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| RBCAA > SEC Filings for RBCAA > Form 10-Q on 24-Jul-2009 | All Recent SEC Filings |
24-Jul-2009
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations of Republic Bancorp, Inc. ("Republic" or the "Company") analyzes the major elements of Republic's consolidated balance sheets and statements of income. Republic, a bank holding company headquartered in Louisville, Kentucky, is the Parent Company of Republic Bank & Trust Company, ("RB&T"), Republic Bank (collectively referred together with RB&T as the "Bank"), Republic Funding Company and Republic Invest Co. Republic Invest Co. includes its subsidiary, Republic Capital LLC. The consolidated financial statements also include the wholly-owned subsidiaries of RB&T: Republic Financial Services, LLC, TRS RAL Funding, LLC and Republic Insurance Agency, LLC. Republic Bancorp Capital Trust is a Delaware statutory business trust that is a 100%-owned unconsolidated finance subsidiary of Republic Bancorp, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part I Item 1 "Financial Statements."
This discussion includes various forward-looking statements with respect to credit quality, including but not limited to, delinquency trends and the adequacy of the allowance for loan losses, segments, corporate objectives, the Company's interest rate sensitivity model and other financial and business matters. Broadly speaking, forward-looking statements may include:
· projections of revenue, expenses, income, losses, earnings per share, capital expenditures, dividends, capital structure or other financial items;
· descriptions of plans or objectives for future operations, products or services;
· forecasts of future economic performance; and
· descriptions of assumptions underlying or relating to any of the foregoing.
The Company may make forward-looking statements discussing management's expectations about various matters, including:
· delinquencies, future credit losses, non-performing loans and non-performing assets;
· the adequacy of the allowance for loans losses;
· anticipated future funding sources for Tax Refund Solutions ("TRS");
· potential impairment on securities;
· the future value of mortgage servicing rights;
· the impact of new accounting pronouncements;
· future short-term and long-term interest rates and the respective impact on net interest margin, net interest spread, net income, liquidity and capital;
· legal and regulatory matters including results and consequences of regulatory examinations; and
· future capital expenditures.
Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would," or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management's expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management may not update them to reflect changes that occur subsequent to the date the statements are made. See additional discussion under Part I Item 1A "Risk Factors" of the Company's 2008 Annual Report on Form 10-K.
As used in this report, the terms "Republic," the "Company," "we," "our" and "us" refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries; and the term the "Bank" refers to the Company's subsidiary banks: Republic Bank & Trust Company and Republic Bank.
BUSINESS SEGMENT COMPOSITION
As of June 30, 2009, the Company was divided into three distinct segments:
Banking, Tax Refund Solutions and Mortgage Banking.
Net income, total assets and net interest margin by segment for the three and
six months ended June 30, 2009 and 2008 are presented below:
Three Months Ended June 30, 2009
Traditional Tax Refund Mortgage
(in thousands) Banking Solutions Banking Total Company
Net income $ 3,456 $ 1,148 $ 2,263 $ 6,867
Segment assets 3,064,313 6,693 33,334 3,104,340
Net interest margin 3.72 % NM NM 3.69 %
Three Months Ended June 30, 2008
Traditional Tax Refund Mortgage
(in thousands) Banking Solutions Banking Total Company
Net income $ 5,458 $ 648 $ 317 $ 6,423
Segment assets 3,032,078 9,445 11,686 3,053,209
Net interest margin 4.00 % NM NM 3.99 %
Six Months Ended June 30, 2009
Traditional Tax Refund Mortgage
(in thousands) Banking Solutions Banking Total Company
Net income $ 5,587 $ 22,033 $ 5,006 $ 32,626
Segment assets 3,064,313 6,693 33,334 3,104,340
Net interest margin 3.79 % NM NM 6.21 %
Six Months Ended June 30, 2008
Traditional Tax Refund Mortgage
(in thousands) Banking Solutions Banking Total Company
Net income $ 10,287 $ 17,198 $ 1,061 $ 28,546
Segment assets 3,032,078 9,445 11,686 3,053,209
Net interest margin 3.92 % NM NM 4.82 %
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(I) Banking
As of June 30, 2009, Republic had 44 full-service banking centers with 35
located in Kentucky, five located in metropolitan Tampa, Florida, three located
in southern Indiana and one located in metropolitan Cincinnati, Ohio. RB&T's
primary market areas are located in metropolitan Louisville, Kentucky, central
Kentucky, northern Kentucky and southern Indiana. Louisville, the largest city
in Kentucky, is the location of Republic's headquarters, as well as 20 banking
centers. RB&T's central Kentucky market includes 12 banking centers in the
following Kentucky cities: Bowling Green (1); Elizabethtown (1); Frankfort (1);
Georgetown (1); Lexington, the second largest city in Kentucky (5); Owensboro
(2); and Shelbyville (1). RB&T's northern Kentucky market includes banking
centers in Covington, Florence, and Independence. During the first quarter of
2009, the Company announced that it will be closing one of its four northern
Kentucky locations in the third quarter of 2009. RB&T also has banking centers
located in Floyds Knobs, Jeffersonville and New Albany, Indiana. Republic Bank
has locations in Hudson, New Port Richey, Palm Harbor, Port Richey and Temple
Terrace, Florida, as well as metropolitan Cincinnati, Ohio.
(II) Tax Refund Solutions ("TRS")
Republic, through its TRS segment, is one of a limited number of financial institutions which facilitates the payment of federal and state tax refunds through third party tax-preparers located throughout the U.S., as well as tax preparation software providers. The Company facilitates the payment of these tax refunds through three primary products: Electronic Refund Checks ("ERCs"), Electronic Refund Deposits ("ERDs") and Refund Anticipation Loans ("RALs"). Substantially all of the business generated by TRS occurs in the first quarter of the year.
ERCs/ERDs are products whereby a tax refund is issued to the taxpayer after the Company has received the refund from the federal or state government. There is no credit risk or borrowing cost for the Company associated with these products because they are only delivered to the taxpayer upon receipt of the refund directly from the Internal Revenue Service ("IRS"). Fees earned on ERCs/ERDs are reported as non interest income under the line item "Electronic refund check fees."
RALs are short-term consumer loans offered to taxpayers that are secured by the customer's anticipated tax refund, which represents the source of repayment. The Company underwrites the RAL application through an automated credit review process utilizing information contained in the taxpayer's tax return and the tax-preparer's history. If the application is approved, the Company advances the amount of the refund due on the taxpayer's return up to specified amounts less the loan fee due to the Company and, if requested by the taxpayer, the fees due for preparation of the return to the tax-preparer. As part of the RAL application process, each taxpayer signs an agreement directing the IRS to send the taxpayer's refund directly to the Company. The refund received from the IRS is used by the Company to pay off the RAL. Any amount due the taxpayer above the amount of the RAL is remitted to the taxpayer once the refund is received by the Company. The funds advanced by the Company are generally repaid by the IRS within two weeks. The fees earned on RALs are reported as interest income under the line item "Loans, including fees."
Rebate Accruals
The Company makes rebate payments to third party technology and service providers within its TRS segment. These rebates are reflected in the financial statements as a reduction to RAL and ERC fees. All rebate payments to individual technology and service providers are based on the product volume funded by the IRS through that provider, with various rebate tiers at different volume levels. In addition, rebate payments made to the service providers are significantly influenced by RAL losses. While the rebates paid to the Company's technology providers are typically paid throughout the year, the rebate payments paid to the third party service providers are generally paid in one lump sum payment on or near June 30th of each year.
Accounting for the Company's rebates payable requires management's judgment since the substantial majority of these liabilities are established in the first quarter of each year and accounted for based on cash flow modeling techniques that require management to make estimates regarding the amount and timing of expected future IRS payments, including assumptions regarding credit losses and final product volume tiers.
The Company accrued $36.0 million in total rebates during the first six months of 2009 compared to $28.8 million during the same period in 2008. While total TRS gross product revenue increased 33% during the first six months of 2009 compared to 2008, rebate accruals increased 25% for the same period. The overall increase in rebates was less than the increase in total gross revenue during 2009 primarily due to larger payments made through a fixed fee component, in lieu of rebates. This fixed fee component is classified in non interest expense on the income statement.
The Company accrued $3.8 million in total rebates during the three months ended June 30, 2009 compared to $826,000 during the same period in 2008. The increase in rebate accruals during the second quarter of 2009 was primarily the result of an increase in ERC volume during the quarter and better than projected paydowns in outstanding RALs subsequent to March 31, 2009, significantly lowering the overall loss rate component of the rebate calculation for individual service providers.
TRS Funding - First Quarter 2009 Tax Season
Due to the excessive costs of securitization structures, which resulted from a significant lack of liquidity in the credit markets during the latter half of 2008, the Company elected not to obtain funding from a securitization structure for the first quarter 2009 tax season. Instead, the Company utilized brokered certificates of deposits and its traditional borrowing lines of credit as its primary RAL funding source for the first quarter 2009 tax season. Accounting for this change in funding strategy has caused differences among some income and expense items when comparing income statement results for 2009 to results in 2008. The securitization had the effect during 2008 of reclassifying for securitized RALs the fee income earned, interest expense paid and provision expense into "Net RAL securitization income," which is a component of non interest income. During 2009, these items were, and will continue to be, classified in interest income on loans, interest expense on deposits and provision for loan losses, respectively.
During the fourth quarter of 2008, the Company obtained $918 million in brokered certificates of deposits to be utilized to fund the RAL program. These brokered certificates of deposits had a weighted average life of three months with a weighted average interest rate of 2.71%. Also, during January of 2009, the Company obtained an additional $375 million in brokered certificates of deposits to fund additional RAL demand. These brokered certificates of deposits acquired in January had a weighted average life of 45 days and a weighted average interest rate of 1.27%.
TRS Funding - First Quarter 2008 Tax Season
The Company recognized net RAL securitization income of $12.9 million and sold $1.1 billion RALs into the securitization during the six months ended June 30, 2008. During the first quarter 2008 tax season, in addition to the securitization structure, the Company also utilized brokered certificates of deposits to fund RALs retained on balance sheet. These brokered certificates of deposits had a weighted average life of three months with a weighted average interest rate of 5.09%. Also, during January of 2008, the Company obtained an additional $200 million in brokered certificates of deposits to fund additional RAL demand. These brokered certificates of deposits had a weighted average life of three months and a weighted average interest rate of 4.95%.
For additional discussion regarding TRS, see the following sections:
· Part I Item 1 "Financial Statements:"
o Footnote 1 "Summary of Significant Accounting Policies"
o Footnote 3 "Loans and Allowance for Loan Losses"
o Footnote 10 "Segment Information"
o Footnote 11 "Securitization"
· Part I Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations:"
o "Overview"
o "Results of Operations"
o "Comparison of Financial Condition"
· Part I Item 1A "Risk Factors" of the Company's 2008 Annual Report on Form 10-K
For additional discussion regarding RAL Provision for Loan Losses see Footnote 3 "Loans and Allowance for Loans Losses." In addition, Footnote 3 contains a detailed table illustrating the effect on the 2009 provision for loan losses of TRS if final losses of RALs differ from management's current estimate by as much as twenty basis points lower.
(III) Mortgage Banking
Mortgage Banking activities primarily include 15, 20 and 30-year fixed term single family residential rate real estate loans that are sold into the secondary market, primarily to Freddie Mac. Since 2003, the Bank has historically retained servicing on substantially all loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and insurance and remitting payments to secondary market investors. A fee is received by the Bank for performing these standard servicing functions.
As part of the sale of loans with servicing retained, the Company records as part of the transaction a Mortgage Servicing Right ("MSR"). MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs that Republic expects to receive on loans sold with servicing retained by the Company. MSRs are capitalized as separate assets when loans are sold and servicing is retained. This transaction is posted to net gain on sale of loans, a component of "Mortgage Banking income" in the income statement. Management considers all relevant factors, in addition to pricing considerations from other servicers, to estimate the fair value of the MSRs to be recorded when the loans are initially sold with servicing retained by the Company. The carrying value of MSRs is initially amortized in proportion to and over the estimated period of net servicing income and subsequently adjusted based on the weighted average remaining life. The amortization is recorded as a reduction to Mortgage Banking income.
The carrying value of the MSRs asset is reviewed monthly for impairment based on the fair value of the MSRs, using groupings of the underlying loans by interest rates. Any impairment of a grouping would be reported as a valuation allowance. A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is expected to decline due to anticipated prepayments within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs is expected to increase as prepayments on the underlying loans would be anticipated to decline. Management utilizes an independent third party on a monthly basis to assist with the fair value estimate of the MSRs.
See additional detail regarding Mortgage Banking under Footnote 10 "Segment Information" of Part I Item 1 "Financial Statements."
OVERVIEW (Three Months Ended June 30, 2009 compared to Three Months Ended June 30, 2008)
Net income for the three months ended June 30, 2009 was $6.9 million, representing an increase of $444,000, or 7%, compared to the same period in 2008. Diluted earnings per Class A Common Share increased 6% to $0.33 for the quarter ended June 30, 2009 compared to $0.31 for the same period in 2008. General highlights for the three months ended June 30, 2009 by business segment consist of the following:
Traditional Banking (Second Quarter Highlights)
· Traditional Banking segment net income decreased $2.0 million, or 37%, for the second quarter of 2009 compared to the same period in 2008. The second quarter fluctuation related to a decline in net interest income coupled with increases in provision for loan losses and non interest expenses offset by an increase in non interest income.
· Net interest income within the Traditional Banking segment decreased $1.1 million, or 4%, for the second quarter ended June 30, 2009 compared to the same period in 2008.
· The Traditional Banking segment provision for loan losses was $3.5 million for the second quarter ended June 30, 2009 compared to $2.9 million for the same period in 2008.
· Non interest income increased $1.4 million, or 38%, for the second quarter ended June 30, 2009 compared to the same period in 2008.
· Total non interest expense within the Traditional Banking segment increased $2.7 million, or 13%, for the second quarter ended June 30, 2009 compared to the same period in 2008.
Tax Refund Solutions ("TRS") (Second Quarter Highlights)
· Due to the excessive costs of securitization structures, which resulted from a significant lack of liquidity in the credit markets during the latter half of 2008, the Company elected not to obtain funding from a securitization structure for the first quarter 2009 tax season.
· TRS segment net income increased $500,000, or 77%, for the second quarter ended June 30, 2009 compared to the same period in 2008.
Mortgage Banking (Second Quarter Highlights)
· Within the Mortgage Banking segment, mortgage banking income increased $2.4 million, or 210%, for the second quarter ended June 30, 2009 compared to the same period in 2008.
RESULTS OF OPERATIONS (Three Months Ended June 30, 2009 Compared to Three Months ended June 30, 2008)
Net Interest Income
The largest source of Republic's revenue is net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates. The overall reduction in the Company's cost of funds is illustrated in Table 2 "Volume/Rate Variance Analysis."
Total Company net interest income decreased $1.4 million, or 5%, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Total Company net interest margin decreased 30 basis points to 3.69%. The most significant components comprising the total Company decrease in net interest income were as follows:
Traditional Banking segment
Net interest income within the Traditional Banking segment decreased $1.1 million, or 4%, for the second quarter ended June 30, 2009 compared to the same period in 2008. Since the Federal Reserve Bank began lowering the Federal Funds Target rate ("FFTR") in September 2007, net interest income within the Traditional Banking segment continued to benefit from low short-term interest rates in combination with a "steep" yield curve and an increase in average earning assets. The month-to-month improvement in this benefit when comparing to the same month in the previous year, however, began to decrease in late 2008, as the Company could no longer lower the rate on many of its interest bearing liabilities, while its interest earning assets continued to reprice lower.
During the second quarter of 2009, the comparison of the current month to same month in the prior year became negative largely due to the repricing factors just discussed. In addition, the Company extended maturities on $185 million of its Federal Home Loan Bank ("FHLB") advances during the first and second quarters of 2009 in order to mitigate its risk position from a future rise in short-term interest rates. The weighted average cost of these advances went from 0.35% on an overnight basis to 2.99% after their maturities were extended. The Traditional Banking segment also continued to have a significant sum of cash on hand from maturing securities and portfolio loans, which were refinanced into the secondary market. This cash held at the Federal Reserve Bank averaged $188 million for the second quarter of 2009 and earned 0.25% in a variable rate account. The Company maintained this cash at the Federal Reserve Bank for interest rate risk mitigation and because other investment alternatives were considered less attractive when considering the current economic environment and the Company's overall interest rate risk position. The Company was not able to offset these negative factors impacting net interest income by lowering the current rates paid on its interest bearing liability accounts. As a result, the Traditional Banking segment's net interest margin decreased to 3.72% from 4.00% comparing the second quarter ended June 30, 2009 to the quarter ended June 30, 2008.
The Company continues to experience paydowns in its loan and investment portfolios. These paydowns have caused, and will continue to cause, compression in Republic's net interest income and net interest margin, as the cash received from these paydowns is reinvested at lower yields. Additionally, because the FFTR is now at a target range between 0.00% and 0.25%, no future FFTR decreases from the FOMC are possible, exacerbating the compression to the Company's net interest income and net interest margin caused by its repricing loans and investments. The Company is unable to precisely determine the ultimate negative impact to the Company's net interest spread and margin in the future because several factors remain unknown at this time, such as future demand for financial products and the overall future need for liquidity, among many other factors.
For additional information on the potential future effect of changes in short-term interest rates on Republic's net interest income, see section titled "Interest Rate Sensitivity" in this section of the document.
Table 1 provides detailed information as to average balances, interest income/expense and rates by major balance sheet category for the three month periods ended June 30, 2009 and 2008. Table 2 provides an analysis of the changes in net interest income attributable to changes in rates and changes in volume of interest-earning assets and interest-bearing liabilities for the same periods.
Table 1 - Average Balance Sheets and Interest Rates for the Three Months Ended
June 30, 2009 and 2008
Three Months Ended Three Months Ended
June 30, 2009 June 30, 2008
Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate
ASSETS
Earning assets:
Taxable investment securities(1) $ 518,070 $ 4,963 3.83 % $ 560,496 $ 6,819 4.87 %
Tax exempt investment
securities(4) 1,832 6 2.02 1,826 21 7.08
Federal funds sold and other
interest-earning deposits 188,604 140 0.30 7,661 71 3.71
Loans and fees(2)(3) 2,316,494 34,397 5.94 2,361,208 38,762 6.57
Total earning assets 3,025,000 39,506 5.22 2,931,191 45,673 6.23
Less: Allowance for loan losses 18,346 15,558
Non-earning assets:
Non interest-earning cash and
cash equivalents 110,814 57,261
Premises and equipment, net 40,885 39,875
Other assets(1) 58,516 42,854
Total assets $ 3,216,869 $ 3,055,623
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Transaction accounts $ 259,552 $ 55 0.08 % $ 236,502 $ 210 0.36 % . . . |
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