Form 10-K 2004


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

FORM 10-K

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

For the Fiscal Year Ended December 31, 2004

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)
www.republicbancorp.com

Michigan
 
38-2604669
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
   
     
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 Par Value
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o 

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

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

The aggregate market value of the Registrant's common stock held by non-affiliates, based on the closing price on June 30, 2004 of $12.64, was $890.1 million.

Number of shares of Registrant's common stock outstanding as of March 8, 2005: 70,480,788.
 
DOCUMENTS INCORPORATED BY REFERENCE

Part III: Portions of the Registrant's definitive proxy statement for its 2005 Annual Meeting of Stockholders.

 

 
FORM 10-K TABLE OF CONTENTS
   
Page
Part I
   
Item 1 -
Business
 
 
General Description
2
 
Business Segments
2
 
Competition
4
 
Employees
4
 
Principal Sources of Revenue
4
 
Monetary Policy and Economic Controls
4
 
Supervision and Regulation
5
 
Forward-Looking Statements
9
     
Item 2 -
Properties
9
     
Item 3 -
Legal Proceedings
10
   
 
Item 4 -
Submission of Matters to a Vote of Security Holders
10
     
Part II
   
     
Item 5 -
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
10
 
Purchases of Equity Securities
 
     
Item 6 -
Selected Financial Data
12
     
Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of Operations
13
     
Item 7A-
Quantitative and Qualitative Disclosures about Market Risk
34
     
Item 8 -
Financial Statements and Supplementary Data
37
     
Item 9 -
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
75
     
Item 9A-
Controls and Procedures
75
     
Item 9B-
Other Information
75
     
Part III
   
     
Item 10 -
Directors and Executive Officers of the Registrant
75
     
Item 11 -
Executive Compensation
76
     
Item 12 -
Security Ownership of Certain Beneficial Owners and Management
76
     
Item 13 -
Certain Relationships and Related Transactions
76
     
Item 14 -
Principal Accountant Fees And Services
76
     
Part IV
   
     
Item 15 -
Exhibits, Financial Statement Schedules
76
     
Signatures
 
82
     
Exhibits 31 -
Certifications of the Principal Executive Officer and Principal Financial Officer
83
     
Exhibits 32 -
Certifications of the Chief Executive Officer and Chief Financial Officer
85

1


PART I

ITEM 1. BUSINESS

General Description

Republic Bancorp Inc. (the "Company") is a bank holding company incorporated under the laws of the State of Michigan in 1986. The Company's principal office is located in Ann Arbor, Michigan. Through its wholly-owned subsidiary, Republic Bank, a Michigan banking corporation, the Company provides commercial, retail and mortgage banking products and services. Republic Bank is headquartered in Lansing, Michigan. Republic Bank exercises the power of a full-service commercial bank and operates 95 offices and 90 ATMs in 7 market areas in Michigan, the greater Cleveland, Ohio area and Indianapolis, Indiana. In addition, Republic Bank operates a loan production office in Massachusetts.
 
Republic Bank has three wholly owned subsidiaries; Quincy Investment Services, Inc., a licensed insurance agency that could provide investment and insurance services, Republic Bank Real Estate Finance, LLC, a Michigan limited liability company and Republic Management Company, Inc., a Michigan corporation, which were formed to hold certain commercial and residential real estate loans. Quincy Investment Services, Inc. is inactive.

In October 2001, the Company formed Republic Capital Trust I, a Delaware business trust, for the purpose of issuing $50 million of 8.60% Cumulative Trust Preferred Securities (liquidation preference $25 per preferred security). The preferred securities trade on The NASDAQ Stock Marketâ under the symbol "RBNCP".

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

Business Segments

The Company engages in three lines of business—Commercial Banking, Retail Banking and Mortgage Banking. See Note 22 to the Consolidated Financial Statements for financial information concerning the Company's business segments.

Commercial Banking

Republic Bank provides traditional commercial banking products and services to small- and medium-sized businesses in Michigan, Ohio and Indiana. Products and services offered include commercial and small business loans, other types of installment loans and commercial products and deposit services. Lending activity at Republic Bank is primarily focused on real estate-secured lending (e.g., fixed and variable rate commercial real estate mortgage loans and commercial real estate construction loans) to small- and medium-sized businesses. In addition, emphasis is placed on loans that are government guaranteed or insured, such as SBA loans and United States Department of Agriculture (USDA) loans. Commercial loans are typically secured by the customer's assets, (primarily real estate and generally at a 75% or less loan-to-value ratio) and by personal guarantees. Management believes that the Company's historically low net charge-offs are reflective of its emphasis on real estate-secured lending and adherence to conservative underwriting standards.

Retail Banking

Republic Bank provides traditional retail banking products and services to consumers at 82 offices in Michigan and Ohio. Products and services offered include home equity loans and lines of credit, other types of installment loans, and demand, savings and time deposit accounts. Republic Bank targets consumers interested in receiving personalized banking service. The Company's deposit base consists primarily of retail deposits gathered from within local markets served. At December 31, 2004, retail deposits comprised 81% of total deposits.

2


Mortgage Banking

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

The Company's current operating strategy for the mortgage banking segment is to continue growing mortgage banking revenue and related interest income in its Michigan, Ohio and Indiana markets while managing interest rate and liquidity risks as well as operating costs. Additionally, the Company seeks to capitalize on the opportunity to cross-sell products using a shared customer base between its commercial, mortgage and retail banking business lines.

Mortgage Loan Production

Retail residential mortgage loans are originated by the Company's own sales staff at retail mortgage loan production offices and retail banking offices located in Michigan, Ohio and Indiana and a loan production office located in Massachusetts. Retail loan production offices are responsible for processing loan applications received and preparing loan documentation. Loan applications are then evaluated by utilizing a combination of proprietary automated underwriting systems developed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and the underwriting department for compliance with the Company's underwriting criteria, including loan-to-value ratios, borrower qualifications and required insurance.

The Company originates primarily conventional mortgage loans secured by residential properties which conform to the underwriting guidelines for sale to Fannie Mae and Freddie Mac. Loans guaranteed by the Department of Veterans Affairs (VA) and insured through the Federal Housing Administration (FHA) are originated in compliance with their underwriting guidelines permitting conversion of such loans into mortgage-backed securities issued by the Government National Mortgage Association (GNMA).

The Company's residential mortgage origination business during 2004 was funded primarily with Republic Bank's retail deposits and short-term borrowings, including federal funds purchased, short-term security repurchase agreements and Federal Home Loan Bank (FHLB) advances. A significant portion of mortgage loans originated are generally sold within a period of 30 to 60 days after closing. These loans are classified as mortgage loans held for sale. Mortgage loans held for sale consist of loans that will be sold directly to secondary market investors or loans that are being prepared for securitization into mortgage-backed securities; however, the mortgage-backed security has not yet been formed and issued. These mortgage loans are typically sold without recourse by the Company in the event of default by the borrowers. To minimize interest rate risk, the Company obtains mandatory purchase commitments from investors prior to funding the loans.

Consistent with the Company's strategy for managing its interest rate risk, the majority of long-term fixed rate mortgages originated are typically securitized and sold, or sold directly to secondary market investors. During 2004, a majority of the variable rate mortgages originated by Republic Bank were retained in its loan portfolio. Such loans may be securitized at a later date and at that time would either be sold or held as securities available for sale.

Mortgage Loan Servicing for Others

The mortgage loan servicing function involves the administration of loans; collection and remittance of loan payments; receipt of escrow funds for payment of taxes and insurance; counseling of delinquent mortgagors; and supervision of foreclosures and property dispositions in the event of unremedied defaults.

3


Competition

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

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

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

Employees

As of February 28, 2005, the Company and its subsidiaries had 1,114 full-time equivalent employees. None of the Company's employees are represented by a labor union. The Company considers its relations with its employees to be good.

Principal Sources of Revenue

The principal sources of revenue for the Company are interest income from interest and fees on loans and investment securities as well as mortgage banking income. Interest income totaled $282.4 million in 2004, an increase of 6% from $265.7 million in 2003 and down 1% from $284.7 million in 2002. In 2004, interest income accounted for 86% of total revenues, compared to 81% and 84% of total revenues in 2003 and 2002, respectively. Mortgage banking income, the largest component of noninterest income, totaled $22.7 million in 2004, a decrease of 42% from $39.0 million in 2003 and down 33% from $34.1 million in 2002. Mortgage banking income represented 7% of total revenues in 2004, compared to 12% in 2003 and 10% in 2002.

Monetary Policy and Economic Controls

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

The Federal Reserve Board's monetary policies strongly influence the behavior of interest rates and can have a significant effect on the operating results of commercial banks and mortgage banking companies. During 2003, the Federal Reserve Board maintained interest rates at historically low levels. During 2004, the Federal Reserve raised the federal funds target rate by 125 basis points. The effects of the various Federal Reserve Board policies on the future business and earnings of the Company cannot be predicted. Other economic controls also have affected the Company's operations in the past. The Company cannot predict the nature or extent of any effects that possible future governmental controls or legislation may have on its business and earnings.

4


Supervision and Regulation

General

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

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

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

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

Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"), among other things: (i) permits bank holding companies to acquire control of banks in any state, subject to (a) specified maximum national state deposit concentration limits, (b) any applicable state law provisions requiring the acquired bank to be in existence for a specified period of up to five years, (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank's assets available for call by a state sponsored housing entity, and (d) applicable anti-trust laws; (ii) authorizes interstate mergers by banks in different states (and retention of interstate branches resulting from such mergers, subject to the provisions noted above in (i) and to any state laws that "opt-out" of the provision entirely); and (iii) authorizes states to enact legislation permitting interstate de novo branching.
The Michigan Banking Code permits, in appropriate circumstances and with notice to, or the approval of the Commissioner of OFIS: (i) the acquisition of Michigan-chartered banks (such as Republic Bank) by FDIC-insured banks, savings banks or savings and loan associations located in other states; (ii) the sale by a Michigan-chartered bank of one or more of its branches (not comprising all or substantially all of its assets) to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan-chartered bank could purchase one or more branches of the purchasing entity; (iii) the acquisition by a Michigan-chartered bank of an FDIC-insured bank, savings bank or savings and loan association located in another state; (iv) the acquisition by a Michigan-chartered bank of one or more branches (not comprising all or substantially all of the assets) of an FDIC-insured bank, savings bank or savings and loan association located in another state; (v) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states with the resulting organization chartered either by Michigan or one of such other states; (vi) the establishment by Michigan-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates; (vii) the establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia, or U.S. territories or protectorates having laws permitting a Michigan-chartered bank to establish a branch in such jurisdiction; and (viii) the establishment by foreign banks of branches located in Michigan.

5


Dividends and Affiliate Transactions

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

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

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

Financial and other transactions between Republic Bank and the Company or any Company affiliate are also limited under applicable federal law. Among other things, Republic Bank may not lend funds to, or otherwise extend credit to or for the benefit of, the Company or Company affiliates, except on specified types and amounts of collateral and other terms required by federal law. In addition, the Federal Reserve Board has authority to define and limit, from time to time, the transactions between banks and their affiliates. Under the Federal Reserve Board’s Regulation W, which became effective April 1, 2003, additional limitations are imposed on transactions in which Republic Bank may engage with the Company or Company affiliates.

USA Patriot Act

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

Gramm-Leach-Bliley

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

Gramm-Leach-Bliley provides new consumer protections with respect to the transfer and use of their nonpublic personal information and generally enables financial institution customers to "opt-out" of the dissemination of their personal financial information to unaffiliated third parties. ATM operators who charge a fee to non-customers for use of its ATMs must disclose the fee on a sign placed on the ATM and before the transaction is made as part of the on-screen display or by paper notice issued by the machine.

6


FIRREA

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

FDICIA

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

Regulations establishing the specific capital tiers provide that an institution is well capitalized if it has a total risk-based capital ratio of at least 10 percent, a Tier 1 risk-based capital ratio of at least 6 percent, a Tier 1 leverage ratio of at least 5 percent, and is not subject to any specific capital order or directive. For an institution to be adequately capitalized it must have a total risk-based capital ratio of at least 8 percent, a Tier 1 risk-based capital ratio of at least 4 percent, and a Tier 1 leverage ratio of at least 4 percent (and in some cases 3 percent). Under these regulations, the Company and Republic Bank are considered to be well capitalized as of December 31, 2004.

FDICIA directed each federal banking agency to prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, asset quality, earnings, stock valuation and other standards as they deem appropriate. The "Interagency Guidelines Establishing Standards for Safety and Soundness" describing such systems and controls were issued jointly by the agencies on August 9, 1995.

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

FDIC Insurance Assessments

Republic Bank is generally subject to FDIC deposit insurance assessments paid to the Bank Insurance Fund ("BIF"). Republic Bank is also subject to FDIC deposit insurance assessments paid to the Savings Association Insurance Fund ("SAIF") with respect to deposits acquired from thrift institutions, including those deposits held by Republic Savings Bank prior to the January 1, 1999 merger of Republic Savings Bank with and into Republic Bank, and those deposits held by D&N Bank prior to the December 1, 2000 merger of D&N Bank with and into Republic Bank. Pursuant to FDICIA, the FDIC has implemented a risk-based assessment methodology. Under this arrangement, each depository institution is assigned to one of nine categories (based upon three categories of capital adequacy and three categories of perceived risk to the applicable insurance fund). The assessment rate applicable to the Company's bank subsidiary depends in part upon the risk assessment classification assigned to Republic Bank by the FDIC and in part on the BIF and SAIF assessment schedules adopted by the FDIC. FDIC regulations currently provide that premiums related to deposits assessed by the BIF and SAIF are to be assessed at a rate of between 0 cents and 27 cents per $100 of deposits.

7


Under the Deposit Insurance Funds Act of 1996, effective January 1, 1997, Republic Bank is required to pay, in addition to the BIF and SAIF deposit insurance assessments, if any, the Financing Corporation ("FICO") assessment to service the interest on FICO bond obligations. FICO assessment rates may be adjusted quarterly to reflect a change in assessment bases for the BIF and SAIF. The current FICO annual assessment rate for BIF and SAIF is 1.54 cents per $100 of deposits.

Mortgage Banking Activities

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

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

Regulation of Proposed Acquisitions

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

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

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

Community Reinvestment Act

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

8


Forward-Looking Statements

From time to time, we may communicate or 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 "appropriate," "believes," "considers," "expects," "plans," "anticipates," "estimates," "seeks," "intends," "outlook," "forecast," "target," "project," "assume," "achievable," "potential," "strategy," "goal," "trends" and variations of such words and other similar expressions, we are making forward-looking statements. Our disclosures on pages 31-33 appearing under "Market Risk Management" contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. You should understand that the following important factors, in addition to those discussed elsewhere in this Annual Report on Form 10-K, 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, and in our public documents to which we refer, could affect our future results and performance. This could cause those results to differ materially from those expressed in our forward-looking statements. Factors that might cause such a difference include the following:

 
·
significantly increased competition from banking and non-banking institutions;
 
·
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
 
·
general political, industry and economic conditions, either domestically or internationally, that are different than expected;
 
·
adverse developments concerning credit quality in our business segments that may result in increases in our provision for loan losses, nonperforming assets, net charge-offs and reserve for credit losses and could cause earnings to decline;
 
·
instruments, systems and strategies that are used to hedge or otherwise manage our exposure to various types of market, credit, operational and enterprise-wide risk could be less effective than anticipated, and we may not be able to effectively mitigate risk exposures in particular market environments or against particular types of risk;
 
·
customer borrowing, repayment, investment and deposit practices generally may be less favorable than anticipated;
 
·
the mix of interest rates and maturities of our interest earning assets and interest-bearing liabilities (primarily loans and deposits) may be less favorable than expected;
 
·
interest rate margin compression may be greater than expected;
 
·
adverse changes in the securities markets;
 
·
legislative or regulatory changes or actions 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, the Financial Accounting Standards Board or other regulatory agencies;
 
·
changes in our organization, compensation and benefit plans;
 
·
costs and effects of new litigation or changes in existing litigation and unexpected or adverse outcomes in such litigation; and
 
·
our success in managing the foregoing factors and the risks associated with or inherent 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. 

ITEM 2. PROPERTIES

The Company's executive offices are located at 1070 East Main Street, Owosso, Michigan 48867. At December 31, 2004, the Company had 95 commercial, retail, and mortgage banking offices in Michigan, Ohio and Indiana, of which 37 were owned and 58 were leased. Additionally, the Company leases a loan production office in Massachusetts. All of these offices are considered by management to be well maintained and adequate for the purpose intended. See Note 7 to the Consolidated Financial Statements included under Item 8 of this document for further information on our properties.

9

ITEM 3.  LEGAL PROCEEDINGS

The Company and its subsidiary are parties to litigation and claims arising in the normal course of their activities. Although the amount of ultimate liability, if any, with respect to such matters cannot be determined with reasonable certainty, management, after consultation with legal counsel, believes that the aggregate liability, if any, resulting from such matters would not have a material adverse effect on the Company's consolidated financial condition. See Note 20 to the Consolidated Financial Statements included in Item 8 of this document.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2004.


PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Quarterly Dividends and Market Price Summary

               
   
Dividends
 
Common Stock
 
   
Declared
 
Price Range (1)
 
   
Per Share (1)
 
High
 
Low
 
2004
                   
Fourth quarter
 
$
0.110
 
$
16.280
 
$
13.864
 
Third quarter
   
0.100
   
14.636
   
12.264
 
Second quarter
   
0.087
   
12.909
   
11.409
 
First quarter
   
0.086
   
12.864
   
12.073
 
                     
Year
 
$
0.383
 
$
16.280
 
$
11.409
 
2003
                   
Fourth quarter
 
$
0.086
 
$
12.864
 
$
10.967
 
Third quarter
   
0.079
   
11.777
   
10.248
 
Second quarter
   
0.070
   
11.331
   
9.463
 
First quarter
   
0.070
   
10.554
   
9.438
 
                     
Year
 
$
0.305
 
$
12.864
 
$
9.438
 
                     

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

The Company's common stock is traded on The NASDAQ Stock Marketâ under the symbol RBNC. There were approximately 28,000 shareholders of the Company's common stock as of March 8, 2005. See also the response to Item 12 of this report.

For information regarding securities authorized for issuance under our equity compensation plans, see page 60 of this Form 10-K and the disclosures under “Stock-Based Compensation Plan Summary Information” in Note 16 to the Consolidated Financial Statements included in Item 8 of this document (which information and disclosures are incorporated herein by this reference).


10

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  (Continued)

Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities:

None

Purchases of Equity Securities by the Issuer and Affiliated Purchasers:

Republic Bancorp Inc. shares repurchased during 2004 were as follows:

                   
           
Shares
 
Maximum
 
           
Purchased as
 
Shares
 
           
Part of
 
Available to be
 
           
Publicly
 
Purchased
 
   
Total Shares
 
Average Price
 
Announced
 
Under the
 
Period
 
Purchased
 
Paid Per Share
 
Plans (1)
 
Plans (1)
 
01/01/04 - 01/31/04
   
8,000
 
$
13.84
   
8,000
   
2,419,852
 
02/01/04 - 02/29/04
   
57,000
   
13.65
   
57,000
   
2,362,852
 
03/01/04 - 03/31/04
   
-
   
-
   
-
   
2,362,852
 
04/01/04 - 04/30/04
   
-
   
-
   
-
   
2,362,852
 
05/01/04 - 05/31/04
   
-
   
-
   
-
   
2,362,852
 
06/01/04 - 06/30/04
   
-
   
-
   
-
   
2,362,852
 
07/01/04 - 07/31/04
   
45,000
   
14.07
   
45,000
   
2,317,852
 
08/01/04 - 08/31/04
   
55,000
   
14.34
   
55,000
   
2,262,852
 
09/01/04 - 09/30/04
   
90,000
   
15.07
   
90,000
   
2,172,852
 
10/01/04 - 10/31/04
   
40,000
   
15.36
   
40,000
   
2,132,852
 
11/01/04 - 11/30/04
   
112,500
   
15.52
   
112,500
   
2,020,352
 
12/01/04 - 12/31/04
   
120,000
   
15.46
   
120,000
   
1,900,352
 
Total
   
527,500
 
$
14.94
   
527,500
   
1,900,352
 
                           

(1)
On February 15, 2001, the Board of Directors approved the 2001 Stock Repurchase Program authorizing the repurchase of up to 1,100,000 shares, which was amended in October 2001 to allow for the repurchase of up to 3,300,000 shares and was further amended in October 2002 to allow for the repurchase of up to 4,300,000 shares. As of December 31, 2004, no shares were available to repurchase under the 2001 Stock Repurchase Program. As of December 31, 2003 there were 7,852 shares available for repurchase under this Program.
 
On July 17, 2003, the Board of Directors approved the 2003 Stock Repurchase Program authorizing the repurchase of up to 2,420,000 shares. The 2003 Stock Repurchase Program commenced at the conclusion of the 2001 Stock Repurchase Program and there were 1,900,352 and 2,420,000 shares available for repurchase at December 31, 2004 and December 31, 2003, respectively.

11

ITEM 6.  SELECTED FINANCIAL DATA
                       
Year Ended December 31
 
2004
 
2003
 
2002
 
2001
 
2000
 
                       
Earnings Summary (In thousands)
                               
Interest income
 
$
282,379
 
$
265,680
 
$
284,704
 
$
333,376
 
$
348,328
 
Interest expense
   
132,529
   
123,183
   
142,852
   
193,422
   
216,403
 
Net interest income
   
149,850
   
142,497
   
141,852
   
139,954
   
131,925
 
Provision for loan losses
   
8,500
   
12,000
   
16,000
   
8,700
   
6,500
 
Mortgage banking revenue
   
22,739
   
38,976
   
34,132
   
46,808
   
55,720
 
Other noninterest income
   
24,580
   
21,803
   
21,895
   
24,576
   
15,118
 
Noninterest expense
   
94,075
   
104,654
   
100,515
   
132,213
   
127,641
 
Net income
   
66,684
   
60,726
   
56,677
   
47,910
   
45,677
 
                                 
Per Common Share(1) 
                               
Basic earnings
 
$
.95
 
$
.87
 
$
.81
 
$
.66
 
$
.63
 
Diluted earnings
   
.94
   
.86
   
.79
   
.65
   
.63
 
Cash dividends declared
   
.38
   
.31
   
.26
   
.24
   
.22
 
Book value (year-end)
   
5.82
   
5.29
   
4.79
   
4.31
   
4.07
 
Closing price of common stock (year-end)
   
15.28
   
12.26
   
9.73
   
10.41
   
7.39
 
Dividend payout ratio
   
41
%
 
35
%
 
33
%
 
34
%
 
35
%
                                 
Operating Data (In millions)
                               
Loan closings:
                               
Residential mortgage loans
 
$
1,957
 
$
4,041
 
$
3,928
 
$
5,340
 
$
3,852
 
Commercial loans
   
564
   
442
   
493
   
490
   
531
 
SBA loans
   
53
   
47
   
42
   
34
   
32
 
Consumer loans
   
498
   
508
   
486
   
438
   
424
 
Mortgage loan servicing portfolio (year-end)
   
353
   
232
   
307
   
189
   
2,229
 
                                 
Year-End Balances (In millions)
                               
Total assets
 
$
5,714
 
$
5,354
 
$
4,778
 
$
4,741
 
$
4,611
 
Total earning assets
   
5,493
   
5,137
   
4,567
   
4,573
   
4,375
 
Mortgage loans held for sale
   
105
   
135
   
661
   
748
   
385
 
Total portfolio loans
   
4,464
   
4,158
   
3,657
   
3,458
   
3,772
 
Total deposits
   
3,046
   
2,815
   
2,788
   
2,753
   
2,729
 
Total short-term borrowings, security repurchase
                               
agreements and FHLB advances
   
2,144
   
2,058
   
1,517
   
1,477
   
1,385
 
Long-term debt
   
50
   
50
   
64
   
92
   
76
 
Shareholders' equity
   
410
   
369
   
333
   
305
   
295
 
                                 
Ratios
                               
Return on average assets
   
1.18
%
 
1.23
%
 
1.24
%
 
1.04
%
 
1.02
%
Return on average equity
   
17.03
   
17.33
   
17.52
   
15.76
   
16.28
 
Net interest margin (2) 
   
2.83
   
3.07
   
3.31
   
3.24
   
3.08
 
Net loan charge-offs to average total loans
   
.10
   
.20
   
.25
   
.22
   
.14
 
Allowance for loan losses as a percentage
                               
of year-end portfolio loans
   
.94
   
.97
   
.99
   
.84
   
.75
 
Non-performing assets as a percentage
                               
of year-end total assets
   
.59
   
.79
   
.89
   
.66
   
.56
 
Efficiency ratio (3)
   
47.34
   
51.23
   
51.29
   
62.04
   
62.96
 
Net interest income to operating expenses
   
159.29
   
136.16
   
141.13
   
105.85
   
103.36
 
Average shareholders' equity to average assets
   
6.95
   
7.09
   
7.10
   
6.63
   
6.26
 
Tier 1 risk-based capital
   
11.87
   
11.72
   
11.18
   
11.43
   
9.50
 
Total risk-based capital
   
12.96
   
12.85
   
12.26
   
12.31
   
10.38
 
Tier 1 leverage
   
7.94
   
8.04
   
7.81
   
8.34
   
6.82
 

(1)
All per share amounts presented have been adjusted to reflect the issuance of stock dividends or stock splits effected in the form of stock dividends.
(2)
Net interest income (FTE) expressed as a percentage of average interest-earnings assets.
(3)
Total noninterest expense divided by total revenue (FTE), excluding gains or losses on sale of securities.

12

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

Overview

The Company's 2004 results of operations reflected the following trends in earnings:

 
·
Net interest income increased $7.4 million for the year ended December 31, 2004 compared to 2003, primarily due to an increase in interest earning assets offset by a decrease in net interest margin.
 
   
 
·
Net interest margin was 2.83% in 2004 compared to 3.07% in 2003. The decrease in the net interest margin during 2004 was due to the Company's yield on interest-earning assets declining during the year more than the decrease in the cost of funds on interest-bearing liabilities.
     
 
·
The commercial loan portfolio balance grew $54.2 million, or 4% over 2003 to $1.58 billion after increasing 4% in 2003.
     
 
·
The residential loan portfolio grew $137.9 million, or 7% over 2003 to $2.15 billion after increasing 26% in 2003, as the Company’s retention of fixed and variable-rate portfolio single-family residential mortgages more than offset pay-offs of loans.
     
 
·
The direct consumer loan portfolio grew $122.7 million, or 20% over 2003 to $731 million after increasing 9% in 2003, reflecting continued success of specifically targeted sales and marketing efforts in home equity lending.
     
 
·
Mortgage banking income decreased 42% during 2004 following an increase of 14% in 2003. The decrease was primarily due to lower funding levels of loans sold into the secondary market.

Shareholders' equity totaled $409.6 million at December 31, 2004. Market capitalization, which is computed by multiplying the number of shares outstanding (70.4 million) by the closing price of the Company's common stock at year-end ($15.28), was $1.1 billion at December 31, 2004. Our capital ratios remain in excess of regulatory requirements for a well-capitalized financial institution.
 
Business Segments
 
   The Company's operations are managed as three major business segments: (1) commercial banking, (2) retail banking and (3) mortgage banking. The commercial banking segment consists of commercial lending to small- and medium-sized companies, primarily in the form of commercial real estate and Small Business Administration (SBA) loans. The retail banking segment consists of home equity lending, other consumer lending and the deposit-gathering function. Deposits and loan products are offered through 82 retail branch offices of Republic Bank, which are staffed by branch management, personal bankers and loan originators. The mortgage banking segment is comprised of mortgage loan production and in a limited capacity, mortgage loan servicing for others. Mortgage loan production is conducted in all offices of Republic Bank. See Note 22 to the Consolidated Financial Statements for further information concerning the Company's business segments.

Commercial and Retail Banking

The remaining disclosures and analyses within this Management's Discussion and Analysis of the Company's financial condition and results of operations relate principally to the commercial and retail banking segments. The results of operations of the mortgage banking segment are described in "Mortgage Banking Income" on page 17.

13


Results of Operations

Net Interest Income

Net interest income is defined as the difference between total interest income generated by earning assets and the cost of funding those assets. To permit the comparable analysis of tax-exempt and fully taxable income, net interest income is stated on a fully taxable equivalent (FTE) basis, reflecting adjustments based on a 35% tax rate made to the yields of tax-exempt investment securities included in earning assets. The net interest margin is net interest income (FTE) expressed as a percentage of average earning assets and measures how effectively the Company utilizes its earning assets in relationship to the interest cost of funding them. The following discussion should be read in conjunction with Table 1 and Table 2 on pages 15 and 16, which identify and quantify the components impacting net interest income for the years ending December 31, 2004, 2003 and 2002.

Net interest income (FTE) totaled $153.9 million and $145.7 million in 2004 and 2003, respectively, as an increase in average earning assets was partially offset by a decrease in the Company's net interest margin. Average earning assets increased $695.2 million, or 15%, to $5.4 billion in 2004, as the increase in average portfolio loans and total investment securities more than offset a reduction in average mortgage loans held for sale. Net interest margin decreased by 24 basis points to 2.83% in 2004 compared to 3.07% in 2003. The decrease in the margin was due to the Company's cost of funds decreasing less than the yields on average earning assets during 2004.

In 2003, net interest margin decreased 24 basis points to 3.07%, compared to 3.31% in 2002. The decrease in the margin was due to the Company's cost of funds decreasing less than the yields on average earning assets during 2003.

14


Table 1
Analysis of Net Interest Income (FTE)
                                       
Year Ended December 31
                                     
(In thousands)
 
2004
 
2003
 
2002
 
   
Average
     
Avg.
 
Average
     
Avg.
 
Average
     
Avg.
 
   
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
                                       
Average Assets:
                                                       
Short-term investments
 
$
585
 
$
7
   
1.21
%
$
322
 
$
2
   
0.68
%
$
1,818
 
$
37
   
2.03
%
Mortgage loans held for sale
   
119,070
   
6,862
   
5.76
   
359,486
   
20,339
   
5.66
   
429,381
   
27,677
   
6.45
 
Securities available for sale: (1)
                                                       
Taxable
   
483,900
   
19,242
   
3.98
   
184,451
   
6,749
   
3.66
   
129,748
   
5,101
   
3.93
 
Tax-exempt
   
215,707
   
12,348
   
5.72
   
155,142
   
9,881
   
6.37
   
165,862
   
12,319
   
7.43
 
Securities held to maturity
   
222,358
   
10,082
   
4.53
   
24,574
   
1,140
   
4.64
   
-
   
-
   
-
 
Portfolio loans: (2)
                                                       
Commercial loans
   
1,546,485
   
87,973
   
5.69
   
1,478,397
   
88,878
   
5.93
   
1,432,793
   
98,594
   
6.79
 
Real estate mortgage loans
   
2,089,464
   
109,446
   
5.24
   
1,864,960
   
103,118
   
5.53
   
1,565,739
   
99,400
   
6.35
 
Installment loans
   
676,236
   
36,768
   
5.42
   
592,342
   
34,790
   
5.87
   
591,417
   
40,761
   
6.89
 
Total loans, net of 
                                                       
unearned income
   
4,312,185
   
234,187
   
5.43
   
3,935,699
   
226,786
   
5.73
   
3,589,949
   
238,755
   
6.61
 
FHLB stock (at cost)
   
80,722
   
3,651
   
4.51
   
79,700
   
3,978
   
4.99
   
79,005
   
4,778
   
6.05
 
Total interest-earning assets
   
5,434,527
   
286,379
   
5.27
   
4,739,374
   
268,875
   
5.65
   
4,395,763
   
288,667
   
6.54
 
Allowance for loan losses
   
(43,016
)
             
(38,352
)
             
(31,065
)
           
Cash and due from banks
   
54,642
               
63,898
               
60,885
             
Other assets
   
189,936
               
174,035
               
133,285
             
Total assets
 
$
5,636,089
             
$
4,938,955
             
$
4,558,868
             
                                                         
Average Liabilities and
                                                       
Shareholders' Equity:
                                                       
Interest-bearing demand
                                                       
deposits
 
$
192,728
 
$
600
   
0.31
%
$
181,947
 
$
599
   
0.33
%
$
163,191
 
$
1,019
   
0.62
%
Savings and money
                                                       
market accounts
   
1,058,740
   
13,832
   
1.30
   
995,637
   
13,648
   
1.37
   
863,424
   
15,358
   
1.78
 
Time deposits
   
1,378,135
   
38,747
   
2.80
   
1,381,271
   
42,058
   
3.04
   
1,469,788
   
58,795
   
4.00
 
Total interest bearing
                                                       
deposits
   
2,629,603
   
53,179
   
2.02
   
2,558,855
   
56,305
   
2.20
   
2,496,403
   
75,172
   
3.01
 
Short-term borrowings
   
852,002
   
12,237
   
1.41
   
603,847
   
7,689
   
1.26
   
450,943
   
10,022
   
2.19
 
Long-term FHLB advances and
                                                       
security repurchase agreements
   
1,400,875
   
62,813
   
4.48
   
1,063,695
   
54,850
   
5.16
   
928,228
   
50,865
   
5.40
 
Long-term debt
   
50,000
   
4,300
   
8.60
   
50,563
   
4,339
   
8.58
   
79,356
   
6,793
   
8.56
 
Total interest bearing
                                                       
liabilities
   
4,932,480
   
132,529
   
2.68
   
4,276,960
   
123,183
   
2.86
   
3,954,930
   
142,852
   
3.59
 
Noninterest-bearing deposits
   
276,799
               
269,436
               
240,902
             
Other liabilities
   
35,229
               
42,236
               
39,476
             
Total liabilities
   
5,244,508
               
4,588,632
               
4,235,308
             
                                                         
Shareholders' equity
   
391,581
               
350,323
               
323,560
             
Total liabilities and
                                                       
shareholders' equity
 
$
5,636,089
             
$
4,938,955
             
$
4,558,868
             
                                                         
Net interest income/
                                                       
Rate spread (FTE)
       
$
153,850
   
2.59
%
     
$
145,692
   
2.79
%
     
$
145,815
   
2.95
%
                                                         
FTE adjustment(1)
       
$
4,000
             
$
3,195
             
$
3,963
       
                                                         
Impact of noninterest-
                                                       
bearing sources of funds
               
.24
%
             
.28
%
             
.36
%
                                                         
Net interest margin (FTE)
               
2.83
%
             
3.07
%
             
3.31
%
                                                         

(1)
To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pretax equivalents based on the marginal corporate
Federal tax rate of 35%.
(2)
Non-accrual loans and overdrafts are included in average balances.


15

Table 2
Rate/Volume Analysis (FTE)
           
   
2004/2003
 
2003/2002
 
   
Increase/(Decrease)
 
Increase/(Decrease)
 
   
Due to Change in:
 
Due to Change in:
 
   
Average
 
Average
 
Net
 
Average
 
Average
 
Net
 
(In thousands)
 
Balance(1)
 
Rate(1)
 
Change
 
Balance(1)
 
Rate(1)
 
Change
 
                           
Interest Income:
                                     
Short-term investments
 
$
2
 
$
3
 
$
5
 
$
(19
)
$
(16
)
$
(35
)
Mortgage loans held for sale
   
(13,830
)
 
353
   
(13,477
)
 
(4,187
)
 
(3,151
)
 
(7,338
)
Securities available for sale
   
16,413
   
(1,453
)
 
14,960
   
2,378
   
(3,168
)
 
(790
)
Securities held to maturity
   
8,970
   
(28
)
 
8,942
   
1,140
   
-
   
1,140
 
Loans, net of unearned income (2)
   
19,980
   
(12,579
)
 
7,401
   
20,606
   
(32,575
)
 
(11,969
)
FHLB stock (at cost)
   
52
   
(379
)
 
(327
)
 
42
   
(842
)
 
(800
)
Total interest income
   
31,587
   
(14,083
)
 
17,504
   
19,960
   
(39,752
)
 
(19,792
)
                                       
Interest Expense:
                                     
Interest-bearing demand deposits
   
37
   
(36
)
 
1
   
104
   
(524
)
 
(420
)
Savings deposits
   
874
   
(690
)
 
184
   
2,144
   
(3,855
)
 
(1,711
)
Time deposits
   
(92
)
 
(3,219
)
 
(3,311
)
 
(3,357
)
 
(13,379
)
 
(16,736
)
Total interest-bearing deposits
   
819
   
(3,945
)
 
(3,126
)
 
(1,109
)
 
(17,758
)
 
(18,867
)
Short-term borrowings
   
3,526
   
1,022
   
4,548
   
830
   
(3,163
)
 
(2,333
)
Long-term FHLB advances and
                                     
security repurchase agreements
   
15,843
   
(7,880
)
 
7,963
   
6,470
   
(2,485
)
 
3,985
 
Long-term debt
   
(49
)
 
10
   
(39
)
 
(2,470
)
 
16
   
(2,454
)
Total interest expense
   
20,139
   
(10,793
)
 
9,346
   
3,721
   
(23,390
)
 
(19,669
)
                                       
Net interest income (FTE)
 
$
11,448
 
$
(3,290
)
$
8,158
 
$
16,239
 
$
(16,362
)
$
(123
)
                                       

(1)
Variances attributable jointly to volume and rate changes are allocated to volume and rate in proportion to the relationship of the absolute dollar amount of the change in each.
(2)
Non-accrual loans and overdrafts are included in average balances.

Noninterest Income

Noninterest income is a significant source of revenue for the Company, contributing 14% of total revenues in 2004, compared to 19% in 2003 and 16% in 2002. Details of the largest component of noninterest income are presented in the "Mortgage Banking Income" section on page 17. Exclusive of mortgage banking revenue, noninterest income was $24.6 million and $21.8 million in 2004 and 2003, respectively.
 
  Service charges collected on customer accounts increased to $11.5 million, or 4% during 2004 after increasing 21% during 2003. The increases were primarily due to a higher level of collection of fees for overdraft protection and ancillary fees.

During 2004, the Company sold $180.2 million of investment securities available for sale resulting in a net gain of $2.5 million. During 2003, the Company sold $68.3 million of investment securities for a net gain of $2.2 million. During 2002, the Company sold $317.6 million of investment securities for a net gain of $5.9 million.

During 2002, the Company purchased $85 million of separate account bank owned life insurance. During 2003, the Company added $16.5 million to the Non-Modified Endowment Contract policy portion of the bank owned life insurance. The increase in the cash surrender value of these insurance contracts resulted in income of $4.6 million, $5.5 million and $2.2 million in 2004, 2003 and 2002, respectively.

The guaranteed portion of SBA loans are regularly sold to investors. In 2004, the Company sold $51.8 million of the guaranteed portion of SBA loans, compared to $3.5 million in 2003 and $23.8 million in 2002, resulting in gains of $3.8 million, $322,000 and $1.5 million, respectively.

16


Table 3
Noninterest Income
               
Year Ended December 31
             
(In thousands)
 
2004
 
2003
 
2002
 
                     
Mortgage banking income
 
$
22,739
 
$
38,976
 
$
34,132
 
Service charges
   
11,514
   
11,097
   
9,206
 
Gain on sale of securities
   
2,461
   
2,190
   
5,859
 
Gain on sale of SBA loans
   
3,816
   
322
   
1,447
 
Income from banked owned life insurance
   
4,648
   
5,519
   
2,192
 
Other noninterest income
   
2,141
   
2,675
   
3,191
 
Total noninterest income
 
$
47,319
 
$
60,779
 
$
56,027
 
                     


Mortgage Banking Income

The Company's total closings of single-family mortgage loans decreased $2.08 billion, or 52% to $1.96 billion in 2004. The decrease in origination volume was primarily due to an increase in interest rates, which resulted in a lower level of refinance activity. Refinances totaled $775 million, or 40% of total closings in 2004, compared to $2.7 billion, or 66% of total closings in 2003. In 2003, total mortgage loan closings increased 3% to $4.0 billion compared to $3.9 billion in 2002. The Company's pipeline of mortgage loan applications in process was $350 million at December 31, 2004, compared to $312 million at December 31, 2003.

Table 4
Residential Mortgage Loan Closings
               
Year Ended December 31
             
(In thousands)
 
2004
 
2003
 
2002
 
                     
Total closings
 
$
1,957,374
 
$
4,041,243
 
$
3,928,064
 

Mortgage banking income, the largest component of total noninterest income, decreased $16.2 million, or 42%, to $22.7 million in 2004. The decrease was primarily due to lower funding levels of loans sold into the secondary market. Mortgage loans held for sale fundings were $948 million during 2004 compared to $3.1 billion during 2003. For the year ended December 31, 2003, mortgage banking income increased $4.8 million, or 14% from 2002, to $39.0 million. The increase was primarily due to higher funding levels of loans sold to the secondary market. Mortgage loans held for sale fundings were $3.1 billion during 2003 compared to $2.7 billion during 2002. The ratio of mortgage loan production income to mortgage loans held for sale fundings was 2.64% in 2004, compared to 2.11% and 2.00% in 2003 and 2002, respectively.

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 underlying loans sold (mortgage loan production revenue), net of commissions, incentives and deferred mortgage loan origination costs and fees for mortgage loans held for sale and residential real estate loans as accounted for under SFAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS 91). Mortgage loan production revenue totaled $25.0 million, $65.0 million and $54.7 million for 2004, 2003 and 2002, respectively. Commissions and incentives paid were $18.2 million, $38.4 million and $35.9 million for 2004, 2003 and 2002, respectively. For 2004, 2003 and 2002, the SFAS 91 credit totaled $10.8 million, $9.2 million and $10.4 million, respectively.

Mortgage banking income also included gains on sale of residential real estate loans totaling $5.1 million, $3.2 million and $5.0 million for 2004, 2003 and 2002, respectively. Residential real estate loan sales totaled $272.1 million, $134.2 million and $232.4 million for 2004, 2003 and 2002, respectively.


17


Noninterest Expense

Total noninterest expense decreased 10% in 2004 to $94.1 million, after increasing 4% in 2003. Salaries and employee benefits expense decreased $3.6 million, or 6%, in 2004, following an increase of $1.3 million, or 2%, in 2003. The decrease in 2004 was primarily related to incentives, temporary services, employee benefits and payroll taxes reflecting significantly lower mortgage closing volume for 2004 compared to 2003. The increase in salaries and employee benefits expense in 2003 reflects increases in sales incentives to commercial and retail banking personnel and an increase in benefit costs during the year.

Occupancy expense decreased 1% in 2004 after increasing 4% in 2003, and equipment expense decreased 1% in 2004 and 2% in 2003. Other noninterest expense decreased 25% in 2004 after increasing 11% in 2003. The decrease in other noninterest expense in 2004 related to decreases in state income taxes, loan collection expenses, advertising and other miscellaneous expenses. The increase in 2003 primarily reflects increases in state tax accruals, recruiting fees and other miscellaneous expenses.

Table 5
Noninterest Expense
               
Year Ended December 31
             
(In thousands)
 
2004
 
2003
 
2002
 
                     
Salaries and employee benefits
 
$
56,819
 
$
60,454
 
$
59,134
 
Occupancy expense of premises
   
10,243
   
10,296
   
9,926
 
Equipment expense
   
6,675
   
6,768
   
6,903
 
Other noninterest expense
   
20,338
   
27,136
   
24,552
 
Total noninterest expense
 
$
94,075
 
$
104,654
 
$
100,515
 
 

Income Taxes

The provision for income taxes was $27.9 million in 2004, compared to $25.9 million in 2003 and $24.7 million in 2002. The effective tax rate, computed by dividing the provision for income taxes by income before taxes, was 29.5% for 2004, compared to 29.9% for 2003 and 30.3% for 2002. The effective tax rate in 2004 decreased primarily as a result of an increase in net tax-exempt interest income and other miscellaneous deductions. The decrease in the effective tax rate in 2003 was primarily a result of an increase in tax-exempt income from bank owned life insurance.

Financial Condition

Total assets were $5.7 billion at December 31, 2004 and $5.4 billion at December 31, 2003. The increase in total assets reflects the growth in total portfolio loans, securities available for sale and securities held to maturity, which were funded primarily by increases in deposits, short and long-term borrowings and a decrease in mortgage loans held for sale.

Assets

Investment Securities

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 Company's securities portfolio is comprised principally of U.S. Government agency securities, municipal securities, collateralized mortgage obligations and mortgage-backed securities. At December 31, 2004, fixed rate investment securities within the portfolio, excluding municipal securities, totaled $546.4 million compared to $404.0 million at December 31, 2003. At December 31, 2004, $397.3 million of these fixed rate mortgage-backed securities and collateralized mortgage obligations were collateralized with 5/1, 7/1 and 10/1 hybrid adjustable rate mortgage loans which provide for an interest rate reset cap of 2% to 5% at the first reset date. This compares to $306.7 million at December 31, 2003.

Investment securities available for sale totaled $620.8 million at December 31, 2004, a $13.3 million increase from $607.5 million at December 31, 2003. Investment securities available for sale totaled $170.5 million at December 31, 2002. The increase from 2003 primarily reflects purchases of 5/1 and 7/1 hybrid adjustable rate collateralized mortgage obligations, which offset the decline in mortgage loans held for sale. The investment securities available for sale portfolio constituted 10.9% of the Company's assets at December 31, 2004, compared to 11.3% a year earlier.


18


Investment securities held to maturity totaled $222.8 million at December 31, 2004, a $66.2 million increase from $156.6 million at December 31, 2003. The investment securities held to maturity portfolio consists of collateralized mortgage obligations and mortgage-backed securities collateralized with 7/1 and 10/1 hybrid adjustable rate mortgage loans and constituted 3.9% of the Company's assets at December 31, 2004, compared to 2.9% a year earlier.

The following table summarizes the composition of the Company's investment securities portfolio at December 31, 2004, 2003 and 2002.

Table 6
Investment Securities
               
December 31
             
(In thousands)
 
2004
 
2003
 
2002
 
Securities Available For Sale (Estimated Fair Value):
                   
U.S. Government agency securities
 
$
225,190
 
$
238,718
 
$
43,684
 
Collateralized mortgage obligations
   
127,289
   
88,958
   
46,160
 
Mortgage-backed securities
   
65,214
   
77,125
   
6,242
 
Municipal and other securities
   
203,101
   
202,649
   
74,370
 
Total securities available for sale
 
$
620,794
 
$
607,450
 
$
170,456
 
Securities Held To Maturity (At Cost):
                   
Collateralized mortgage obligations
 
$
204,952
 
$
133,882
 
$
-
 
Mortgage-backed securities
   
17,805
   
22,673
   
-
 
Total securities held to maturity
 
$
222,757
 
$
156,555
 
$
-
 
                     
The maturity distribution of and average yield information for the investment securities portfolio as of December 31, 2004 is provided in the following table.

Table 7
Maturity Distribution of Investment Securities Portfolio
                       
December 31, 2004
 
Due Within
 
One to
 
Five to
 
After
     
(In thousands)
 
One Year
 
Five Years
 
Ten Years
 
Ten Years
 
Total
 
   
Estimated
     
Estimated
     
Estimated
     
Estimated
     
Estimated
     
   
Market
 
Avg.
 
Market
 
Avg.
 
Market
 
Avg.
 
Market
 
Avg.
 
Market
 
Avg.
 
   
Value
 
Yield
 
Value
 
Yield
 
Value
 
Yield
 
Value
 
Yield
 
Value
 
Yield
 
Securities Available For Sale:
                                 
U.S. Government agency
                                                             
securities
 
$
91,964
   
3.91
%
$
-
   
-
%
$
90,463
   
4.96
%
$
42,763
   
5.38
%
$
225,190
   
4.61
%
Collateralized mortgage
                                                             
obligations (2) (3)
   
-
   
-
   
127,289
   
4.14
   
-
   
-
   
-
   
-
   
127,289
   
4.14
 
Mortgage-backed
   
                                                       
securities (2) (3)
   
2,120
   
3.24
   
-
   
-
   
4,829
   
5.38
   
58,265
   
4.11
   
65,214
   
4.17
 
Municipal and other
                                                             
securities (1)
   
5
   
7.86
   
15
   
8.57
   
45,897
   
5.04
   
157,184
   
5.66
   
203,101
   
5.52
 
Total securities
                                                             
available for sale
 
$
94,089
   
3.90
%
$
127,304
   
4.14
%
$
141,189
   
5.00
%
$
258,212
   
5.26
%
$
620,794
   
4.77
%
 
Securities Held To Maturity:
                                                     
Collateralized mortgage
                                                             
obligations (2) (3)
 
$
-
   
-
%
$
202,419
   
4.62
%
$
-
   
-
%
$
-
   
-
%
$
202,419
   
4.62
%
Mortgage-backed
                                                             
securities (2) (3)
   
-
   
-
   
17,661
   
4.18
   
-
   
-
   
-
   
-
   
17,661
   
4.18
 
Total securities
                                                             
held to maturity
 
$
-
   
-
%
$
220,080
   
4.59
%
$
-
   
-
%
$
-
   
-
%
$
220,080
   
4.59
%
                                                               

(1)
Average yields on tax-exempt obligations have been computed on a tax equivalent basis, based on a 35% federal tax rate.
(2)
Collateral guaranteed by U.S. Government agencies or private label securities rated "AAA" by a major rating agency.
(3)
Maturity distributions for collateralized mortgage obligations and mortgage-backed securities are based on estimated average lives. The average yield presented represents the current yield on these securities calculated using amortized cost.


19


Portfolio Loans

The Company's loan portfolio is comprised of domestic loans to businesses and consumers. At December 31, 2004 and 2003, there were no loans to foreign debtors outstanding and the amount of agribusiness loans outstanding was insignificant. Loans to businesses are classified as commercial loans and are further segregated as commercial and industrial loans and commercial real estate loans. Commercial and industrial loans are made to local small- and medium-sized corporations primarily to finance working capital and equipment purchases.

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

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

Table 8
Loan Portfolio Analysis
                                           
December 31
                                         
(In thousands)             2004
 
2003
 
2002
 
2001
 
2000
 
   
Amount
   %  
Amount
   %  
Amount
   %  
Amount
   %  
Amount
   %  
Commercial loans:
                                         
Commercial and
                                                             
industrial
 
$
32,632
   
0.7
%
$
38,319
   
0.9
%
$
48,509
   
1.3
%
$
68,428
   
2.0
%
$
79,544
   
2.1
%
Real estate
                                                             
construction
   
224,643
   
5.0
   
247,393
   
6.0
   
250,546
   
6.9
   
250,040
   
7.2
   
211,754
   
5.6
 
 Commercial real
                                                             
estate mortgages
   
1,318,017
   
29.5
   
1,235,421
   
29.7
   
1,170,212
   
32.0
   
1,044,594
   
30.2
   
840,994
   
22.3
 
Total commercial
                                                             
loans
   
1,575,292
   
35.2
   
1,521,133
   
36.6
   
1,469,267
   
40.2
   
1,363,062
   
39.4
   
1,132,292
   
30.0
 
Residential real
                                                             
estate mortgages
   
2,152,720