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RBCAA > SEC Filings for RBCAA > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for REPUBLIC BANCORP INC /KY/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for REPUBLIC BANCORP INC /KY/


9-May-2013

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"), 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.

Republic and its subsidiaries operate in a heavily regulated industry. These regulatory requirements can and do affect the Company's results of operations and financial condition.

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") included under Part 1 Item 1A "Risk Factors" of the Company 2012 Annual Report on Form 10-K.

Broadly speaking, forward-looking statements include:
? projections of revenue, income, expenses, 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; non-performing, classified, or impaired loans; and troubled debt restructurings ("TDR"s); ? 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; ? future credit losses and the overall adequacy of the allowance for loan losses;
? potential write-downs of other real estate owned ("OREO"); ? potential recast adjustments to acquisition day fair values ("day-one fair values");
? 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 impact of Company strategies to mitigate interest rate risk; ? future long-term interest rates and their impact on the demand for Mortgage Banking products and warehouse lines of credit; ? the future value of mortgage servicing rights; ? the future operating performance of the Tax Refund Solutions ("TRS") division;
? future Refund Transfers ("RTs") volume for TRS; ? the impact to net income resulting from the termination of material TRS contracts;
? future revenues associated with RTs at TRS; ? future financial performance of Republic Payment Solutions ("RPS");


? future financial performance of Republic Credit Solutions ("RCS"); ? potential impairment of investment securities; ? 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;
? 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; ? 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 but not limited to the acquisition of failed banks.

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 1 "Business" and Part I Item 1A "Risk Factors" of the Company's 2012 Annual Report on Form 10-K.


BUSINESS SEGMENT COMPOSITION

As of March 31, 2013, the Company was divided into three distinct business operating segments: Traditional Banking, Mortgage Banking and Republic Processing Group ("RPG"). During 2012, the Company realigned the previously reported 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 the newly formed RPG segment. The RPS and RCS divisions are considered immaterial for segment reporting. Net income, total assets and net interest margin by segment for the three months ended March 31, 2013 and 2012 are presented below:

                                   Three Months Ended March 31, 2013
                                                       Republic
                      Traditional      Mortgage       Processing         Total
(in thousands)          Banking         Banking         Group           Company

Net income            $      6,562     $   1,646     $      5,148     $    13,356
Segment assets           3,316,188        25,989           59,181       3,401,358
Net interest margin           3.60 %          NM               NM            3.55 %



                                   Three Months Ended March 31, 2012
                                                       Republic
                      Traditional      Mortgage       Processing         Total
(in thousands)          Banking         Banking         Group           Company

Net income            $     20,358     $     211     $     61,903     $    82,472
Segment assets           3,227,652        10,498          106,684       3,344,834
Net interest margin           3.58 %          NM               NM            7.76 %


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 March 31, 2013, in addition to an internet delivery channel, 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 Tampa, Florida - 4*

? Metropolitan Cincinnati, Ohio - 1*

? Metropolitan Nashville, Tennessee - 1

? Metropolitan Minneapolis, Minnesota - 1



* - Denotes a RB location

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

(II) Mortgage Banking segment

Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single family, first lien residential real estate loans that are sold into the secondary market, primarily to the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"). 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.

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) Republic Processing Group segment

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


OVERVIEW

Net income for the three months ended March 31, 2013 was $13.4 million, representing a decrease of $69.1 million, or 84%, compared to the same period in 2012. Diluted earnings per Class A Common Share decreased to $0.64 for the quarter ended March 31, 2013 compared to $3.92 for the same period in 2012.

Within the Company's Traditional Banking segment, comparability of net income for the first quarter of 2013 to the same period in 2012 was significantly impacted by a $27.9 million bargain purchase gain recorded during the first quarter of 2012 from the acquisition of Tennessee Commerce Bank ("TCB") in an FDIC-assisted transaction. There were no FDIC-assisted acquisitions during the quarter ended March 31, 2013. Management believes that opportunities for FDIC-assisted transactions that fit within the Company's strategic plan will likely decline in 2013 as compared to 2012. As a result of the anticipated decline in FDIC-assisted opportunities, management also believes that the pricing for the transactions that do become available will be less favorable as competition increases for these limited opportunities.

In the Company's RPG segment, net income for the first quarter of 2013 was $5.1 million, a decline of $56.8 million from the first quarter of 2012. RPG net income was significantly impacted by the previously disclosed elimination of the RAL product and the termination of material contracts with Liberty Tax Service ("Liberty") and Jackson Hewitt Tax Service ("JHI") during the third quarter of 2012. The RAL product, eliminated effective April 30, 2012, generated $45.0 million in revenues for the quarter ended March 31, 2012 and helped the Company maintain a competitive advantage related to RT revenues. With the elimination of RALs and the termination of the Liberty and JHI contracts during the third quarter of 2012, both the volume and the Company's share of the revenue for the RT product were reduced in 2013. RT revenues for the first quarter of 2013 were $12.0 million, a decrease of $59.7 million, or 83%, from the same period in 2012.

The TRS segment of RPG derives substantially all of its revenues during the first and second quarters of the year and historically operates at a net loss during the second half of the year, as the Company prepares for the upcoming tax season.

Other general highlights by segment for the quarter ended March 31, 2013 consisted of the following:

Traditional Banking segment

? Net income decreased $13.8 million for the first quarter of 2013 compared to the same period in 2012.

? Provision for loan losses was a credit of $26,000 for the quarter ended March 31, 2013 compared to a charge of $3.1 million for the same period in 2012.

? Net interest income increased $1.1 million, or 4%, for the first quarter of 2013 to $29.0 million. The Traditional Banking segment net interest margin increased two basis points for the quarter ended March 31, 2013 to 3.60%.

? Total non-interest income decreased $26.8 million for the first quarter of 2013 compared to the same period in 2012 primarily due to a pre-tax bargain purchase gain of $27.9 million recognized in the first quarter of 2012 when Republic acquired TCB in an FDIC-assisted transaction on January 27, 2012.

? Total non-interest expense decreased $1.9 million, or 7%, during the first quarter of 2013 compared to the first quarter of 2012.

? Total non-performing loans to total loans for the Traditional Banking segment was 0.80% at March 31, 2013, compared to 0.82% at December 31, 2012 and 0.98% at March 31, 2012.

? RB&T's Warehouse Lending portfolio had $173 million in loans outstanding at March 31, 2013 compared to $217 million at December 31, 2012 and $60 million at March 31, 2012.

? Gross loans declined by $52 million, or 2%, from December 31, 2012 to March 31, 2013.

? Deposits grew by $89 million, or 4%, from December 31, 2012 to March 31, 2013.


Mortgage Banking segment

? Within the Mortgage Banking segment, mortgage banking income increased $1.9 million or 142%, during the first quarter of 2013 compared to the same period in 2012.

? Mortgage banking income was positively impacted by an increase in secondary market loan volume during the first quarter of 2013 as the Bank initiated a $0 closing cost promotion. During the first quarter of 2013, Republic entered into rate lock agreements for clients with secondary market loan applications totaling $173 million compared to $97 million during the first quarter of 2012.

RPG segment

? The total dollar volume of tax refunds processed during the first quarter 2013 tax season decreased $6.8 million, or 68%, from the first quarter 2012 tax season.

? Total RT revenue declined $59.7 million, or 83%, during the first quarter of 2013 compared to the first quarter of 2012.

? Net income decreased $56.8 million, or 92%, for the first quarter of 2013 compared to the same period in 2012.

? RB&T permanently discontinued the offering of its RAL product effective April 30, 2012. Total RAL dollar volume was $795 million during the first quarter 2012 tax season. Total net interest income on the RAL product was $45.2 million during the first quarter 2012 tax season.

? RPG recorded a credit to the provision for loan losses of $599,000 for the first quarter of 2013, compared to an $8.0 million charge for the same period in 2012.

? Non-interest income was $12.5 million for the first quarter of 2013 compared to $71.9 million for the same period in 2012.

? Non-interest expense was $5.3 million for the first quarter of 2013 compared to $13.0 million for the same period in 2012.

? Liberty and JHI unilaterally terminated their contracts with RPG's TRS division during the third quarter of 2012 and as a result, Republic processed no business during the first quarter of 2013 from either of these service providers.

RESULTS OF OPERATIONS

Net Interest Income

Banking operations are significantly dependent upon 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, securities sold under agreements to repurchase and FHLB advances. 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.

Total Company net interest income decreased $44.1 million, or 60%, for the first quarter of 2013 compared to the same period in 2012. The total Company net interest margin decreased from 7.76% during the first quarter of 2012 to 3.55% for the first quarter of 2013. The primary driver of the decrease in the total Company net interest margin was the discontinuation of the RAL product effective April 30, 2012. The most significant components affecting the total Company's net interest income by business segment were as follows:


Traditional Banking segment

Net interest income within the Traditional Banking segment increased $1.1 million, or 4%, for the quarter ended March 31, 2013 compared to the same period in 2012. The Traditional Banking net interest margin increased two basis points for the same period to 3.60%. The increase in net interest income during 2013 was directly attributable to an increase in the average balance of loans outstanding. Three distinguishable drivers occurring in the past 15 months that positively impacted the size of the loan portfolio as compared to the first quarter of 2012 and correspondingly provided a positive impact to net interest income. The increase in net interest income from these three drivers was partially offset by continued margin compression of the Traditional Bank's assets and liabilities from its banking center footprint that existed prior to its 2012 acquisitions of failed banks. The three diving factors for the Traditional Bank's increase in net interest income were as follows:

First, as discussed in more detail within the "Loan Portfolio" section of this filing, the Bank began offering its Mortgage Warehouse Lending product during June of 2011. During the quarter ended March 31, 2013, the Mortgage Warehouse Lending portfolio had average loans outstanding of $148 million achieving an average yield of 4.60% as compared to average loans outstanding of $40 million with a weighted average yield of 4.26% during the first quarter of 2012. These loans are revolving lines of credit with a term of 364 days, contain interest rate floors and adjust monthly with 30 day LIBOR.

The second driver occurred on January 27, 2012 when RB&T acquired TCB. As part of the acquisition, RB&T acquired loans, net of loans put back to the FDIC, with a fair value of approximately $57 million and an initial projected effective yield of 7.94%. At March 31, 2013 TCB loans with a carrying value of $28 million were still outstanding. RB&T recorded net interest income from its acquired TCB assets and assumed liabilities of $1.5 million during the first quarter of 2013 compared to $1.1 million during the first quarter of 2012. See additional discussion regarding the 2012 acquisitions of failed banks under Footnote 2 "2012 Acquisitions of Failed Banks" of Part I Item I "Financial Statements."

Lastly, the third driver occurred on September 7, 2012 when RB&T acquired FCB. As part of the FCB acquisition, the Bank acquired loans with a fair value of approximately $128 million and an initial projected effective yield of 7.36%. At March 31 31, 2013 FCB loans with a carrying value of $95 million were still outstanding. RB&T recorded net interest income from its acquired FCB assets and assumed liabilities of $1.7 million during the first quarter of 2013 compared to no such income during the first quarter of 2012, as the acquisition took place during the third quarter of 2012. See additional discussion regarding the 2012 acquisitions of failed banks under Footnote 2 "2012 Acquisitions of Failed Banks" of Part I Item 1 "Financial Statements."

Management expects to continue to experience downward repricing in its loan and investment portfolios resulting from on-going paydowns and early payoffs. This downward repricing will continue to cause compression in Republic's net interest income and net interest margin. Additionally, because the FFTR (the index which many of the Bank's short-term deposit rates track) has remained at a target range between 0.00% and 0.25%, no future FFTR decreases from the Federal Open Markets Committee of the FRB are possible, exacerbating the compression to the Bank's net interest income and net interest margin caused by its repricing loans and investments. The Bank is unable to precisely determine the ultimate negative impact to the Bank'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.

Republic Processing Group segment

Net interest income within the RPG segment decreased $45 million for the first quarter of 2013 compared to the same period in 2012. As discussed throughout, the decrease in net interest income at RPG was the result of the Company's discontinuation of the RAL product effective April 30, 2012.


Table 1 - Total Company Average Balance Sheets and Interest Rates for the Three
Months Ended March 31, 2013 and 2012

                                      Three Months Ended March 31, 2013                      Three Months Ended March 31, 2012
                                  Average                                               Average
(dollars in thousands)            Balance           Interest       Average Rate         Balance           Interest       Average Rate

ASSETS

Interest-earning assets:
Taxable investment
securities, including FHLB
stock(1)                      $       509,006       $   2,359               1.85 %   $      690,328       $   3,868               2.24 %
Federal funds sold and
other interest-earning
deposits                              186,237             128               0.27 %          645,863             427               0.26 %
Refund Anticipation Loan
fees(2)(4)                                  -               -               0.00 %           96,303          45,080             187.24 %
Traditional Bank loans and
fees(2)(3)                          2,582,932          31,914               4.94 %        2,343,028          30,212               5.16 %

Total interest-earning
assets                              3,278,175          34,401               4.20 %        3,775,522          79,587               8.43 %

Less: Allowance for loan
losses                                 23,851                                                31,075

Non interest-earning
assets:
Non interest-earning cash
and cash equivalents                  109,903                                               337,068
Premises and equipment, net            33,507                                                34,567
Other assets(1)                        51,947                                                37,174
Total assets                  $     3,449,681                                        $    4,153,256

LIABILITIES AND
STOCKHOLDERS' EQUITY

Interest-bearing
liabilities:
Transaction accounts          $       652,151       $     112               0.07 %   $      602,795       $     116               0.08 %
Money market accounts                 528,964             168               0.13 %          447,132             175               0.16 %
Time deposits                         204,191             392               0.77 %          330,290             720               0.87 %
Brokered money market and
brokered CD's                         126,600             383               1.21 %          289,950             528               0.73 %

Total deposits                      1,511,906           1,055               0.28 %        1,670,167           1,539               0.37 %

Securities sold under
agreements to repurchase
and
  other short-term
borrowings                            202,924              29               0.06 %          271,322             112               0.17 %
Federal Home Loan Bank
advances                              552,080           3,558               2.58 %          681,518           4,086               2.40 %
Subordinated note                      41,240             629               6.10 %           41,240             630               6.11 %

Total interest-bearing
liabilities                         2,308,150           5,271               0.91 %        2,664,247           6,367               0.96 %

Non interest-bearing
liabilities and
Stockholders' equity
Non interest-bearing
deposits                              570,619                                               922,628
Other liabilities                      27,406                                                54,687
Stockholders' equity                  543,506                                               511,694
Total liabilities and
stockholders' equity          $     3,449,681                                        $    4,153,256

Net interest income                                 $  29,130                                             $  73,220

Net interest spread                                                         3.29 %                                                7.47 %
. . .
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