##### 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, 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. 
  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 
     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 mark 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, 2004: Common Stock, $5 Par Value Per Share
    
    64,023,196 Shares




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INDEX PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-9Item 2.
    
    Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    10-20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21-22Item 4.
    
    Controls and Procedures
    
    
    23PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    24Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    24Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    24SIGNATURE
    
    
    
    
    25Computation of Ratios of Earnings to Fixed ChargesCertification of Principal Executive Officer pursuant to Section 302Certification of Principal Financial Officer pursuant to Section 302Certification of Chief Executive Officer pursuant to Section 906Certification of Chief Financial Officer pursuant to Section 906
  2




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PART I  FINANCIAL INFORMATION 
  REPUBLIC BANCORP INC. AND SUBSIDIARIES 
  June 30,
    
    December 31,(Dollars in thousands)
    
    2004
    
    2003(Unaudited)ASSETSCash and cash equivalents
    
    $
    60,868
    
    
    $
    63,858Mortgage loans held for sale
    
    
    54,836
    
    
    
    135,360Securities available for sale (amortized cost of
$773,324 and $608,677, respectively)
    
    
    754,632
    
    
    
    607,450Securities held to maturity (fair value of $236,552
and $157,067, respectively)
    
    
    240,081
    
    
    
    156,555Loans, net of unearned income
    
    
    4,356,280
    
    
    
    4,157,514Less allowance for loan losses
    
    
    (43,086
    )
    
    
    (40,271
    )Net loans
    
    
    4,313,194
    
    
    
    4,117,243Federal Home Loan Bank stock (at cost)
    
    
    80,503
    
    
    
    80,500Premises and equipment
    
    
    27,400
    
    
    
    26,928Bank owned life insurance
    
    
    110,813
    
    
    
    108,330Other assets
    
    
    69,166
    
    
    
    57,464Total assets
    
    $
    5,711,493
    
    
    $
    5,353,688LIABILITIESNoninterest-bearing deposits
    
    $
    294,355
    
    
    $
    256,265Interest-bearing deposits:NOW accounts
    
    
    189,904
    
    
    
    184,217Savings and money market accounts
    
    
    1,065,516
    
    
    
    1,054,857Certificates of deposit under $100,000
    
    
    665,841
    
    
    
    678,758Certificates of deposit $100,000 or greater
    
    
    608,565
    
    
    
    641,172Total interest-bearing deposits
    
    
    2,529,826
    
    
    
    2,559,004Total deposits
    
    
    2,824,181
    
    
    
    2,815,269Federal funds purchased and other short-term borrowings
    
    
    595,147
    
    
    
    491,245Short-term FHLB advances
    
    
    391,000
    
    
    
    280,000Long-term FHLB advances and reverse repurchase agreements
    
    
    1,411,003
    
    
    
    1,286,726Accrued expenses and other liabilities
    
    
    58,209
    
    
    
    61,028Long-term debt
    
    
    50,000
    
    
    
    50,000Total liabilities
    
    
    5,329,540
    
    
    
    4,984,268SHAREHOLDERS EQUITYPreferred 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; 64,035,000 and 63,527,000, issued and
outstanding, respectively
    
    
    320,177
    
    
    
    317,633Capital surplus
    
    
    53,709
    
    
    
    50,358Unearned compensation  restricted stock
    
    
    (4,197
    )
    
    
    (1,666
    )Retained earnings
    
    
    24,414
    
    
    
    3,893Accumulated other comprehensive loss
    
    
    (12,150
    )
    
    
    (798
    )Total shareholders equity
    
    
    381,953
    
    
    
    369,420Total liabilities and shareholders equity
    
    $
    5,711,493
    
    
    $
    5,353,688
 See notes to consolidated financial statements. 3




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##### Table of Contents



REPUBLIC BANCORP INC. AND SUBSIDIARIES 
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Interest Income:Interest and fees on loans
    
    $
    57,298
    
    
    $
    62,944
    
    
    $
    115,294
    
    
    $
    125,880Interest on investment securities and FHLB stock dividends
    
    
    10,694
    
    
    
    3,898
    
    
    
    20,517
    
    
    
    6,712Total interest income
    
    
    67,992
    
    
    
    66,842
    
    
    
    135,811
    
    
    
    132,592Interest Expense:Interest on deposits
    
    
    12,667
    
    
    
    14,432
    
    
    
    25,704
    
    
    
    29,926Short-term borrowings
    
    
    2,319
    
    
    
    1,995
    
    
    
    4,337
    
    
    
    3,506Long-term FHLB advances and reverse repurchase agreements
    
    
    15,734
    
    
    
    13,475
    
    
    
    31,544
    
    
    
    26,581Long-term debt
    
    
    1,075
    
    
    
    1,075
    
    
    
    2,150
    
    
    
    2,189Total interest expense
    
    
    31,795
    
    
    
    30,977
    
    
    
    63,735
    
    
    
    62,202Net interest income
    
    
    36,197
    
    
    
    35,865
    
    
    
    72,076
    
    
    
    70,390Provision for loan losses
    
    
    2,000
    
    
    
    3,000
    
    
    
    4,500
    
    
    
    6,000Net interest income after provision for loan losses
    
    
    34,197
    
    
    
    32,865
    
    
    
    67,576
    
    
    
    64,390Noninterest Income:Service charges
    
    
    3,005
    
    
    
    2,735
    
    
    
    5,702
    
    
    
    5,387Mortgage banking income
    
    
    6,566
    
    
    
    10,455
    
    
    
    11,740
    
    
    
    20,191Gain on sale of securities
    
    
    674
    
    
    
    432
    
    
    
    1,362
    
    
    
    880Gain on sale of SBA loans
    
    
    665
    
    
    
    96
    
    
    
    1,186
    
    
    
    291Income from bank owned life insurance
    
    
    1,180
    
    
    
    1,320
    
    
    
    2,483
    
    
    
    2,615Other noninterest income
    
    
    428
    
    
    
    459
    
    
    
    859
    
    
    
    994Total noninterest income
    
    
    12,518
    
    
    
    15,497
    
    
    
    23,332
    
    
    
    30,358Noninterest Expense:Salaries and employee benefits
    
    
    13,835
    
    
    
    16,040
    
    
    
    25,924
    
    
    
    30,455Occupancy expense of premises
    
    
    2,476
    
    
    
    2,496
    
    
    
    5,095
    
    
    
    5,139Equipment expense
    
    
    1,652
    
    
    
    1,721
    
    
    
    3,326
    
    
    
    3,426Other noninterest expense
    
    
    5,416
    
    
    
    6,444
    
    
    
    10,056
    
    
    
    12,063Total noninterest expense
    
    
    23,379
    
    
    
    26,701
    
    
    
    44,401
    
    
    
    51,083Income before income taxes
    
    
    23,336
    
    
    
    21,661
    
    
    
    46,507
    
    
    
    43,665Provision for income taxes
    
    
    6,968
    
    
    
    6,503
    
    
    
    13,840
    
    
    
    13,354Net Income
    
    $
    16,368
    
    
    $
    15,158
    
    
    $
    32,667
    
    
    $
    30,311Basic earnings per share
    
    $
    .26
    
    
    $
    .24
    
    
    $
    .51
    
    
    $
    .48Diluted earnings per share
    
    $
    .25
    
    
    $
    .24
    
    
    $
    .50
    
    
    $
    .47Average common shares outstanding  diluted
    
    
    64,763
    
    
    
    64,116
    
    
    
    64,692
    
    
    
    64,124Cash dividends declared per common share
    
    $
    .095
    
    
    $
    .077
    
    
    $
    .190
    
    
    $
    .155
 See notes to consolidated financial statements. 4




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REPUBLIC BANCORP INC. AND SUBSIDIARIES 
  Six Months Ended June 30 (In thousands)
    
    2004
    
    2003Cash Flows From Operating Activities:Net income
    
    $
    32,667
    
    
    $
    30,311Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    5,398
    
    
    
    5,750Net gains on sale of securities available for sale
    
    
    (1,362
    )
    
    
    (880
    )Net gains on sale of commercial and residential real estate loans
    
    
    (2,906
    )
    
    
    (2,516
    )Proceeds from sale of mortgage loans held for sale
    
    
    297,375
    
    
    
    1,561,896Origination of mortgage loans held for sale
    
    
    (216,851
    )
    
    
    (1,380,650
    )Net increase in other assets
    
    
    (13,148
    )
    
    
    (10,058
    )Net (decrease) increase in other liabilities
    
    
    (2,819
    )
    
    
    22,154Other, net
    
    
    2,815
    
    
    
    2,191Total adjustments
    
    
    68,502
    
    
    
    197,887Net cash provided by operating activities
    
    
    101,169
    
    
    
    228,198Cash Flows From Investing Activities:Proceeds from sale of securities available for sale
    
    
    58,280
    
    
    
    41,940Proceeds from calls and principal payments of securities available for sale
    
    
    92,143
    
    
    
    103,927Proceeds from principal payments of securities held to maturity
    
    
    25,790
    
    
    
    Purchases of securities available for sale
    
    
    (313,898
    )
    
    
    (264,568
    )Purchases of securities held to maturity
    
    
    (109,663
    )
    
    
    Proceeds from sale of commercial and residential real estate loans
    
    
    111,055
    
    
    
    89,256Net increase in loans made to customers
    
    
    (306,976
    )
    
    
    (381,428
    )Premises and equipment expenditures
    
    
    (3,557
    )
    
    
    (2,424
    )Net cash used in investing activities
    
    
    (446,826
    )
    
    
    (413,297
    )Cash Flows From Financing Activities:Net increase in total deposits
    
    
    8,912
    
    
    
    28,282Net increase in short-term borrowings
    
    
    103,902
    
    
    
    57,429Net increase in short-term FHLB advances
    
    
    111,000
    
    
    
    100,000Proceeds from long-term FHLB advances and reverse repurchase agreements
    
    
    146,000
    
    
    
    100,000Payments on long-term FHLB advances
    
    
    (20,271
    )
    
    
    (60,139
    )Payments on long-term debt
    
    
    
    
    
    
    (13,500
    )Net proceeds from issuance of common shares
    
    
    6,129
    
    
    
    6,056Repurchase of common shares
    
    
    (889
    )
    
    
    (8,892
    )Dividends paid on common shares
    
    
    (12,116
    )
    
    
    (9,786
    )Net cash provided by financing activities
    
    
    342,667
    
    
    
    199,450Net (decrease) increase in cash and cash equivalents
    
    
    (2,990
    )
    
    
    14,351Cash and cash equivalents at beginning of period
    
    
    63,858
    
    
    
    75,625Cash and cash equivalents at end of period
    
    $
    60,868
    
    
    $
    89,976
 See notes to consolidated financial statements. 5




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##### Table of Contents



REPUBLIC BANCORP INC. AND SUBSIDIARIES 
  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 U. S. generally accepted accounting principles 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 U S. generally accepted
accounting principles 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, 2003. Note 2  Principles of Consolidation The consolidated financial statements include the accounts of the parent
company, Republic Bancorp Inc. and its wholly-owned banking subsidiary,
Republic Bank (including its wholly-owned subsidiaries Quincy Investment
Services, Inc., Republic Bank Real Estate Finance, LLC and Republic Management
Company, Inc.). All significant intercompany accounts and transactions have
been eliminated in consolidation. Effective December 31, 2003, the Company adopted FASB Interpretation No. 46,
Consolidation of Variable Interest Entities(FIN 46). FIN 46 required the
Company to reclassify its trust preferred securities balance of $50 million as
subordinated debt and the dividends paid on its trust preferred securities as
interest expense, where in prior periods dividends on trust preferred
securities were classified as a component of noninterest expense. All prior
periods have been restated to reflect the adoption of FIN 46. Note 3  Consolidated Statements of Cash Flows Supplemental disclosures of cash flow information for the six months ended June
30, include: (In thousands)
    
    2004
    
    2003Cash paid during the period for:Interest
    
    $
    61,879
    
    
    $
    58,340Income taxes
    
    $
    13,300
    
    
    $
    14,740Non-cash investing activities:Loan charge-offs
    
    $
    3,754
    
    
    $
    4,681
 Note 4  Comprehensive Income The following table sets forth the computation of comprehensive income: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    16,368
    
    
    $
    15,158
    
    
    $
    32,667
    
    
    $
    30,311Unrealized holding (losses) gains on securities, net of tax
    
    
    (15,631
    )
    
    
    3,345
    
    
    
    (10,467
    )
    
    
    3,392Reclassification adjustment for gains included in net income,
net of tax of $236, $151, $477 and $308, respectively
    
    
    (438
    )
    
    
    (281
    )
    
    
    (885
    )
    
    
    (572
    )Net unrealized (losses) gains on securities, net of tax
    
    
    (16,069
    )
    
    
    3,064
    
    
    
    (11,352
    )
    
    
    2,820Comprehensive income
    
    $
    299
    
    
    $
    18,222
    
    
    $
    21,315
    
    
    $
    33,131
 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, 2004
    
    December 31, 2003Core Deposit Intangible Asset:Gross carrying amount
    
    $
    10,475
    
    
    $
    10,475Accumulated amortization
    
    
    6,392
    
    
    
    5,897Net book value
    
    $
    4,083
    
    
    $
    4,578
 Amortization expense on the core deposit intangible asset totaled $247,500 for
each of the quarters ended June 30, 2004 and 2003, and $495,000 for the six
months ended June 30, 2004 and 2003. The Company expects core deposit
intangible amortization expense to be $990,000, $936,000, $823,000, $823,000
and $663,000 for each of the years ending December 31, 2004, 2005, 2006, 2007
and 2008, respectively. 6




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##### Table of Contents



Note 6  Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Dollars in thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Numerator for basic and diluted earnings per share:Net income
    
    $
    16,368
    
    
    $
    15,158
    
    
    $
    32,667
    
    
    $
    30,311Denominator for basic earnings per share
weighted-average shares
    
    
    64,019,108
    
    
    
    63,205,052
    
    
    
    63,908,845
    
    
    
    63,249,770Effect of dilutive securities:Stock options
    
    
    691,294
    
    
    
    847,409
    
    
    
    724,082
    
    
    
    807,002Warrants
    
    
    52,302
    
    
    
    63,296
    
    
    
    59,199
    
    
    
    67,048Dilutive potential common shares
    
    
    743,596
    
    
    
    910,705
    
    
    
    783,281
    
    
    
    874,050Denominator for diluted earnings per shareadjusted
weighted-average shares for assumed conversions
    
    
    64,762,704
    
    
    
    64,115,757
    
    
    
    64,692,126
    
    
    
    64,123,820Basic earnings per share
    
    $
    .26
    
    
    $
    .24
    
    
    $
    .51
    
    
    $
    .48Diluted earnings per share
    
    $
    .25
    
    
    $
    .24
    
    
    $
    .50
    
    
    $
    .47
 Note 7  Segment Information The Companys operations are managed as three major business segments: (1)
commercial banking, (2) retail banking, and
(3) mortgage banking. The commercial banking segment consists of commercial
lending to small- and medium-sized companies, primarily in the form of
commercial real estate and Small Business Administration (SBA) loans. The
retail banking segment consists of home equity lending, other consumer lending
and the deposit-gathering function. Deposits and loan products are offered
through 83 retail branch offices of Republic Bank, which are staffed by
personal bankers and loan originators. The mortgage banking segment is
comprised of mortgage loan production. Mortgage loan production is conducted
in all offices of Republic Bank. Treasury and Other is comprised of balance
sheet management activities that include the securities portfolio, residential
real estate mortgage portfolio loans and non-deposit funding. Treasury and
Other also includes unallocated corporate expenses such as corporate overhead,
including accounting, data processing, human resources and operation costs. The following table presents the financial results of each business segment for
the three and six months ended June 30, 2004 and 2003. Treasury(In thousands)
    
    Commercial
    
    Retail
    
    Mortgage
    
    and Other
    
    ConsolidatedFor the Three Months Ended June 30, 2004Net interest income from external customers
    
    $
    21,031
    
    
    $
    (6,197
    )
    
    $
    3,856
    
    
    $
    17,507
    
    
    $
    36,197Internal funding
    
    
    (8,301
    )
    
    
    29,912
    
    
    
    (1,709
    )
    
    
    (19,902
    )
    
    
    Net interest income
    
    
    12,730
    
    
    
    23,715
    
    
    
    2,147
    
    
    
    (2,395
    )
    
    
    36,197Provision for loan losses
    
    
    32
    
    
    
    520
    
    
    
    69
    
    
    
    1,379
    
    
    
    2,000Noninterest income
    
    
    860
    
    
    
    3,069
    
    
    
    7,755
    
    
    
    834
    
    
    
    12,518Noninterest expense
    
    
    2,489
    
    
    
    7,784
    
    
    
    5,717
    
    
    
    7,389
    
    
    
    23,379Income before taxes
    
    
    11,069
    
    
    
    18,480
    
    
    
    4,116
    
    
    
    (10,329
    )
    
    
    23,336Income taxes
    
    
    3,949
    
    
    
    6,593
    
    
    
    1,441
    
    
    
    (5,015
    )
    
    
    6,968Net income
    
    $
    7,120
    
    
    $
    11,887
    
    
    $
    2,675
    
    
    $
    (5,314
    )
    
    $
    16,368Depreciation and amortization
    
    $
    30
    
    
    $
    734
    
    
    $
    432
    
    
    $
    1,271
    
    
    $
    2,467Capital expenditures
    
    $
    4
    
    
    $
    119
    
    
    $
    73
    
    
    $
    177
    
    
    $
    373Net identifiable assets (in millions)
    
    $
    1,535
    
    
    $
    2,775
    
    
    $
    243
    
    
    $
    1,159
    
    
    $
    5,711Return on equity(1)
    
    
    18.67
    %
    
    
    35.33
    %
    
    
    73.87
    %
    
    
    n/m
    
    
    
    17.11
    %Return on assets
    
    
    1.87
    %
    
    
    1.68
    %
    
    
    3.69
    %
    
    
    n/m
    
    
    
    1.17
    %Efficiency ratio
    
    
    18.31
    %
    
    
    29.06
    %
    
    
    57.74
    %
    
    
    n/m
    
    
    
    48.66
    %
 7




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Note 7  Segment Information (Continued) Treasury(In thousands)
    
    Commercial
    
    Retail
    
    Mortgage
    
    and Other
    
    ConsolidatedFor the Three Months Ended June 30, 2003Net interest income from external customers
    
    $
    22,514
    
    
    $
    (7,846
    )
    
    $
    7,477
    
    
    $
    13,720
    
    
    $
    35,865Internal funding
    
    
    (8,966
    )
    
    
    34,164
    
    
    
    (3,327
    )
    
    
    (21,871
    )
    
    
    Net interest income
    
    
    13,548
    
    
    
    26,318
    
    
    
    4,150
    
    
    
    (8,151
    )
    
    
    35,865Provision for loan losses
    
    
    2,508
    
    
    
    473
    
    
    
    69
    
    
    
    (50
    )
    
    
    3,000Noninterest income
    
    
    355
    
    
    
    2,864
    
    
    
    12,735
    
    
    
    (457
    )
    
    
    15,497Noninterest expense
    
    
    2,385
    
    
    
    7,836
    
    
    
    7,390
    
    
    
    9,090
    
    
    
    26,701Income before taxes
    
    
    9,010
    
    
    
    20,873
    
    
    
    9,426
    
    
    
    (17,648
    )
    
    
    21,661Income taxes
    
    
    3,215
    
    
    
    7,447
    
    
    
    3,299
    
    
    
    (7,458
    )
    
    
    6,503Net income
    
    $
    5,795
    
    
    $
    13,426
    
    
    $
    6,127
    
    
    $
    (10,190
    )
    
    $
    15,158Depreciation and amortization
    
    $
    30
    
    
    $
    745
    
    
    $
    704
    
    
    $
    965
    
    
    $
    2,444Capital expenditures
    
    $
    6
    
    
    $
    431
    
    
    $
    258
    
    
    $
    500
    
    
    $
    1,195Net identifiable assets (in millions)
    
    $
    1,457
    
    
    $
    2,790
    
    
    $
    630
    
    
    $
    154
    
    
    $
    5,031Return 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
    
    
    
    52.43
    %
 Treasury(In thousands)
    
    Commercial
    
    Retail
    
    Mortgage
    
    and Other
    
    ConsolidatedFor the Six Months Ended June 30, 2004Net interest income from external customers
    
    $
    41,995
    
    
    $
    (12,970
    )
    
    $
    7,780
    
    
    $
    35,271
    
    
    $
    72,076Internal funding
    
    
    (16,850
    )
    
    
    60,776
    
    
    
    (3,406
    )
    
    
    (40,520
    )
    
    
    Net interest income
    
    
    25,145
    
    
    
    47,806
    
    
    
    4,374
    
    
    
    (5,249
    )
    
    
    72,076Provision for loan losses
    
    
    1,150
    
    
    
    915
    
    
    
    137
    
    
    
    2,298
    
    
    
    4,500Noninterest income
    
    
    1,617
    
    
    
    5,874
    
    
    
    12,903
    
    
    
    2,938
    
    
    
    23,332Noninterest expense
    
    
    4,490
    
    
    
    15,388
    
    
    
    11,049
    
    
    
    13,474
    
    
    
    44,401Income before taxes
    
    
    21,122
    
    
    
    37,377
    
    
    
    6,091
    
    
    
    (18,083
    )
    
    
    46,507Income taxes
    
    
    7,536
    
    
    
    13,335
    
    
    
    2,132
    
    
    
    (9,163
    )
    
    
    13,840Net income
    
    $
    13,586
    
    
    $
    24,042
    
    
    $
    3,959
    
    
    $
    (8,920
    )
    
    $
    32,667Depreciation and amortization
    
    $
    60
    
    
    $
    1,468
    
    
    $
    882
    
    
    $
    2,988
    
    
    $
    5,398Capital expenditures
    
    $
    24
    
    
    $
    2,482
    
    
    $
    281
    
    
    $
    770
    
    
    $
    3,557Net identifiable assets (in millions)
    
    $
    1,535
    
    
    $
    2,775
    
    
    $
    243
    
    
    $
    1,159
    
    
    $
    5,711Return on equity(1)
    
    
    17.91
    %
    
    
    36.01
    %
    
    
    54.21
    %
    
    
    n/m
    
    
    
    17.13
    %Return on assets
    
    
    1.79
    %
    
    
    1.71
    %
    
    
    2.71
    %
    
    
    n/m
    
    
    
    1.18
    %Efficiency ratio
    
    
    16.78
    %
    
    
    28.67
    %
    
    
    63.95
    %
    
    
    n/m
    
    
    
    47.21
    %
 Treasury(In thousands)
    
    Commercial
    
    Retail
    
    Mortgage
    
    and Other
    
    ConsolidatedFor the Six Months Ended June 30, 2003Net interest income from external customers
    
    $
    45,455
    
    
    $
    (16,581
    )
    
    $
    15,881
    
    
    $
    25,635
    
    
    $
    70,390Internal funding
    
    
    (18,300
    )
    
    
    69,073
    
    
    
    (7,236
    )
    
    
    (43,537
    )
    
    
    Net interest income
    
    
    27,155
    
    
    
    52,492
    
    
    
    8,645
    
    
    
    (17,902
    )
    
    
    70,390Provision for loan losses
    
    
    4,562
    
    
    
    704
    
    
    
    137
    
    
    
    597
    
    
    
    6,000Noninterest income
    
    
    687
    
    
    
    5,538
    
    
    
    27,160
    
    
    
    (3,027
    )
    
    
    30,358Noninterest expense
    
    
    4,692
    
    
    
    15,583
    
    
    
    14,711
    
    
    
    16,097
    
    
    
    51,083Income before taxes
    
    
    18,588
    
    
    
    41,743
    
    
    
    20,957
    
    
    
    (37,623
    )
    
    
    43,665Income taxes
    
    
    6,632
    
    
    
    14,893
    
    
    
    7,335
    
    
    
    (15,506
    )
    
    
    13,354Net income
    
    $
    11,956
    
    
    $
    26,850
    
    
    $
    13,622
    
    
    $
    (22,117
    )
    
    $
    30,311Depreciation and amortization
    
    $
    62
    
    
    $
    1,512
    
    
    $
    1,349
    
    
    $
    2,827
    
    
    $
    5,750Capital expenditures
    
    $
    9
    
    
    $
    1,020
    
    
    $
    358
    
    
    $
    1,037
    
    
    $
    2,424Net identifiable assets (in millions)
    
    $
    1,457
    
    
    $
    2,790
    
    
    $
    630
    
    
    $
    154
    
    
    $
    5,031Return 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
    
    
    
    51.15
    %
 (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 8




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##### Table of Contents



Note 8  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.
During 2003 and in the first six months of 2004, 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 2004 was immaterial. The income statement impact from expensing stock
options is expected to be immaterial for the remainder of 2004. 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, 2004 and 2003. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Dollars in thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Net income (as reported)
    
    $
    16,368
    
    
    $
    15,158
    
    
    $
    32,667
    
    
    $
    30,311Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
    
    
    287
    
    
    
    215
    
    
    
    996
    
    
    
    806Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (402
    )
    
    
    (418
    )
    
    
    (1,251
    )
    
    
    (1,234
    )Net income (pro forma)
    
    $
    16,253
    
    
    $
    14,955
    
    
    $
    32,412
    
    
    $
    29,883Basic earnings per share (as reported)
    
    $
    .26
    
    
    $
    .24
    
    
    $
    .51
    
    
    $
    .48Basic earnings per share (pro forma)
    
    
    .25
    
    
    
    .24
    
    
    
    .51
    
    
    
    .47Diluted earnings per share (as reported)
    
    $
    .25
    
    
    $
    .24
    
    
    $
    .50
    
    
    $
    .47Diluted earnings per share (pro forma)
    
    
    .25
    
    
    
    .23
    
    
    
    .50
    
    
    
    .47
 Note 9  Legal Proceedings The Company and its Subsidiaries are subject to certain legal actions and
proceedings in the ordinary course of business. Management believes that the
aggregate liability, if any, resulting from such legal actions would not have a
material adverse effect on the Companys financial condition. 9




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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, 2004 of $16.4
million. This compares to net income of $15.2 million for the second quarter
of 2003. Diluted earnings per share for the second quarter of 2004 were $.25,
up 7% from $.24 earned in 2003. Annualized returns on average assets and
average shareholders equity for the quarter ended June 30, 2004 were 1.17% and
17.11%, respectively. Net income for the six months ended June 30, 2004 was $32.7 million, compared
to net income of $30.3 million earned for the same period in 2003. For the six
months period ended June 30, 2004, diluted earnings per share were $.50, an
increase of 7% over the $.47 earned in 2003. Annualized returns on average
assets and average shareholders equity for the first six months of 2004 were
1.18% and 17.13%, 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, 2004
and 2003. Net interest income, on a fully taxable equivalent (FTE) basis, was $37.2
million for the second quarter of 2004 compared to $36.6 million for the second
quarter of 2003. The increase was primarily the result of an increase in the
Companys average interest earning assets of $754 million, or 16%, as the
average balance of total securities increased $711 million, or 267%, and the
average portfolio loan balance increased $285 million, or 7%, during the second
quarter of 2004 compared to 2003. A significant portion of the increase in the
securities balance was utilized to offset the lower levels of mortgage loans
held for sale as the average balance of loans held for sale decreased $244
million to $128 million in the second quarter of 2004 compared to the second
quarter of 2003. The increase in the average portfolio loan balance reflects a
$76 million, or 5%, increase in average commercial loans, a $135 million, or
7%, increase in average residential real estate mortgage loans and a $74
million, or 13%, increase in average installment loans. Average total interest
bearing liabilities increased $725 million for the second quarter of 2004
compared to 2003 due to a $40 million increase in total average
interest-bearing deposits, a $296 million increase in average short-term
borrowings and a $390 million increase in average long-term FHLB advances and
long-term reverse repurchase agreements. The net interest margin (FTE) was 2.75% for the quarter ended June 30, 2004, a
decrease of 40 basis points from 3.15% in 2003. The decrease in the margin was
primarily attributable to the Companys yield on earning assets decreasing more
than the decline in the cost of funds on interest-bearing liabilities. For the six months ended June 30, 2004, net interest income (FTE) was $74.1
million, compared to $71.6 million for the first half of 2003. The increase
was primarily the result of an increase in the Companys average interest
earning assets of $755 million, or 17%. The net interest margin (FTE) for the
six months ended June 30, 2004, declined 35 basis points to 2.79% from 3.14%
for the comparable period in 2003. The decrease in the margin was due to the
Companys yield on earning assets decreasing more than the decline in the cost
of funds on interest-bearing liabilities. 10




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##### Table of Contents



Table I  Quarterly Net Interest Income and Rate/Volume Analysis (FTE) Three Months Ended
    
    Three Months EndedJune 30, 2004
    
    June 30, 2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average(Dollar amounts in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateAverage Assets:Short-term investments
    
    $
    903
    
    
    $
    1
    
    
    
    0.65
    %
    
    $
    338
    
    
    $
    1
    
    
    
    0.61
    %Mortgage loans held for sale
    
    
    127,606
    
    
    
    1,754
    
    
    
    5.50
    
    
    
    371,728
    
    
    
    5,247
    
    
    
    5.65Securities available for sale(2)
    
    
    740,597
    
    
    
    8,217
    
    
    
    4.45
    
    
    
    266,366
    
    
    
    3,592
    
    
    
    5.39Securities held to maturity
    
    
    236,784
    
    
    
    2,654
    
    
    
    4.48
    
    
    
    
    
    
    
    
    
    
    
    Portfolio loans(1):Commercial loans
    
    
    1,544,344
    
    
    
    21,206
    
    
    
    5.43
    
    
    
    1,468,123
    
    
    
    22,733
    
    
    
    6.13Residential real estate mortgage loans
    
    
    2,014,715
    
    
    
    25,684
    
    
    
    5.10
    
    
    
    1,879,731
    
    
    
    26,115
    
    
    
    5.56Installment loans
    
    
    656,756
    
    
    
    8,654
    
    
    
    5.28
    
    
    
    582,712
    
    
    
    8,849
    
    
    
    6.09Total loans, net of unearned income
    
    
    4,215,815
    
    
    
    55,544
    
    
    
    5.25
    
    
    
    3,930,566
    
    
    
    57,697
    
    
    
    5.85Federal Home Loan Bank stock
    
    
    80,721
    
    
    
    852
    
    
    
    4.23
    
    
    
    79,280
    
    
    
    1,043
    
    
    
    5.26Total interest-earning assets
    
    
    5,402,426
    
    
    
    69,022
    
    
    
    5.10
    
    
    
    4,648,278
    
    
    
    67,580
    
    
    
    5.80Allowance for loan losses
    
    
    (42,615
    )
    
    
    
    
    
    
    
    
    
    
    (37,986
    )Other assets
    
    
    252,907
    
    
    
    
    
    
    
    
    
    
    
    229,935Total assets
    
    $
    5,612,718
    
    
    
    
    
    
    
    
    
    
    $
    4,840,227Average Liabilities and Shareholders Equity:Interest-bearing demand deposits
    
    $
    191,335
    
    
    $
    131
    
    
    
    0.27
    %
    
    $
    179,959
    
    
    $
    161
    
    
    
    0.36
    %Savings and money market accounts
    
    
    1,056,628
    
    
    
    3,189
    
    
    
    1.21
    
    
    
    953,788
    
    
    
    3,285
    
    
    
    1.38Time deposits
    
    
    1,334,148
    
    
    
    9,347
    
    
    
    2.81
    
    
    
    1,408,252
    
    
    
    10,986
    
    
    
    3.13Total interest-bearing deposits
    
    
    2,582,111
    
    
    
    12,667
    
    
    
    1.97
    
    
    
    2,541,999
    
    
    
    14,432
    
    
    
    2.28Short-term borrowings and FHLB advances
    
    
    854,019
    
    
    
    2,319
    
    
    
    1.07
    
    
    
    558,493
    
    
    
    1,995
    
    
    
    1.41Long-term FHLB advances and
reverse repurchase agreements
    
    
    1,421,560
    
    
    
    15,734
    
    
    
    4.38
    
    
    
    1,031,727
    
    
    
    13,475
    
    
    
    5.17Long-term debt
    
    
    50,000
    
    
    
    1,075
    
    
    
    8.60
    
    
    
    50,000
    
    
    
    1,075
    
    
    
    8.60Total interest-bearing liabilities
    
    
    4,907,690
    
    
    
    31,795
    
    
    
    2.58
    
    
    
    4,182,219
    
    
    
    30,977
    
    
    
    2.95Noninterest-bearing deposits
    
    
    283,691
    
    
    
    
    
    
    
    
    
    
    
    273,858Other liabilities
    
    
    38,708
    
    
    
    
    
    
    
    
    
    
    
    36,980Total liabilities
    
    
    5,230,089
    
    
    
    
    
    
    
    
    
    
    
    4,493,057Shareholders equity
    
    
    382,629
    
    
    
    
    
    
    
    
    
    
    
    347,170Total liabilities and shareholders equity
    
    $
    5,612,718
    
    
    
    
    
    
    
    
    
    
    $
    4,840,227Net interest income/rate spread (FTE)
    
    
    
    
    
    $
    37,227
    
    
    
    2.52
    %
    
    
    
    
    
    $
    36,603
    
    
    
    2.85
    %Net interest margin (FTE)
    
    
    
    
    
    
    
    
    
    
    2.75
    %
    
    
    
    
    
    
    
    
    
    
    3.15
    %
 Increase (decrease) due to change in:
    
    Volume(3)
    
    Rate(3)
    
    Net ChangeShort-term investments
    
    $
    
    
    
    $
    
    
    
    $
    Mortgage loans held for sale
    
    
    (3,358
    )
    
    
    (135
    )
    
    
    (3,493
    )Securities available for sale
    
    
    5,353
    
    
    
    (728
    )
    
    
    4,625Securities held to maturity
    
    
    2,654
    
    
    
    
    
    
    
    2,654Portfolio loans(1):Commercial loans
    
    
    1,129
    
    
    
    (2,656
    )
    
    
    (1,527
    )Residential real estate mortgage loans
    
    
    1,809
    
    
    
    (2,240
    )
    
    
    (431
    )Installment loans
    
    
    1,058
    
    
    
    (1,253
    )
    
    
    (195
    )Total loans, net of unearned income
    
    
    3,996
    
    
    
    (6,149
    )
    
    
    (2,153
    )Federal Home Loan Bank stock
    
    
    18
    
    
    
    (209
    )
    
    
    (191
    )Total interest income
    
    
    8,663
    
    
    
    (7,221
    )
    
    
    1,442Interest-bearing demand deposits
    
    
    10
    
    
    
    (40
    )
    
    
    (30
    )Savings deposits
    
    
    334
    
    
    
    (430
    )
    
    
    (96
    )Time deposits
    
    
    (557
    )
    
    
    (1,082
    )
    
    
    (1,639
    )Total interest-bearing deposits
    
    
    (213
    )
    
    
    (1,552
    )
    
    
    (1,765
    )Short-term borrowings
    
    
    875
    
    
    
    (551
    )
    
    
    324Long-term FHLB advances and
reverse repurchase agreements
    
    
    4,511
    
    
    
    (2,252
    )
    
    
    2,259Long-term debt
    
    
    
    
    
    
    
    
    
    
    Total interest expense
    
    
    5,173
    
    
    
    (4,355
    )
    
    
    818Net interest income
    
    $
    3,490
    
    
    $
    (2,866
    )
    
    $
    624
  (1)
    
    Non-accrual loans and overdrafts are included in average balances.(2)
    
    The FTE adjustment for tax-exempt securities interest income totaled $1.0
million and $738,000 for the quarters ended June 30, 2004 and 2003,
respectively.(3)
    
    Rate/volume variances are proportionately allocated to rate and volume
based on the absolute value of the change in each. 11




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##### Table of Contents



Table II  Year-to-date Net Interest Income and Rate/Volume Analysis (FTE) Six Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average(Dollar amounts in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateAverage Assets:Short-term investments
    
    $
    671
    
    
    $
    2
    
    
    
    0.68
    %
    
    $
    282
    
    
    $
    2
    
    
    
    1.09
    %Mortgage loans held for sale
    
    
    110,225
    
    
    
    3,128
    
    
    
    5.68
    
    
    
    404,546
    
    
    
    11,517
    
    
    
    5.69Securities available for sale (2)
    
    
    706,090
    
    
    
    15,799
    
    
    
    4.49
    
    
    
    229,666
    
    
    
    5,736
    
    
    
    5.00Securities held to maturity
    
    
    212,724
    
    
    
    4,825
    
    
    
    4.54
    
    
    
    
    
    
    
    
    
    
    
    Portfolio
loans(1):Commercial loans
    
    
    1,535,407
    
    
    
    42,323
    
    
    
    5.45
    
    
    
    1,471,111
    
    
    
    45,891
    
    
    
    6.20Residential real estate mortgage loans
    
    
    2,021,182
    
    
    
    52,770
    
    
    
    5.22
    
    
    
    1,784,837
    
    
    
    50,528
    
    
    
    5.66Installment loans
    
    
    642,868
    
    
    
    17,073
    
    
    
    5.33
    
    
    
    585,274
    
    
    
    17,944
    
    
    
    6.18Total loans, net of unearned income
    
    
    4,199,457
    
    
    
    112,166
    
    
    
    5.32
    
    
    
    3,841,222
    
    
    
    114,363
    
    
    
    5.95Federal Home Loan Bank stock
    
    
    80,727
    
    
    
    1,909
    
    
    
    4.74
    
    
    
    78,874
    
    
    
    2,155
    
    
    
    5.46Total interest-earning assets
    
    
    5,309,894
    
    
    
    137,829
    
    
    
    5.18
    
    
    
    4,554,590
    
    
    
    133,773
    
    
    
    5.87Allowance for loan losses
    
    
    (41,769
    )
    
    
    
    
    
    
    
    
    
    
    (37,251
    )Other assets
    
    
    247,116
    
    
    
    
    
    
    
    
    
    
    
    229,317Total assets
    
    $
    5,515,241
    
    
    
    
    
    
    
    
    
    
    $
    4,746,656Average Liabilities and Shareholders Equity:Interest-bearing demand deposits
    
    $
    187,539
    
    
    $
    255
    
    
    
    0.27
    %
    
    $
    178,200
    
    
    $
    347
    
    
    
    0.39
    %Savings and money market accounts
    
    
    1,048,983
    
    
    
    6,656
    
    
    
    1.27
    
    
    
    941,722
    
    
    
    7,033
    
    
    
    1.51Time deposits
    
    
    1,340,993
    
    
    
    18,793
    
    
    
    2.81
    
    
    
    1,429,920
    
    
    
    22,546
    
    
    
    3.18Total interest-bearing deposits
    
    
    2,577,515
    
    
    
    25,704
    
    
    
    2.00
    
    
    
    2,549,842
    
    
    
    29,926
    
    
    
    2.37Short-term borrowings and FHLB advances
    
    
    790,838
    
    
    
    4,337
    
    
    
    1.08
    
    
    
    490,325
    
    
    
    3,506
    
    
    
    1.51Long-term FHLB advances and
reverse repurchase agreements
    
    
    1,408,890
    
    
    
    31,544
    
    
    
    4.43
    
    
    
    1,012,054
    
    
    
    26,581
    
    
    
    5.22Long-term debt
    
    
    50,000
    
    
    
    2,150
    
    
    
    8.60
    
    
    
    51,125
    
    
    
    2,189
    
    
    
    8.56Total interest-bearing liabilities
    
    
    4,827,243
    
    
    
    63,735
    
    
    
    2.63
    
    
    
    4,103,346
    
    
    
    62,202
    
    
    
    3.04Noninterest-bearing deposits
    
    
    269,031
    
    
    
    
    
    
    
    
    
    
    
    262,403Other liabilities
    
    
    37,609
    
    
    
    
    
    
    
    
    
    
    
    37,844Total liabilities
    
    
    5,133,883
    
    
    
    
    
    
    
    
    
    
    
    4,403,593Shareholders equity
    
    
    381,358
    
    
    
    
    
    
    
    
    
    
    
    343,063Total liabilities and shareholders equity
    
    $
    5,515,241
    
    
    
    
    
    
    
    
    
    
    $
    4,746,656Net interest income/rate spread (FTE)
    
    
    
    
    
    $
    74,094
    
    
    
    2.55
    %
    
    
    
    
    
    $
    71,571
    
    
    
    2.83
    %Net interest margin (FTE)
    
    
    
    
    
    
    
    
    
    
    2.79
    %
    
    
    
    
    
    
    
    
    
    
    3.14
    %
 Increase (decrease) due to change in:
    
    Volume(3)
    
    Rate(3)
    
    Net ChangeShort-term investments
    
    $
    1
    
    
    $
    (1
    )
    
    $
    Mortgage loans held for sale
    
    
    (8,369
    )
    
    
    (20
    )
    
    
    (8,389
    )Securities available for sale
    
    
    10,708
    
    
    
    (645
    )
    
    
    10,063Securities held to maturity
    
    
    4,825
    
    
    
    
    
    
    
    4,825Portfolio loans(1):Commercial loans
    
    
    1,981
    
    
    
    (5,549
    )
    
    
    (3,568
    )Residential real estate mortgage loans
    
    
    6,361
    
    
    
    (4,119
    )
    
    
    2,242Installment loans
    
    
    1,712
    
    
    
    (2,583
    )
    
    
    (871
    )Total loans, net of unearned income
    
    
    10,054
    
    
    
    (12,251
    )
    
    
    (2,197
    )Federal Home Loan Bank stock
    
    
    49
    
    
    
    (295
    )
    
    
    (246
    )Total interest income
    
    
    17,268
    
    
    
    (13,212
    )
    
    
    4,056Interest-bearing demand deposits
    
    
    18
    
    
    
    (110
    )
    
    
    (92
    )Savings deposits
    
    
    786
    
    
    
    (1,163
    )
    
    
    (377
    )Time deposits
    
    
    (1,307
    )
    
    
    (2,446
    )
    
    
    (3,753
    )Total interest-bearing deposits
    
    
    (503
    )
    
    
    (3,719
    )
    
    
    (4,222
    )Short-term borrowings
    
    
    2,007
    
    
    
    (1,176
    )
    
    
    831Long-term FHLB advances and
reverse repurchase agreements
    
    
    9,350
    
    
    
    (4,387
    )
    
    
    4,963Long-term debt
    
    
    (49
    )
    
    
    10
    
    
    
    (39
    )Total interest expense
    
    
    10,805
    
    
    
    (9,272
    )
    
    
    1,533Net interest income
    
    $
    6,463
    
    
    $
    (3,940
    )
    
    $
    2,523
  (1)
    
    Non-accrual loans and overdrafts are included in average balances.(2)
    
    The FTE adjustment for tax-exempt securities interest income totaled $2.0
million and $1.2 million for the six months ended June 30, 2004 and 2003,
respectively.(3)
    
    Rate/volume variances are proportionately allocated to rate and volume
based on the absolute value of the change in each. 12




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##### Table of Contents



Noninterest Income Total noninterest income decreased $3.0 million, or 19%, for the quarter ended
June 30, 2004, compared to the same period in 2003. The decrease was primarily
due to lower levels of mortgage banking income. Details of mortgage banking
income are presented below. Exclusive of mortgage banking income, noninterest
income was $6.0 million for the quarter ended June 30, 2004, an increase of
$910,000, or 18%, over the second quarter of 2003. The increase was due
primarily to higher levels of service charges, gains on sale of securities and
gains on sale of SBA loans. Service charges increased $270,000, or 10%, over
the second quarter of 2003 reflecting an increase in deposit accounts as well
as increased service fees per account. During the quarter ended June 30, 2004,
gain on sale of securities was $674,000, an increase of $242,000 from the
second quarter of 2003. The Company also sold $7.1 million of the guaranteed
portion of SBA loans during the quarter ended June 30, 2004, resulting in gains
of $665,000, or a $569,000 increase over the gains on sale of SBA loans during
the second quarter of 2003. During the quarter ended June 30, 2003, the
Company sold $1.4 million of SBA loans for gains of $96,000. The guaranteed
portions of SBA loans are regularly sold to investors. For the six months ended June 30, 2004, total noninterest income decreased $7.0
million, or 23%, compared to the same period in 2003. This decrease was
primarily due to lower levels of mortgage banking income. Exclusive of
mortgage banking income, noninterest income was $11.6 million for the six
months ended June 30, 2004, an increase of $1.4 million, or 14%, over the same
period in 2003. This increase was primarily due to higher levels of service
charges, gains on sale of securities and gains on sale of SBA loans. The
Company sold $12.1 million of the guaranteed portion of SBA loans during the
six months ended June 30, 2004, resulting in gains of $1.2 million, or a
$895,000 increase over the gains on sale of SBA loans during the same period in
2003. During the six months ended June 30, 2003, the Company sold $3.0 million
of SBA loans for gains of $291,000. Mortgage Banking Income The Company closed $619 million in single-family residential mortgage loans in
the second quarter of 2004, a decrease of 53% compared to $1.3 billion closed
in the same period last year. During the first half of 2004, mortgage loans
closing were $1.0 billion, a decrease of 55% compared to $2.3 billion for the
comparable period in 2003. Refinancings for the second quarter of 2004
represented 44% of total closings compared to 71% in the second quarter of
2003. During the first half of 2004, refinancings represented 45% of total
closings compared to 73% for the first half of 2003. For the three months ended June 30, 2004, mortgage banking income decreased
$3.9 million, or 37%, to $6.6 million from $10.5 million a year earlier. The
decrease is primarily due to lower funding levels of loans sold into the
secondary market. Mortgage loans held for sale fundings were $297 million
during the second quarter of 2004 compared to $702 million in the prior year.
The ratio of mortgage loan production income to mortgage loans held for sale
fundings was 2.56% for the second quarter of 2004, compared to 2.00% for the
second of quarter 2003. For the six months ended June 30, 2004, mortgage banking income decreased $8.5
million, or 42%, compared to the first half of 2003. The decrease is primarily
due to lower funding levels of loans sold into the secondary market. For the
six months ended June 30, 2004, mortgage loans held for sale fundings totaled
$553 million compared to $1.56 billion during the first six months of 2003.
The ratio of mortgage production revenue to mortgage loans held for sale
fundings was 2.50% for the first six months of 2004, compared to 1.98% for the
comparable period in 2003. 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 real estate 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 $7.6 million and $14.1 million
for the second quarters of 2004 and 2003, respectively, and $13.9 million and
$30.9 million for the six months ended June 30, 2004 and 2003, respectively.
Commissions and incentives were $5.7 million and $12.1 million for the second
quarters of 2004 and 2003, respectively, and $9.1 million and $20.3 million for
the six months ended June 30, 2004 and 2003, respectively. The SFAS 91 credit
to mortgage banking income totaled $3.8 million and $6.7 million for the second
quarter of 2004 and 2003, respectively. The SFAS 91 credit for the six months
ended June 30, 2004 and 2003 totaled $5.2 million and $7.4 million,
respectively. Mortgage banking income also includes gains on sales of mortgage portfolio
loans totaling $863,000 and $1.8 million for the second quarters of 2004 and
2003, respectively, and $1.7 million and $2.2 million for the six months ended
June 30, 2004 and 2003, respectively. Mortgage loan portfolio sales totaled
$44.5 million and $65.9 million for the second quarters of 2004 and 2003,
respectively, and $96.1 million and $83.7 million for the six months ended June
30, 2004 and 2003, respectively. During the quarter ended June 30, 2004, the Company had mortgage loan
applications of $851 million and at June 30, 2004, the Companys mortgage loan
pipeline of applications in process was $489 million, an increase of 57% over
December 31, 2003. The Company estimates that mortgage applications for the
quarter ended September 30, 2004 will range from $550 to $650 million, and
closings for the quarter ended September 30, 2004 will range from $450 to $500
million. 13




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##### Table of Contents



Noninterest Expense Total noninterest expense for the quarter ended June 30, 2004 decreased $3.3
million, or 12%, to $23.4 million compared to $26.7 million for the second
quarter of 2003. The decrease was primarily due to decreases in salaries and
employee benefits of $2.2 million related to lower levels of incentive accruals
and related payroll taxes and other noninterest expenses of $1 million. The
decrease in other non-interest expenses reflects lower levels of state income
taxes, loan collection expenses and other miscellaneous expenses. Total
noninterest expense for the six months ended June 30, 2004, decreased $6.7
million, or 13%, to $44.4 million compared to $51.1 million in 2003. The
decrease was primarily due to decreases in salaries and employee benefits of
$4.5 million and other noninterest expenses of $2 million. BALANCE SHEET ANALYSIS ASSETS At June 30, 2004, the Company had $5.71 billion in total assets, an increase of
$358 million, or 7%, from $5.35 billion at December 31, 2003. The increase is
primarily the result of an increase in the Companys total portfolio loans,
securities available for sale and securities held to maturity, partially offset
by a decrease in mortgage loans held for sale. 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 June 30, 2004, fixed rate
investment securities within the portfolio, excluding municipal securities,
totaled $505.4 million compared to $404.0 million at December 31, 2003. At
June 30, 2004, $457.5 million of these fixed rate investment securities 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 $754.6 million at June 30,
2004, a $147.2 million increase from $607.5 million at December 31, 2003. The
increase in the Companys securities available for sale portfolio was primarily
due to the purchase of collateralized mortgage obligations, collateralized with
5/1 and 7/1 hybrid adjustable rate mortgage loans. The investment securities
available for sale portfolio constituted 13% of total assets at June 30, 2004. Investment securities held to maturity totaled $240.1 million at June 30, 2004,
an $83.5 million increase from $156.6 million at December 31, 2003. The
increase in investment securities held to maturity was primarily due to the
purchase of collateralized mortgage obligations, collateralized with 7/1 and
10/1 hybrid adjustable rate mortgage loans. The investment securities held to
maturity portfolio constituted 4% of the Companys total assets at June 30,
2004. During the first quarter of 2004, $145 million of long-term reverse repurchase
agreements with a weighted average cost of funds of 2.65% and an average term
of 3.4 years were utilized to fund approximately 83% of the first quarter
purchases of fixed rate investment securities. The reverse repurchase
agreements are utilized to reduce the interest rate risk associated with the
fixed rate investment securities purchased. During the second quarter of 2004,
no additional long-term reverse repurchase agreements were utilized. The following table details the composition, amortized cost and fair value of
the Companys investment securities portfolio at
June 30, 2004: Investment SecuritiesGross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    Fair(In thousands)
    
    Cost
    
    Gains
    
    Losses
    
    ValueSecurities Available For Sale (Estimated Fair Value):U.S. Government agency securities
    
    $
    311,234
    
    
    $
    13
    
    
    $
    3,546
    
    
    $
    307,701Collateralized mortgage obligations
    
    
    148,338
    
    
    
    16
    
    
    
    2,692
    
    
    
    145,662Mortgage-backed securities
    
    
    87,065
    
    
    
    205
    
    
    
    1,078
    
    
    
    86,192Municipal and other securities
    
    
    226,687
    
    
    
    197
    
    
    
    11,807
    
    
    
    215,077Total securities available for sale
    
    $
    773,324
    
    
    $
    431
    
    
    $
    19,123
    
    
    $
    754,632Securities Held To Maturity (At Cost):Collateralized mortgage obligations
    
    $
    219,972
    
    
    $
    169
    
    
    $
    3,400
    
    
    $
    216,741Mortgage-backed securities
    
    
    20,109
    
    
    
    
    
    
    
    298
    
    
    
    19,811Total securities held to maturity
    
    $
    240,081
    
    
    $
    169
    
    
    $
    3,698
    
    
    $
    236,552
 14




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##### Table of Contents



Investment Securities (continued) At June 30, 2004, all of the unrealized losses in the securities portfolio were
comprised of securities guaranteed by U.S. Government agencies, investment
grade municipalities and private label securities rated AAA by the major
rating agencies. The Company believes that the price movements in these
securities are dependent upon the movement in market interest rates,
particularly given the low inherent credit risk associated with these
securities. Securities with unrealized losses totaling less than $100,000 have
been in a continuous unrealized loss position for more than 12 months. The
Company has the ability and intent to hold all securities that are in an
unrealized loss position until maturity or market price recovery. The Company
believes that the unrealized losses in the table above are temporary. Certain securities having a carrying value of $666.7 million and $418.4 million
at June 30, 2004 and December 31, 2003, respectively, were pledged to secure
FHLB advances, reverse repurchase agreements and public deposits as required by
law. Federal Home Loan Bank Stock As a member of the Federal Home Loan Bank (FHLB) of Indianapolis, the Company
is required to own capital stock in the FHLB. The carrying value of the stock
is at cost, or par. All transactions in the capital stock of the FHLB are
executed at par. The balance of FHLB stock was $80.5 million at June 30, 2004
and December 31, 2003. The Company earned an average dividend of 4.23% on the
FHLB stock during the second quarter of 2004. Mortgage Loans Held for Sale Mortgage loans held for sale were $55 million at June 30, 2004, a decrease of
$80 million from $135 million at December 31, 2003. The decrease is primarily
a result of the Company originating a higher percentage of adjustable-rate
residential mortgage loans and retaining these loans in its portfolio. Loans
closed generally remain in loans held for sale for 30 to 60 days after closing. Portfolio Loans Total portfolio loans were $4.36 billion at June 30, 2004, an increase of $199
million from $4.16 billion at December 31, 2003. The increase was due to
increases in each of the commercial, residential and installment portfolio loan
balances. The commercial portfolio loan balance was $1.55 billion at June 30,
2004, an increase of $32 million from $1.52 billion at December 31, 2003. The
increase was concentrated in commercial real estate loans. In addition, the
Company closed $28 million in Small Business Administration (SBA) loans during
the six months ended June 30, 2004, an increase of 32% over the first six
months of 2003. The residential portfolio loan balance increased $116 million during the first
half of 2004. During the first six months of 2004, the Company retained $516
million of mortgage loans originated, 75% of which were adjustable-rate
mortgages. Loan pay-offs and principal repayments for the first half of 2004
were $301 million. During the first six months of 2004, the Company also sold
$96 million of fixed-rate residential portfolio loans. The consumer direct installment loan portfolio increased $56.7 million during
the first six months of 2004, primarily due to an increase in home equity
loans. The consumer indirect installment loan portfolio decreased $5.5 million
during the first six months of 2004 due to the anticipated pay-off of these
loans. The following table provides further information regarding the Companys loan
portfolio: June 30, 2004
    
    December 31, 2003(Dollars in thousands)
    
    Amount
    
    Percent
    
    Amount
    
    PercentCommercial loans:Commercial and industrial
    
    $
    40,292
    
    
    
    1.0
    %
    
    $
    38,319
    
    
    
    1.0
    %Commercial real estate mortgage
    
    
    1,512,948
    
    
    
    34.7
    
    
    
    1,482,814
    
    
    
    35.6Total commercial loans
    
    
    1,553,240
    
    
    
    35.7
    
    
    
    1,521,133
    
    
    
    36.6Residential real estate mortgages
    
    
    2,130,310
    
    
    
    48.9
    
    
    
    2,014,809
    
    
    
    48.5Installment loans
    
    
    672,730
    
    
    
    15.4
    
    
    
    621,572
    
    
    
    14.9Total portfolio loans
    
    $
    4,356,280
    
    
    
    100.0
    %
    
    $
    4,157,514
    
    
    
    100.0
    %
 15




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##### Table of Contents



Credit Quality The Company attempts to reduce the credit risk in its 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, 2004, such loans
comprised approximately 98% 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 that are secured by
personal guarantees; and home equity loans with combined first and second
mortgages with loan-to-value ratios of 85% or less. 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
believes that the Companys historically low net charge-offs are reflective of
the emphasis on real estate-secured lending and adherence to conservative
underwriting standards. 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). Non-Performing Assets Non-performing assets consist of non-accrual loans, restructured loans and
other real estate owned (OREO). OREO represents real estate properties
acquired by the Company through foreclosure or by deed in lieu of foreclosure.
Commercial loans 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. Residential real estate mortgage loans and
installment loans are placed in non-accrual status at the time the loan is four
scheduled payments past due or 90 days or more past the maturity date of the
loan. In all cases, loans may be placed on non-accrual status earlier when, in
the opinion of management, reasonable doubt exists as to the full, timely
collection of interest or principal. When a loan is placed on non-accrual
status, interest accruals cease and any uncollected interest is charged against
current income. Interest subsequently received on non-accrual loans is applied
against the principal balance. The following table summarizes the Companys non-performing assets and 90-day
past due loans: June 30,
    
    December 31,(Dollars in thousands)
    
    2004
    
    2003Non-Performing Assets:Non-accrual loans:Commercial
    
    $
    22,889
    
    
    $
    27,666Residential real estate mortgages
    
    
    11,476
    
    
    
    11,181Installment
    
    
    1,070
    
    
    
    873Total non-accrual loans
    
    
    35,435
    
    
    
    39,720Other real estate owned
    
    
    3,854
    
    
    
    2,718Total non-performing assets
    
    $
    39,289
    
    
    $
    42,438Non-performing assets as a percentage of:Portfolio loans and OREO
    
    
    .90
    %
    
    
    1.02
    %Total assets
    
    
    .69
    %
    
    
    .79
    %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, 2004, approximately $17.6 million, or .40% of total portfolio loans
were 30-89 days delinquent, compared to $28.2 million, or .68%, at December 31,
2003. The Company also maintains a list of potential problem loans (classified
as watch and substandard, but excluding non-accrual and restructured loans)
identified as requiring a higher level of monitoring where known information
about possible borrower credit problems raises serious doubts as to the ability
of such borrowers to comply with the repayment terms. As of June 30, 2004,
total potential problem loans, excluding those categorized as non-accrual
loans, were $29.6 million, or 0.68% of total portfolio loans, compared to $30.8
million, or 0.74% of total portfolio loans at December 31, 2003. 16




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##### Table of Contents



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 a level the Company believes is adequate through additions to the
provision for loan losses. An appropriate level of the risk allocated
allowance is determined based on the application of risk percentages to graded
loans by categories. Specific reserves are established for individual loans
when deemed necessary by management. In addition, management considers other
factors when determining the unallocated allowance, including loan quality,
changes in the size and character of the loan portfolio, consultation with
regulatory authorities, amount of nonperforming loans, delinquency trends and
economic conditions and industry trends. Due to the inherent risks and uncertainties related to the operation of a
financial institution, management must depend on estimates, appraisals and
valuations 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 adversely impacted. During the three months ended June 30, 2004, the Company recorded provision for
loan losses of $2.0 million, a decrease of $1.0 million from the second quarter
of 2003. The decrease was primarily due to lower net charge-offs during the
second quarter of 2004 of $1.5 million compared to same period of 2003. During the six months ended June 30, 2004, the Company recorded provision for
loan losses of $4.5 million, a decrease of $1.5 million from the comparable
period in 2003. The decrease in the provision was primarily due to lower net
charge-offs during the first half of 2004 of $2.1 million compared to the first
half of 2003. In addition, non-performing assets decreased $3.1 million, or
7%, from December 31, 2003. The following table provides an analysis of the allowance for loan losses: Six Months EndedJune 30,(Dollars in thousands)
    
    2004
    
    2003Allowance for loan losses:Balance at January 1
    
    $
    40,271
    
    
    $
    36,077Loans charged off
    
    
    (3,754
    )
    
    
    (4,681
    )Recoveries of loans previously charged off
    
    
    2,069
    
    
    
    873Net charge-offs
    
    
    (1,685
    )
    
    
    (3,808
    )Provision charged to expense
    
    
    4,500
    
    
    
    6,000Balance at June 30
    
    $
    43,086
    
    
    $
    38,269Annualized net charge-offs as a percentage of average loans
    
    
    .08
    %
    
    
    .20
    %Allowance for loan losses as a percentage of total portfolio loans
outstanding at period-end
    
    
    .99
    %
    
    
    .97
    %Allowance for loan losses as a percentage of non-performing
loans
    
    
    121.59
    %
    
    
    133.10
    %
 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. The Company evaluates all
commercial
loans graded watch, substandard, doubtful and loss for impairment. An impaired
loan for which it is deemed necessary to record a specific allocated allowance
may be written down to the fair value of the underlying collateral via a direct
charge-off against the allowance for loan losses at the time it is determined
the loan balance exceeds the fair value of the collateral. Consequently, those
impaired loans not requiring a specific allocated allowance represent loans for
which the fair value of the underlying collateral equaled or exceeded the
recorded investment in the loan. All impaired loans were evaluated using the
fair value of the underlying collateral as the measurement method. Bank Owned Life Insurance Republic Bank has purchased 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. 17




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##### Table of Contents



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
and standby letters of credit 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, management believes that 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. 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. The Company has determined the fair value of commitments to extend
credit to be zero. As a result, no liability is recorded for the commitments
to extend credit at June 30, 2004 and December 31, 2003. Deferred revenue
recorded for standby letters of credit was $81,000 and $189,000 at June 30,
2004 and December 31, 2003, respectively. The following table presents the contractual amounts of the Companys
off-balance sheet financial instruments outstanding at June 30, 2004 and
December 31, 2003. June 30,
    
    December 31,(In thousands)
    
    2004
    
    2003Financial instruments whose contract amounts represent credit risk:Commitments to fund residential real estate loans
    
    $
    323,368
    
    
    $
    296,978Commitments to fund commercial real estate loans
    
    
    389,925
    
    
    
    306,062Other unused commitments to extend credit, primarily revolving
consumer loans
    
    
    441,440
    
    
    
    421,619Standby letters of credit
    
    
    72,240
    
    
    
    71,834
 LIABILITIES Total liabilities were $5.33 billion at June 30, 2004, a $345 million, or 7%
increase from $4.98 billion at December 31, 2003. This increase was primarily
due to increases in total deposits, short-term borrowings and long-term reverse
repurchase agreements. Deposits Total deposits increased $8.9 million, or 0.3%, to $2.824 billion at June 30,
2004 from $2.815 billion at December 31, 2003. Noninterest bearing deposits
increased $38.1 million, or 15%; NOW accounts, savings and money market
accounts increased $16.3 million, or 1%; and certificates of deposit decreased
$45.5 million, or 3%, from December 31, 2003. 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,
2004 and the year ended December 31, 2003, were as follows: June 30, 2004
    
    December 31, 2003Average
    
    
    
    
    
    
    
    
    
    AverageEnding
    
    Average
    
    Rate During
    
    Ending
    
    Average
    
    Rate During(Dollars in thousands)
    
    Balance
    
    Balance
    
    Period
    
    Balance
    
    Balance
    
    PeriodFederal funds purchased
    
    $
    327,000
    
    
    $
    324,915
    
    
    
    1.09
    %
    
    $
    313,000
    
    
    $
    280,745
    
    
    
    1.21
    %Reverse repurchase agreements
    
    
    267,668
    
    
    
    218,596
    
    
    
    0.88
    
    
    
    177,745
    
    
    
    56,637
    
    
    
    0.91Other short-term borrowings
    
    
    479
    
    
    
    415
    
    
    
    0.78
    
    
    
    500
    
    
    
    339
    
    
    
    0.90Total short-term borrowings
    
    $
    595,147
    
    
    $
    543,926
    
    
    
    1.00
    %
    
    $
    491,245
    
    
    $
    337,721
    
    
    
    1.16
    %
 At June 30, 2004 and December 31, 2003, other short-term borrowings consisted
of treasury, tax and loan (TT&L) demand notes. 18




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##### Table of Contents



Short-Term FHLB Advances Short-term FHLB advances outstanding at June 30, 2004 and December 31, 2003,
were as follows: June 30, 2004
    
    December 31, 2003Average
    
    
    
    
    
    
    
    
    
    AverageEnding
    
    Average
    
    Rate During
    
    Ending
    
    Average
    
    Rate During(Dollars in thousands)
    
    Balance
    
    Balance
    
    Period
    
    Balance
    
    Balance
    
    PeriodShort-term FHLB advances
    
    $
    391,000
    
    
    $
    246,912
    
    
    
    1.27
    %
    
    $
    280,000
    
    
    $
    266,126
    
    
    
    1.38
    %
 Republic Bank routinely borrows short-term advances from the Federal Home Loan
Bank (FHLB) to fund mortgage loans held for sale and a portion of the
investment securities portfolio. 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. Long-term FHLB Advances And Reverse Repurchase Agreements Long-term FHLB advances and reverse repurchase agreements outstanding at June
30, 2004 and December 31, 2003, were as follows: June 30, 2004
    
    December 31, 2003Average
    
    
    
    
    
    AverageEnding
    
    Rate At
    
    Ending
    
    Rate At(Dollars in thousands)
    
    Balance
    
    Period-End
    
    Balance
    
    Period-EndLong-term FHLB advances
    
    $
    1,069,074
    
    
    
    5.05
    %
    
    $
    1,090,276
    
    
    
    5.02
    %Long-term reverse repurchase agreements
    
    
    341,929
    
    
    
    2.65
    
    
    
    196,450
    
    
    
    2.67Total
    
    $
    1,411,003
    
    
    
    4.47
    %
    
    $
    1,286,726
    
    
    
    4.66
    %
 Republic Bank routinely utilizes long-term FHLB advances and reverse repurchase
agreements to provide funding to reduce the interest rate risk associated with
certain fixed rate commercial and residential mortgage portfolio loans and
investment securities. The long-term FHLB 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. The long-term reverse repurchase agreements are secured by certain securities
with a carrying value of $374.2 million. The increase in the long-term reverse
repurchase agreements of $145 million during the first half of 2004 was due to
the Company funding approximately 83% of the first quarter purchases of fixed
rate investment securities with reverse repurchase agreements to help reduce
the interest rate risk associated with the securities purchased. No long-term
reverse repurchase agreements were added in the second quarter of 2004. The long-term FHLB advances and reverse repurchase agreements have original
maturities ranging from July 2004 to October 2017. CAPITAL Shareholders equity was $382.0 million at June 30, 2004, a $12.5 million, or
3%, increase from $369.4 million at December 31, 2003. This increase in
shareholders equity during the first half of 2004 resulted primarily from net
income of $32.7 million and the issuance of shares through the exercise of
stock options, warrants and restricted stock of $4.3 million, offset by $12.2
million in cash dividends to shareholders, $889,000 in stock repurchases and a
decrease in accumulated other comprehensive income of $11.4 million. The Company is subject to risk-based capital adequacy guidelines that measure
capital relative to risk-weighted assets and off-balance sheet financial
instruments. Capital adequacy guidelines issued by the Federal Reserve Board
require bank holding companies to have a minimum total risk-based capital ratio
of 8.00%, with at least half of total capital in the form of Tier 1, or core
capital. 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, 2004, the Company met all capital adequacy requirements to which
it is subject. The Companys capital ratios were as follows: June 30,
    
    December 31,2004
    
    2003Total capital to risk-weighted assets(1)
    
    
    12.92
    %
    
    
    12.85
    %Tier 1 capital to risk-weighted assets(1)
    
    
    11.77
    
    
    
    11.72Tier 1 capital to average assets(1)
    
    
    7.82
    
    
    
    8.04
 (1) As defined by the regulations. As of June 30, 2004, the Companys total risk-based capital was $482 million
and Tier 1 risk-based capital was $439 million, an excess of $109 million and
$215 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. 19




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##### Table of Contents



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
Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 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 42 and 43 of the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2003. FORWARD-LOOKING STATEMENTS From time to time, the Company 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 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, 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 provisions for loan losses,
nonperforming assets, net charge-offs and reserve for credit losses and
could cause our earnings to decline;
    
    instruments, systems and strategies used to hedge or otherwise manage
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 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 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. 20




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##### Table of Contents



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. Currently, the Companys market risk exposure is
composed entirely of interest rate risk. Interest rate risk arises in the
normal course of business to the extent that there is a difference between the
amount of the Companys interest-earning assets and the amount of
interest-bearing liabilities that are prepaid/withdrawn, reprice or mature in
specified periods. Because the Companys business is subject to many factors
beyond its control (see Forward-Looking Statements on previous page), in
managing the Companys assets, liabilities and overall exposure to risk,
management must rely on numerous estimates, evaluations and assumptions.
Consequently, actual results could differ materially from those anticipated by
management or expressed in the Companys press releases and public documents. Asset and Liability Management The primary objective of asset and liability management is to maintain
stability in the level of net interest income by producing the optimal yield
and maturity mix of assets and liabilities within the interest rate risk limits
set by the Companys Asset and Liability Management Committee (ALCO) and
consistent with projected liquidity needs and capital adequacy requirements. Interest Rate Risk Management The Companys ALCO, which meets weekly, is responsible for reviewing the
interest rate sensitivity position of the Company and establishing policies to
monitor and limit exposure to interest rate risk. Senior management is
responsible for ensuring that the Companys asset and liability management
procedures adhere to corporate policies and risk limits established by the
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, 2004 the Companys cumulative one-year gap was a positive 5.58% of total
earning assets. The Companys current policy is to maintain a mix of asset and liabilities with
repricing and maturity characteristics that reflect 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 positive 15% of total earning assets for the
cumulative one-year gap. Management believes that this range reduces the
vulnerability of net interest income to large shifts in market interest rates
while allowing the Company to take advantage of fluctuations in current
short-term rates. This range also complements the Companys strong retail
mortgage banking franchise. Earnings Simulation Modeling:On a monthly basis, management uses an earnings
simulation model to quantify the effects of various hypothetical changes in
interest rates on the Companys projected net interest income over the ensuing
twelve-month period. The model permits management to evaluate the effects of
various parallel shifts of the U.S. Treasury yield curve, upward and downward,
on net interest income expected in a stable interest rate environment (i.e.,
base net interest income). As of June 30 2004, 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
    
    
    
    -200Change in net interest income over
the next twelve months
    
    
    3.68
    %
    
    
    2.23
    %
    
    
    1.23
    %
    
    
    -1.04
    %
    
    
    -2.62
    %
    
    
    -11.30
    %
 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. 21




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##### Table of Contents



Mortgage Banking Hedging Activities At June 30, 2004, the Company had outstanding $32 million of commitments to
fund residential real estate loan applications with agreed-upon rates
(Interest Rate Lock Commitments or IRLCs). 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 loans are sold to the investors. To reduce this exposure to interest rate
risk, the Company enters into firm commitments to sell such mortgage loans and
IRLCs at specified future dates to various third parties. At June 30, 2004, the Company had outstanding mandatory forward commitments to
sell $83 million of residential mortgage loans. These mandatory forward
commitments covered $55 million of mortgage loans held for sale and $28 million
of IRLCs. The Company implemented SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities,as amended, effective January 1, 2001. For the quarter
ended June 30, 2004, the Companys hedging policies using mandatory forward
commitments, as they relate to IRLCs and mortgage loans held for sale, were
highly effective. Therefore, the impact of SFAS No. 133 on net income was
immaterial. The fair value of IRLCs and mandatory forward commitments was also
immaterial at June 30, 2004. Interest Rate Swap Transactions During the second quarter of 2004, the Company entered into interest rate swap
transactions with a total notional amount of $73.3 million as part of its
asset/liability management activities and associated management of interest
rate risk. Using interest rate swaps, the Companys interest rate sensitivity
is adjusted to maintain a desired interest rate risk profile. Interest rate
swaps involve the exchange of fixed-rate and variable-rate payments without the
exchange of the underlying notional amount on which the interest payments are
calculated. Maximizing hedge effectiveness is the primary consideration in
choosing the specific liability to be hedged. The Companys interest rate swap
transactions are used to adjust the interest rate sensitivity of certain
long-term fixed-rate FHLB advances and reverse repurchase agreements
(interest-bearing liabilities) and will not need to be replaced at maturity,
since the corresponding liability will mature along with the interest rate
swap. The interest rate swaps are designated as fair value type hedges. As required
by SFAS No. 133, all interest rate derivatives that qualify for hedge
accounting are recorded at fair value as other assets or liabilities on the
balance sheet. The hedging relationship involving the interest-bearing
liabilities and the interest rate swaps meet the conditions of SFAS No. 133 to
assume no ineffectiveness in the hedging relationship. As a result, changes in
the fair value of the interest rate swaps and the interest-bearing instruments
off-set with no impact on income. Interest expense on interest rate swaps used to manage interest rate exposure
is recorded on an accrual basis as an adjustment to the yield of the designated
hedged exposures over the periods covered by the contracts. This matches the
income recognition treatment of that exposure, liabilities carried at
historical cost, with interest recorded on an accrual basis. The notional amounts, fair value, maturity and weighted-average pay and receive
rates for the swap position at June 30, 2004 are summarized as follows: Year of Maturity(Dollars in thousands)
    
    2004
    
    2005
    
    2006
    
    2007
    
    
    
    
    
    2008
    
    TotalReceive fixed/pay floating swaps:(1)Notional amount
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    36,300
    
    
    
    
    
    
    $
    37,000
    
    
    $
    73,300Fair value gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (463
    )
    
    
    
    
    
    
    (988
    )
    
    
    (1,451
    )Weighted average:Receive rate
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    2.92
    %
    
    
    
    
    
    
    3.24
    %
    
    
    3.08
    %Pay rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .83
    %
    
    
    
    
    
    
    1.44
    %
    
    
    1.13
    %
   (1) Variable interest rates  which generally are based on the one-month and
three-month London interbank offered rates (LIBOR) in effect on the date of
repricing. 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. 22




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##### Table of Contents



ITEM 4: Disclosure Controls and Procedures Internal Controls The Company maintains a system of internal controls that are 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 U. S. 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-15e and 15d-15e) that are designed to provide reasonable
assurance that the information required to be disclosed in the reports it files
with the SEC is collected and then processed, summarized and disclosed 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 all material respects.. 23




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##### Table of Contents



PART II  OTHER INFORMATION 
  Item 1.
    
    Legal Proceedings  The Company and its subsidiaries are subject to certain legal actions
and proceedings in the ordinary course of business. Management
believes that the aggregate liability, if any, resulting from such
legal actions would not have a material adverse effect on the Companys
financial condition. 
  Item 2.
    
    Changes in Securities and Use of Proceeds  Republic Bancorp Inc. shares repurchased during the first half of 2004 were as follows: Total
    
    Average
    
    Shares Purchased
    
    Maximum Shares AvailableShares
    
    Price Paid
    
    as Part of Publicly
    
    to be PurchasedPeriod
    
    Purchased
    
    Per Share
    
    Announced Plans(1)
    
    Under the Plans(1)1/1/04  1/31/04
    
    
    8,000
    
    
    $
    13.84
    
    
    
    8,000
    
    
    
    2,199,8522/1/04  2/29/04
    
    
    57,000
    
    
    
    13.65
    
    
    
    57,000
    
    
    
    2,142,8523/1/04  3/31/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,142,8524/1/04  6/30/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,142,852Total
    
    
    65,000
    
    
    $
    13.67
    
    
    
    65,000
    
    
    
    2,142,852
  (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 3,300,00 shares and was further amended in October 2002 to
allow for the repurchase of up to 4,300,000 shares. As of June 30,
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 2,200,000
shares. The 2003 Stock Repurchase Program commenced at the conclusion
of the 2001 Stock Repurchase Program. There were 2,142,852 and
2,200,000 shares available for repurchase at June 30, 2004 and December
31, 2003, respectively. 
  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 0f
2002)*
  * Filed herewith  (b)
    
    Reports on Form 8-KOn April 13, 2004, the Company filed a report on Form 8-K reporting
that the Company released its first quarter results and held a
conference call to discuss the earnings release. The press release
was included as an exhibit.On May 13, 2004, 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 May 12,
2004 to the Philadelphia Securities Association in Philadelphia,
Pennsylvania. The slide show presentation was included as an
exhibit.On June 7, 2004, 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 2,
2004 at the Howe Barnes Investments, Inc. Community Bank Conference
in Chicago, Illinois and on June 3, 2004, Mr. Cluckey and Mr.
Menacher made a presentation at the Keefe, Bruyette & Woods
Midwestern Bank Conference in Chicago, Illinois. The slide show
presentations were included as an exhibit.On June 18, 2004, the Company filed a report on Form 8-K reporting
that on June 18, 2004 the Company announced that its Board of
Directors declared an $.11 per share cash dividend to shareholders of
record as of September 10, 2004 and payable October 4, 2004. 24




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##### Table of Contents



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 6, 2004
    
    BY:
    
    /s/ Thomas F. MenacherThomas F. MenacherExecutive Vice President, Treasurer andChief Financial Officer(Principal Financial and
Accounting Officer)
 25




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    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 0f
2002)*