e10vq
Table of Contents

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2003

Or

     
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 incorporation or organization)   (I.R.S. Employer Identification No.)
     
1070 East Main Street, Owosso, Michigan   48867
(Address of principal executive offices)   (Zip Code)

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

                                                                                                                                                              
(Former name, former address and former fiscal year, if changed since last report)

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.

     þ Yes          o No

Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     þ Yes          o No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

           
Common Stock Outstanding as of July 31, 2003:
       
 
Common Stock, $5 Par Value
  57,419,908 Shares

 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Computation of Ratios of Earnings to Fixed Charges
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


Table of Contents

INDEX

         
PART I   FINANCIAL INFORMATION    
         
      Item 1.   Financial Statements (Unaudited)    
         
    Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002   3
         
    Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and 2002   4
         
    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002   5
         
    Notes to Consolidated Financial Statements   6-9
         
      Item 2.   Management’s Discussion and Analysis of Results of Operations and Financial Condition   10-21
         
      Item 3.   Quantitative and Qualitative Disclosures About Market Risk   22
         
      Item 4.   Controls and Procedures   23
         
PART II   OTHER INFORMATION    
         
      Item 1.   Legal Proceedings   24
         
      Item 6.   Exhibits and Reports on Form 8-K   24
         
SIGNATURE   25

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Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1 — Financial Statements

REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

                     
        June 30,     December 31,  
(Dollars in thousands)   2003     2002  

 
   
 
        (Unaudited)          
ASSETS
               
Cash and cash equivalents
  $ 89,976     $ 75,625  
Mortgage loans held for sale
    479,753       660,999  
Securities available for sale (amortized cost of $366,534 and $247,573, respectively)
    372,232       248,931  
Loans
    3,954,998       3,656,543  
 
Less allowance for loan losses
    (38,269 )     (36,077 )
 
 
   
 
Net loans
    3,916,729       3,620,466  
Premises and equipment
    27,084       27,790  
Bank owned life insurance
    89,192       87,192  
Other assets
    55,989       57,192  
 
 
   
 
   
Total assets
  $ 5,030,955     $ 4,778,195  
 
 
   
 
LIABILITIES
               
Noninterest-bearing deposits
  $ 298,832     $ 260,634  
Interest-bearing deposits:
               
 
NOW accounts
    179,855       176,366  
 
Savings and money market accounts
    972,034       910,863  
 
Certificates of deposit
    1,365,833       1,440,409  
 
 
   
 
   
Total interest-bearing deposits
    2,517,722       2,527,638  
 
 
   
 
   
Total deposits
    2,816,554       2,788,272  
Federal funds purchased and other short-term borrowings
    266,499       209,070  
Short-term FHLB advances
    405,000       305,000  
Long-term FHLB advances
    1,042,804       1,002,943  
Accrued expenses and other liabilities
    98,836       76,682  
Long-term debt
          13,500  
 
 
   
 
   
Total liabilities
    4,629,693       4,395,467  
Trust preferred securities
    50,000       50,000  
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; 57,377,000 and 57,441,000, issued and outstanding, respectively
    286,883       287,207  
Capital surplus
    38,081       40,633  
Unearned compensation — restricted stock
    (2,357 )     (368 )
Retained earnings
    24,952       4,373  
Accumulated other comprehensive income
    3,703       883  
 
 
   
 
 
Total shareholders’ equity
    351,262       332,728  
 
 
   
 
   
Total liabilities and shareholders’ equity
  $ 5,030,955     $ 4,778,195  
 
 
   
 

See notes to consolidated financial statements.

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REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

                                     
        Three Months Ended     Six Months Ended  
        June 30,     June 30,  
       
   
 
(In thousands, except per share data)   2003     2002     2003     2002  

 
   
   
   
 
Interest Income:
                               
Loans, including fees
  $ 62,944     $ 64,288     $ 125,880     $ 133,315  
Investment securities
    3,898       5,563       6,712       10,071  
 
 
   
   
   
 
   
Total interest income
    66,842       69,851       132,592       143,386  
 
 
   
   
   
 
Interest Expense:
                               
Deposits
    14,432       19,064       29,926       39,704  
Short-term borrowings
    958       857       1,776       1,640  
FHLB advances
    14,512       13,653       28,311       27,861  
Long-term debt
          241       39       483  
 
 
   
   
   
 
   
Total interest expense
    29,902       33,815       60,052       69,688  
 
 
   
   
   
 
Net interest income
    36,940       36,036       72,540       73,698  
Provision for loan losses
    3,000       2,400       6,000       4,800  
 
 
   
   
   
 
Net interest income after provision for loan losses
    33,940       33,636       66,540       68,898  
 
 
   
   
   
 
Noninterest Income:
                               
Mortgage banking income
    10,455       8,140       20,191       15,662  
Service charges
    2,735       2,017       5,387       4,006  
Gain on sale of securities
    432       417       880       818  
Income from bank owned life insurance
    1,320             2,615        
Other noninterest income
    555       1,423       1,285       2,088  
 
 
   
   
   
 
   
Total noninterest income
    15,497       11,997       30,358       22,574  
 
 
   
   
   
 
Noninterest Expense:
                               
Salaries and employee benefits
    16,040       12,950       30,455       26,877  
Occupancy expense of premises
    2,496       2,485       5,139       4,972  
Equipment expense
    1,721       1,665       3,426       3,345  
Other noninterest expense
    6,444       5,757       12,063       11,460  
Dividends on trust preferred securities and preferred stock of subsidiary
    1,075       1,755       2,150       3,511  
 
 
   
   
   
 
 
Total noninterest expense
    27,776       24,612       53,233       50,165  
 
 
   
   
   
 
Income before income taxes
    21,661       21,021       43,665       41,307  
Provision for income taxes
    6,503       6,487       13,354       12,655  
 
 
   
   
   
 
Net income
  $ 15,158     $ 14,534     $ 30,311     $ 28,652  
 
 
   
   
   
 
Basic earnings per share
  $ .26     $ .25     $ .53     $ .49  
 
 
   
   
   
 
Diluted earnings per share
  $ .26     $ .24     $ .52     $ .48  
 
 
   
   
   
 
Average common shares outstanding — diluted
    58,287       59,562       58,294       59,367  
 
 
   
   
   
 
Cash dividends declared per common share
  $ .085     $ .077     $ .170     $ .155  
 
 
   
   
   
 

See notes to consolidated financial statements.

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REPUBLIC BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

                       
Six Months Ended June 30 (In thousands)   2003     2002  

 
   
 
Cash Flows From Operating Activities:
               
Net income
  $ 30,311     $ 28,652  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
   
Depreciation and amortization
    5,750       4,586  
   
Net gains on sale of securities available for sale
    (880 )     (818 )
   
Net gains on sale of commercial and residential real estate loans
    (2,516 )     (3,225 )
   
Proceeds from sale of mortgage loans held for sale
    1,561,896       1,437,819  
   
Origination of mortgage loans held for sale
    (1,380,650 )     (886,804 )
   
Net (increase) decrease in other assets
    (10,058 )     12,928  
   
Net increase (decrease) in other liabilities
    22,154       (50,857 )
   
Other, net
    (233 )     (506 )
 
 
   
 
     
Total adjustments
    195,463       513,123  
 
 
   
 
     
Net cash provided by operating activities
    225,774       541,775  
 
 
   
 
Cash Flows From Investing Activities:
               
Proceeds from sale of securities available for sale
    41,940       83,238  
Proceeds from maturities/payments of securities available for sale
    103,927       14,934  
Purchases of securities available for sale
    (264,568 )     (192,590 )
Proceeds from sale of commercial and residential real estate loans
    89,256       115,874  
Net increase in loans made to customers
    (381,428 )     (202,069 )
 
 
   
 
     
Net cash used in investing activities
    (410,873 )     (180,613 )
 
 
   
 
Cash Flows From Financing Activities:
               
Net increase (decrease) in total deposits
    28,282       (79,080 )
Net increase in short-term borrowings
    57,429       7,000  
Net increase (decrease) in short-term FHLB advances
    100,000       (360,000 )
Proceeds from long-term FHLB advances
    100,000       76,952  
Payments on long-term FHLB advances
    (60,139 )      
Payments on long-term debt
    (13,500 )      
Net proceeds from issuance of common shares
    6,056       4,310  
Repurchase of common shares
    (8,892 )     (4,724 )
Dividends paid on common shares
    (9,786 )     (9,051 )
 
 
   
 
     
Net cash provided by (used in) financing activities
    199,450       (364,593 )
 
 
   
 
Net increase (decrease) in cash and cash equivalents
    14,351       (3,431 )
Cash and cash equivalents at beginning of period
    75,625       76,734  
 
 
   
 
Cash and cash equivalents at end of period
  $ 89,976     $ 73,303  
 
 
   
 

See notes to consolidated financial statements.

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Table of Contents

REPUBLIC BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 — Basis of Presentation
The accompanying unaudited consolidated financial statements of Republic Bancorp Inc. and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of results have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Note 2 — Principles of Consolidation
The consolidated financial statements include the accounts of the parent company, Republic Bancorp Inc., its wholly-owned banking 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 as of June 30, 2002, 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 June 30, 2003 does not include D&N Capital Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.

Mortgage servicing rights totaling $2.9 million at June 30, 2002 have been reclassified to other assets to conform to the current year presentation. In addition, for a consistent presentation, dividends on trust preferred securities and preferred stock of subsidiary for the three and six months ended June 30, 2002 have been reclassified to noninterest expense.

Note 3 — Consolidated Statements of Cash Flows
Supplemental disclosures of cash flow information for the six months ended June 30, include:

                   
(In thousands)   2003     2002  

 
   
 
Cash paid during the period for:
               
 
Interest
  $ 58,340     $ 69,607  
 
Income taxes
  $ 14,740     $ 12,984  
Non-cash investing activities:
               
 
Loan charge-offs
  $ 4,681     $ 4,737  

Note 4 — Comprehensive Income
The following table sets forth the computation of comprehensive income:

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
   
   
 
(In thousands)   2003     2002     2003     2002  

 
   
   
   
 
Net income
  $ 15,158     $ 14,534     $ 30,311     $ 28,652  
Unrealized holding gains on securities, net of tax
  $ 3,345     $ 3,770     $ 3,392     $ 4,655  
Reclassification adjustment for gains included in net income, net of tax of $151, $146, $308 and $286, respectively
    (281 )     (271 )     (572 )     (532 )
 
 
   
   
   
 
Net unrealized gains on securities, net of tax
    3,064       3,499       2,820       4,123  
 
 
   
   
   
 
Comprehensive income
  $ 18,222     $ 18,033     $ 33,131     $ 32,775  
 
 
   
   
   
 

Note 5 — Intangible Assets
The following table summarizes the Company’s core deposit intangible asset which is subject to amortization:

                     
(Dollars in thousands)   June 30, 2003     Dec. 31, 2002  

 
   
 
Core Deposit Intangible Asset:
               
 
Gross carrying amount
  $ 10,475     $ 10,475  
 
Accumulated amortization
    (5,402 )     (4,907 )
 
 
   
 
   
Net book value
  $ 5,073     $ 5,568  
 
 
   
 

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Table of Contents

Note 5 — Intangible Assets (Continued)
Amortization expense on the core deposit intangible asset totaled $247,500 for each of the quarters ended June 30, 2003 and 2002, and $990,000 for the year ended December 31, 2002. The Company expects core deposit intangible amortization expense to be $990,000 for each of the years ending December 31, 2003 and 2004. The Company expects core deposit intangible amortization expense for the year ended December 31, 2005 to be $936,000 and for each of the years ended December 31, 2006 and 2007 to be $823,000, respectively.

Note 6 — Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:

                                         
            Three Months Ended     Six Months Ended  
            June 30,     June 30,  
           
   
 
(Dollars in thousands, except per share data)   2003     2002     2003     2002  

 
   
   
   
 
Numerator for basic and diluted earnings per share:
                               
   
Net income
  $ 15,158     $ 14,534     $ 30,311     $ 28,652  
Denominator for basic earnings per share — weighted-average shares
    57,459,138       58,493,862       57,499,791       58,411,081  
 
Effect of dilutive securities:
                               
     
Stock options
    770,372       995,086       733,638       888,627  
     
Warrants
    57,542       72,565       60,953       67,002  
 
 
   
   
   
 
       
Dilutive potential common shares
    827,914       1,067,651       794,591       955,629  
 
 
   
   
   
 
Denominator for diluted earnings per share — adjusted weighted-average shares for assumed conversions
    58,287,052       59,561,513       58,294,382       59,366,710  
 
 
   
   
   
 
   
Basic earnings per share
  $ .26     $ .25     $ .53     $ .49  
 
 
   
   
   
 
   
Diluted earnings per share
  $ .26     $ .24     $ .52     $ .48  
 
 
   
   
   
 

Note 7 — Segment Information
The Company’s operations are managed as three major business segments: (1) commercial banking, (2) retail banking, and (3) mortgage banking. The commercial banking segment consists of commercial lending to small- and medium-sized companies, primarily in the form of commercial real estate and Small Business Administration (SBA) loans. The retail banking segment consists of home equity lending, other consumer lending and the deposit-gathering function. Deposits and loan products are offered through 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. Mortgage loan production is conducted in 56 offices of Republic Bank. Treasury and Other is comprised of balance sheet management activities that include the securities portfolio, residential real estate mortgage portfolio loans and outside funding. Treasury and Other also includes unallocated corporate expenses such as corporate overhead, including accounting, data processing, human resources and operation costs.

In 2003, the allocated capital to the retail banking segment was decreased to 5% of total deposits compared to 10% in 2002. 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 three and six months ended June 30, 2003 and 2002.

                                           
                              Treasury          
(In thousands)   Commercial     Retail     Mortgage     and Other     Consolidated  

 
   
   
   
   
 
For the Three Months Ended June 30, 2003
                                       
Net interest income from external customers
  $ 22,514     $ (7,846 )   $ 7,477     $ 14,795     $ 36,940  
Internal funding
    (8,966 )     34,164       (3,327 )     (21,871 )      
 
 
   
   
   
   
 
Net interest income
    13,548       26,318       4,150       (7,076 )     36,940  
Provision for loan losses
    2,508       473       69       (50 )     3,000  
Noninterest income
    355       2,864       12,735       (457 )     15,497  
Noninterest expense
    2,385       7,836       7,390       10,165       27,776  
 
 
   
   
   
   
 
 
Income before taxes
    9,010       20,873       9,426       (17,648 )     21,661  
Income taxes
    3,215       7,447       3,299       (7,458 )     6,503  
 
 
   
   
   
   
 
Net income
  $ 5,795     $ 13,426     $ 6,127     $ (10,190 )   $ 15,158  
 
 
   
   
   
   
 
Depreciation and amortization
  $ 30     $ 745     $ 704     $ 965     $ 2,444  
Capital expenditures
  $ 6     $ 431     $ 258     $ 500     $ 1,195  
Net identifiable assets (in millions)
  $ 1,457     $ 2,790     $ 630     $ 154     $ 5,031  
Return on equity(1)
    15.98 %     40.39 %     85.65 %     n/m       17.46 %
Return on assets
    1.60 %     1.92 %     4.28 %     n/m       1.25 %
Efficiency ratio
    17.15 %     26.85 %     43.77 %     n/m       51.34 %

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Note 7 — Segment Information (Continued)

                                           
                              Treasury          
(In thousands)   Commercial     Retail     Mortgage     and Other     Consolidated  

 
   
   
   
   
 
For the Three Months Ended June 30, 2002
                                       
Net interest income from external customers
  $ 24,157     $ (12,089 )   $ 6,627     $ 17,341     $ 36,036  
Internal funding
    (10,957 )     37,937       (3,311 )     (23,669 )      
 
 
   
   
   
   
 
Net interest income
    13,200       25,848       3,316       (6,328 )     36,036  
Provision for loan losses
    941       426             1,033       2,400  
Noninterest income
    786       2,089       6,948       2,174       11,997  
Noninterest expense
    2,196       7,623       6,522       6,516       22,857  
 
 
   
   
   
   
 
 
Income before taxes
    10,849       19,888       3,742       (11,703 )     22,776  
Preferred stock dividend
                      1,755       1,755  
Income taxes
    3,970       7,270       1,310       (6,063 )     6,487  
 
 
   
   
   
   
 
Net income
  $ 6,879     $ 12,618     $ 2,432     $ (7,395 )   $ 14,534  
 
 
   
   
   
   
 
Depreciation and amortization
  $ 37     $ 792     $ 588     $ 1,050     $ 2,467  
Capital expenditures
  $ 6     $ 196     $ 156     $ 501     $ 859  
Net identifiable assets (in millions)
  $ 1,409     $ 2,782     $ 312     $ (146 )   $ 4,357  
Return on equity(1)
    19.77 %     39.72 %     49.00 %     n/m       18.12 %
Return on assets
    1.98 %     1.81 %     2.45 %     n/m       1.34 %
Efficiency ratio
    15.70 %     27.29 %     63.54 %     n/m       48.00 %
                                           
                              Treasury          
(In thousands)   Commercial     Retail     Mortgage     and Other     Consolidated  

 
   
   
   
   
 
For the Six Months Ended June 30, 2003
                                       
Net interest income from external customers
  $ 45,455     $ (16,581 )   $ 15,881     $ 27,785     $ 72,540  
Internal funding
    (18,300 )     69,073       (7,236 )     (43,537 )      
 
 
   
   
   
   
 
Net interest income
    27,155       52,492       8,645       (15,752 )     72,540  
Provision for loan losses
    4,562       704       137       597       6,000  
Noninterest income
    687       5,538       27,160       (3,027 )     30,358  
Noninterest expense
    4,692       15,583       14,711       18,247       53,233  
 
 
   
   
   
   
 
 
Income before taxes
    18,588       41,743       20,957       (37,623 )     43,665  
Income taxes
    6,632       14,893       7,335       (15,506 )     13,354  
 
 
   
   
   
   
 
Net income
  $ 11,956     $ 26,850     $ 13,622     $ (22,117 )   $ 30,311  
 
 
   
   
   
   
 
Depreciation and amortization
  $ 62     $ 1,512     $ 1,349     $ 2,827     $ 5,750  
Capital expenditures
  $ 9     $ 1,020     $ 358     $ 1,037     $ 2,424  
Net identifiable assets (in millions)
  $ 1,457     $ 2,790     $ 630     $ 154     $ 5,031  
Return on equity(1)
    16.46 %     40.53 %     94.62 %     n/m       17.67 %
Return on assets
    1.65 %     1.92 %     4.73 %     n/m       1.28 %
Efficiency ratio
    16.85 %     26.85 %     41.09 %     n/m       50.07 %
                                           
                              Treasury          
(In thousands)   Commercial     Retail     Mortgage     and Other     Consolidated  

 
   
   
   
   
 
For the Six Months Ended June 30, 2002
                                       
Net interest income from external customers
  $ 48,452     $ (25,928 )   $ 18,407     $ 32,767     $ 73,698  
Internal funding
    (21,711 )     77,664       (9,202 )     (46,751 )      
 
 
   
   
   
   
 
Net interest income
    26,741       51,736       9,205       (13,984 )     73,698  
Provision for loan losses
    2,223       730             1,847       4,800  
Noninterest income
    1,076       4,087       14,254       3,157       22,574  
Noninterest expense
    4,647       15,811       13,711       12,485       46,654  
 
 
   
   
   
   
 
 
Income before taxes
    20,947       39,282       9,748       (25,159 )     44,818  
Preferred stock dividend
                      3,511       3,511  
Income taxes
    7,504       14,008       3,412       (12,269 )     12,655  
 
 
   
   
   
   
 
Net income
  $ 13,443     $ 25,274     $ 6,336     $ (16,401 )   $ 28,652  
 
 
   
   
   
   
 
Depreciation and amortization
  $ 71     $ 1,590     $ 1,147     $ 1,778     $ 4,586  
Capital expenditures
  $ 18     $ 243     $ 298     $ 665     $ 1,224  
Net identifiable assets (in millions)
  $ 1,409     $ 2,782     $ 312     $ (146 )   $ 4,357  
Return on equity(1)
    19.58 %     39.24 %     44.61 %     n/m       18.13 %
Return on assets
    1.96 %     1.78 %     2.23 %     n/m       1.29 %
Efficiency ratio
    16.71 %     28.32 %     58.45 %     n/m       48.88 %

(1) Capital is allocated as a percentage of assets of 10% and 5% for the commercial and mortgage banking segments, respectively and is allocated as a percentage of deposits of 5% for the retail segment.
n/m — Not meaningful

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Table of Contents

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 the cash surrender value resulting from investment returns are recorded in noninterest income.

Note 9 — Stock Based Compensation
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. In the first six months of 2003, the Company generally issued restricted stock in lieu of stock option grants. As a result, the GAAP income statement impact associated with expensing stock options in the first six months of 2003 was immaterial. The income statement impact from expensing stock options is expected to be immaterial for the remainder of 2003.

The following table presents net income and earnings per share had compensation cost for the Company’s stock-based compensation plans been determined in accordance with SFAS No. 123 for all outstanding and unvested awards for the three and six months ended June 30, 2003 and 2002.

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
   
   
 
(Dollars in thousands, except per share data)   2003     2002     2003     2002  

 
   
   
   
 
Net income (as reported)
  $ 15,158     $ 14,534     $ 30,311     $ 28,652  
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
    215       285       806       533  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (418 )     (659 )     (1,234 )     (1,179 )
 
 
   
   
   
 
Net income (pro forma)
  $ 14,955     $ 14,160     $ 29,883     $ 28,006  
 
 
   
   
   
 
Basic earnings per share (as reported)
  $ .26     $ .25     $ .53     $ .49  
Basic earnings per share (pro forma)
    .26       .24       .52       .48  
Diluted earnings per share (as reported)
  $ .26     $ .24     $ .52     $ .48  
Diluted earnings per share (pro forma)
    .26       .24       .51       .47  

Note 10 — Legal Proceedings
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. On July 25, 2003, the Bank filed an appeal through a Petition for Rehearing En Banc with the United States Court of Appeals for the Federal Circuit of the decision of the Court of Federal Claims granting summary judgment to the government on D&N Bank’s contract claims, which a Panel of the Court of Appeals affirmed on June 17, 2003. The ultimate outcome of this matter cannot be determined at this time, however, an adverse ruling as it relates to the Company would not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

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Table of Contents

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

EARNINGS PERFORMANCE

The Company reported net income for the quarter ended June 30, 2003 of $15.2 million. This compares to net income of $14.5 million for the second quarter of 2002. Diluted earnings per share for the second quarter of 2003 were $.26, up 7% from $.24 earned in 2002. Annualized returns on average assets and shareholders’ equity for the quarter ended June 30, 2003 were 1.25% and 17.46%, respectively.

Net income for the six months ended June 30, 2003 was $30.3 million, compared to net income of $28.7 million earned for the same period in 2002. For the six month period ended June 30, 2003, diluted earnings per share were $0.52, an increase of 8% over the $0.48 earned in 2002. Annualized returns on average assets and shareholders’ equity for the first six months of 2003 were 1.28% and 17.67%, respectively.

RESULTS OF OPERATIONS

Net Interest Income
The following discussion should be read in conjunction with Table I and Table II on the following two pages, which identify and quantify the components impacting net interest income for the three and six months ended June 30, 2003 and 2002.

Net interest income, on a fully taxable equivalent (FTE) basis, was $37.7 million for the second quarter of 2003 compared to $37.2 million for the second quarter of 2002. The increase was primarily the result of an increase in the Company’s average interest-earning assets of $442 million. The average mortgage loans held for sale balance increased $113 million, or 44% for the second quarter of 2003 compared to 2002 and the average portfolio loan balance increased $413 million, or 12% during the second quarter of 2003 compared to 2002. The increase in interest-earning assets was offset by a decrease in securities available for sale of $84 million. Average total interest bearing liabilities increased $471 million for the second quarter of 2003 compared to 2002 primarily due to a $119 million increase in total average interest-bearing deposits, a $211 million increase in short-term borrowings and short-term FHLB advances and a $154 million increase in long-term FHLB advances.

The net interest margin (FTE) was 3.24% for the quarter ended June 30, 2003, a decrease of 29 basis points from 3.53% in 2002. The decrease in the margin was due to the Company’s yield on earning assets decreasing more than the decline in interest-bearing liabilities primarily as a result of the Company’s asset sensitive position in the declining interest rate environment.

For the six months ended June 30, 2003, net interest income (FTE) was $73.7 million, compared to $76.1 million for the first half of 2002. The decrease was primarily the result of a decrease in the Company’s net interest margin. The net interest margin (FTE) for the six months ended June 30, 2003, declined 30 basis points to 3.23% from 3.53% for the comparable period in 2002. The decrease in the margin was due to the Company’s yield on earning assets decreasing more than the decline in interest-bearing liabilities.

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Table of Contents

Table I — Quarterly Net Interest Income and Rate/Volume Analysis (FTE)

                                                         
            Three Months Ended     Three Months Ended  
            June 30, 2003     June 30, 2002  
           
   
 
            Average             Average     Average             Average  
(Dollar amounts in thousands)   Balance     Interest     Rate     Balance     Interest     Rate  

 
   
   
   
   
   
 
Average Assets:
                                               
Short-term investments
  $ 338     $ 1       0.61 %   $ 1,080     $ 4       1.32 %
Mortgage loans held for sale
    371,728       5,247       5.65       258,254       4,284       6.64  
Securities available for sale
    345,646       4,635       5.38       429,551       6,723       6.28  
Portfolio loans(1):
                                               
 
Commercial loans
    1,468,123       22,733       6.13       1,412,915       24,455       6.85  
 
Residential real estate mortgage loans
    1,879,731       26,115       5.56       1,517,138       25,222       6.65  
 
Installment loans
    582,712       8,849       6.09       587,731       10,327       7.05  
 
 
   
   
   
   
   
 
   
Total loans, net of unearned income
    3,930,566       57,697       5.85       3,517,784       60,004       6.80  
 
 
   
   
   
   
   
 
   
Total interest-earning assets
    4,648,278       67,580       5.80       4,206,669       71,015       6.73  
Allowance for loan losses
    (37,986 )                     (29,641 )                
Cash and due from banks
    65,150                       58,175                  
Other assets
    164,785                       99,858                  
 
 
                   
                 
   
Total assets
  $ 4,840,227                     $ 4,335,061                  
 
 
                   
                 
Average Liabilities and Shareholders’ Equity:
                                               
Interest-bearing demand deposits
  $ 179,959     $ 161       0.36 %   $ 161,398     $ 262       0.65 %
Savings deposits
    953,788       3,285       1.38       843,004       3,861       1.84  
Time deposits
    1,408,252       10,986       3.13       1,418,331       14,941       4.23  
 
 
   
   
   
   
   
 
 
Total interest-bearing deposits
    2,541,999       14,432       2.28       2,422,733       19,064       3.16  
Short-term borrowings
    283,163       958       1.34       183,828       857       1.84  
Short-term FHLB advances
    275,330       1,037       1.49       163,758       1,410       3.41  
Long-term FHLB advances
    1,031,727       13,475       5.17       877,881       12,243       5.52  
Long-term debt
                      13,500       241       7.15  
 
 
   
   
   
   
   
 
   
Total interest-bearing liabilities
    4,132,219       29,902       2.88       3,661,700       33,815       3.68  
 
         
   
           
   
 
Noninterest-bearing deposits
    273,858                       230,346                  
Other liabilities
    36,980                       43,408                  
 
 
                   
                 
   
Total liabilities
    4,443,057                       3,935,454                  
Trust preferred securities and preferred stock of subsidiary
    50,000                       78,719                  
Shareholders’ equity
    347,170                       320,888                  
 
 
                   
                 
   
Total liabilities and shareholders’ equity
  $ 4,840,227                     $ 4,335,061                  
 
 
                   
                 
Net interest income/rate spread (FTE)
          $ 37,678       2.92 %           $ 37,200       3.05 %
 
         
   
           
   
 
Net interest margin (FTE)
                    3.24 %                     3.53 %
 
                 
                   
 
 
      Increase (decrease) due to change in:
  Volume(2)
          Rate(2)
          Net Change
       
 
     
Short-term investments
  $ (2 )           $ (1 )           $ (3 )        
     
Mortgage loans held for sale
    1,673               (710 )             963          
     
Securities available for sale
    (1,205 )             (883 )             (2,088 )        
     
Portfolio loans(1):
                                               
       
Commercial loans
    911               (2,633 )             (1,722 )        
       
Residential real estate mortgage loans
    5,434               (4,541 )             893          
       
Installment loans
    (87 )             (1,391 )             (1,478 )        
 
 
           
           
         
       
Total loans, net of unearned income
    6,258               (8,565 )             (2,307 )        
 
 
           
           
         
       
Total interest income
    6,724               (10,159 )             (3,435 )        
     
Interest-bearing demand deposits
    27               (128 )             (101 )        
     
Savings deposits
    470               (1,046 )             (576 )        
     
Time deposits
    (106 )             (3,849 )             (3,955 )        
 
 
           
           
         
       
Total interest-bearing deposits
    391               (5,023 )             (4,632 )        
     
Short-term borrowings
    373               (272 )             101          
     
Short-term FHLB advances
    656               (1,029 )             (373 )        
     
Long-term FHLB advances
    2,033               (801 )             1,232          
     
Long-term debt
    (241 )                           (241 )        
 
 
           
           
         
       
Total interest expense
    3,212               (7,125 )             (3,913 )        
 
 
           
           
         
       
Net interest income
  $ 3,512             $ (3,034 )           $ 478          
 
 
           
           
         

    (1) Non-accrual loans and overdrafts are included in average balances.
 
    (2) Rate/volume variances are proportionately allocated to rate and volume based on the absolute value of the change in each.

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Table of Contents

Table II — Year-to-Date Net Interest Income and Rate/Volume Analysis (FTE)

                                                         
            Six Months Ended
June 30, 2003
    Six Months Ended
June 30, 2002
 
            Average             Average     Average             Average  
(Dollar amounts in thousands)   Balance     Interest     Rate     Balance     Interest     Rate  

 
   
   
   
   
   
 
Average Assets:
                                               
Short-term investments
  $ 282     $ 2       1.09 %   $ 924     $ 8       1.80 %
Mortgage loans held for sale
    404,546       11,517       5.69       411,163       13,715       6.67  
Securities available for sale
    308,540       7,891       5.16       398,415       12,451       6.30  
Portfolio loans(1):
                                               
 
Commercial loans
    1,471,111       45,891       6.20       1,394,752       49,071       7.00  
 
Residential real estate mortgage loans
    1,784,837       50,528       5.66       1,505,893       49,820       6.62  
 
Installment loans
    585,274       17,944       6.18       586,146       20,709       7.12  
 
 
   
   
   
   
   
 
   
Total loans, net of unearned income
    3,841,222       114,363       5.95       3,486,791       119,600       6.85  
 
 
   
   
   
   
   
 
   
Total interest-earning assets
    4,554,590       133,773       5.87       4,297,293       145,774       6.78  
Allowance for loan losses
    (37,251 )                     (29,463 )                
Cash and due from banks
    64,716                       59,090                  
Other assets
    164,601                       103,181                  
 
 
                   
                 
   
Total assets
  $ 4,746,656                     $ 4,430,101                  
 
 
                   
                 
Average Liabilities and Shareholders’ Equity:
                                               
Interest-bearing demand deposits
  $ 178,200     $ 347       0.39 %   $ 158,834     $ 504       0.64 %
Savings deposits
    941,722       7,033       1.51       838,077       7,556       1.82  
Time deposits
    1,429,920       22,546       3.18       1,463,308       31,644       4.36  
 
 
   
   
   
   
   
 
 
Total interest-bearing deposits
    2,549,842       29,926       2.37       2,460,219       39,704       3.25  
Short-term borrowings
    263,253       1,776       1.34       176,597       1,640       1.85  
Short-term FHLB advances
    227,072       1,730       1.52       249,127       3,860       3.08  
Long-term FHLB advances
    1,012,054       26,581       5.22       862,739       24,001       5.53  
Long-term debt
    1,125       39       6.93       13,500       483       7.15  
 
 
   
   
   
   
   
 
   
Total interest-bearing liabilities
    4,053,346       60,052       2.97       3,762,182       69,688       3.71  
 
         
   
           
   
 
Noninterest-bearing deposits
    262,403                       229,156                  
Other liabilities
    37,844                       43,922                  
 
 
                   
                 
   
Total liabilities
    4,353,593                       4,035,260                  
Trust preferred securities and preferred stock of subsidiary
    50,000                       78,719                  
Shareholders’ equity
    343,063                       316,122                  
 
 
                   
                 
   
Total liabilities and shareholders’ equity
  $ 4,746,656                     $ 4,430,101                  
 
 
                   
                 
Net interest income/rate spread (FTE)
          $ 73,721       2.90 %           $ 76,086       3.07 %
 
         
   
           
   
 
Net interest margin (FTE)
                    3.23 %                     3.53 %
 
                 
                   
   
      Increase (decrease) due to change in:
  Volume(2)
          Rate(2)
          Net Change
       
 
     
Short-term investments
  $ (4 )           $ (2 )           $ (6 )        
     
Mortgage loans held for sale
    (217 )             (1,981 )             (2,198 )        
     
Securities available for sale
    (2,530 )             (2,030 )             (4,560 )        
     
Portfolio loans(1):
                                               
       
Commercial loans
    2,584               (5,764 )             (3,180 )        
       
Residential real estate mortgage loans
    8,505               (7,797 )             708          
       
Installment loans
    (31 )             (2,734 )             (2,765 )        
 
 
           
           
         
       
Total loans, net of unearned income
    11,058               (16,295 )             (5,237 )        
 
 
           
           
         
       
Total interest income
    8,307               (20,308 )             (12,001 )        
     
Interest-bearing demand deposits
    57               (214 )             (157 )        
     
Savings deposits
    873               (1,396 )             (523 )        
     
Time deposits
    (707 )             (8,391 )             (9,098 )        
 
 
           
           
         
       
Total interest-bearing deposits
    223               (10,001 )             (9,778 )        
     
Short-term borrowings
    664               (528 )             136          
     
Short-term FHLB advances
    (317 )             (1,813 )             (2,130 )        
     
Long-term FHLB advances
    3,967               (1,387 )             2,580          
     
Long-term debt
    (429 )             (15 )             (444 )        
 
 
           
           
         
       
Total interest expense
    4,108               (13,744 )             (9,636 )        
 
 
           
           
         
       
Net interest income
  $ 4,199             $ (6,564 )           $ (2,365 )        
 
 
           
           
         

    (1) Non-accrual loans and overdrafts are included in average balances.
 
    (2) Rate/volume variances are proportionately allocated to rate and volume based on the absolute value of the change in each.

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Noninterest Income
Total noninterest income increased $3.5 million, or 29%, for the quarter ended June 30, 2003, compared to the same period in 2002. The increase was primarily due to higher levels of service charges, mortgage banking income, and income from bank owned life insurance. Service charges were $2.7 million for the second quarter of 2003, an increase of $718,000, or 36%, due primarily to an increase in service fees. Mortgage banking income increased due to higher levels of loan fundings of loans sold into the secondary market offset by lower gross margins. Additionally, the Company had income of $1.3 million from bank owned life insurance, which is used to fund future employee benefit costs.

For the six months ended June 30, 2003, total noninterest income increased $7.8 million, or 34%, compared to the same period in 2002. This increase was also primarily due to higher levels of service charges, mortgage banking income and income from bank owned life insurance.

Mortgage Banking Income
The Company closed $1.3 billion in single-family residential mortgage loans in the second quarter of 2003, an increase of 96% compared to $668 million closed in the same period last year. During the first half of 2003, mortgage loan closings were $2.30 billion, an increase of 66% compared to $1.38 billion for the comparable period in 2002. Mortgage loan volumes during 2003 increased primarily due to the decrease in interest rates which resulted in a higher level of mortgage refinance activity. Refinancings for the second quarter of 2003 represented approximately 71% of total closings compared to 38% in the second quarter of 2002. During the first half of 2003, refinancings represented 73% of total closings compared to 48% for the first half of 2002.

For the three months ended June 30, 2003, mortgage banking income increased $2.3 million, or 28%, to $10.5 million from $8.1 million a year earlier. The increase is primarily due to higher funding levels of loans sold into the secondary market. Mortgage loans held for sale fundings were $702 million during the second quarter of 2003 compared to $596 million in the prior year. The ratio of mortgage loan production income to mortgage loans held for sale fundings was 2.00% for the second quarter of 2003, compared to 2.15% for the second quarter 2002.

For the six months ended June 30, 2003, mortgage banking income increased $4.5 million, or 29%, compared to the first half of 2002. The increase is primarily due to higher funding levels of loans sold into the secondary market and an improved ratio of mortgage loan production income to mortgage loans held for sale fundings. For the six months ended June 30, 2003, mortgage loans held for sale fundings totaled $1.56 billion compared to $1.48 billion during the first six months of 2002. The ratio of mortgage production revenue to mortgage loans held for sale fundings was 1.98% for the first six months of 2003, compared to 1.95% for the comparable period in 2002.

Mortgage banking income includes fee revenue derived from the loan origination process (e.g., points collected), gains on the sale of mortgage loans and the related mortgage servicing rights released concurrently with the underlying loans sold (mortgage loan production income), net of commissions, incentives and deferred mortgage loan origination costs and fees for mortgage loans held for sale and residential portfolio loans as accounted for under FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS 91). Mortgage loan production income totaled $14.1 million and $12.8 million for the second quarter of 2003 and 2002, respectively, and $30.9 million and $28.0 million for the six months ended June 30, 2003 and 2002, respectively. Commissions and incentives paid were $12.1 million and $6.6 million for the second quarters of 2003 and 2002, respectively, and $20.3 million and $12.0 million for the six months ended June 30, 2003 and 2002, respectively. For the second quarter of 2003, the SFAS 91 credit to mortgage banking income totaled $6.7 million compared to a SFAS 91 credit of $37,000 for the second quarter of 2002. For the first half of 2003, the SFAS 91 credit totaled $7.4 million compared to a SFAS 91 debit of $2.8 million for the first half of 2002.

Mortgage banking income also includes gains on sales of mortgage portfolio loans totaling $1.8 million and $1.9 million for the second quarters of 2003 and 2002, respectively, and $2.2 million and $2.5 million for the six months ended June 30, 2003 and 2002, respectively. Mortgage loan portfolio sales totaled $65.9 million and $63.5 million for the second quarters of 2003 and 2002, respectively, and $83.7 million and $102.1 million for the six months ended June 20, 2003 and 2002, respectively.

During the quarter ended June 30, 2003, the Company had mortgage loan applications of $1.8 billion and at June 30, 2003, the Company’s mortgage loan pipeline of applications in process was $991 million. Subsequently, the composite 30-year fixed mortgage interest rate has increased over 100 basis points from historic lows reached during the quarter ended June 30, 2003. Consequently, the Company anticipates that mortgage applications for the quarter ended September 30, 2003 will range from $800 to $900 million.

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Noninterest Expense
Total noninterest expense for the quarter ended June 30, 2003 increased $3.2 million, to $27.8 million compared to $24.6 million for the second quarter of 2002 due primarily to an increase in salaries and employee benefits. Total noninterest expense for the six months ended June 30, 2003, increased $3.0 million to $53.2 million compared to $50.2 million in 2002 due primarily to an increase in salaries and employee benefits, partially offset by a decrease in dividends on preferred stock of subsidiary resulting from the 2002 redemption of D&N Capital Corporation 9% Noncumulative Preferred Stock. The increase in salaries and employee benefits for the quarter and six months ended June 30, 2003 reflects a higher level of incentive accruals driven by the strong results for each business line and above peer group results in earnings per share and return on equity for the Company.

BALANCE SHEET ANALYSIS

ASSETS

At June 30, 2003, the Company had $5.03 billion in total assets, an increase of $253 million, or 5%, from $4.78 billion at December 31, 2002. The increase is primarily the result of an increase in the Company’s total portfolio loans and securities available for sale, partially offset by a decrease in mortgage loans held for sale.

Securities
Investment securities available for sale increased $123 million, to $372 million, representing 7.4% of total assets at June 30, 2003. At December 31, 2002, the investment securities portfolio totaled $249 million, or 5.2% of total assets. During the first half of 2003, the Company sold $41.1 million of investment securities and realized gross gains and losses on the sales of available for sale securities of $918,388 and $38,019, respectively. During the first half of 2003, the Company had $44.9 million of government agency securities that were called prior to the maturity date.

The Company’s investment securities portfolio serves as a secondary source of earnings and contributes to the management of interest rate risk and liquidity risk. The debt securities portfolio is comprised primarily of municipal securities and government agency securities. Fixed rate securities within the portfolio, excluding municipal securities, totaled $65.8 million and $65.7 million at June 30, 2003 and December 31, 2002, respectively.

The following table details the composition, amortized cost and fair value of the Company’s investment securities portfolio at June 30, 2003:

                                     
        Securities Available for Sale  
       
 
                Gross     Gross     Estimated  
        Amortized     Unrealized     Unrealized     Fair  
(In thousands)   Cost     Gains     Losses     Value  

 
   
   
   
 
Debt Securities:
                               
 
Government agency securities
  $ 86,903     $ 549     $     $ 87,452  
 
Collateralized mortgage obligations
    15,391             144       15,247  
 
Mortgage-backed securities
    5,572       145       30       5,687  
 
Municipal and other securities
    179,134       5,344       166       184,312  
 
 
   
   
   
 
   
Total debt securities
    287,000       6,038       340       292,698  
Investment in FHLB
    79,534                   79,534  
 
 
   
   
   
 
Total securities available for sale
  $ 366,534     $ 6,038     $ 340     $ 372,232  
 
 
   
   
   
 

Certain securities having a carrying value of approximately $6.0 million and $76.9 million at June 30, 2003 and December 31, 2002, respectively, were pledged to secure FHLB advances and public deposits as required by law.

Mortgage Loans Held for Sale
Mortgage loans held for sale were $480 million at June 30, 2003, a decrease of $181 million from $661 million at December 31, 2002. The decrease was primarily due to a decrease in residential mortgage loan closings during the second quarter of 2003 of $1.3 billion compared to $1.4 billion closed during the fourth quarter of 2002 (loans closed generally remain in loans held for sale for 30 to 60 days after closing). In addition, $326 million of mortgage loan closings during the second quarter 2003 were portfolio loan closings compared to $235 million during the fourth quarter of 2002.

Portfolio Loans
Total portfolio loans were $3.95 billion at June 30, 2003, an increase of $298 million from $3.66 billion at December 31, 2002. The increase was primarily due to increases in the residential real estate mortgage loan balance. The residential portfolio loan balance increased $300 million during the first half of 2003 due to the addition of $761 million of fixed rate and variable rate residential loan closings which were offset by $461 million in mortgage principal payments and paid-off residential loans. During the six months ended June 30, 2003 and 2002, the Company closed $20.9 million and $25.1 million in Small Business Administration (SBA) loans, respectively. The Company sold $3.0 million and $10.5 million of the guaranteed portion of SBA loans in the first six months of 2003 and 2002, respectively, resulting in corresponding gains of $291,000 and $750,000, respectively.

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Portfolio Loans (Continued)
The commercial portfolio loan balance at June 30, 2003 was $1.48 billion, compared to $1.47 billion at December 31, 2002.

The consumer direct installment loan portfolio increased $5.3 million during the first half of 2003 due to an increase in home equity loan closings. The consumer indirect installment loan portfolio decreased $14.7 million during the first half of 2003 due to the anticipated pay-off of these loans.

The following table provides further information regarding the Company’s loan portfolio:

                                         
            June 30, 2003     December 31, 2002  
           
   
 
(Dollars in thousands)   Amount     Percent     Amount     Percent  

 
   
   
   
 
Commercial loans:
                               
 
Commercial and industrial
  $ 44,352       1.1 %   $ 48,509       2.0 %
 
Commercial real estate mortgage
    1,432,456       36.2       1,420,758       37.4  
 
 
   
   
   
 
     
Total commercial loans
    1,476,808       37.3       1,469,267       39.4  
Residential real estate mortgages
    1,894,246       47.9       1,593,929       43.7  
Installment loans:
                               
   
Consumer direct
    561,782       14.2       556,507       14.4  
   
Consumer indirect
    22,162       0.6       36,840       2.5  
 
 
   
   
   
 
       
Total installment loans
    583,944       14.8       593,347       16.9  
 
 
   
   
   
 
     
Total portfolio loans
  $ 3,954,998       100.0 %   $ 3,656,543       100.0 %
 
 
   
   
   
 

Credit Quality
The Company attempts to minimize credit risk in the loan portfolio by focusing primarily on real estate-secured lending (i.e., commercial real estate mortgage and construction loans, residential real estate mortgage and construction loans and home equity loans). As of June 30, 2003, such loans comprised approximately 97% of total portfolio loans. The Company’s general policy is to originate conventional residential real estate mortgages with loan-to-value ratios of 80% or less; SBA-secured loans or real estate-secured commercial loans with loan-to-value ratios of 75% or less and secured by personal guarantees; and home equity loans with combined first and second mortgages with loan-to-value ratios of 85% or less.

The Company originates primarily conventional mortgage loans secured by residential properties which conform to the underwriting guidelines for sale to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), or for conversion to mortgage-backed securities issued by the Government National Mortgage Association (GNMA).

The majority of the Company’s commercial loans are secured by real estate and are generally made to small and medium-size businesses. These loans are made at rates based on the prevailing prime interest rate of Republic Bank, as well as fixed rates for terms generally ranging from three to five years. Management’s emphasis on real estate-secured lending and adherence to conservative underwriting standards is reflected in the Company’s historically low net charge-offs.

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Non-Performing Assets
Non-performing assets consist of non-accrual loans and other real estate owned (OREO). OREO represents real estate properties acquired through foreclosure or by deed in lieu of foreclosure. Commercial loans, residential real estate mortgage loans and installment loans are generally placed on non-accrual status when principal or interest is 90 days or more past due, unless the loans are well-secured and in the process of collection. In all cases, loans may be placed on non-accrual status earlier when, in the opinion of management, reasonable doubt exists as to the full, timely collection of interest or principal.

The following table summarizes the Company’s non-performing assets and 90-day past due loans:

                       
          June 30,     December 31,  
(Dollars in thousands)   2003     2002  

 
   
 
Non-Performing Assets:
               
 
Non-accrual loans:
               
   
Commercial
  $ 16,696     $ 19,167  
   
Residential real estate mortgages
    10,534       15,215  
   
Installment
    1,523       2,876  
 
 
   
 
     
Total non-accrual loans
    28,753       37,258  
 
Restructured loans
          2,309  
 
Other real estate owned
    3,456       2,904  
 
 
   
 
     
Total non-performing assets
  $ 32,209     $ 42,471  
 
 
   
 
Non-performing assets as a percentage of:
               
   
Portfolio loans and OREO
    .81 %     1.16 %
   
Portfolio loans, mortgage loans held for sale and OREO
    .73 %     .98 %
   
Total assets
    .64 %     .89 %
Loans past due 90 days or more and still accruing interest:
               
 
Commercial
  $     $  
 
Residential real estate
           
 
Installment
           
 
 
   
 
     
Total loans past due 90 days or more
  $     $  
 
 
   
 

At June 30, 2003, approximately $23.4 million, or .53% of total loans were 30-89 days delinquent, compared to $26.5 million, or .61%, at December 31, 2002. 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 June 30, 2003, total loans on the watch list, excluding those categorized as non-accrual loans, were $45.7 million, or 1.16% of total portfolio loans, compared to $33.3 million, or .90% of total portfolio loans at December 31, 2002. The increase of total loans on the watch list, which is primarily due to an increase in commercial loans, may result in an increase in commercial delinquencies, non-accrual loans or restructured loans in the second half of 2003.

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 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 rely on estimates, appraisals and evaluations of loans to prepare the Company’s financial statements. Changes in economic conditions and the financial prospects of borrowers may result in abrupt changes to the estimates, appraisals or evaluations used. In addition, if actual circumstances and losses differ substantially from management’s assumptions and estimates, the allowance for loan losses may not be sufficient to absorb all future losses, and net income could be significantly impacted.

During the six months ended June 30, 2003, the Company recorded provision for loan losses of $6.0 million, an increase of $1.2 million from the comparable period in 2002. The increase in 2003 was deemed necessary by management as a result of higher non-accrual commercial loan balances and higher commercial loan charge-off ratios in the first half of 2003 as compared to the first half of 2002 as well as the increase in the loan portfolio balance as compared to June 30, 2002. The Company anticipates that the provision for loan losses and net charge-offs for the quarter ended September 30, 2003 to be in the range of amounts recorded during each of the first two quarters of 2003.

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Provision and Allowance for Loan Losses (Continued)
The following table provides an analysis of the allowance for loan losses:

                     
        Six Months Ended  
        June 30,  
       
 
(Dollars in thousands)   2003     2002  

 
   
 
Allowance for loan losses:
               
Balance at January 1
  $ 36,077     $ 29,157  
 
Loans charged off
    (4,681 )     (4,737 )
 
Recoveries of loans previously charged off
    873       650  
 
 
   
 
   
Net charge-offs
    (3,808 )     (4,087 )
 
Provision charged to expense
    6,000       4,800  
 
 
   
 
Balance at June 30
  $ 38,269     $ 29,870  
 
 
   
 
Annualized net charge-offs as a percentage of average loans (including loans held for sale)
    .18 %     .21 %
Allowance for loan losses as a percentage of total portfolio loans outstanding at period-end
    .97 %     .84 %
Allowance for loan losses as a percentage of non-performing loans
    133.10 %     103.44 %

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. 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.

Off-Balance Sheet Instruments
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 June 30, 2003 and December 31, 2002, no liability is recorded for the commitments to extend credit or the standby letters of credit.

At June 30, 2003, the Company had outstanding $541 million of commitments to fund residential real estate loan applications with agreed-upon rates (Interest Rate Lock Commitments). Interest Rate Lock Commitments and holding residential mortgage loans for sale to the secondary market exposes the Company to interest rate risk during the period from application to when the loan is sold to the investors. To minimize this exposure to interest rate risk, the Company enters into firm commitments to sell such mortgage loans and Interest Rate Lock Commitments at specified future dates to various third parties.

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Off-Balance Sheet Instruments (Continued)
At June 30, 2003, the Company had outstanding mandatory forward commitments to sell $974 million of residential mortgage loans, which includes put options on 10-year treasury futures with a notional amount of $5 million. These mandatory forward commitments covered $459 million of mortgage loans held for sale and $515 million of Interest Rate Lock Commitments. These outstanding forward commitments to sell mortgage loans are expected to settle in the third quarter of 2003 without producing any material gains or losses.

The Company implemented FAS 133, as amended effective January 1, 2001. For the quarter ended June, 2003, the impact of FAS 133 on net income was immaterial.

The following table presents the contractual amounts of the Company’s off-balance sheet financial instruments outstanding at June 30, 2003 and December 31, 2002.

                   
      June 30,     December 31,  
(In thousands)   2003     2002  

 
   
 
Financial instruments whose contract amounts represent credit risk:
               
 
Commitments to fund residential real estate loans
  $ 516,826     $ 340,615  
 
Commitments to fund commercial real estate loans
    248,336       142,332  
 
Other unused commitments to extend credit, primarily revolving consumer loans
    387,518       374,692  
 
Standby letters of credit
    47,967       46,480  
Financial instruments subject to interest rate risk:
               
 
Residential real estate loan applications with agreed-upon rates
    541,033       181,042  
 
Forward commitments to sell residential real estate mortgage loans
    973,900       789,037  

LIABILITIES

Total liabilities were $4.63 billion at June 30, 2003, a $234 million, or 5% increase from $4.40 billion at December 31, 2002. This increase was primarily due to increases in core deposits, federal funds purchased and short-term and long-term FHLB advances.

Deposits
Total deposits increased $28 million, or 1%, to $2.82 billion at June 30, 2003 from $2.79 billion at December 31, 2002. Noninterest bearing deposits increased $38.2 million, or 15%; NOW and savings and money market accounts increased $64.7 million, or 6%; and certificates of deposit decreased $74.6 million, or 5%, for the period.

Short-Term Borrowings
Short-term borrowings with maturities of less than one year, along with the related average balances and interest rates for the six months ended June 30, 2003 and the year ended December 31, 2002, were as follows:

                                                   
      June 30, 2003     December 31, 2002  
     
   
 
                      Average                     Average  
      Ending     Average     Rate During     Ending     Average     Rate During  
(Dollars in thousands)   Balance     Balance     Period     Balance     Balance     Period  

 
   
   
   
   
   
 
Federal funds purchased
  $ 266,000     $ 262,967       1.34 %   $ 208,500     $ 201,621       1.77 %
Other short-term borrowings
    499       286       1.07       570       508       1.38  
 
 
   
   
   
   
   
 
 
Total short-term borrowings
  $ 266,499     $ 263,253       1.34 %   $ 209,070     $ 202,129       1.75 %
 
 
   
   
   
   
   
 

At June 30, 2003 and December 31, 2002, other short-term borrowings consisted of treasury, tax and loan (TT&L) demand notes.

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FHLB Advances
Republic Bank routinely utilizes FHLB advances, both on a short- and long-term basis, to provide funding for mortgage loans held for sale and to minimize the interest rate risk associated with certain fixed rate commercial and residential mortgage portfolio loans 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.

FHLB advances outstanding at June 30, 2003 and December 31, 2002, were as follows:

                                   
      June 30, 2003     December 31, 2002  
     
   
 
              Average             Average  
      Ending     Rate At     Ending     Rate At  
(Dollars in thousands)   Balance     Period-End     Balance     Period-End  

 
   
   
   
 
Short-term FHLB advances
  $ 405,000       1.36 %   $ 305,000       1.33 %
Long-term FHLB advances
    1,042,804       5.13       1,002,943       5.30  
 
 
   
   
   
 
 
Total
  $ 1,447,804       4.08 %   $ 1,307,943       4.37 %
 
 
   
   
   
 

The long-term FHLB advances have original maturities ranging from July 2003 to October 2017.

CAPITAL
Shareholders’ equity was $351 million at June 30, 2003, an $18 million, or 6%, increase from $333 million at December 31, 2002. This increase primarily resulted from the retention of $20.5 million in earnings after the payment of dividends. Capital was utilized through the repurchase of 707,500 shares of common stock during the first six months of 2003 which more than offset an increase in accumulated other comprehensive income and the issuance of common shares through the exercise of stock options and shares granted to employees under the incentive stock plan.

The Company is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines require minimum capital ratios of 8.00% for Total risk-based capital, 4.00% for Tier 1 risk-based capital and 3.00% for Tier 1 leverage. To be considered well-capitalized under the regulatory framework, minimum capital ratios of 10.00% for Total risk-based capital, 6.00% for Tier 1 risk-based capital and 5.00% for Tier 1 leverage must be maintained.

As of June 30, 2003, the Company met all capital adequacy requirements to which it is subject and management does not anticipate any difficulty in meeting these requirements on an ongoing basis. The Company’s capital ratios were as follows:

                 
    June 30,     December 31,  
    2003     2002  
   
   
 
Total capital to risk-weighted assets (1)
    12.50 %     12.26 %
Tier 1 capital to risk-weighted assets (1)
    11.38       11.18  
Tier 1 capital to average assets (1)
    8.09       7.81  

(1)   As defined by the regulations.

As of June 30, 2003, the Company’s total risk-based capital was $429 million and Tier 1 risk-based capital was $391 million, an excess of $86 million and $185 million, respectively, over the minimum guidelines prescribed by regulatory agencies for a well-capitalized institution. In addition, Republic Bank had regulatory capital ratios in excess of the minimum levels established for well-capitalized institutions.

ACCOUNTING AND FINANCIAL REPORTING DEVELOPMENTS

The Company’s consolidated financial statements are prepared based on the application of accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements included in the Company’s 2002 Annual Report on Form 10-K. These policies require estimates and assumptions which may prove inaccurate or subject to variations. Changes in underlying factors, assumptions or estimates could have a material impact on the Company’s future financial condition and results of operations. The most critical of these significant accounting policies is the policy for the allowance for loan losses. This policy is discussed more fully on pages 38 and 39 of the Company’s 2002 Annual Report on Form 10-K.

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ACCOUNTING AND FINANCIAL REPORTING DEVELOPMENTS (Continued)

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. The requirements of the statement are effective July 1, 2003 and restatement is not permitted. Beginning July 1, 2003, SFAS 150 will require the Company to reclassify its trust preferred securities balance of $50 million as long-term debt and the dividends paid on its trust preferred securities as interest expense. The requirements of SFAS 150 will not impact the Company’s net income or earnings per share, however, the reclassification to interest expense will decrease its net interest margin by approximately 9 basis points.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 provides principles on how to identify variable interest entities (VIEs), and requires the consolidation of VIEs in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The Company must apply the provisions of FIN 46 to its existing variable interests in a VIE no later than July 1, 2003. The adoption of the provisions of FIN 46 is not expected to have a material impact on the Company’s financial position or results of operations. As a result of adoption, the Company expects that it will need to deconsolidate its trust preferred securities subsidiary. Deconsolidation of this subsidiary will not change the classification of this debt, but will change the description from trust preferred securities to subordinated debt. Banking regulators announced that, “until notice is given to the contrary,” this debt would continue to qualify as Tier 1 Capital.

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 obligation 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 Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Instruments. The requirements of FIN 45 did not have a material impact on the financial position or results of operations for the quarter ended June 30, 2003.

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FORWARD-LOOKING STATEMENTS

From time to time, the Company 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,” “seeks,” “intends,” “outlook,” “forecast,” “target,” “project,” “assume,” “achievable,” “potential,” “strategy,” “goal,” “trends,” and variations of such words and 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 Quarterly Report on Form 10-Q, or in our filings with the SEC which are accessible on the SEC’s website at www.sec.gov and on our website at www.republicbancorp.com, or in our press releases, 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 political, industry and economic conditions, either domestically or internationally, that are worse than expected;
 
    adverse developments concerning credit quality in our business segments that may result in increases in our provisions for credit losses, nonperforming assets, net charge-offs and reserve for credit losses;
 
    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.

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ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

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 of interest rate risk. Interest rate risk arises in the normal course of business to the extent that there is a difference between the amount of the Company’s interest-earning assets and interest-bearing liabilities that are prepaid/withdrawn, reprice or mature in specified periods.

The primary objective of asset and liability management is to maintain stability in the level of net interest income by producing an appropriate yield and maturity mix of assets and liabilities within the interest rate risk limits set by the Company’s Asset and Liability Management Committee (ALCO) and consistent with projected liquidity needs and capital adequacy requirements.

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

The Company utilizes two complementary quantitative tools to measure and monitor interest rate risk: static gap analysis and earnings simulation modeling. While each of these interest rate risk measurements has limitations, the Company believes that evaluating these measures together provides a reasonably comprehensive view of the Company’s exposure 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 June 30, 2003 the Company’s cumulative one-year gap was a positive 14.81% 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. Management also believes that this range complements the Company’s strong retail mortgage banking franchise.

Earnings Simulation Modeling: On a monthly basis, Management uses an earnings simulation model to estimate the effects of various hypothetical changes in interest rates on the Company’s projected net interest income over the ensuing twelve-month period. The model permits management to evaluate the effects of various parallel shifts of the U.S. Treasury yield curve, upward and downward, on net interest income expected in a stable interest rate environment (i.e., base net interest income).

As of June 30, 2003, 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
    5.17 %     3.37 %     1.77 %     -0.89 %     -1.41 %     -6.85 %

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.

Additional quantitative and qualitative disclosures about market risk are discussed throughout Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 10 of this report.

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ITEM 4: 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 as of the end of the period covered by this report (the “Evaluation Date”). 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 Evaluation Date.

Disclosure Controls And Procedures
The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these procedures are effective in collecting such information and in processing, summarizing and disclosing such information.

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).

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PART II — OTHER INFORMATION

Item 1.   Legal Proceedings
 
    In the ordinary course of business, the Company and its subsidiaries are parties to certain routine litigation. Based on current knowledge and after consultation with legal counsel, management believes that the aggregate liabilities, if any, arising from such legal proceedings would not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
 
Item 6.   Exhibits and Reports on Form 8-K
 
  (a) Exhibits
     
(12)   Computations of ratios of earnings to fixed charges.*
(31)(a)   Certification of Principal Executive Officer of Republic Bancorp Inc. Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002)*
(31)(b)   Certification of Principal Financial Officer of Republic Bancorp Inc. Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002)*
(32)(a)   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).*
(32)(b)   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)*

*Filed herewith
 
(b) Reports on Form 8-K
 
    On April 15, 2003, the Company filed a report on Form 8-K reporting that the Company released its first quarter results on April 14, 2003 and held a conference call on April 15, 2003 to discuss the earnings release. The press release was included as an exhibit.
 
    On April 22, 2003, the Company filed a report on Form 8-K reporting that on April 22, 2003, the Company announced that it would be added to Standard & Poor’s S&P SmallCap 600 Index after the close of trading on April 23, 2003.
 
    On May 19, 2003, the Company filed a report on Form 8-K reporting that on May 15, 2003, the Company announced that its Board of Directors declared a $.085 per share cash dividend to shareholders of record as of June 6, 2003 and payable July 7, 2003.
 
    On June 6, 2003, the Company filed a report on Form 8-K reporting that Dana M. Cluckey, Republic Bancorp’s President and Chief Executive Officer, and Thomas F. Menacher, Executive Vice President, Treasurer and Chief Financial Officer, made a presentation on June 5, 2003 at the Keefe, Bruyette & Woods, Inc. Midwestern Bank Conference in Chicago, Illinois. A slide presentation was included by exhibit.

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SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
        REPUBLIC BANCORP INC.
(Registrant)
         
Date: August 13, 2003   BY:   /s/ Thomas F. Menacher
Thomas F. Menacher
        Executive Vice President, Treasurer and Chief Financial Officer
        (Principal Financial and Accounting Officer)

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10-Q EXHIBIT INDEX

     
EXHIBIT NO.   DESCRIPTION

 
(12)   Computations of ratios of earnings to fixed charges.*
(31)(a)   Certification of Principal Executive Officer of Republic Bancorp Inc. Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002)*
(31)(b)   Certification of Principal Financial Officer of Republic Bancorp Inc. Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002)*
(32)(a)   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).*
(32)(b)   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)*
*Filed herewith