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RBCAA > SEC Filings for RBCAA > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for REPUBLIC BANCORP INC /KY/

Form 10-Q for REPUBLIC BANCORP INC /KY/


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 ("RB") (collectively referred together 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."

As used in this filing, 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: RB&T and RB.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures, equity and fixed income market fluctuations, personal and corporate customers' bankruptcies, inflation, recession, acquisitions and integrations of acquired businesses, technological changes, changes in law and regulations or the interpretation and enforcement thereof, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required, as well as other risks and uncertainties reported from time to time in the Company's filings with the Securities and Exchange Commission ("SEC") including under Part II Item 1A "Risk Factors" in this filing.

Broadly speaking, forward-looking statements 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:

? loan delinquencies, future credit losses, non-performing loans and non-performing assets;

? further developments in the Bank's ongoing review of and efforts to resolve possible problem credit relationships, which could result in, among other things, additional provision for loan losses;

? deteriorating credit quality, including changes in the interest rate environment and reducing interest margins;

? the overall adequacy of the allowance for loan losses;

? future short-term and long-term interest rates and the respective impact on net interest margin, net interest spread, net income, liquidity and capital;

? the future performance of assets, including loans, acquired in FDIC-assisted failed bank acquisitions;

? the future operating performance of the Republic Payment Solutions ("RPS") division;

? the future operating performance of the Republic Credit Solutions ("RCS") division;

? the future regulatory viability of the Tax Refund Solutions ("TRS") division;

? the future operating performance of the TRS division, including the impact of the cessation of Refund Anticipation Loans ("RALs");

? future Refund Transfer ("RT") (formerly referred to as Electronic Refund Checks/Electronic Refund Deposits or ERCs/ERDs) volume for the TRS division;

? future revenues associated with RTs at the TRS division;

? future recoveries associated with RALs originated during 2012 and prior;

? potential impairment of investment securities;

? the future value of mortgage servicing rights;


? the impact of new accounting pronouncements;

? legal and regulatory matters including results and consequences of regulatory guidance, litigation, administrative proceedings, rule-making, interpretations, actions and examinations;

? the extent to which regulations written and implemented by the Federal Bureau of Consumer Financial Protection, and other federal, state and local governmental regulation of consumer lending and related financial products and services may limit or prohibit the operation of the Company's business;

? financial services reform and other current, pending or future legislation or regulation that could have a negative effect on the Company's revenue and businesses, including the Dodd-Frank Act and legislation and regulation relating to overdraft fees (and changes to the Bank's overdraft practices as a result thereof), debit card interchange fees, credit cards, and other bank services;

? future capital expenditures;

? the strength of the U.S. economy in general and the strength of the local economies in which the Company conducts operations;

? the Bank's ability to maintain current deposit and loan levels at current interest rates and

? the Company's ability to successfully implement future growth plans, including growth through future acquisitions.

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 II Item 1A "Risk Factors."

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Republic's consolidated financial statements and accompanying footnotes have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

Management continually evaluates the Company's accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management's estimates are based on historical experience, on information from regulators and independent third party professionals and on various assumptions that are believed to be reasonable. Actual results may differ from those estimates made by management.

Critical accounting policies are those that management believes are the most important to the portrayal of the Company's financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under U.S. generally accepted accounting principles. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.

As stated in its 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2012, Republic believes its critical accounting policies and estimates relate to the following valuations:

? Traditional Banking segment allowance for loan losses and provision for loan losses

? Mortgage servicing rights

? Income tax accounting

? Goodwill and other intangible assets

? Impairment of investment securities


Summary of new critical accounting policies and estimates:

In addition to the critical accounting policies and estimates disclosed in the Company's 2011 Annual Report on Form 10-K, Republic considers the purchase accounting surrounding acquisitions of failed banks to be a new critical accounting policy and significant estimate. Bargain purchase gains often result in acquisitions of failed banks because the overall price paid by the acquiring bank is less than the estimated fair value of the assets acquired and liabilities assumed of the failed bank. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition, as additional information relative to the acquisition date fair values becomes available. More specifically, fair value adjustments for loans and other real estate owned may be made, as market value data, such as appraisals, are received by the Bank.

Due to the compressed due diligence period of a FDIC-assisted acquisition, the measurement period analysis of information that may be reflective of conditions existing as of the acquisition date generally extends longer within the one year measurement period compared to non-assisted transactions. The difference is attributable to the fact that FDIC-assisted transactions are marketed for two to four weeks with on-site due diligence limited to two to three days while traditional non-assisted transactions generally have a three to six month due diligence and regulatory approval periods prior to the acquisition. The accuracy of the bargain purchase gain estimate can also be negatively impacted by the amount of time between the acquisition date of the failed bank and the required reporting date of the Company. The shorter the time between those two dates can limit the amount of information the Bank can gather before it reports its bargain purchase gain, thus limiting the overall precision in the estimate.

BUSINESS SEGMENT COMPOSITION

As of September 30, 2012, the Company was divided into three distinct business operating segments: Traditional Banking, Mortgage Banking and Republic Processing Group ("RPG"). During the second quarter of 2012, the Company realigned the previously reported Tax Refund Solutions ("TRS") segment as a division of the newly formed RPG segment. Along with the TRS division, Republic Payment Solutions ("RPS") and Republic Credit Solutions ("RCS") also operate as divisions of newly formed the RPG segment.

Nationally, through RB&T, RPG facilitates the receipt and payment of federal and state tax refund products under the TRS division. Nationally, through RB, the RPS division is preparing to become an issuing bank to offer general purpose reloadable prepaid debit, payroll, gift and incentive cards through third party program managers. Nationally, through RB&T, the RCS division is preparing to pilot short-term consumer credit products through multiple channels.

For the projected near-term, as the prepaid card and consumer credit programs are being established, the operating results of these divisions are expected to be immaterial to the Company's overall results of operations and will be reported as part of the RPG business operating segment. The RPS and RCS divisions will not be reported as separate business operating segment until such time, if any, that they become material to the Company's overall results of operations.


Net income, total assets and net interest margin by segment for the three and nine months ended September 30, 2012 and 2011 are presented below:

                                     Three Months Ended September 30, 2012
                                                           Republic
                       Traditional        Mortgage        Processing
(in thousands)           Banking           Banking          Group          Total Company

Net income            $       20,948     $     1,003     $     (1,283 )   $        20,668
Segment assets             3,413,293           8,765           13,718           3,435,776
Net interest margin             3.54 %            NM               NM                3.54 %

                                     Three Months Ended September 30, 2011
                                                           Republic
                       Traditional        Mortgage        Processing
(in thousands)           Banking           Banking          Group          Total Company

Net income (loss)     $        8,822     $       503     $     (1,455 )   $         7,870
Segment assets             3,067,504          11,810           15,827           3,095,141
Net interest margin             3.61 %            NM               NM                3.60 %



                                   Nine Months Ended September 30, 2012
                                                       Republic
                      Traditional      Mortgage       Processing
(in thousands)          Banking         Banking         Group          Total Company

Net income            $     47,786     $   1,932     $     63,000     $       112,718
Segment assets           3,413,293         8,765           13,718           3,435,776
Net interest margin           3.51 %          NM               NM                5.11 %

                                   Nine Months Ended September 30, 2011
                                                      Republic
                      Traditional      Mortgage       Processing
(in thousands)          Banking         Banking         Group          Total Company

Net income (loss)     $     18,615     $     442     $     68,888     $        87,945
Segment assets           3,067,504        11,810           15,827           3,095,141
Net interest margin           3.48 %          NM               NM                5.60 %

NM = Not Meaningful

For expanded segment financial data see Footnote 11 "Segment Information" of

Part I Item 1 "Financial Statements.


(I) Traditional Banking segment

As of September 30, 2012, Republic had 44 full-service banking centers with locations as follows:

? Kentucky - 34

o Metropolitan Louisville - 20

o Central Kentucky - 11

Elizabethtown - 1

Frankfort - 1

Georgetown - 1

Lexington - 5

Owensboro - 2

Shelbyville, Kentucky - 1

o Northern Kentucky - 3

Covington, Kentucky - 1

Florence, Kentucky - 1

Independence, Kentucky - 1

? Southern Indiana - 3

o Floyds Knobs - 1

o Jeffersonville - 1

o New Albany - 1

? Metropolitan Nashville, Tennessee - 1

? Metropolitan Minneapolis, Minnesota - 1

? Metropolitan Tampa, Florida - 4*

? Metropolitan Cincinnati, Ohio - 1*



* - Denotes a RB location

Republic's headquarters are located in Louisville, which is the largest city in Kentucky.

Effective January 27, 2012, RB&T acquired certain assets and assumed substantially all of the deposits and certain other liabilities of Tennessee Commerce Bank ("TCB"), headquartered in Franklin, Tennessee from the FDIC, as receiver for TCB. This acquisition represented a single banking center located in metropolitan Nashville and represented RB&T's initial entrance into the Tennessee market.

Effective September 7, 2012 RB&T acquired substantially all of the assets and assumed substantially all of the liabilities of First Commercial Bank ("FCB"), headquartered in Bloomington, Minnesota from the FDIC, as receiver for FCB. This acquisition represented a single banking center located in metropolitan Minneapolis and represented RB&T's initial entrance into the Minnesota market. See additional discussion regarding the TCB and FCB acquisitions under Footnote
2 "Acquisitions of Failed Banks" of Part I Item 1 "Financial Statements."

In June 2011, the Bank commenced business in its newly established warehouse lending division. Through this division, the Bank provides short-term, revolving credit facilities to mortgage bankers secured by single 1-4 family real estate loans. These advances enable the mortgage company customer to close single 1-4 family real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. These individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold to the secondary market investor. The Bank receives the sale proceeds of each loan directly from the investor and applies the funds to payoff the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage banking customer. As of September 30, 2012, the Bank had outstanding loans of $167 million and 11 committed lines totaling $251 million within its warehouse lending division.

As a result of the historically low interest rate environment over the last several years, the Bank has been challenged in its efforts to grow its residential real estate portfolio, as consumer demand shifted to 15 and 30 year fixed rate loan products that the Bank has historically sold into the secondary market. In addition to retaining a portion of longer-fixed rate loan originations, the Bank also created a fixed rate Home Equity Amortizing Loan ("HEAL") product during the second half of 2010 in an effort to grow its residential real estate portfolio. The HEAL product is a first mortgage or a junior lien mortgage product with amortization periods of 20 years or less. Features of the HEAL include $199 fixed closing costs; no requirement for the client to escrow insurance and property taxes; and as with the Bank's traditional ARM products, no requirement for private mortgage insurance. The overall features of the HEAL have made it an attractive alternative to long-term fixed rate secondary market products. As of September 30, 2012 and December 31, 2011, the Bank had $196 million and $58 million of HEALs outstanding.


Acquisitions of Failed Banks

The assets acquired and liabilities assumed in the 2012 acquisitions of failed banks are presented at estimated fair value on the respective acquisition date. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition, as additional information relative to the acquisition date fair values becomes available. More specifically, fair value adjustments for loans and other real estate owned may be made, as market value data, such as appraisals, are received by the Bank. Due to the compressed due diligence period of a FDIC-assisted acquisition, the measurement period analysis of information that may be reflective of conditions existing as of the acquisition date generally extends longer within the one year measurement period compared to non-assisted transactions. The difference is attributable to the fact that FDIC-assisted transactions are marketed for two to four weeks with on-site due diligence limited to two to three days while traditional non-assisted transactions generally have a three to six month due diligence and regulatory approval periods prior to the acquisition. In addition, the tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the respective acquisition dates.

During the third quarter of 2012, the Bank recorded a nominal recast of the TCB bargain purchase gain, representing a decrease totaling $189,000. Future recasts of the bargain purchase gain are possible up to one year from the date of the acquisition, however, management does not currently anticipate additional future adjustments to the TCB bargain purchase gain, as a significant amount of information is now available to management regarding the assets and liabilities in the acquisition and a significant amount of the assets acquired have been resolved in some manner.

Related to the FCB bargain purchase gain, management believes there will be future adjustments made to the bargain purchase gain that was originally recorded for the third quarter of 2012. Management also believes that it is possible that some of these adjustments could be significant. Unlike the TCB acquisition, which occurred 64 days before the end of the first quarter, the FCB acquisition occurred 23 days before the end of the third quarter. As with any acquisition of a failed bank from the FDIC, the Bank had a limited amount of time in its preliminary due diligence process to value the assets and liabilities that were part of the transaction. In addition, in the case of FCB, the Bank also had a significantly shorter timeframe between the acquisition date and the end of the quarter to make assessments and gather data about the future estimated cash flows of the assets acquired and liabilities assumed to more precisely determine a day-one bargain purchase gain. While management has made its best estimate related to the future cash flows of the FCB loans and deposits based on the information it had available at quarter-end, management believes more data will become available by the end of the fourth quarter of 2012, including updated appraisal information and face-to-face discussions with troubled borrowers to determine their willingness and ability to repay the loans purchased, which will allow the Bank to more precisely estimate its bargain purchase gain related to the FCB acquisition.

(II) Mortgage Banking segment

Mortgage Banking activities primarily include 15, 20 and 30 year fixed-term single family first lien residential rate real estate loans that are sold into the secondary market, primarily to FHLMC. The Bank typically retains servicing on 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 Bank records a MSR. MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs, which the Bank expects to receive on loans sold with servicing retained by the Bank. MSRs are capitalized as separate assets. 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 Bank. The carrying value of MSRs is initially amortized in proportion to and over the estimated period of net servicing income and subsequently adjusted quarterly based on the weighted average remaining life of the underlying loans. 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 is 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 increased anticipated prepayment speed assumptions within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs is expected to increase, as prepayment speed assumptions 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 8 "Mortgage Banking Activities" and Footnote 11 "Segment Information" of Part I Item 1 "Financial Statements."


(III) RPG segment

The RPG segment is comprised of three distinct divisions: Tax Refund Solutions ("TRS"), Republic Payment Solutions ("RPS") and Republic Credit Solutions ("RCS").

TRS division:

Republic, through its TRS division, is one of a limited number of financial institutions that facilitates the payment of federal and state tax refund products through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers. The TRS division's three primary tax-related products have historically included: Refund Transfers ("RTs") (formerly referred to as Electronic Refund Checks/Electronic Refund Deposits or ERCs/ERDs or ARs/ARDs) and Refund Anticipation Loans ("RALs"). Substantially all of the business generated by the TRS division occurs in the first quarter of the year. The TRS division traditionally operates at a loss during the second half of the year, during which time the division incurs costs preparing for the upcoming year's first quarter tax season.

During the nine months ended September 30, 2012 and 2011, net income from the TRS division accounted for approximately 56% and 78% of the Company's total net income. Net income associated with RALs represented approximately 35% and 34% of the TRS division's net income for the same respective periods. As discussed below, RB&T discontinued its offering of the RAL product effective April 30, 2012.

RTs are products whereby a tax refund is issued to the taxpayer after RB&T has received the refund from the federal or state government. There is no credit risk or borrowing cost for RB&T associated with these products because they are only delivered to the taxpayer upon receipt of the refund directly from the . . .

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