estate Mortgage Loans

The Company originates fixed rate and variable rate residential mortgage loans which are secured by the underlying 1-4 family unit residential property. At December 31, 2002, these loans accounted for 44% of total portfolio loans. Credit risk in this area of lending is minimized by the assessment of the creditworthiness of the borrower, including debt to income ratios, credit bureau scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance, unless otherwise guaranteed or insured by the Federal or state government. Credit risk is further reduced since the majority of the Company’s fixed rate mortgage loan production is sold to investors in the secondary market without recourse.

Installment Loans

Credit risk in the installment loan portfolio is controlled through consistent adherence to conservative underwriting standards that consider, but are not necessarily limited to, debt to income levels, past payment tendencies as evidenced by credit bureau reports, and loan-to-value ratios as to any collateral.

Asset Quality

Non-Performing Assets

Non-performing assets consist of non-accrual loans, restructured loans and other real estate owned (OREO). OREO represents real estate properties acquired by the Company through foreclosure or by deed in lieu of foreclosure. Commercial loans, residential real estate mortgage loans and installment loans are generally placed on non-accrual status when principal or interest is 90 days or more past due, unless the loans are well-secured and in the process of collection. In all cases, loans may be placed on non-accrual status earlier when, in the opinion of management, reasonable doubt exists as to the full, timely collection of interest or principal. When a loan is placed on non-accrual status, interest accruals cease and any uncollected interest is charged against current income. Interest subsequently received on non-accrual loans is applied against the principal balance.

Table 10
Non-Performing Assets


December 31
(Dollars in thousands)			2002			2001			2000			1999			1998

Non-accrual loans:
	Commercial		$	19,167		$	6,413		$	5,499		$	4,651		$	6,141
	Residential real estate mortgages			15,215			18,808			13,429			10,449			12,011
	Installment			2,876			2,957			2,167			2,419			1,826

		Total non-accrual loans		37,258			28,178			21,095			17,519			19,978
Restructured loans				2,309			—			—			—			—
Other real estate owned				2,904			2,978			4,906			4,743			5,648

		Total non-performing assets	$	42,471		$	31,156		$	26,001		$	22,262		$	25,626

Non-performing assets as a percentage of:
	Portfolio loans and OREO			1.16	%		.90	%		.69	%		.66	%		1.01	%
	Portfolio loans, mortgage loans held for sale and OREO			.98			.74			.62			.58			.77
	Total assets			.89			.66			.56			.52			.61
Loans past due 90 days or more and still accruing interest:
	Commercial		$	—		$	144		$	209		$	100		$	74
	Residential real estate mortgages			—			—			—			—			—
	Installment			—			—			—			—			—

		Total loans past due 90 days or more	$	—		$	144		$	209		$	100		$	74

Non-performing assets totaled $42.5 million at December 31, 2002, an increase of $11.3 million, or 36% compared to $31.2 million at December 31, 2001, due primarily to increases in non-accrual commercial loans. The increase in non-accrual commercial loans was due primarily to two commercial real estate loan relationships located in Michigan and Indiana. The Company believes the risk-allocated allowance for loan losses attributable to these loans is adequate. Included in total non-performing assets at December 31, 2002 is a $2.3 million restructured loan, which is performing according to the new loan terms and is in an accruing status.

Approximately $26.5 million, or .72%, of the loans in the loan portfolio at December 31, 2002 were 30 to 89 days delinquent, compared to $40.5 million, or 1.17% of portfolio loans at December 31, 2001. The Company also maintains a watch list for loans identified as requiring a higher level of monitoring by management because of one or more characteristics, such as economic conditions, industry trends, nature of collateral, collateral margin, payment history or other factors. As of December 31, 2002, total loans on the watch list, excluding those categorized as non-accrual loans were $33.3 million, or .90% of total portfolio loans, compared to $38.7 million, or 1.10% of total portfolio loans at December 31, 2001.

The following table presents the amount of interest income that would have been earned on non-performing loans outstanding at December 31, 2002, 2001 and 2000 had those loans been accruing interest in accordance with the original terms of the loan agreement, as well as the amount of interest income earned and included in net interest income for each of those years.

Table 11
Forgone Interest on Non-Performing Loans


For the Year Ended December 31
(In thousands)		2002				2001				2000

		Non-Accrual		Restructured		Non-Accrual		Restructured		Non-Accrual		Restructured

Pro forma interest income		$	2,935	$	121	$	3,164	$	—	$	1,513	$	-
Interest income earned			966		121		946		—		600		-

	Forgone interest income	$	1,969	$	—	$	2,218	$	—	$	913	$	-

Impaired Loans

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.

At December 31, 2002 and 2001, the gross recorded investment in impaired loans totaled $21.5 million and $6.4 million, respectively. Similar to non-accrual loans, interest payments subsequently received on impaired loans are applied against the principal balance. See Note 5 to the Consolidated Financial Statements for further discussion of impaired loans.

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.

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 $1.4 million to $10.4 million in 2002, compared to $9.0 million in 2001 and $6.5 million in 2000. The increase in 2002 is primarily due to increases in the Company’s commercial loan charge-offs, which have been impacted by growth in the Company’s commercial real estate loan portfolio and the overall economy in the Company’s primary market areas of Michigan, Ohio and Indiana. Based on these factors, the Company may have a similar loss experience on such loans in the future.

The ratio of net loan charge-offs to average loans, including loans held for sale, was .23% in 2002, compared to .19% for 2001 and .13% for 2000. Commercial loan net charge-offs as a percentage of average commercial loans was .36% for 2002, compared to .32% for 2001 and .14% for 2000. Residential real estate mortgage loan net charge-offs as a percentage of average residential mortgage loans, including loans held for sale, was .05% for 2002 compared to .03% for 2001 and .02% for 2000. Installment loan net charge-offs as a percentage of average installment loans was .50% for 2002, compared to .55% for 2001 and .44% for 2000.

The Company’s policy for charging off loans varies with respect to the category of and specific circumstances surrounding each loan under consideration. If management determines a loan to be under collateralized, then a charge-off will generally be recommended no later than the month in which the loan becomes 90 days past due. Open-end installment loans (home equity lines of credit) are generally charged off when they become 180 days past due.

Table 12
Analysis of the Allowance for Loan Losses


Year Ended December 31
(Dollars in thousands)			2002			2001			2000			1999			1998

Balance at beginning of year			$	29,157		$	28,450		$	27,128		$	21,446		$	17,883
Loan charge-offs:
	Commercial loans			5,449			4,137			1,884			3,452			302
	Residential real estate mortgage loans			989			671			724			572			678
	Installment loans			3,947			4,159			3,922			3,376			2,539

		Total loan charge-offs		10,385			8,967			6,530			7,400			3,519
Recoveries:
	Commercial loans			285			149			452			691			83
	Residential real estate mortgage loans			9			—			178			27			52
	Installment loans			1,011			825			722			714			447

		Total recoveries		1,305			974			1,352			1,432			582

		Net loan charge-offs		9,080			7,993			5,178			5,968			2,937
Provision charged to expense				16,000			8,700			6,500			11,650			6,500

Balance at end of year			$	36,077		$	29,157		$	28,450		$	27,128		$	21,446

Allowance for loan losses as a percentage of year-end portfolio loans				.99	%		.84	%		.75	%		.80	%		.84	%
Allowance for loan losses as a percentage of year-end non-performing loans				91.18			103.47			134.87			154.85			107.35
Net charge-offs as a percentage of average total loans (including loans held for sale)				.23			.19			.13			.17			.09

The following table summarizes the Company’s allocation of the allowance for loan losses for risk allocated, specific allocated and unallocated allowances by loan type and the percentage of each loan type of total portfolio loans. The entire allowance, however, is available for use against any type of loan loss deemed necessary.

Table 13
Allocation of the Allowance for Loan Losses


December 31
(Dollars in thousands)			2002					2001					2000

					% of					% of					% of
					total					total					total
			Amount		loans			Amount		loans			Amount		loans

Risk allocated allowances:
		Commercial loans	$	11,507		40	%	$	8,597		39	%	$	7,109		30	%
		Residential real estate mortgage loans		3,721		44			4,203		44			4,009		52
		Installment loans		8,377		16			7,905		17			8,089		18

	Total risk allocated allowances			23,605					20,705					19,207
Specific allocated allowances:
		Commercial loans		—		—			—		—			—		—
		Residential real estate mortgage loans		—		—			—		—			—		—
		Installment loans		—		—			—		—			—		—

	Total specific allowances			—		—			—		—			—		—
Unallocated allowances				12,472		—			8,452		—			9,243		—

	Total allowance for loan losses		$	36,077		100	%	$	29,157		100	%	$	28,450		100	%

[Additional columns below]

[Continued from above table, first column(s) repeated]


December 31
(Dollars in thousands)			1999					1998

					% of					% of
					total					total
			Amount		loans			Amount		loans

Risk allocated allowances:
		Commercial loans	$	4,705		26	%	$	2,339		25	%
		Residential real estate mortgage loans		5,643		53			4,489		51
		Installment loans		8,717		21			4,616		24

	Total risk allocated allowances			19,065					11,444
Specific allocated allowances:
		Commercial loans		—		—			1,145		—
		Residential real estate mortgage loans		—		—			—		—
		Installment loans		—		—			—		—

	Total specific allowances			—		—			1,145		—
Unallocated allowances				8,063		—			8,857		—

	Total allowance for loan losses		$	27,128		100	%	$	21,446		100	%

The following table summarizes the graded loan categories used by the Company to determine the adequacy of the risk allocated allowance for loan losses at December 31, 2002, 2001 and 2000.

Table 14
Graded Loan Categories Used in the
Allocation of the Allowance for Loan Losses


December 31
(In thousands)			2002		2001		2000

			Loan		Loan		Loan
			Amount ⁽¹⁾		Amount ⁽¹⁾		Amount ⁽¹⁾

Graded loan categories:
	Pass (Superior, High and Satisfactory)		$	4,876,561	$	4,724,893	$	4,641,892
	Special mention			33,315		38,713		35,034
	Substandard			42,082		36,739		27,989
	Doubtful			—		—		—
	Loss			—		—		—

		Total loans	$	4,951,958	$	4,800,345	$	4,704,915

⁽¹⁾

Loan amounts include mortgage loans held for sale and unfunded commitments of $634 million, $594 million and $548 million at December 31, 2002, 2001 and 2000, respectively.

Each element of the risk allocated allowance for December 31, 2002, 2001 and 2000 was determined by applying the following risk percentages to each grade of loan: Pass — .10% to 1.25%, depending on category of loans classified as Superior, High and Satisfactory; Special mention — 2.5% to 5%; Substandard — 5% to 20%; Doubtful — 50%; and Loss — 100%. The risk percentages are developed by the Company in consultation with regulatory authorities, actual loss experience, peer group loss experience and are adjusted for current economic conditions. The risk percentages are considered a prudent measurement of the risk of the Company’s loan portfolio. Such risk percentages are applied to individual loans based on loan type.

The Company reviews each delinquent commercial loan on a bi-weekly basis. Grades for commercial loans are assigned based upon review of such factors such as debt service coverage, collateral value, financial condition of the borrower, experience and reputation of management and payment history. Delinquent mortgage and installment loans are reviewed monthly and assigned a rating based on their payment status. In addition, the Commercial Loan Review Committee will, on a monthly basis, conduct reviews of certain individual loans exceeding $250,000 that have not exhibited delinquency trends. These reviews assign a current risk rating based on the financial condition of the borrower and collateral values.

Based upon these reviews, the Company determines the grades for its loan portfolio on a monthly basis and computes the allocation for allowance for loan losses. These reviews provide a mechanism that results in loans being graded in the proper category and accordingly, assigned the proper risk percentage in computing the risk allocated or specific allocated allowance.

The unallocated allowance for loan losses increased to $12.5 million at December 31, 2002 from $8.5 million at December 31, 2001. The increase reflects the growing commercial real estate loan portfolio and economic concerns about the Company’s market areas.

The provision for loan losses increased to $16.0 million during 2002 from $8.7 million in 2001. The increased provision was necessary as a result of the increase in the loan portfolio, increase in net charge-offs and the increase in non-accrual loans in 2002. As stated previously, the increase in net charge-offs in 2002 of $1.1 million is primarily due to increases in the Company’s commercial loan portfolio charge-offs. In 2001, the provision for loan losses increased to $8.7 million from $6.5 million in 2000. The increased provision was necessary as a result of the increase in the commercial loan portfolio, the increase in non-accrual loans, the increase in net charge-offs and the increase in loans 30 to 89 days delinquent from 2000.

Non-accrual loans are included in the “substandard” classification in the Company’s risk rating methodology. There have been no changes in the Company’s estimation methods since 1996, however, risk percentages for certain loan classifications within the “pass” category were adjusted in 2000.

Securities Available for Sale

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 principally of municipal securities and collateralized mortgage obligations. At December 31, 2002, fixed rate investment securities within the portfolio, excluding municipal securities, totaled $144.1 million compared to $101.3 million at December 31, 2001.

Investment securities available for sale totaled $248.9 million at December 31, 2002, a $115.7 million decrease from $364.6 million at December 31, 2001. Investment securities available for sale totaled $211.9 million at December 31, 2000. The decrease from 2001 reflects sales of fixed rate municipal securities. The investment securities portfolio constituted 5.2% of the Company’s assets at December 31, 2002, compared to 7.7% a year earlier.

The following table summarizes the composition of the Company’s investment securities portfolio at December 31, 2002, 2001 and 2000.

Table 15
Securities Available For Sale Portfolio


December 31
(In thousands)		2002		2001		2000

Debt Securities:
U.S. Treasury and Government agency securities		$	43,684	$	8,396	$	12,494
Collateralized mortgage obligations			46,160		49,329		88,249
Mortgage-backed securities			6,242		1,952		19,869
Municipal and other securities			74,370		225,876		14,512

	Total debt securities		170,456		285,553		135,124
Investment in FHLB			78,475		79,095		76,736

	Total securities available for sale	$	248,931	$	364,648	$	211,860

The maturity distribution of and average yield information for investment securities held as of December 31, 2002 is provided in the following table.

Table 16
Maturity Distribution of Securities Available for Sale Portfolio


December 31, 2002		Due Within					One to					Five to
(Dollars in thousands)		One Year					Five Years					Ten Years

		Estimated					Estimated					Estimated
		Market		Avg.			Market		Avg.			Market		Avg.
		Value		Yield			Value		Yield			Value		Yield

U.S. Treasury and Government agency securities		$	—		—	%	$	—		—	%	$	43,684		4.11	%
Collateralized mortgage obligations ⁽²⁾⁽³⁾			—		—			—		—			—		—
Mortgage-backed securities ⁽²⁾⁽³⁾			—		—			171		3.69			—		—
Municipal and other securities ⁽¹⁾			5		7.52			21		8.33			1,237		7.79
Investment in FHLB			78,475		6.25			—		—			—		—

	Total securities available for sale	$	78,480		6.25	%	$	192		4.17	%	$	44,921		4.21	%

[Additional columns below]

[Continued from above table, first column(s) repeated]


December 31, 2002		After
(Dollars in thousands)		Ten Years					Total

		Estimated					Estimated
		Market		Avg.			Market		Avg.
		Value		Yield			Value		Yield

U.S. Treasury and Government agency securities		$	—		—	%	$	43,684		4.11	%
Collateralized mortgage obligations ⁽²⁾⁽³⁾			46,160		1.98			46,160		1.98
Mortgage-backed securities ⁽²⁾⁽³⁾			6,071		5.14			6,242		5.10
Municipal and other securities ⁽¹⁾			73,107		7.32			74,370		7.33
Investment in FHLB			—		—			78,475		6.25

	Total securities available for sale	$	125,338		5.22	%	$	248,931		5.36	%

⁽¹⁾		Average yields on tax-exempt obligations have been computed on a tax equivalent basis, based on a 35% federal tax rate.

⁽²⁾		Collateral guaranteed by U.S. Government agencies.

(3)		All maturities beyond ten years have estimated average lives of .6 years. The average yield presented represents the current yield on these securities based on amortized costs.

Liabilities

Deposits

Total deposits, the Company’s primary source of funding, increased 1% to $2.79 billion at December 31, 2002, after increasing 1% a year earlier. The Company’s core deposits represent the largest and most stable component of total deposits and consist of demand deposits, NOW accounts, savings accounts and money market accounts. At December 31, 2002, core deposits totaled $1.35 billion, an 11% increase when compared to $1.22 billion at December 31, 2001.

Table 17
Maturity Distribution of Certificates of Deposit of $100,000 or More


December 31
(In thousands)		2002

Three months or less		$	254,697
Over three months through six months			124,433
Over six months through twelve months			66,837
Over twelve months			244,426

	Total	$	690,393

The Company also funds its loans with brokered certificates of deposit and municipal certificates of deposit. At December 31, 2002, these deposits totaled $124.7 million and $334.0 million, respectively, and represented 16% of total deposits on a combined basis. At December 31, 2001, brokered certificates of deposit totaled $48.0 million and municipal certificates of deposit totaled $417.7 million, representing 17% of total deposits on a combined basis.

Short-Term Borrowings

Short-term borrowings increased $32.6 million to $209.1 million at December 31, 2002 from a year earlier. Short-term borrowings at December 31, 2002 and 2001 consisted of federal funds purchased and treasury, tax and loan demand notes. The amount provided by these funding sources increased during 2002 primarily due to the redemption of the D&N Capital Corporation Preferred Stock of $30.25 million. See Note 9 to the Consolidated Financial Statements for further information regarding short-term borrowings.

FHLB Advances

Republic Bank routinely utilizes FHLB advances, both on a short-term 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 and fixed rate investment securities. These advances are generally secured under a blanket security agreement by first mortgage loans and investment securities with an aggregate book value equal to at least 145% of the total advances. Total FHLB advances were $1.31 billion at December 31, 2002 compared to $1.30 billion at December 31, 2001, representing a 1% increase. See Note 10 to the Consolidated Financial Statements for further information regarding FHLB advances.

Long-Term Debt

Long-term debt totaled $13.5 million at December 31, 2002 and 2001. The 6.95% Senior Debentures of $13.5 million matured on January 15, 2003. See Note 11 to the Consolidated Financial Statements for further information regarding long-term debt.

Capital

Shareholders’ equity increased $27.8 million, or 9%, to $332.7 million at December 31, 2002, after increasing 3% to $304.9 million a year earlier. The increase in shareholders’ equity during 2002 resulted primarily from net income of $56.7 million and an increase in net unrealized gains on securities of $4.0 million being offset by $18.4 million in cash dividends to shareholders and $18.6 million in stock repurchases. The total cash dividend paid in 2002 represented a 7% increase over the amount declared in 2001, reflecting the increase in the shares outstanding that resulted from the Company’s 10% stock dividend.

On November 18, 1999, the Board of Directors approved a stock repurchase plan allowing for the repurchase of up to 1,100,000 shares of the Company’s outstanding common stock. On February 15, 2001, the Board of Directors approved the 2001 Stock Repurchase Program authorizing the repurchase of up to 1,100,000 shares, which was amended in October 2001 to allow for the repurchase of up to 3,300,000 shares. The 2001 Stock Repurchase Program was further amended in October 2002 to allow for the repurchase of up to 4,300,000 shares. The 2001 Stock Repurchase Program commenced at the conclusion of the 1999 Stock Repurchase Program. Repurchases are made from time to time as market and business conditions warrant, in the open market, negotiated, or block transactions, and are funded from available working capital and cash flow from operations. Repurchased shares will be used for employee benefit plans, stock dividends and other general business purposes, including potential acquisitions. The Company repurchased 184,000 shares and 922,000 shares under the 1999 Program during 2001 and 2000, respectively. The Company repurchased 1,467,000 shares and 1,665,000 shares under the 2001 Program during 2002 and 2001, respectively. As of December 31, 2002, there were 1,168,000 shares available for repurchase under the 2001 Program.

The Company is subject to risk-based capital adequacy guidelines that measure capital relative to risk-weighted assets and off-balance sheet financial instruments. Capital adequacy guidelines issued by the Federal Reserve Board require bank holding companies to have a minimum total risk-based capital ratio of 8.00%, with at least half of total capital in the form of Tier 1, or core capital. The Company’s total risk-based capital ratio was 12.26% at December 31, 2002 compared to 12.31% at December 31, 2001. For further information regarding regulatory capital requirements, see Note 24 to the Consolidated Financial Statements.

Liquidity Management

The objective of liquidity management is to provide funds at an acceptable cost to meet loan demand and deposit withdrawals and to service other liabilities as they become due. Managing liquidity also enables the Company to take advantage of opportunities for business expansion. Funds are available from a number of sources, including, but not limited to, cash and money market investments, the investment securities portfolio, mortgage loans held for sale and portfolio loan repayments and maturities.

Short-term liquidity is available from federal funds purchased, securities sold under agreement to repurchase, deposit growth, retail, brokered and municipal certificates of deposit and FHLB advances. Long-term liquidity is generated from securities sold under agreement to repurchase, deposit growth, the maturity structure of time deposits, brokered certificates of deposit and FHLB advances. As of December 31, 2002 the Company’s balance of certificates of deposit maturing within the next twelve months was $813.6 million. The Company expects that a significant portion of these certificates of deposit will be renewed based on the Company’s success at establishing long lasting customer relationships. However, the Company will use its other available funding sources to replace those deposits which are not renewed.

At December 31, 2002, Republic Bank had available $99.0 million in unused lines of credit with third parties for federal funds purchased and $237.6 million available in unused borrowings with the FHLB.

Republic Bancorp Inc. has four major funding sources to meet its liquidity requirements: interest earning deposits, dividends from Republic Bank, access to the capital markets and a revolving credit agreement with a third party. On December 31, 2002, $134.5 million was available from Republic Bank for payment of dividends to the parent company without prior regulatory approval, compared to $126.0 million at December 31, 2001. Also, at December 31, 2002, the parent company had interest-earning deposits of $32.9 million at Republic Bank to meet any liquidity requirements. In December 2000, the Company entered into a $30 million revolving credit agreement with a third party with a floating interest rate based on LIBOR. There were no advances outstanding under the agreement at December 31, 2002, which expires on December 27, 2003. Depending on market conditions and liquidity requirements, the Company would also consider the issuance of additional debt instruments to provide additional liquidity, if necessary.

As discussed in Item 1 of this Report on Form 10-K, Republic Bank is subject to statutory and regulatory requirements and, among other things, may be limited in their ability to pay dividends to the parent company. These statutory and regulatory restrictions have not had, and are not expected to have, a material effect on the Company’s ability to meet its cash obligations.

Forward-Looking Statements

The disclosures on pages 28-30 appearing under “Market Risk Management” contains 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. For a discussion of certain factors that may cause such forward-looking statements to differ materially from actual results, see Item 1 of this document.

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 the amount of interest-bearing liabilities that are prepaid/withdrawn, reprice or mature in specified periods.

Asset and Liability Management

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.

Interest Rate Risk Management

The Company’s ALCO, which meets weekly, is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. Senior management at Republic Bank is responsible for ensuring that the Bank asset and liability management procedures adhere to corporate policies and risk limits established by their respective board of directors.

During 2002, both short-term and long-term interest rates decreased. The three-month treasury bill decreased 53 basis points and the prime-lending rate decreased 50 basis points from December 31, 2001 to December 31, 2002, while the 30-year treasury bond decreased 69 basis points during 2002. The demand for residential loans continued to be high during 2002 as mortgage rates remained historically low. The Company’s residential real estate mortgage balance increased during the year, as new mortgage loan production more than offset loan payoffs within the portfolio. Commercial lending continued to be strong due to the successful efforts by our team of experienced commercial lenders and the lower prime lending rates. Lower interest rates also continued to attract home equity borrowers as the balance of consumer direct loans grew in 2002.

The mortgage loans held for sale balance is the Company’s most interest rate sensitive asset. It is also short-term in nature as the majority of loans held for sale are sold within 60 days. By funding this balance with primarily short-term borrowings, the Company is able to closely match its liquidity needs, as this balance will generally increase in a declining interest rate environment and decrease in a rising interest rate environment, and maintain a consistent interest rate spread when the yield curve moves in parallel shifts. As is discussed in Note 21 to the Consolidated Financial Statements, committing to fund residential real estate loan applications at specified rates and holding residential mortgage loans for sale exposes the Company to market risk during the period after the loans close but before they are sold to investors. To minimize this exposure to market risk, the Company enters into firm commitments to sell such mortgage loans at specific future dates and prices to various third parties.

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. The Company undertakes this analysis 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. 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 than rates paid on interest-bearing liabilities. 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 December 31, 2002, the cumulative one-year gap was a positive 17.87% of total earning assets. At December 31, 2001, the cumulative one-year gap was a positive 6.52% 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 zero to +15% of total earning assets for the cumulative one-year gap. Management believes that this range reduces the vulnerability of net interest income to large shifts in market interest rates while allowing the Company to take advantage of fluctuations in current short-term rates. This range also complements the Company’s strong retail mortgage banking franchise. The one-year gap at December 31, 2002 exceeds this range primarily due to the prepayment assumption the model uses in estimating the maturity terms of the residential mortgage portfolio. With residential mortgage rates at historical lows, prepayment speed assumptions are at high levels resulting in a high level of assumed maturities within the one-year period. A slow-down in prepayment speed assumptions to more normalized levels would significantly reduce the one-year gap percentage.

Earnings Simulation: 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 December 31, 2002, the earnings simulation model projects the following change in net interest income from base net interest income, assuming an immediate parallel shift in market interest rates:


Change in market interest rates in basis points	+200		+100		+50		-50		-100		-200
Change in net interest income over the next twelve months	6.1	%	3.6	%	2.1	%	-1.6	%	-2.8	%	-7.3	%

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.

Impact of Interest Rate Fluctuations and Inflation on Earnings

Unlike most industrial companies, substantially all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rate fluctuations generally have a more significant and direct impact on a financial institution’s performance than do the effects of inflation. To the extent inflation affects interest rates, real estate values and other costs, the Company’s lending activities may be adversely impacted. Significant increases in interest rates make it more difficult for potential borrowers to purchase residential property and to qualify for mortgage loans. As a result, the Company’s volume of loans originated may be reduced and the potential reduction in the related interest income and fee income may be larger than would be implied by a simple linear extrapolation of the results generated by the earnings simulation model. A lower interest rate environment would enable more potential borrowers to reduce their mortgage interest rate and qualify for relatively higher mortgage loan balances, therefore resulting in higher mortgage loan production activity as well as interest income.

Table 18
Static Gap Analysis⁽¹⁾


					Within			4 Months			1 to			5 Years
(Dollars in thousands)					3 Months			to 1 Year			5 Years			or Over			Total

December 31, 2002
Interest-Earning Assets:
	Federal funds sold and other money market investments				$	85		$	—		$	—		$	—		$	85
	Mortgage loans held for sale					660,999			—			—			—			660,999
	Securities available for sale					113,197			11,555			8,459			115,720			248,931
	Loans, net of unearned income					1,163,835			755,265			1,484,456			213,420			3,616,976

				Total interest-earning assets	$	1,938,116		$	766,820		$	1,492,915		$	329,140		$	4,526,991

Interest-Bearing Liabilities:
	Deposits:
			NOW accounts		$	—		$	—		$	141,092		$	35,274		$	176,366
			Savings and money market accounts			37,030			434,864			327,880			111,089			910,863
			Certificates of deposit:
				Under $100,000		102,419			265,247			368,841			13,509			750,016
				$100,000 or more		254,697			191,270			238,325			6,101			690,393

				Total certificates of deposit		357,116			456,517			607,166			19,610			1,440,409

				Total interest-bearing deposits		394,146			891,381			1,076,138			165,973			2,527,638
	Short-term borrowings ⁽²⁾					209,070			—			—			—			209,070
	FHLB advances					357,275			30,392			254,314			665,962			1,307,943
	Long-term debt					13,500			—			—			—			13,500

			Total interest-bearing liabilities		$	973,991		$	921,773		$	1,330,452		$	831,935		$	4,058,151

Interest rate sensitivity gap					$	964,125		$	(154,953	)	$	162,463		$	(502,795	)	$	468,840
As a percentage of total interest-earning assets						21.30	%		(3.42	)%		3.59	%		(11.11	)%		10.36	%
Cumulative interest rate sensitivity gap					$	964,125		$	809,172		$	971,635		$	468,840
As a percentage of total interest-earning assets						21.30	%		17.87	%		21.46	%		10.36	%
December 31, 2001
		Interest-Earning Assets:
				Federal funds sold and other money market investments	$	1,464		$	—		$	—		$	—		$	1,464
				Mortgage loans held for sale		748,463			—			—			—			748,463
				Securities available for sale		114,257			3,577			9,013			237,801			364,648
				Loans, net of unearned income		998,425			738,055			1,273,242			420,481			3,430,203

				Total interest-earning assets	$	1,862,609		$	741,632		$	1,282,255		$	658,282		$	4,544,778

		Interest-Bearing Liabilities:
			Deposits:
				NOW accounts	$	—		$	—		$	123,071		$	30,768		$	153,839
				Savings and money market accounts		32,074			377,763			313,614			96,223			819,674
				Certificates of deposit:
				Under $100,000		192,006			423,649			187,861			15,705			819,221
				$100,000 or more		355,439			265,366			93,995			539			715,339

				Total certificates of deposit		547,445			689,015			281,856			16,244			1,534,560

				Total interest-bearing deposits		579,519			1,066,778			718,541			143,235			2,508,073
			Short-term borrowings ⁽²⁾			176,500			—			—			—			176,500
			FHLB advances			360,000			125,000			118,503			697,215			1,300,718
			Long-term debt			—			—			13,500			—			13,500

				Total interest-bearing liabilities	$	1,116,019		$	1,191,778		$	850,544		$	840,450		$	3,998,791

Interest rate sensitivity gap					$	746,590		$	(450,146	)	$	431,711		$	(182,168	)	$	545,987
As a percentage of total interest-earning assets						16.43	%		(9.91	)%		9.50	%		(4.01	)%		12.01	%
Cumulative interest rate sensitivity gap					$	746,590		$	296,444		$	728,155		$	545,987
As a percentage of total interest-earning assets						16.43	%		6.52	%		16.02	%		12.01	%

⁽¹⁾		Actual maturity or repricing dates are used for investment securities, certificates of deposit and short-term borrowings. Assumptions and estimates have been made for NOW accounts, savings, and money market accounts to more accurately reflect repricing and retention.

⁽²⁾		Includes federal funds purchased and other short-term borrowings.

Accounting and Financial Reporting Developments

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. As of December 31, 2002 the Company had no variable interest entities. The Company does not expect FIN 46 to have any impact on the financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure, which provides guidance on how to transition from the intrinsic value method of accounting for stock-based employee compensation under APB 25 to SFAS 123’s fair value method of accounting, if a company so elects.

Effective January 1, 2003, the Company adopted the fair value method of recording stock options under SFAS 123. In accordance with the transitional guidance of SFAS 148, the fair value method of accounting for stock options will be applied prospectively to awards granted subsequent to January 1, 2003. As permitted, options granted prior to January 1, 2003 will continue to be accounted for under APB Opinion 25, and the pro forma impact of accounting for these options at fair value will continue to be disclosed in the consolidated financial statements until the last of those options vest in 2006. The Company uses the Black-Scholes model to estimate option values.

In 2003, the Company anticipates issuing restricted stock in lieu of stock option grants. As a result, the Company estimates the income statement impact associated with expensing stock options in 2003 will be immaterial. The actual impact per diluted share may vary in the event the fair value or the number of options granted increases from the current estimate, or if the current accounting guidance changes.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. Guarantees subject to the disclosure requirements of FIN 45 but not to the recognition provisions include, among others, a guarantee accounted for as a derivative instrument under SFAS 133, a parent’s guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is based on performance not price. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Significant guarantees that have been entered into by the Company are disclosed in Note 22. The Company does not expect the requirements of FIN 45 to have a material impact on the financial position or results of operations.

In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial Institutions, which provides guidance on the accounting for the acquisition of a financial institution and supersedes the specialized accounting guidance provided in SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. SFAS 147 became effective upon issuance and requires companies to cease amortization of unidentified intangible assets associated with certain branch acquisitions and reclassify these assets to goodwill. SFAS 147 also modifies SFAS 144 to include in its scope long-term customer-relationship intangible assets and thus subject those intangible assets to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions required for other long-lived assets. While SFAS 147 may affect how future business combinations, if undertaken, are accounted for and disclosed in the financial statements, the issuance of the new guidance had no effect on results of operations, financial position, or liquidity because the Company does not have any assets subject to the specialized accounting guidance provided in SFAS 72 or SFAS 147.

SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued in July 2002 and becomes effective for the Company beginning January 1, 2003. This statement requires a cost associated with an exit or disposal activity, such as the sale or termination of a line of business, the closure of business activities in a particular location, or a change in management structure, to be recorded as a liability at fair value when it becomes probable the cost will be incurred and no future economic benefit will be gained by the Company for such cost. Applicable costs include employee termination benefits, contract termination costs, and costs to consolidate facilities or relocate employees. SFAS 146 supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, which in some cases required certain costs to be recognized before a liability was actually incurred. The adoption of this standard is not expected to have a material impact on the financial position or results of operations of the Company.

SFAS 144, Accounting for the Impairment of Disposal of Long-Lived Assets, was issued in October 2001 and addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange, or distribution to owners. The statement’s provisions supersede SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, which addressed asset impairment, and certain provision of APB Opinion 30 related to reporting the effects of the disposal of a business segment and requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. Under SFAS 144, more dispositions may qualify for discontinued operations treatment in the income statement. The provisions of SFAS 144 became effective for the Company on January 1, 2002, and did not have a material impact on the financial position or results of operations of the Company.

In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations, SFAS 143 requires an entity to record a liability for an obligation associated with the retirement of an asset at the time the liability is incurred by capitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of that asset. The standard is effective for the Company beginning January 1, 2003 and its adoption is not expected to have a material impact on the financial position or results of operations of the Company.

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 No. 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 No. 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of Statement No. 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 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. The amortization provisions of Statement No. 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 No. 142 in their fiscal year beginning after December 15, 2001.

At December 31, 2002, the Company’s goodwill balance was $1.2 million and intangible asset balance was $5.6 million. As a result, the adoption of these Statements did not have a material impact on the financial position or results of operations of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is set forth in the section entitled “Market Risk Management” included under Item 7 of this document and is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Republic Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets


December 31
(Dollars in thousands)				2002			2001

Assets
Cash and due from banks				$	75,540		$	75,270
Interest-earning deposits with banks					85			1,464

		Cash and cash equivalents			75,625			76,734
Mortgage loans held for sale					660,999			748,463
Securities available for sale					248,931			364,648
Loans, net of unearned income					3,656,543			3,458,381
Less allowance for loan losses					(36,077	)		(29,157	)

		Net loans			3,620,466			3,429,224
Premises and equipment					27,790			30,858
Bank owned life insurance					87,192			—
Other assets					57,192			90,678

		Total assets		$	4,778,195		$	4,740,605

Liabilities
Noninterest-bearing deposits				$	260,634		$	245,395
Interest bearing deposits:
	NOW accounts				176,366			153,839
	Savings and money market accounts				910,863			819,674
	Certificates of deposit				1,440,409			1,534,560

		Total interest-bearing deposits			2,527,638			2,508,073

			Total deposits		2,788,272			2,753,468
Federal funds purchased and other short-term borrowings					209,070			176,500
FHLB advances					1,307,943			1,300,718
Accrued expenses and other liabilities					76,682			112,783
Long-term debt					13,500			13,500

		Total liabilities			4,395,467			4,356,969
Trust preferred securities and preferred stock of subsidiary					50,000			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; 57,441,000 and 58,483,000 shares issued and outstanding in 2002 and 2001, respectively					287,207			265,831
Capital surplus					40,265			38,693
Retained earnings					4,373			3,542
Accumulated other comprehensive income (loss)					883			(3,149	)

		Total shareholders’ equity			332,728			304,917

		Total liabilities and shareholders’ equity		$	4,778,195		$	4,740,605

See accompanying notes.

Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Income


Years Ended December 31
(In thousands, except per share data)			2002		2001			2000

Interest Income
Interest and fees on loans			$	266,432	$	316,292		$	333,667
Interest on investment securities				18,272		17,084			14,661

	Total interest income			284,704		333,376			348,328

Interest Expense
Interest on deposits:
	NOW accounts			1,019		1,967			1,708
	Savings and money market accounts			15,358		22,251			22,625
	Certificates of deposits			58,795		90,386			98,829

		Total interest expense on deposits		75,172		114,604			123,162
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings				3,582		3,460			3,532
Interest on FHLB advances				57,305		70,252			83,552
Interest on long-term debt				965		1,451			3,434

	Total interest expense			137,024		189,767			213,680

	Net interest income			147,680		143,609			134,648
Provision for loan losses				16,000		8,700			6,500

	Net interest income after provision for loan losses			131,680		134,909			128,148

Noninterest Income
Mortgage loan production revenue				34,132		46,808			55,720
Net mortgage servicing revenue (expense)				295		(127	)		3,439
Service charges				9,206		7,720			7,819
Gains on sale of securities				5,859		1,425			109
Income from bank owned life insurance				2,192		—			-
Other noninterest income				4,343		3,558			3,751
Gain on sale of subsidiary				—		12,000			—

	Total noninterest income			56,027		71,384			70,838

Noninterest Expense
Salaries and employee benefits				59,134		64,377			72,538
Occupancy expense of premises				9,926		11,427			13,467
Equipment expense				6,903		7,847			9,090
Other noninterest expenses				24,552		29,562			36,546
Restructuring costs to exit mortgage servicing business				—		19,000			—
Merger integration and restructuring credit				—		—			(4,000	)

		Total noninterest expense		100,515		132,213			127,641

Income before income taxes				87,192		74,080			71,345
Provision for income taxes				24,687		22,515			22,945

Income before dividends				62,505		51,565			48,400
Dividends on trust preferred securities and preferred stock of subsidiary				5,828		3,655			2,723

Net Income			$	56,677	$	47,910		$	45,677

Basic earnings per share			$	.97	$	.80		$	.76

Diluted earnings per share			$	.96	$	.79		$	.76

See accompanying notes.

Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity


		Number of
		Common			Common			Capital
(In thousands, except per share data)		Shares			Stock			Surplus

Balances at January 1, 2000			45,286		$	226,429		$	39,163
Comprehensive income:
	Net income
	Unrealized holding gains on securities, net of $1,299 income tax expense
	Reclassification adjustment for gains included in net income, net of $38 income tax expense

	Net unrealized gains on securities, net of tax

	Comprehensive income
Cash dividends declared ($.26 per share)
Awards of common stock under Incentive Stock Plan			58			290			(125	)
Amortization of restricted stock									968
10% common share dividend			4,507			22,535			7,823
Issuance of common shares:
	Through exercise of stock options		331			1,654			(683	)
	Through exercise of stock warrants		21			104			46
	Through employee stock awards		143			715			694
Tax benefit relating to exercise of stock options and warrants and vesting of restricted stock									521
Repurchase of common shares			(922	)		(4,608	)		(3,446	)

Balances at December 31, 2000			49,424			247,119			44,961
Comprehensive income:
	Net income
	Unrealized holding losses on securities, net of $1,084 income tax benefit
	Reclassification adjustment for gains included in net income, net of $499 income tax expense

	Net unrealized losses on securities, net of tax

	Comprehensive income
Cash dividends declared ($.29 per share)
Awards of common stock under Incentive Stock Plan			66			330			386
Amortization of restricted stock									825
10% common share dividend			4,877			24,388			5,787
Issuance of common shares:
	Through exercise of stock options		609			3,045			1,168
	Through exercise of stock warrants		14			70			43
	Through employee stock awards		25			125			138
Tax benefit relating to exercise of stock options and warrants and vesting of restricted stock									1,555
Repurchase of common shares			(1,849	)		(9,246	)		(16,170	)

Balances at December 31, 2001			53,166			265,831			38,693
Comprehensive income:
	Net income
	Unrealized holding gains on securities, net of $4,222 income tax expense
	Reclassification adjustment for gains included in net income, net of $2,051 income tax expense

	Net unrealized gains on securities, net of tax

	Comprehensive income
Cash dividends declared ($.32 per share)
Awards of common stock under Incentive Stock Plan			137			685			(330	)
Amortization of restricted stock									1,527
10% common share dividend			5,246			26,232			11,193
Redemption of preferred stock of subsidiary									(1,531	)
Issuance of common shares:
	Through exercise of stock options		351			1,755			838
	Through exercise of stock warrants		2			10			9
	Through employee stock awards		6			28			354
Tax benefit relating to exercise of stock options and warrants and vesting of restricted stock									748
Repurchase of common shares			(1,467	)		(7,334	)		(11,236	)

Balances at December 31, 2002			57,441		$	287,207		$	40,265

[Additional columns below]

[Continued from above table, first column(s) repeated]


					Accumulated Other			Total
		Retained			Comprehensive			Shareholders’
(In thousands, except per share data)		Earnings			Income (Loss)			Equity

Balances at January 1, 2000		$	3,401		$	(2,552	)	$	266,441
Comprehensive income:
	Net income		45,677						45,677
	Unrealized holding gains on securities, net of $1,299 income tax expense					2,413			2,413
	Reclassification adjustment for gains included in net income, net of $38 income tax expense					(71	)		(71	)

	Net unrealized gains on securities, net of tax					2,342			2,342

	Comprehensive income								48,019
Cash dividends declared ($.26 per share)			(15,726	)					(15,726	)
Awards of common stock under Incentive Stock Plan									165
Amortization of restricted stock									968
10% common share dividend			(30,358	)					—
Issuance of common shares:
	Through exercise of stock options								971
	Through exercise of stock warrants								150
	Through employee stock awards								1,409
Tax benefit relating to exercise of stock options and warrants and vesting of restricted stock									521
Repurchase of common shares									(8,054	)

Balances at December 31, 2000			2,994			(210	)		294,864
Comprehensive income:
	Net income		47,910						47,910
	Unrealized holding losses on securities, net of $1,084 income tax benefit					(2,013	)		(2,013	)
	Reclassification adjustment for gains included in net income, net of $499 income tax expense					(926	)		(926	)

	Net unrealized losses on securities, net of tax					(2,939	)		(2,939	)

	Comprehensive income								44,971
Cash dividends declared ($.29 per share)			(17,163	)					(17,163	)
Awards of common stock under Incentive Stock Plan									716
Amortization of restricted stock									825
10% common share dividend			(30,199	)					(24	)
Issuance of common shares:
	Through exercise of stock options								4,213
	Through exercise of stock warrants								113
	Through employee stock awards								263
Tax benefit relating to exercise of stock options and warrants and vesting of restricted stock									1,555
Repurchase of common shares									(25,416	)

Balances at December 31, 2001			3,542			(3,149	)		304,917
Comprehensive income:
	Net income		56,677						56,677
	Unrealized holding gains on securities, net of $4,222 income tax expense					7,840			7,840
	Reclassification adjustment for gains included in net income, net of $2,051 income tax expense					(3,808	)		(3,808	)

	Net unrealized gains on securities, net of tax					4,032			4,032

	Comprehensive income								60,709
Cash dividends declared ($.32 per share)			(18,401	)					(18,401	)
Awards of common stock under Incentive Stock Plan									355
Amortization of restricted stock									1,527
10% common share dividend			(37,445	)					(20	)
Redemption of preferred stock of subsidiary									(1,531	)
Issuance of common shares:
	Through exercise of stock options								2,593
	Through exercise of stock warrants								19
	Through employee stock awards								382
Tax benefit relating to exercise of stock options and warrants and vesting of restricted stock									748
Repurchase of common shares									(18,570	)

Balances at December 31, 2002		$	4,373		$	883		$	332,728

See accompanying notes.

Republic Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows


Year Ended December 31
(In thousands)				2002			2001			2000

Cash Flows From Operating Activities:
Net income				$	56,677		$	47,910		$	45,677
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization			9,211			8,554			10,406
		Amortization and impairment of mortgage servicing rights			1,194			20,433			13,974
		Net gains on sale of mortgage servicing rights			—			(21,521	)		(28,445	)
		Net gains on sale of securities available for sale			(5,859	)		(1,425	)		(109	)
		Net gains on sale of loans			(6,444	)		(3,697	)		(1,112	)
		Net gain on sale of subsidiary			—			(12,000	)		—
		Proceeds from sale of mortgage loans held for sale			2,736,693			4,074,133			3,509,017
		Origination of mortgage loans held for sale			(2,649,229	)		(4,652,237	)		(3,435,165	)
		Net decrease in other assets			23,432			7,668			3,858
		Net (decrease) increase in other liabilities			(36,101	)		33,267			9,339
		Other, net			3,736			(2,796	)		(6,139	)

			Total adjustments		76,633			(549,621	)		75,624

			Net cash provided by (used in) operating activities		133,310			(501,711	)		121,301
Cash Flows From Investing Activities:
Proceeds from sale of securities available for sale					323,444			176,764			41,373
Proceeds from maturities/payments of securities available for sale					86,412			12,197			24,651
Purchases of securities available for sale					(283,209	)		(344,303	)		(67,838	)
Purchase of bank owned life insurance					(85,000	)		—			—
Proceeds from sale of consumer loans					—			39,485			56,400
Proceeds from sale of commercial and residential real estate loans					262,670			182,018			115,541
Net (increase) decrease in loans made to customers					(449,614	)		95,395			(566,961	)
Proceeds from sale of subsidiary and payments received on related borrowings					—			193,248			—
Proceeds from sale of mortgage servicing rights					—			96,994			63,887
Additions to mortgage servicing rights					(1,506	)		(49,768	)		(40,647	)

			Net cash (used in) provided by investing activities		(146,803	)		402,030			(373,594	)
Cash Flows From Financing Activities:
Net increase in total deposits					34,804			24,942			115,476
Net increase (decrease) in short-term borrowings					32,570			174,771			(55,514	)
Net decrease in short-term FHLB advances					(180,000	)		(70,000	)		(202,000	)
Proceeds from long-term FHLB advances					192,952			160,000			635,302
Payments on long-term FHLB advances					(5,727	)		(172,795	)		(222,000	)
Payments on long-term debt					—			(34,000	)		—
Redemption of preferred stock of subsidiary					(30,250	)		—			—
Net proceeds from issuance of trust preferred securities					—			47,963			—
Net proceeds from issuance of common shares					4,687			5,411			3,096
Repurchase of common shares					(18,570	)		(25,416	)		(8,054	)
Dividends paid on common shares					(18,082	)		(16,838	)		(15,397	)

			Net cash provided by financing activities		12,384			94,038			250,909

Net decrease in cash and cash equivalents					(1,109	)		(5,643	)		(1,384	)
Cash and cash equivalents at beginning of year					76,734			82,377			83,761

Cash and cash equivalents at end of year				$	75,625		$	76,734		$	82,377

Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
	Interest			$	137,751		$	198,245		$	210,304
	Income taxes				23,615			27,832			22,273
Supplemental Schedule of Non-Cash Investing Activities:
	Portfolio loan charge-offs			$	10,385		$	8,967		$	6,530

See accompanying notes.

Notes to Consolidated Financial Statements

Note 1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Republic Bancorp Inc. and Subsidiaries (the “Company”) is a bank holding company headquartered in Ann Arbor, Michigan. The Company has three primary lines of business: commercial banking, retail banking and mortgage banking. The Company’s bank subsidiary, Republic Bank, offers financial products to consumers and businesses through its 96 retail, commercial and mortgage banking branches located in Michigan, Ohio and Indiana and a loan production office in Massachusetts.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Republic Bancorp Inc., its wholly-owned bank subsidiary, Republic Bank (including its wholly-owned subsidiaries, Quincy Investment Services, Inc., CAS Properties, Inc., Republic Bank Real Estate Finance, LLC and Republic Management Company, Inc.) and Republic Capital Trust I. The consolidated financial statements also include the operations of Republic Bank’s 80% majority owned mortgage company subsidiary, Market Street Mortgage Corporation, through June 29, 2001, when the subsidiary was sold. Therefore, the consolidated balance sheets as of December 31, 2002 and 2001 do not include Market Street Mortgage Corporation. The consolidated financial statements also include the accounts of Republic Bank’s wholly-owned subsidiary, D&N Capital Corporation. On July 22, 2002, the Company redeemed all 1,210,000 issued and outstanding shares of D&N Capital Corporation’s 9.0% Noncumulative Preferred Stock, Series A (liquidation preference $25.00 per share) at a redemption price of $25.00 per share, plus accrued dividends of $0.1375 per share, for cash. Therefore, the consolidated balance sheet as of December 31, 2002 does not include D&N Capital Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.

Mortgage servicing rights totaling $2.5 million in 2001 have been reclassified to other assets to conform to the current year presentation.

Use of Estimates

Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as the amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. Actual results could differ from these estimates.

Securities Available for Sale

The Company’s investment securities classified as available for sale are stated at fair market value with unrealized gains and losses, net of income taxes, reported as a component of shareholders’ equity. Gains and losses on sales of securities are computed based on specific identification of the adjusted cost of each security and included in gains on sale of securities.

For mortgage portfolio loans securitized and retained as investment securities, the remaining net deferred fees or costs are treated as a discount or premium and recognized as an adjustment to the yield over the life of the security using the effective interest method. If the security is subsequently sold, any remaining net deferred fees or costs are treated as part of the cost basis in determining the gain or loss on sale of the security.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of aggregate cost or market. The cost basis of mortgage loans held for sale is adjusted by any gains or losses generated from mandatory forward commitments to sell the loans to investors in the secondary market, loan origination and commitment fees and certain direct loan origination costs. Such forward commitments are generally entered into at the time when applications are taken to protect the value of the mortgage loans from increases in interest rates during the period held. Mortgage loans originated are generally sold within a period of 30 to 60 days after closing, therefore, the related fees and costs are not amortized during that period.

Notes to Consolidated Financial Statements

Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

Loans

Loans are stated at the principal amount outstanding, net of unearned income. Interest income earned on all loans is accrued daily. Loans for which the accrual of interest has been discontinued are designated as non-accrual loans. Commercial loans, residential real estate mortgage loans and installment loans are placed on non-accrual status at the time the loan is 90 or more days past due, unless the loan is well-secured and in the process of collection. In all cases, loans may be placed on non-accrual status when, in the opinion of management, reasonable doubt exists as to the full, timely collection of interest or principal. All interest accrued but not collected for loans that are placed on non-accrual status is reversed and charged against current income. Any interest payments subsequently received on non-accrual loans are applied against the principal balance. Loans are considered restructured when the Company makes certain concessions to a financially troubled debtor that would not normally be considered.

Loan origination and commitment fees and certain direct loan origination costs are deferred and recognized over the life of the related loan as an adjustment to the yield on the loan.

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. In addition, specific reserves are established for individual loans when deemed necessary by management. Management also considers other factors when determining the unallocated allowance, including loan quality, changes in the size and character of the loan portfolio, consultation with regulatory authorities, amount of nonperforming loans, delinquency trends and economic conditions and industry trends.

Notes to Consolidated Financial Statements

Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

Based upon these reviews, the Company determines the grade for its loan portfolio on a monthly basis and computes the allowance for loan losses. These reviews provide a mechanism that results in loans being graded in the proper category and accordingly, assigned the proper risk loss percentage in computing the risk allocated or specific allocated allowance.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the estimated useful lives of the related assets or the remaining lease terms. Long-lived assets held for use, held for disposal and goodwill are measured for impairment and are accounted for under the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective January 1, 2002. The adoption of SFAS No. 144 had no impact on the financial position or results of operations of the Company.

Goodwill and Core Deposit Intangibles

The excess of cost over the fair value of net assets acquired is included in other assets and prior to January 1, 2002 was amortized using the straight-line method over a period of 15 years. Core deposit intangible assets are amortized on a straight-line basis over a period of 10 to 15 years. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS 142, goodwill is no longer ratably amortized, but reviewed annually for impairment. Core deposit intangibles continue to be amortized. See Note 7 for a summary the Company’s core deposit intangibles and goodwill.

Income Taxes

Deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the tax and financial statement basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established to the extent current available evidence about future events raise doubt about the future realization of a deferred tax asset. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date.

Earnings Per Share

Basic earnings per share is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share include any dilutive effects of options and warrants.

Notes to Consolidated Financial Statements

Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

Stock-Based Compensation

Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation. As permitted by the Statement, the Company continues to use the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25 when accounting for its employee stock compensation plans. Therefore, no compensation costs are charged against income for stock option grants. Accordingly, the Company is required to disclose pro forma net income and earnings per share information as if compensation expense had been recognized for stock options granted based on the fair value method prescribed by SFAS No. 123. See Note 15 to the Consolidated Financial Statements.

Effective January 1, 2003, the Company will adopt the fair value method of recording stock options under the transitional guidance of SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure. In accordance with the transitional guidance of SFAS 148, the fair value method of accounting for stock options will be applied prospectively to awards granted subsequent to January 1, 2003. As permitted, options granted prior to January 1, 2003 will continue to be accounted for under APB Opinion 25, and the pro forma impact of accounting for these options at fair value will continue to be disclosed in the consolidated financial statements until the last of those options vest in 2006. The Company uses the Black-Scholes model to estimate option values.

The Company continues to recognize compensation expense for restricted stock over the vesting period in accordance with APB Opinion No. 25. Such expense is included in salaries and employee benefits expense on the consolidated statements of income. The unamortized portion of restricted stock totaled $368,000 at December 31, 2002 and is a reduction to capital surplus.

Statements of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-earning deposits with banks, federal funds sold and other short-term investments with maturities less than 90 days.

Note 2. Divestitures

On June 29, 2001, the Company sold its 80% majority-owned subsidiary, Market Street Mortgage Corporation to NetBank, Inc. The Company received $4.9 million in cash and NetBank stock valued at $17.6 million. During the fourth quarter of 2001, the Company sold its entire investment in NetBank, Inc. stock for total proceeds of $17.2 million. In total, the Company received $22.1 million in consideration for the sale of Market Street. Net of the Company’s investment in the subsidiary and transaction costs, the Company’s pre-tax gain on the sale of Market Street was $12 million.

Notes to Consolidated Financial Statements

Note 3. Securities Available for Sale

Information regarding the Company’s securities available for sale portfolio follows:


					Gross		Gross		Estimated
			Amortized		Unrealized		Unrealized		Fair
(In thousands)			Cost		Gains		Losses		Value

December 31, 2002:
	U.S. Treasury and Government agency securities		$	43,615	$	91	$	22	$	43,684
	Collateralized mortgage obligations			46,482		185		507		46,160
	Mortgage-backed securities			6,131		150		39		6,242
	Municipal and other securities			72,870		1,552		52		74,370

		Total debt securities		169,098		1,978		620		170,456
	Investment in FHLB			78,475		—		—		78,475

		Total securities available for sale	$	247,573	$	1,978	$	620	$	248,931

December 31, 2001:
	U.S. Treasury and Government agency securities		$	8,576	$	8	$	188	$	8,396
	Collateralized mortgage obligations			49,515		121		307		49,329
	Mortgage-backed securities			1,913		39		—		1,952
	Municipal and other securities			230,393		207		4,724		225,876

		Total debt securities		290,397		375		5,219		285,553
	Investment in FHLB			79,095		—		—		79,095

		Total securities available for sale	$	369,492	$	375	$	5,219	$	364,648

The amortized cost and estimated market value of securities available for sale at December 31, 2002, by contractual maturity, are shown on the following table. Expected maturities for mortgage-backed securities and collateralized mortgage obligations will differ from contractual maturities because borrowers may have the right to call or prepay obligations. Based upon prepayment assumptions, the weighted average estimated lives of fixed rate mortgage-backed securities and fixed rate collateralized mortgage obligations are approximately ..6 years. Collateral for all mortgage-backed securities and collateralized mortgage obligations is guaranteed by U.S. Government agencies.


December 31, 2002		Due Within				One to				Five to
(In thousands)		One Year				Five Years				Ten Years

				Estimated				Estimated				Estimated
		Amortized		Market		Amortized		Market		Amortized		Market
		Cost		Value		Cost		Value		Cost		Value

U.S. Treasury and
	Government agency securities	$	—	$	—	$	—	$	—	$	43,615	$	43,684
Collateralized mortgage obligations			—		—		—		—		—		—
Mortgage-backed securities			—		—		172		171		—		—
Municipal and other securities			5		5		20		21		1,171		1,237
Investment in FHLB			78,475		78,475		—		—		—		—

	Total securities available for sale	$	78,480	$	78,480	$	192	$	192	$	44,786	$	44,921

[Additional columns below]

[Continued from above table, first column(s) repeated]


December 31, 2002		After
(In thousands)		Ten Years				Total

				Estimated				Estimated
		Amortized		Market		Amortized		Market
		Cost		Value		Cost		Value

U.S. Treasury and
	Government agency securities	$	—	$	—	$	43,615	$	43,684
Collateralized mortgage obligations			46,482		46,160		46,482		46,160
Mortgage-backed securities-			5,959		6,071		6,131		6,242
Municipal and other securities			71,674		73,107		72,870		74,370
Investment in FHLB			—		—		78,475		78,475

	Total securities available for sale	$	124,115	$	125,338	$	247,573	$	248,931

Notes to Consolidated Financial Statements

Note 3. Securities Available for Sale (Continued)

Sales of investment securities resulted in the following realized gains and losses:


Year Ended December 31
(In thousands)		2002			2001			2000

Proceeds from sales		$	323,444		$	176,764		$	41,373
Realized gains (losses):
	Securities gains	$	6,156		$	1,809		$	119
	Securities losses		(297	)		(384	)		(10	)

Net gain on sales of securities		$	5,859		$	1,425		$	109

Securities with a carrying value of $76.9 million and $8.4 million at December 31, 2002 and 2001, respectively, were pledged to secure FHLB advances and public deposits as required by law.

Note 4. Loans

Information regarding the Company’s loan portfolio follows:


December 31
(In thousands)			2002		2001

Commercial:
	Commercial and industrial		$	48,509	$	68,428
	Real estate construction			250,546		250,040
	Commercial real estate mortgages			1,170,212		1,044,594

		Total commercial loans		1,469,267		1,363,062
Residential real estate mortgages				1,593,929		1,511,831
Installment loans				593,347		583,488

		Total loans, net of unearned income	$	3,656,543	$	3,458,381

A geographic concentration exists within the Company’s loan portfolio since most portfolio lending activity is conducted in Michigan and Ohio. At December 31, 2002, approximately 75% of outstanding portfolio loans were concentrated in Michigan and 16% in Ohio. At December 31, 2002, commercial real estate loans in the office-general/professional building industry represented 11.5% of the Company’s total loan portfolio. There were no aggregate loan concentrations of 10% or more of total portfolio loans to any other particular industry.

Note 5. Allowance for Loan Losses and Impaired Loans

An analysis of changes in the allowance for loan losses follows:


Year Ended December 31
(In thousands)		2002			2001			2000

Balance at beginning of year		$	29,157		$	28,450		$	27,128
Loans charged off			(10,385	)		(8,967	)		(6,530	)
Recoveries on loans previously charged off			1,305			974			1,352

	Net loans charged off		(9,080	)		(7,993	)		(5,178	)
Provision for loan losses			16,000			8,700			6,500

Balance at end of year		$	36,077		$	29,157		$	28,450

Amount of balance at end of year:
	Related to impaired loans	$	—		$	—		$	—
	Related to all other loans	$	36,077		$	29,157		$	28,450

Notes to Consolidated Financial Statements

Note 5. Allowance for Loan Losses and Impaired Loans (Continued)

The following impaired loans were included in non-performing loans, which totaled $39.6 million and $28.2 million at December 31, 2002 and 2001, respectively:


December 31
(In thousands)		2002		2001		2000

Average recorded investment in impaired loans for the year		$	13,909	$	6,677	$	6,487
Gross recorded investment in impaired loans (year-end)		$	21,476	$	6,413	$	5,499
	Impaired loans requiring a specific allocated allowance		—		—		—
	Specific impairment allowance		—		—		—
Interest income recognized on impaired loans		$	1,087	$	946	$	600

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.

Note 6. Premises and Equipment

Premises and equipment consisted of the following:


December 31
(In thousands)		2002			2001

Land		$	3,384		$	3,539
Furniture, fixtures and equipment			48,129			47,499
Buildings and improvements			27,657			24,186

			79,170			75,224
Less accumulated amortization and depreciation			(51,380	)		(44,366	)

	Premises and equipment	$	27,790		$	30,858

The Company leases certain office facilities under lease agreements that expire at various dates. In some cases, these leases offer renewal options and require that the Company pay for insurance, maintenance and taxes. Rental expense under all operating leases charged to operations during the years ended December 31, 2002, 2001 and 2000 totaled $5.7 million, $5.7 million and $8.6 million, respectively.

As of December 31, 2002, the future aggregate minimum lease payments required under noncancellable operating leases are as follows:


Year Ending		Operating
(In thousands)		Lease Payments

2003		$	4,016
2004			3,421
2005			2,946
2006			2,351
2007			1,561
2008 and thereafter			1,947

	Total minimum lease payments required	$	16,242

Notes to Consolidated Financial Statements

Note 7. Intangible Assets

Upon adoption of SFAS 142 on January 1, 2002, the Company ceased amortizing its goodwill. The goodwill balance at December 31, 2002 and 2001 was $1.2 million. Goodwill amortization during the year ended December 31, 2001 and 2000 was not material.

The following table summarized the Company’s core deposit intangible asset which is subject to amortization:


(In thousands)			2002		2001

Core Deposit Intangible Asset:
	Gross carrying amount		$	10,475	$	10,475
	Accumulated amortization			4,907		3,917

		Net book value	$	5,568	$	6,558

Amortization expense on the core deposit intangible asset totaled $990,000 for each of the years ended December 31, 2002, 2001 and 2000. As of December 31, 2002, the future core deposit intangible amortization expense is as follows:


Year Ending		Amortization
(In thousands)		Expense

2003		$	990
2004			990
2005			936
2006			823
2007			823
2008 and thereafter			1,006

	Total amortization required	$	5,568

Note 8. Bank Owned Life Insurance

On July 31, 2002, Republic Bank purchased $85 million of separate account bank owned life insurance to fund future employee benefit costs. Increases in cash surrender value resulting from investment returns are recorded in noninterest income.

Note 9. Short-Term Borrowings

Short-term borrowings were as follows:


				Average					Average			Maximum
		Ending		Rate			Average		Rate			Month-End
(Dollars in thousands)		Balance		At Year-End			Balance		During Year			Balance

December 31, 2002
Federal funds purchased		$	208,500		1.31	%	$	201,621		1.77	%	$	241,500
Other short-term borrowings			570		1.00			508		1.38			824

	Total short-term borrowings	$	209,070		1.31	%	$	202,129		1.75	%	$	242,324

December 31, 2001
Federal funds purchased		$	176,000		1.80	%	$	90,290		3.47	%	$	176,000
Other short-term borrowings			500		1.50			6,140		5.28			11,012

	Total short-term borrowings	$	176,500		1.80	%	$	96,430		3.54	%	$	187,012

Federal funds purchased mature one day following the transaction date. At December 31, 2002, Republic Bank had $99.0 million of unused lines of credit available with third parties for federal funds purchased. Other short-term borrowings at December 31, 2002 and 2001 were comprised of treasury, tax and loan demand notes.

Notes to Consolidated Financial Statements

Note 9. Short-Term Borrowings (Continued)

In December 2000, the Company entered into a $30 million revolving credit agreement with a third party with a floating interest rate based on LIBOR. There were no advances outstanding under the agreement at December 31, 2002 or 2001. The agreement expires on December 27, 2003.

Note 10. FHLB Advances

FHLB advances outstanding as of December 31, 2002 and 2001 are presented below. Classifications are based on original maturities.

December 31

(Dollars in thousands)

2002

2001

Average

Ending

Rate at

Ending

Rate at

Balance

Year-End

Balance

Year-End

Short-term FHLB advances

305,000

1.33

485,000

2.69

Long-term FHLB advances

1,002,943

5.30

815,718

5.59

Total FHLB advances

1,307,943

4.37

1,300,718

4.51

Republic Bank routinely borrows short-term and long-term advances from the Federal Home Loan Bank (FHLB) to fund mortgage loans held for sale and to minimize the interest rate risk associated with certain fixed rate commercial and residential mortgage portfolio loans and fixed rate investment securities. These advances are generally secured under a blanket security agreement by first mortgage loans and investment securities with an aggregate book value equal to at least 145% of the advances. Republic Bank had $237.6 million available in unused borrowings with the FHLB at December 31, 2002.

The principal maturities of long-term FHLB advances outstanding at December 31, 2002 are as follows:


(In thousands)		Amount

2003		$	70,000
2004			37,500
2005			58,503
2006			63,991
2007			90,500
2008 and thereafter			682,449

	Total	$	1,002,943

Note 11. Long-Term Debt

At December 31, 2002 and 2001, obligations with original maturities of more than one year and the principal maturities of long-term debt outstanding consisted of $13.5 million of 6.95% Senior Debentures. In January 1996, the Company completed a private offering of $22.5 million of Senior Debentures, of which $9.0 million matured on January 15, 2001 and $13.5 million which matured on January 15, 2003. Interest is payable at the stated rate semi-annually on April 1 and October 1 of each year.

Note 12. Trust Preferred Securities and Preferred Stock of Subsidiary

D&N Capital Corporation, a subsidiary of Republic Bank, was a Delaware corporation incorporated on March 18, 1997 for the purpose of acquiring and holding real estate assets and was a Real Estate Investment Trust. Republic Bank owned all shares of common stock of D&N Capital Corporation. On July 17, 1997, D&N Capital Corporation sold 1.21 million shares of its 9.0% Noncumulative Preferred Stock, Series A with a liquidation preference of $25.00 per share. On June 4, 2002, the Board of Directors of D&N Capital Corporation approved the redemption of its 9.0% Noncumulative Preferred Stock, Series A. The Company redeemed all 1.21 million 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. During 2002 and 2001, D&N Capital Corporation declared and paid preferred dividends totaling $1.53 million and $2.72 million, respectively.

Notes to Consolidated Financial Statements

Note 12. Trust Preferred Securities and Preferred Stock of Subsidiary (Continued)

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 30, 2006, subject to regulatory approval. The preferred securities are treated as Tier 1 Capital by the Company and trade on The Nasdaq Stock Market® under the symbol RBNCP. The Company used the net proceeds for general corporate purposes, for working capital and for repurchases of its common stock. During 2002 and 2001, Republic Capital Trust I declared and paid preferred dividends totaling $4.3 million and $932,000, respectively.

Note 13. Shareholders’ Equity

On October 17, 2002, the Board of Directors declared a 10% stock dividend distributed on December 2, 2002 to shareholders of record on November 8, 2002. On October 18, 2001, the Board of Directors declared a 10% stock dividend distributed on December 3, 2001 to shareholders of record on November 9, 2001. On October 19, 2000, the Board of Directors declared a 10% stock dividend distributed on December 1, 2000 to shareholders of record on November 10, 2000. Share amounts for all periods presented have been adjusted to reflect the issuance of stock dividends.

The Company repurchased 1,467,000, 1,849,000, and 922,000 shares of common stock in 2002, 2001 and 2000, respectively. On February 20, 2001, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 1,100,000 shares of the Company’s outstanding common shares. On October 18, 2001, the Board of Directors amended the 2001 Stock Repurchase Program to allow for the repurchase of up to 3,300,000 shares. This program was further amended on October 17, 2002 by the Board of Directors to allow for the repurchase of 4,300,000 shares. The program commenced at the conclusion of the 1999 Stock Repurchase Program that the Board of Directors approved on November 18, 1999 authorizing the repurchase of up to 1,100,000 shares of the Company’s outstanding common shares. As of December 31, 2002, there were 1,168,000 shares available for repurchase under the Program.

Note 14. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:


Year Ended December 31
(Dollars in thousands, except per share data)				2002(1)		2001(1)		2000(1)

Numerator for basic and diluted earnings per share:
		Net income		$	56,677	$	47,910	$	45,677

Denominator:
Denominator for basic earnings per share- weighted-average shares					58,168,145		59,647,452		60,000,671
		Effect of dilutive securities:
			Employee stock options		792,206		816,586		353,347
			Warrants		64,459		57,977		24,757

			Dilutive potential common shares		856,665		874,563		378,104
	Denominator for diluted earnings per share- adjusted weighted-average shares for assumed conversions				59,024,810		60,522,015		60,378,775

Basic earnings per share				$	.97	$	.80	$	.76

Diluted earnings per share				$	.96	$	.79	$	.76

(1)

Share amounts for all periods presented have been adjusted to reflect the issuance of stock dividends.

Notes to Consolidated Financial Statements

Note 15. Stock-Based Compensation

The Company maintains various stock-based compensation plans that provide for its ability to grant stock options, stock warrants and restricted shares to selected employees and directors. See Note 1 for the Company’s accounting policies relating to stock-based compensation.

Stock Options

The Company awards stock options to officers and key employees under the 1998 Stock Option Plan (1998 Plan) and the 1997 Stock Option Plan (1997 Plan). The 1998 Plan, which was adopted effective February 19, 1998, and amended April 26, 2000, authorizes the issuance of up to 3,161,125 options to purchase common shares at exercise prices equal to the market value of the Company’s common stock on the date of grant. Of the 3,161,125 options to purchase common shares under the 1998 Stock Option Plan, up to 1,464,100 options may be issued pursuant to options which may be granted under the Voluntary Management Stock Accumulation Program which was also adopted effective February 19, 1998. Options are exercisable according to a four-year vesting schedule whereby 25% vest annually, based on the one through four year anniversary of the grant date. Options granted pursuant to the Voluntary Management Stock Accumulation Program fully vest after the third anniversary date of the option grant date. All options have a maximum contractual life of ten years from the date of grant. At December 31, 2002 and 2001, options available for future grant under the 1998 Stock Option Plan totaled 728,874 and 1,004,569, respectively. Options available for future grant under the 1997 Stock Option Plan totaled 331,400 and 310,436 at December 31, 2002 and 2001, respectively.

D&N Financial Corporation previously had stock option plans authorizing the issuance of up to 2,430,428 options to purchase common shares. The term on any option does not exceed ten years from the date of grant. At the merger consummation date of May 17, 1999, 1,475,732 issued options, adjusted for the exchange, remained outstanding under the plans. At December 31, 2002 and 2001, there were no options available for future grant as the D&N Financial Corporation plans were discontinued upon consummation of the merger with the Company.

The following table presents stock option activity for the years indicated:


Year Ended December 31		2002					2001					2000

					Weighted-					Weighted-					Weighted-
					Average					Average					Average
		Number of			Exercise		Number of			Exercise		Number of			Exercise
		Options			Price		Options			Price		Options			Price

Outstanding at beginning of year			3,976,363		$	8.24		4,355,148		$	7.55		4,323,171		$	7.18
	Granted		435,205			10.85		567,676			10.46		822,978			7.81
	Exercised		(383,199	)		6.77		(717,473	)		5.82		(436,315	)		3.37
	Canceled		(195,399	)		8.97		(228,988	)		8.39		(354,686	)		8.84

Outstanding at end of year			3,832,970		$	8.63		3,976,363		$	8.24		4,355,148		$	7.55

Notes to Consolidated Financial Statements

Note 15. Stock-Based Compensation (Continued)

Additional information regarding stock options outstanding and exercisable at December 31, 2002 is provided in the following table:


					Options Outstanding and Exercisable

							Weighted
							Average		Weighted
							Remaining		Average
							Contractual		Exercise
Range of Exercise Prices					Shares		Life (Years)		Price

$	2.58	—	$	6.14		503,587		3.4	$	4.93
$	6.40	—	$	7.70		391,762		6.8		7.27
$	7.98	—	$	8.36		482,478		6.7		8.23
$	8.37	—	$	8.37		526,342		6.1		8.37
$	8.41	—	$	9.09		383,743		6.2		8.49
$	9.14	—	$	10.38		437,390		5.2		9.97
$	10.38	—	$	10.43		498,043		8.1		10.42
$	10.45	—	$	10.66		183,686		5.4		10.52
$	10.84	—	$	10.84		391,875		9.1		10.84
$	10.93	—	$	12.62		34,064		7.3		11.42

$	2.58	—	$	12.62		3,832,970		6.3	$	8.63

Voluntary Management Stock Accumulation Program

Under the Voluntary Management Stock Accumulation Program, which was adopted by the Company on February 19, 1998, the Company offers to officers and key employees the right to acquire shares of the Company’s common stock at fair market value; and if shares are so acquired under the Program, the officer or key employee is granted two tandem stock options, exercisable at the current fair market value, for every one share purchased. This Program authorizes up to 183,013 common shares per year for sale as program shares, subject to an overall maximum of 732,050 shares while the Program is in effect. Consequently, an annual maximum of 366,026 common shares is authorized for tandem stock options (subject to an overall maximum of 1,464,100 stock option shares). The participant’s purchased shares may not be sold, transferred, encumbered or otherwise disposed of for a three year period so long as employed by the Company. Options granted pursuant to the Voluntary Management Stock Accumulation Program fully vest and are exercisable only after the lapsing of the third anniversary of the option grant date. All options have a maximum contractual life of ten years from the date of grant. At December 31, 2002, common shares and tandem stock options available for future grant totaled 224,782 and 449,564, respectively. At December 31, 2001, common shares and tandem stock options available for future grant totaled 204,347 and 408,694, respectively.

Stock Warrants

The Company has a Director Compensation Plan that provides for its ability to issue 1,500 warrants annually to each of the Company’s outside directors. Stock warrants are granted at exercise prices equal to the market value of the Company’s common stock on the date of grant, are immediately exercisable, and have maximum contractual lives of ten years. In 2002, 26,400 warrants were issued, compared to 30,855 warrants in 2001 and 35,937 warrants in 2000. At December 31, 2002, 279,353 warrants were outstanding with exercise prices ranging from $3.73 to $13.27.

Notes to Consolidated Financial Statements

Note 15. Stock-Based Compensation (Continued)

Incentive Stock Plan

The Company’s Incentive Stock Plan authorizes the grant of restricted common shares so that the total number of restricted shares that may be outstanding at any time under the Plan shall not exceed five percent of the issued and outstanding common stock of the Company. At December 31, 2002, the maximum number of authorized shares allowed for grant totaled 2,872,050. Restriction periods for these shares exist for a period of one to four years. Restricted shares are forfeited if employment is terminated before the restriction period expires. As of December 31, 2002 and 2001, 225,923 and 264,388 common shares, respectively, have been awarded and are still subject to restrictions under the incentive stock plan. Compensation expense is recognized over the restriction period and included in salaries and employee benefits expense in the consolidated statements of income. Compensation expense for restricted stock totaled $1,527,000 in 2002, $825,000 in 2001 and $968,000 in 2000. The unamortized portion of restricted stock is included as a component of shareholders’ equity in the consolidated balance sheets. In 2002, 151,081 restricted shares were issued, compared to 77,202 in 2001 and 77,113 in 2000. The weighted average grant-date fair value of restricted shares issued in 2002 was $11.21 per share.

Stock-Based Compensation Plan Summary Information

The following table presents all stock-based compensation plans that were previously approved by security holders at December 31, 2002:


	(a)		(b)		(c)
	Number of				Number of securities
	Securities to be				remaining available
	Issued Upon				for future issuance under
	Exercise of		Weighted-Average		equity compensation
	Outstanding		Exercise Price of		plans (excluding
	Options and		Options and		securities reflected
Compensation Plan	Warrants		Warrants		in column a)

1998 Stock Option Plan		2,261,381	$	9.36		728,874
1997 Stock Option Plan		760,967		8.92		331,400
D&N Financial Corporation Stock Option Plans		799,437		6.35		—
Non-Qualified Stock Option Plan		11,185		4.36		—
Director Compensation Plan (warrants)		279,353		7.93		—

Total Shares		4,112,323	$	8.58		1,060,274

At December 31, 2002 there were no stock-based compensation plans that were not previously approved by shareholders.

Pro Forma Disclosures

For purposes of providing the pro forma disclosures of net income and earnings per share required by SFAS No. 123, Accounting for Stock-Based Compensation, the fair value of stock options and stock warrants was estimated as of the grant date using the Black-Scholes option pricing model. The following weighted average assumptions were used in the option pricing model for the year ending December 31, 2002: an expected volatility factor of 46.4%; an expected dividend yield of 2.85%; a risk-free interest rate of 4.15%; and an expected life of the option of 4.8 years. The weighted average grant-date fair value of stock options and stock warrants granted during each of the years 2002, 2001 and 2000 was $3.85, $3.99 and $3.34, respectively.

Notes to Consolidated Financial Statements

Note 15. Stock-Based Compensation (Continued)

Had compensation cost for the Company’s stock-based compensation plans been determined in accordance with SFAS No. 123, net income and earnings per share would have been as summarized below:


Year Ended December 31
(In thousands, except per share data)	2002		2001		2000

Net income (as reported)	$	56,677	$	47,910	$	45,677
Net income (pro forma)		55,554		46,818		44,390
Basic earnings per share (as reported)	$	.97	$	.80	$	.76
Basic earnings per share (pro forma)		.96		.78		.74
Diluted earnings per share (as reported)	$	.96	$	.79	$	.76
Diluted earnings per share (pro forma)		.94		.77		.74

Note 16. Employee Benefit Plans

The Company maintains a 401(k) plan for its employees. The employer contributions to this defined contribution plan are determined annually by the Board of Directors. Contribution expenses for the 401(k) plan for the years ended December 31, 2002, 2001 and 2000 totaled $1.4 million, $2.0 million, and $2.2 million, respectively.

Note 17. Other Noninterest Expense

The two largest components of other noninterest expense were as follows:


Year Ended December 31
(In thousands)	2002		2001		2000

State taxes	$	3,127	$	2,583	$	3,135
Voice and data communications		2,840		3,988		5,215

Note 18. Income Taxes

The current and deferred components of the provision for Federal income tax expense for the years ended December 31, 2002, 2001, and 2000 are as follows.


(In thousands)	2002			2001			2000

Current income tax expense	$	26,640		$	25,912		$	20,409
Deferred income tax (benefit) expense		(1,953	)		(3,397	)		2,536

Total income tax expense	$	24,687		$	22,515		$	22,945

Notes to Consolidated Financial Statements

Note 18. Income Taxes (Continued)

A deferred tax asset or liability is recognized to reflect the net tax effects of temporary differences between the carrying amounts of existing assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards. Significant temporary differences that gave rise to the deferred tax assets and liabilities as of December 31, 2002 and 2001 were as follows:


(In thousands)		2002				2001

		Deferred				Deferred
		Asset		Liability		Asset		Liability

Allowance for loan losses		$	12,241	$	—	$	9,819	$	—
Originated mortgage servicing rights			—		869		—		700
Deferred loan origination fees and costs, net			—		10,022		—		9,527
Deferred compensation contributions and gains			3,033		—		2,420		—
Restricted stock amortization			666		—		847		—
Depreciation/amortization			—		914		—		480
Stock dividends on FHLB stock			—		1,175		—		1,162
Purchase accounting adjustment amortization			—		—		24		—
Unrealized (gain) loss on securities available for sale			—		475		1,695		—
Loan mark-to-market adjustment			1,504		—		1,703		—
Other temporary differences			440		291		53		337

	Total deferred taxes	$	17,884	$	13,746	$	16,561	$	12,206

Items causing differences between the statutory tax rate and the effective tax rate are summarized as follows:


Year ended December 31
(Dollars in thousands)		2002						2001						2000

		Amount			Rate			Amount			Rate			Amount			Rate

Statutory tax rate		$	30,517			35.0	%	$	25,928			35.0	%	$	24,971			35.0	%
Amortization of goodwill			—			—			87			.1			87			.1
Net tax exempt interest income			(2,707	)		(3.1	)		(2,152	)		(2.9	)		(123	)		(.2	)
Bank owned life insurance income			(767	)		( .9	)		—			—			—			—
Dividends on trust preferred securities and preferred stock of subsidiary			(2,040	)		(2.3	)		(1,279	)		(1.7	)		(953	)		(1.3	)
Other, net			(316	)		( .4	)		(69	)		(.1	)		(1,037	)		(1.4	)

	Provision for income taxes	$	24,687			28.3	%	$	22,515			30.4	%	$	22,945			32.2	%

Note 19. Contingencies

The Company and its subsidiaries are subject to certain legal actions and proceedings in the normal course of business. Management believes that the aggregate liability, if any, resulting from such actions would not have a material adverse affect on the Company’s financial condition.

D&N Bank, a federally insured institution acquired by the Company in May 1999 and merged into Republic Bank in December 2000, is a plaintiff, along with approximately 120 other institutions, in a currently pending claim and an appeal in the United States Court of Appeals for the Federal Circuit seeking substantial damages as a result of the 1989 Financial Institutions Reform, Recovery and Enforcement Act’s mandatory phase-out of the regulatory capital treatment of supervisory goodwill. The ultimate outcome of this matter as it relates to the Company cannot be determined at this time.

Notes to Consolidated Financial Statements

Note 20. Transactions With Related Parties

Republic Bank has, in the normal course of business, made loans to certain directors and officers and to organizations in which certain directors and officers have an interest. Other transactions with related parties include noninterest-bearing and interest-bearing deposits. In the opinion of management, such loans and other transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and did not involve more than normal risk of collectibility.

A summary of related loan activity for the years ended December 31, 2002, 2001 and 2000 follows:


(In thousands)	2002			2001			2000

Balance at beginning of the year	$	15,534		$	14,456		$	8,157
New loans and advances		1,016			2,435			8,641
Repayments		(6,407	)		(1,357	)		(2,342	)

Balance at end of year	$	10,143		$	15,534		$	14,456

Note 21. 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 consumer loan products are offered through 82 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. As discussed in Note 1, Market Street Mortgage was sold in the second quarter of 2001 and in conjunction with the sale of Market Street, the Company substantially exited the mortgage servicing business and separately sold its mortgage servicing portfolio. Prior to 2001, over 90% of the Company’s mortgage loan servicing was performed by Market Street Mortgage. 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, data processing, human resources and operation costs.

The Company evaluates performance and allocates resources based on profit or loss from operations. Business segment performance is determined based on the Company’s management accounting process, in which the accounting policies of the reportable segments are primarily the same as those described in the summary of significant accounting policies. The accounting process assigns revenue, expenses and assets to a business segment using specific identification and an allocation methodology. Changes in the allocation methodology may result in changes in allocations and assignments. In that case, however, results for prior periods would be restated to allow comparability between periods. Each business segment is credited for the interest income earned on its assets. The assets of commercial banking are commercial loans. Retail banking’s assets include direct consumer loans and deposits in excess of its loan balances. The mortgage banking segment’s assets are mortgage loans held for sale and residential construction loans. The commercial and mortgage segments’ internal funding costs are based on the overall cost of funds of Republic Bank. The retail segment is charged for the interest expense on deposits and receives an internal funding credit for excess deposits at Republic Bank’s overall yield on earning assets. Excluding the internal funding and transfer pricing on mortgage portfolio loans, the Company does not have intracompany revenues or expenses. Noninterest income and expenses directly attributable to a business segment’s operations are assigned to that business segment. The provision for loan losses for each segment reflects net charge-offs in each segment and the maintenance of a fixed allowance for loan losses to loans ratio. Additionally, segment income tax expense is calculated using the marginal tax rate. The difference between the marginal and effective tax rate is included in Treasury and Other. Equity is allocated to each segment based on a percentage of its assets.

Revenues from no individual customer exceeded 10 percent of consolidated total revenues. The Company’s segments are not necessarily comparable with similar information for any other financial institution.

Notes to Consolidated Financial Statements

Note 21. Segment Information (Continued)

In 2002, the internal funding credit computation included the allocated capital balance of the retail segment. In addition, cash balances in the retail branches reduced excess deposits. These internal funding credit adjustments were directly offset by adjustments to the internal funding cost to treasury and other. All prior period amounts have been restated to conform to the current year presentation.

The following table presents the financial results of each business segment for the last three years.


										Treasury
(Dollars in thousands)	Commercial			Retail			Mortgage			and Other			Consolidated

For the Year Ended December 31, 2002
Net interest income from external customers	$	97,458		$	(46,636	)	$	36,669		$	60,189		$	147,680
Internal funding		(42,462	)		160,301			(17,801	)		(100,038	)		—

Net interest income		54,996			113,665			18,868			(39,849	)		147,680
Provision for loan losses		5,780			1,393			—			8,827			16,000
Noninterest income		2,129			9,528			36,488			7,882			56,027
Noninterest expense		8,881			31,937			28,644			31,053			100,515

Operating income before taxes		42,464			89,863			26,712			(71,847	)		87,192
Preferred stock dividend		—			—			—			5,828			5,828
Income taxes		15,212			32,192			9,349			(32,066	)		24,687

Net operating income	$	27,252		$	57,671		$	17,363		$	(45,609	)	$	56,677

Depreciation and amortization	$	142		$	3,151		$	2,454		$	4,658		$	10,405
Capital expenditures	$	75		$	803		$	629		$	1,828		$	3,335
Net identifiable assets (in millions)	$	1,450		$	2,865		$	824		$	(361	)	$	4,778
Return on equity⁽²⁾		19.30	%		22.23	%		59.36	%		n/m			17.52	%
Return on assets		1.93	%		2.02	%		2.97	%		n/m			1.24	%
Efficiency ratio		15.55	%		25.92	%		51.75	%		n/m			50.80	%
For the Year Ended December 31, 2001⁽¹⁾
Net interest income from external customers	$	102,428		$	(80,907	)	$	49,710		$	72,378		$	143,609
Internal funding		(50,581	)		186,143			(29,149	)		(106,413	)		—

Net interest income		51,847			105,236			20,561			(34,035	)		143,609
Provision for loan losses		4,641			634			—			3,425			8,700
Noninterest income		1,537			7,764			48,714			1,369			59,384
Noninterest expense		9,571			32,006			47,192			24,444			113,213

Operating income before taxes		39,172			80,360			22,083			(60,535	)		81,080
Preferred stock dividend		—			—			—			3,655			3,655
Income taxes		13,710			28,127			7,729			(24,601	)		24,965

Net income	$	25,462		$	52,233		$	14,354		$	(39,589	)	$	52,460

Depreciation and amortization	$	150		$	3,293		$	6,727		$	2,752		$	12,922
Capital expenditures	$	168		$	1,319		$	328		$	1,686		$	3,501
Net identifiable assets (in millions)	$	1,335		$	2,911		$	914		$	(419	)	$	4,741
Return on equity⁽²⁾		20.47	%		20.01	%		40.77	%		n/m			17.25	%
Return on assets		2.05	%		1.82	%		2.04	%		n/m			1.14	%
Efficiency ratio		17.93	%		28.32	%		68.12	%		n/m			56.17	%

Notes to Consolidated Financial Statements

Note 21. Segment Information (Continued)


										Treasury
(Dollars in thousands)	Commercial			Retail			Mortgage			and Other			Consolidated

For the Year Ended December 31, 2000
Net interest income from external customers	$	92,578		$	(87,410	)	$	45,333		$	84,147		$	134,648
Internal funding		(50,921	)		197,410			(35,697	)		(110,792	)		—

Net interest income		41,657			110,000			9,636			(26,645	)		134,648
Provision for loan losses		3,260			1,153			—			2,087			6,500
Noninterest income		986			7,598			59,159			3,095			70,838
Noninterest expense		8,384			31,772			63,392			24,093			127,641

Operating income before taxes		30,999			84,673			5,403			(49,730	)		71,345
Preferred stock dividend		—			—			—			2,723			2,723
Income taxes		10,850			29,636			1,891			(19,432	)		22,945

Net operating income	$	20,149		$	55,037		$	3,512		$	(33,021	)	$	45,677

Depreciation and amortization	$	184		$	3,281		$	17,939		$	2,976		$	24,380
Capital expenditures	$	201		$	1,401		$	3,613		$	3,919		$	9,134
Net identifiable assets (in millions)	$	1,112		$	2,794		$	494		$	211		$	4,611
Return on equity⁽²⁾		20.21	%		19.70	%		13.14	%		n/m			16.28	%
Return on assets		2.02	%		1.97	%		.66	%		n/m			1.02	%
Efficiency ratio		19.66	%		27.02	%		92.15	%		n/m			64.10	%

⁽¹⁾		Amounts for 2001 exclude $12.0 million of pretax gain on sale of subsidiary and $19.0 million pretax restructuring costs to exit the mortgage servicing business.

⁽²⁾		The Company allocated capital as a percentage of assets of 10%, 10% and 5% for the commercial, retail and mortgage segments, respectively.
n/m — Not meaningful

Note 22. Off-Balance Sheet Transactions

In the normal course of business, the Company becomes a party to transactions involving financial instruments with off-balance sheet risk to meet the financing needs of its customers and to manage its own exposure to interest rate risk. These financial instruments include commitments to extend credit, standby letters of credit and forward commitments to sell mortgage loans that are not reflected in the consolidated financial statements. The contractual amounts of these instruments express the extent of the Company’s involvement in these transactions as of the balance sheet date. These instruments involve, to varying degrees, elements of credit risk, market risk and liquidity risk in excess of the amount recognized in the consolidated balance sheets. However, they do not represent unusual risks for the Company and management does not anticipate any significant losses to arise from these transactions.

Commitments to extend credit are legally binding agreements to lend cash to a customer as long as there is no breach of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Commitments to fund loan applications with agreed-upon rates subject the Company to market risk due to fluctuations in interest rates. Standby letters of credit guarantee the performance of a customer to a third party. The Company issues these guarantees primarily to support public and private borrowing arrangements, real estate construction projects, bond financing and similar transactions.

The credit risk associated with commitments to extend credit and standby letters of credit is essentially the same as that involved with direct lending. Therefore, these instruments are subject to the Company’s loan review and approval procedures and credit policies. Based upon management’s credit evaluation of the counterparty, the Company may require the counterparty to provide collateral as security for the agreement, including real estate, accounts receivable, inventories, and investment securities. The maximum credit risk associated with these instruments equals their contractual amounts and assumes that the counterparty defaults and the collateral proves to be worthless. The total contractual amounts of commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements, since many of these agreements may expire without being drawn upon. At December 31, 2002 and 2001, no liability is recorded for the commitments to extend credit or the standby letters of credit.

At December 31, 2002, the Company had outstanding $181.0 million of commitments to fund residential real estate loan applications with agreed-upon rates (“Interest Rate Lock Commitments” or “IRLCs”).

Notes to Consolidated Financial Statements

Note 22. Off-Balance Sheet Transactions (Continued)

At December 31, 2002, the Company had outstanding mandatory forward commitments to sell $789.0 million of residential mortgage loans, which includes put options on 10-year treasury futures with a notional amount of $7.5 million. These mandatory forward commitments covered $626.2 million of mortgage loans held for sale and $162.8 million of IRLCs. These outstanding forward commitments to sell mortgage loans are expected to settle in the first quarter of 2003 without producing any material gains or losses. At December 31, 2002, the mortgage loans held for sale balance included $26.3 million of loan products for which the Company did not enter into mandatory forward commitments. The Company’s exposure to market risk was not significantly increased, however, since these loans were committed for sale to third parties prior to year-end.

At December 31, 2001, outstanding forward commitments to sell mortgage loans totaled $931.6 million, of which $725.8 million covered the mortgage loans held for sale balance and $205.8 million covered interest rate lock commitments. The Company had $257.9 million of interest rate lock commitments outstanding at December 31, 2001.

In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was amended in June 1999 by Statement No. 137, Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133, and 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 the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The Company implemented Statement No. 133 effective January 1, 2001. The transition adjustments resulting from adopting Statement No. 133 were immaterial. For the years ended December 31, 2002 and 2001, the Company’s hedging policies using mandatory forward commitments and put options on 10-year treasury futures, as they relate to IRLCs and mortgage loans held for sale, were highly effective. Therefore, the impact of Statement No. 133 on net income was immaterial.

The following table presents the contractual amounts of the Company’s off-balance sheet financial instruments outstanding at December 31, 2002 and 2001:


December 31
(In thousands)		2002		2001

Financial instruments whose contract amounts represent credit risk:
	Commitments to fund residential real estate loans	$	241,462	$	299,480
	Commitments to fund commercial real estate loans		241,485		236,280
	Other unused commitments to extend credit, primarily revolving consumer loans		374,692		431,652
	Standby letters of credit		32,855		36,799
Financial instruments subject to interest rate risk:
	Residential real estate loan applications with agreed-upon rates	$	181,042	$	257,946
	Forward commitments to sell residential real estate mortgage loans		789,037		931,600

Notes to Consolidated Financial Statements

Note 23. Estimated Fair Value of Financial Instruments

Fair value estimates of financial instruments are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the Company’s entire holdings of a particular financial instrument. Since no ready market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are determined for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and value of assets and liabilities that are not considered financial instruments. Tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value of financial instruments and have not been considered in these estimates.

The methods and assumptions used to estimate the fair value of each class of financial instruments for which determination of such an estimate was practicable are as follows:

Cash and Cash Equivalents:

The carrying amount is a reasonable estimate of fair value for these instruments.

Mortgage Loans Held for Sale:

The fair value of mortgage loans held for sale, including the fair value of associated mortgage servicing rights, is estimated based on the present value of estimated future cash flows of the loan and related servicing rights.

Securities Available for Sale:

The fair value of securities available for sale are estimated based on quoted market prices or dealer quotes.

Loans:

Fair values are estimated for portfolio loans based on the present value of future estimated cash flows using discount rates which incorporate a premium commensurate with normal credit and interest rate risks involved. Loans are segregated by type such as commercial and industrial, commercial real estate, residential mortgage and installment.

Fair value for non-performing loans is based on the premise that management has allocated adequate reserves for loan losses. As a result, the fair value of non-performing loans approximate their carrying value.

Deposits:

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and NOW accounts, is equal to the amount payable on demand. The estimated fair value of certificates of deposit is based on the present value of future estimated cash flows using the rates currently offered for deposits of similar remaining maturities.

Federal Funds Purchased:

Fair value approximates the carrying value since the majority of these instruments were entered into at or near December 31, 2002 and 2001.

Other Short-Term Borrowings:

The carrying amount is a reasonable estimate of fair value of other short-term borrowings as these financial instruments are tied to floating rate indices such as prime and LIBOR, and reprice frequently.

FHLB Advances and Long-Term Debt:

Fair value is estimated based on the present value of future estimated cash flows using current rates offered to the Company for debt with similar terms.

Notes to Consolidated Financial Statements

Note 23. Estimated Fair Value of Financial Instruments (Continued)

Trust Preferred Securities and Preferred Stock of Subsidiary:

Fair value is estimated based on the present value of future estimated cash flows using current rates offered to the Company for trust preferred securities with similar terms.

Off-Balance Sheet Financial Instruments:

The Company’s off-balance sheet financial instruments are detailed in Note 22 in the Notes to Consolidated Financial Statements. The Company’s commitments to fund residential real estate loan applications with agreed-upon interest rates may result in a gain or loss upon the sale of the funded residential real estate loans.

Additionally, the Company’s forward commitments to sell residential real estate loans may result in a gain or loss. The aggregated fair value of these off-balance sheet financial instruments at December 31, 2002 and 2001 were not material.

The following table presents the estimated fair values of the Company’s financial instruments:

2002

2001

December 31

Carrying

Fair

Carrying

Fair

(In thousands)

Value

Assets:

Cash and cash equivalents

75,625

76,734

Mortgage loans held for sale

660,999

665,295

748,463

753,328

Securities available for sale

248,931

364,648

Loans, net of the allowance for loan losses

3,620,466

3,686,315

3,429,224

3,466,446

Liabilities:

Noninterest-bearing deposits

260,634

245,395

NOW, savings and money market accounts

1,087,229

973,513

Certificates of deposit maturing in:

Six months or less

10,491

10,498

11,082

11,088

Over six months to one year

79,978

80,197

176,148

176,864

Over one year to three years

985,731

997,322

1,142,230

1,159,846

Over three years

364,209

384,473

205,100

214,990

Total certificates of deposit

1,440,409

1,472,490

1,534,560

1,562,788

Total deposits

2,788,272

2,820,353

2,753,468

2,781,696

Federal funds purchased and other short-term borrowings

209,070

176,500

FHLB advances

1,307,943

1,428,497

1,300,718

1,360,040

Long-term debt

13,500

13,517

13,500

13,596

Trust preferred securities and preferred stock of subsidiary

50,000

50,319

78,719

76,638

Note 24. Regulatory Matters

Republic Bank is required by law to maintain average cash reserve balances with the Federal Reserve Bank based on a percentage of deposits. At December 31, 2001, these reserves totaled $3.8 million. There were no reserve requirements as of December 31, 2002.

The principal source of cash flows for the parent company is dividends from Republic Bank. The banking regulatory agencies limit the amount of dividends a state chartered financial institution may declare to the parent company in any calendar year. On December 31, 2002, $134.5 million was available for payment of dividends.

Notes to Consolidated Financial Statements

Note 24. Regulatory Matters (Continued)

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 4.00% (and in some cases 3.00%) for Tier 1 leverage. Under the framework for prompt corrective action, all financial institutions must meet capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. 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. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators with respect to components, risk weightings and other factors.

Management believes, as of December 31, 2002, that the Company met all capital adequacy requirements to which it is subject. In addition, Republic Bank had regulatory capital ratios in excess of the levels established for well capitalized institutions.

As of December 31, 2002, the Federal Reserve Bank of Chicago considers the Company to be “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s category.

Presented in the table below are the capital amounts and ratios for the Company and its bank subsidiary, Republic Bank, at December 31, 2002 and 2001, along with a comparison to the year-end capital amounts and ratios established by the regulators.


(Dollars in thousands)		Actual					Adequately Capitalized					Well Capitalized

		Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2002
Total capital (to risk weighted assets)⁽¹⁾:
	Consolidated	$	410,860		12.26	%	$	268,149		8.00	%	$	335,186		10.00	%
	Republic Bank		401,462		12.03			266,969		8.00			333,711		10.00
Tier 1 capital (to risk weighted assets)⁽¹⁾:
	Consolidated	$	374,783		11.18	%	$	134,075		4.00	%	$	201,112		6.00	%
	Republic Bank		365,385		10.95			133,484		4.00			200,227		6.00
Tier 1 capital (to average assets)⁽¹⁾:
	Consolidated	$	374,783		7.81	%	$	143,683		3.00	%	$	239,471		5.00	%
	Republic Bank		365,385		7.64			143,521		3.00			239,202		5.00
As of December 31, 2001
Total capital (to risk weighted assets)⁽¹⁾:
	Consolidated	$	407,921		12.31	%	$	265,088		8.00	%	$	331,361		10.00	%
	Republic Bank		388,578		11.84			262,590		8.00			328,237		10.00
Tier 1 capital (to risk weighted assets)⁽¹⁾:
	Consolidated	$	378,764		11.43	%	$	132,544		4.00	%	$	198,816		6.00	%
	Republic Bank		359,421		10.95			131,295		4.00			196,942		6.00
Tier 1 capital (to average assets)⁽¹⁾:
	Consolidated	$	378,764		8.34	%	$	136,164		3.00	%	$	226,941		5.00	%
	Republic Bank		359,421		7.97			135,278		3.00			225,463		5.00

⁽¹⁾

As defined in the regulations

Notes to Consolidated Financial Statements

Note 25. Parent Company Financial Information

The condensed financial statements of Republic Bancorp Inc. (Parent Company only) are as follows:


Parent Company Only Balance Sheets
December 31 (In thousands)			2002		2001

Assets:
Cash and due from banks			$	645	$	539
Interest earning deposits				32,924		18,366

	Cash and cash equivalents			33,569		18,905
Investment in subsidiaries				374,437		336,681
Notes and advances receivable from subsidiary				98		6,004
Furniture and equipment				139		176
Other assets				12,519		31,248

		Total assets	$	420,762	$	393,014

Liabilities and Shareholders’ Equity:
Accrued expenses and other liabilities			$	22,988	$	23,051
Subordinated debentures				51,546		51,546
Long-term debt				13,500		13,500

		Total liabilities		88,034		88,097
Total shareholders’ equity				332,728		304,917

		Total liabilities and shareholders’ equity	$	420,762	$	393,014


Parent Company Only Income Statements
Year Ended December 31 (In thousands)		2002			2001			2000

Interest income		$	520		$	198		$	345
Dividends from subsidiary			24,287			35,029			20,000
Management fee from subsidiary			8,000			—			—
Other income			—			12,000			1

	Total income		32,807			47,227			20,346
Interest expense			965			1,746			3,434
Investment securities losses			—			355			—
Salaries and employee benefits			5,115			4,950			2,785
Other expenses			3,020			1,951			875
Merger integration and restructuring			—			—			(431	)

	Total expenses		9,100			9,002			6,663

Income before income taxes and excess of undistributed earnings of subsidiary over dividends			23,707			38,225			13,683
Income tax expense (credit)			(2,015	)		890			(3,056	)

Income before excess of undistributed earnings of subsidiary over dividends			25,722			37,335			16,739
Excess of undistributed earnings of subsidiary over dividends			35,255			11,507			28,938
Dividends on trust preferred securities			(4,300	)		(932	)		—

Net income		$	56,677		$	47,910		$	45,677

Notes to Consolidated Financial Statements

Note 25. Parent Company Financial Information (Continued)


Parent Company Only Statements of Cash Flows
Year Ended December 31 (In thousands)					2002			2001			2000

Cash Flows from Operating Activities:
	Net income				$	56,677		$	47,910		$	45,677
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				906			693			559
		Net loss on securities available for sale				—			355			—
		Excess of undistributed earnings of subsidiary over dividends				(35,255	)		(11,507	)		(28,938	)
		Decrease (Increase) in other assets				24,452			(18,174	)		(1,343	)
		Decrease in other liabilities				(403	)		(4,521	)		(1,942	)
		Gain on sale of subsidiary				—			(12,000	)
		Other, net				252			(23	)		(1,090	)

			Total adjustments			(10,048	)		(45,177	)		(32,754	)

				Net cash provided by operating activities		46,629			2,733			12,923
Cash Flows from Investing Activities:
	Decrease in notes and advances receivable from subsidiary					—			22,064			2,235

				Net cash provided by investing activities		—			22,064			2,235
Cash Flows from Financing Activities:
	Repayment of long-term debt					—			(34,000	)		—
	Net proceeds from issuance of subordinated debentures					—			47,963			—
	Net proceeds from issuance of common shares					4,687			5,411			3,096
	Repurchase of common shares					(18,570	)		(25,416	)		(8,054	)
	Dividends paid on common shares					(18,082	)		(16,838	)		(15,397	)

			Net cash used in financing activities			(31,965	)		(22,880	)		(20,355	)

Net increase (decrease) in cash and cash equivalents						14,664			1,917			(5,197	)
Cash and cash equivalents at beginning of year						18,905			16,988			22,185

Cash and cash equivalents at end of year					$	33,569		$	18,905		$	16,988

Independent Auditors’ Report

Republic Bancorp Inc. Board of Directors

We have audited the accompanying consolidated balance sheets of Republic Bancorp Inc. and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Republic Bancorp Inc. and subsidiaries at December 31, 2002 and 2001 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG, LLP

Detroit, Michigan
January 13, 2003

Quarterly Data (Unaudited)

The following is a summary of unaudited quarterly results of operations for the years 2002 and 2001:


												Full
(Dollars in thousands, except per share data)		1Q				2Q			3Q	4Q		Year

2002
Earnings Summary
	Interest income	$	73,535		$	69,851		$	70,475	$	70,843	$	284,704
	Interest expense		35,873			33,815			33,939		33,397		137,024
	Net interest income		37,662			36,036			36,536		37,446		147,680
	Provision for loan losses		2,400			2,400			6,200		5,000		16,000
	Mortgage banking revenue		7,392			8,270			7,757		11,008		34,427
	Investment securities gains		401			417			1,933		3,108		5,859
	Income from bank owned life insurance		—			—			874		1,318		2,192
	Other non-interest income		2,784			3,310			3,577		3,878		13,549
	Non-interest expense		23,797			22,857			23,042		30,819		100,515
	Income before taxes		22,042			22,776			21,435		20,939		87,192
	Net income		14,118			14,534			14,283		13,742		56,677
Per Common Share
	Basic earnings	$	.24		$	.25		$	.24	$	.24	$	.97
	Diluted earnings		.24			.24			.24		.24		.96
	Cash dividends declared		.08			.08			.08		.08		.32
2001
Earnings Summary
	Interest income	$	88,465		$	88,999		$	79,555	$	76,357	$	333,376
	Interest expense		54,512			51,318			44,497		39,440		189,767
	Net interest income		33,953			37,681			35,058		36,917		143,609
	Provision for loan losses		2,000			2,300			2,000		2,400		8,700
	Mortgage banking revenue		16,451			17,622			6,166		6,442		46,681
	Investment securities gains (losses)		367			163			404		491		1,425
	Other non-interest income		2,503			14,404	⁽¹⁾		3,408		2,963		23,278
	Non-interest expense		49,405	⁽¹⁾		34,618			22,408		25,782		132,213
	Income before taxes		1,869			32,952			20,628		18,631		74,080
	Net income		799			21,318			13,493		12,300		47,910
Per Common Share
	Basic earnings	$	.01		$	.35		$	.23	$	.21	$	.80
	Diluted earnings		.01			.35			.22		.21		.79
	Cash dividends declared		.07			.07			.07		.08		.29

⁽¹⁾

Amounts for 2001 include a $12 million pre-tax gain on the sale of subsidiary and $19 million pre-tax restructuring costs to exit the mortgage servicing business

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

The information required by this item is incorporated herein by reference to the sections of the Company’s proxy statement for its 2003 annual meeting of shareholders entitled “Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

The executive officers of Republic Bancorp Inc. are listed under Item 1 of this document.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the sections of the Company’s proxy statement for its 2003 annual meeting of shareholders entitled “Personnel, Compensation and Nominating Committee Report” and “Summary Compensation Table.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference to the sections of the Company’s proxy statement for its 2003 annual meeting of shareholders entitled “Stock Ownership” and “Equity Compensation Plan Information.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. CONTROLS AND PROCEDURES

Internal Controls. The Company maintains a system of internal controls designed to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of the Company’s internal controls and procedures. Such evaluation was conducted within the 90 days prior to the date of filing of this report. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.

Disclosure Controls And Procedures. The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) that are designed (i) to collect the information it is required to disclose in the reports it files with the SEC, and (ii) to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Such evaluation was conducted within the 90 days prior to the date of filing of this report. Based on such evaluation, the Company’s Chief Executive and Chief Financial Officer have concluded that these procedures are effective.

As recommended by the SEC, and in order to enhance its disclosure controls and procedures, the Company has appointed a disclosure committee that includes the Company’s controller, chief credit officer, chief ethics officer and principal risk management officer, senior vice president of human resources and the investor relations officer. This committee’s members also include officers of Republic Bank who are involved in the flow of information regarding the Company’s financial performance, controls and financial reporting.

This committee is responsible for assessing the materiality and timeliness of the Company’s disclosures in its periodic reports and coordinating the timely review of the Company’s periodic reports by the various parties involved (including the Company’s CEO, CFO, independent accountants, internal auditors and audit committee).

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1.		Financial Statements

		The following financial statements of the Company are filed as a part of this document under Item 8. Financial Statements and Supplementary Data:

		Consolidated Balance Sheets as of December 31, 2002 and 2001

		Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000

		Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2002, 2001 and 2000

		Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

		Notes to Consolidated Financial Statements

		Independent Auditors’ Report

2.		Financial Statement Schedules

		All financial statement schedules required by Article 9 of Regulation S-X have been included in the consolidated financial statements or are either not applicable or not significant.

3.		Exhibits


(3)(a)/(4)(a)		Second Restated Articles of Incorporation of Republic Bancorp Inc. (the “Company”) (incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K dated May 17, 1999 filed with the Securities and Exchange Commission on or about May 28, 1999 (file no. 0-15734)).

(3)(b)/(4)(b)		Bylaws, as amended, of the Company (incorporated by reference to Exhibit 3.2 of the registrant’s Current Report on Form 8-K dated May 17, 1999 filed with the Securities and Exchange Commission on or about May 28, 1999 (file no. 0-15734)).

(4)(c)		Debenture Purchase Agreement dated as of January 29, 1996, between the Company and American United Life Insurance, State Life Insurance Co., Mutual of America Life Insurance Co., GNA, Mega Life & Health Insurance Co. and Provident Mutual Life Insurance Company, related to 6.95% Senior Debentures due January 15, 2003, (incorporated by reference to Exhibit 4(c) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1995 filed with the Securities and Exchange Commission on March 29, 1996 (file no. 0-15734)).

(4)(d)		Revolving Credit Agreement dated as of December 29, 2000, between the Company and Firstar Bank, National Association (incorporated by reference to Exhibit 4(e) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission on March 22, 2001 (file No. 000-15374)).

(4)(e)		First Amendment to Revolving Credit Agreement dated as of December 29, 2001, between the Company and Firstar Bank, National Association (incorporated by reference to Exhibit 4(d) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 22, 2002 (file no. 0-15734)).


(4)(f)		Second Amendment to Revolving Credit Agreement dated as of December 28, 2002, between the Company and U.S. Bank National Association, formerly known as Firstar Bank, National Association.*

(4)(g)		Form of Indenture between the Company and Wilmington Trust Company for the Company’s 8.60% Subordinated Debentures due 2031 (incorporated by reference to Exhibit (4)(e) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062)).

(4)(h)		Form of the Company’s 8.60% Subordinated Debenture due 2031 (incorporated by reference to Exhibit (4)(f) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062) (which Exhibit (4)(f) is included as an exhibit to Exhibit (4)(e) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062)).

(4)(i)		Certificate of Trust of Republic Capital Trust I, a subsidiary of the Company (incorporated by reference to Exhibit (4)(g) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062)).

(4)(j)		Trust Agreement of Republic Capital Trust I, a subsidiary of the Company (incorporated by reference to Exhibit (4)(h) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062)).

(4)(k)		Form of Amended and Restated Trust Agreement of Republic Capital Trust I, a subsidiary of the Company (incorporated by reference to Exhibit (4)(i) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062)).

(4)(l)		Form of Trust Preferred Securities Certificate of Republic Capital Trust I, a subsidiary of the Company (incorporated by reference to Exhibit (4)(j) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062) (which Exhibit (4)(j) is included as an exhibit to Exhibit (4)(i) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062)).

(4)(m)		Form of Agreement as to Expenses and Liabilities between the Company and Republic Capital Trust I, a subsidiary of the Company (incorporated by reference to Exhibit (4)(k) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062)).

(4)(n)		Form of Trust Preferred Securities Guarantee Agreement between the Company and Wilmington Trust Company (incorporated by reference to Exhibit (4)(l) of the Company’s registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2001 (registration no. 333-70062)).

(10)(a)		1998 Stock Option Plan of the Company, (incorporated by reference to Exhibit 10(a) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Securities and Exchange Commission on March 20, 1998 (file no. 0-15734)).

(10)(b)		First Amendment to the 1998 Stock Option Plan of the Company dated October 21, 1999, (incorporated by reference to Exhibit 10(c) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).


(10)(c)		1997 Stock Option Plan of the Company, (incorporated by reference to Exhibit 10(b) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1996 filed with the Securities and Exchange Commission on March 28, 1997 (file no. 0-15734)).

(10)(d)		First Amendment to the 1997 Stock Option Plan of the Company dated February 19, 1998, (incorporated by reference to Exhibit 10(e) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(e)		Second Amendment to the 1997 Stock Option Plan of the Company dated October 21, 1999, (incorporated by reference to Exhibit 10(f) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(f)		Non-Qualified Stock Option Plan of the Company, (incorporated by reference to Exhibit 10(b) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 23, 1993 (file no. 0-15734)).

(10)(g)		Incentive Stock Plan, as Amended, of the Company dated February 19, 1998, (incorporated by reference to Exhibit 10(h) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(h)		Amendment to the Incentive Stock Plan, as Amended, of the Company dated October 21, 1999, (incorporated by reference to Exhibit 10(i) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(i)		Voluntary Management Stock Accumulation Program of the Company, (incorporated by reference to Exhibit 10(e) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Securities and Exchange Commission on March 20, 1998 (file no. 0-15734)).

(10)(j)		First Amendment to the Voluntary Management Stock Accumulation Program of the Company dated October 21, 1999, (incorporated by reference to Exhibit 10(k) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(k)		Directors Compensation Plan of the Company, (incorporated by reference to Exhibit 10(e) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 23, 1993 (file no. 0-15734)).

(10)(l)		Deferred Compensation Plan of the Company, as Amended and Restated Effective June 17, 1999, (incorporated by reference to Exhibit 10(m) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(m)		Form of Indemnity Agreement between the Company and certain executive officers and directors of the Company (incorporated by reference to Exhibit 10(e) of the Company’s Registration Statement Form S-2 filed with the Securities and Exchange Commission on February 12, 1992 (file no. 33-46069)).

(10)(n)		D&N Financial Corporation 1984 Stock Option and Incentive Plan (incorporated by reference to the registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 20, 1999 (file no. 333-83267)).

(10)(o)		D&N Financial Corporation 1994 Management Stock Incentive Plan (incorporated by reference to the registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 20, 1999 (file no. 333-83265)).


(10)(p)		Management Retention Agreement for Dana M. Cluckey (incorporated by reference to Exhibit 10 to the registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2000 (file no. 000-15734)).

(10)(q)		Management Retention Agreement for Thomas F. Menacher. *

(10)(r)		Management Retention Agreement for Barry J. Eckhold. *

(10)(s)		Second Amendment to the 1998 Stock Option Plan of the Company dated February 17, 2000 (incorporated by reference to Exhibit 10 to the registrant’s Form 10-K filed with the Securities and Exchange Commission on March 22, 2001 (file no. 000-15734)).

(11)		No statement is required to be filed because the computations can be clearly determined from the materials contained in the Annual Report on Form 10-K.

(12)		Computations of ratios of earnings to fixed charges.*

(21)		Subsidiaries of the Company.*

(23)		Consent of independent auditors, Ernst & Young LLP.*

(24)		Powers of Attorney.*

(99)(a)		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

(99)(b)		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*Filed herewith

Management contracts and compensatory plans or arrangements:

The management contracts and compensatory plans or arrangements required to be filed as exhibits and included in such list of exhibits are as follows:


(10)(a)		1998 Stock Option Plan of the Company, (incorporated by reference to Exhibit 10(a) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Securities and Exchange Commission on March 20, 1998 (file no. 0-15734)).

(10)(b)		First Amendment to the 1998 Stock Option Plan of the Company dated October 21, 1999, (incorporated by reference to Exhibit 10(c) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(c)		1997 Stock Option Plan of the Company, (incorporated by reference to Exhibit 10(b) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1996 filed with the Securities and Exchange Commission on March 28, 1997 (file no. 0-15734)).

(10)(d)		First Amendment to the 1997 Stock Option Plan of the Company dated February 19, 1998, (incorporated by reference to Exhibit 10(e) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(e)		Second Amendment to the 1997 Stock Option Plan of the Company dated October 21, 1999, (incorporated by reference to Exhibit 10(f) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).


(10)(f)		Non-Qualified Stock Option Plan of the Company, (incorporated by reference to Exhibit 10(b) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 23, 1993 (file no. 0-15734)).

(10)(g)		Incentive Stock Plan, as Amended, of the Company dated February 19, 1998, (incorporated by reference to Exhibit 10(h) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(h)		Amendment to the Incentive Stock Plan, as Amended, of the Company dated October 21, 1999, (incorporated by reference to Exhibit 10(i) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(i)		Voluntary Management Stock Accumulation Program of the Company, (incorporated by reference to Exhibit 10(e) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Securities and Exchange Commission on March 20, 1998 (file no. 0-15734)).

(10)(j)		First Amendment to the Voluntary Management Stock Accumulation Program of the Company dated October 21, 1999, (incorporated by reference to Exhibit 10(k) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(k)		Directors Compensation Plan of the Company, (incorporated by reference to Exhibit 10(e) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 23, 1993 (file no. 0-15734)).

(10)(l)		Deferred Compensation Plan of the Company, as Amended and Restated Effective June 17, 1999, (incorporated by reference to Exhibit 10(m) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 22, 2000 (file no. 0-15734)).

(10)(m)		Form of Indemnity Agreement between the Company and certain executive officers and directors of the Company (incorporated by reference to Exhibit 10(e) of the Company’s Registration Statement Form S-2 filed with the Securities and Exchange Commission on February 12, 1992 (file no. 33-46069)).

(10)(n)		D&N Financial Corporation 1984 Stock Option and Incentive Plan (incorporated by reference to the registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 20, 1999 (file no. 333-83267)).

(10)(o)		D&N Financial Corporation 1994 Management Stock Incentive Plan (incorporated by reference to the registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 20, 1999 (file no. 333-83265)).

(10)(p)		Management Retention Agreement for Dana M. Cluckey (incorporated by reference to Exhibit 10 to the registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2000 (file no. 000-15734)).

(10)(q)		Management Retention Agreement for Thomas F. Menacher . *

(10)(r)		Management Retention Agreement for Barry J. Eckhold. *

(10)(s)		Second Amendment to the 1998 Stock Option Plan of the Company dated February 17, 2000 (incorporated by reference to Exhibit 10 to the registrant’s Form 10-K filed with the Securities and Exchange Commission on March 22, 2001 (file no. 000-15734)).

*Filed herewith

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter of 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 21st day of March 2003.

REPUBLIC BANCORP INC.

By:

/s/ DANA M. CLUCKEY

Dana M. Cluckey
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated, on the 21st day of March 2003.


Signature	Title	Date

/s/ DANA M. CLUCKEY Dana M. Cluckey	President and Chief Executive Officer	March 21, 2003

/s/ THOMAS F. MENACHER Thomas F. Menacher	Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 21, 2003

DIRECTORS *


Jerry D. Campbell	Howard J. Hulsman	Sam H. McGoun	Jeoffrey K. Stross
George J. Butvilas	Gary Hurand	Kelly E. Miller	Steven E. Zack
Mary P. Cauley	Dennis J. Ibold	Randolph P. Piper
Richard J. Cramer Sr.	Stanley A. Jacobson	Isaac J. Powell
George A. Eastman	John J. Lennon	B. Thomas M. Smith Jr.


* By:		/S/ THOMAS F. MENACHER Attorney in Fact for each director listed

Date: March 21, 2003

CEO CERTIFICATION

I, Dana M. Cluckey, certify that:

1. I have reviewed this annual report on Form 10-K of Republic Bancorp Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: March 21, 2003
		/s/ Dana M. Cluckey Dana M. Cluckey
		President and Chief Executive Officer

CFO CERTIFICATION

I, Thomas F. Menacher, certify that:

1. I have reviewed this annual report on Form 10-K of Republic Bancorp Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal controls; and


Date: March 21, 2003
		/s/ Thomas F. Menacher Thomas F. Menacher
		Executive Vice President, Treasurer
		and Chief Financial Officer

EXHIBIT INDEX


Exhibit		Description

(4)(f)		Second Amendment to Revolving Credit Agreement dated as of December 28, 2002, between the Company and U.S. Bank National Association, formerly known as Firstar Bank, National Association.

(10)(q)		Management Retention Agreement for Thomas F. Menacher.

(10)(r)		Management Retention Agreement for Barry J. Eckhold.

(12)		Computations of ratios of earnings to fixed charges.

(21)		Subsidiaries of the Company.

(23)		Consent of Independent auditors, Ernst & Young LLP.

(24)		Powers of Attorney.

(99)(a)		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(99)(b)		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.