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RBCAA > SEC Filings for RBCAA > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for REPUBLIC BANCORP INC /KY/

Form 10-Q for REPUBLIC BANCORP INC /KY/


7-Nov-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") and Republic Bank ("RB"), (collectively referred together as the "Bank"). Republic Invest Co., a former subsidiary of RB&T, and its subsidiary, Republic Capital LLC, were dissolved in April 2013 in connection with the full repayment by RB&T of intragroup subordinated debentures issued by Republic Capital LLC in a 2004 intragroup trust preferred transaction. 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 ("Allowance");

        potential write-downs of other real estate owned ("OREO");

        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 ("RT"s) volume for TRS;

        the future net revenues associated with RTs at TRS;

        the future financial performance of Republic Payment Solutions ("RPS");

        the future financial performance of Republic Credit Solutions ("RCS");

        the potential impairment of investment securities;


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the extent to which regulations written and implemented by the Federal Bureau of Consumer Financial Protection ("CFPB"), 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 Basel III capital reforms; 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 strategic plans,

including but not limited to those related to the acquisition of two failed banks in 2012.

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 and under Part II Item 1A "Risk Factors" of the Company's June 30, 2013 Quarterly Report on Form 10-Q.


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RECENT DEVELOPMENTS

H&R Block & H&R Block Bank

RB&T entered into a Purchase and Assumption Agreement (the "Agreement") dated July 11, 2013, with H&R Block Bank ("HRBB") and its sole shareholder Block Financial LLC (collectively, "H&R Block"). Pursuant to the Agreement, RB&T was to acquire certain assets and assume certain liabilities, including all of the deposits of HRBB (the "P&A Transaction").

On July 15, 2013, RB&T submitted an application for approval of the P&A Transaction to the Office of the Comptroller of the Currency ("OCC") for consideration in conjunction with RB&T's pending application from May 2013 for approval of an internal merger of RB&T and its affiliate, RB, which would include RB&T's conversion to a national bank.

On October 8, 2013, RB&T notified Block that RB&T was withdrawing its pending applications with the OCC to merge and consolidate its RB&T and RB charters into one national bank charter and to consummate the P&A Transaction. As a result, H&R Block terminated the Agreement with RB&T and the parties terminated discussions regarding the Joint Marketing Master Services Agreement and related Receivables Participation Agreement.

Minnesota Banking Center

In October 2013, Republic gave the required 90-day regulatory notice of its intentions to close its sole banking center location in Minneapolis, Minnesota, which it acquired as part of the First Commercial Bank ("FCB") acquisition in September 2012. The Bank is currently under a lease for this location which is set to expire in April 2015. The Bank intends to repurpose the location as a support office until the expiration of its lease or until such time that it is able to negotiate with the landlord a buy-out of its future lease obligations. The banking center is expected to stop transacting business at the Minnesota location with deposit customers in January 2014.

Florida Banking Center

In October 2013, Republic gave the required 90-day regulatory notice of its intentions to close its sole banking center in Palm Harbor, Florida. This location is expected to close in January 2014 with the lease for the premises expiring in February 2014.

Consumer Mortgage Regulation

On January 10, 2013, the CFPB issued a final rule implementing the ability to repay ("ATR") requirement in the Dodd-Frank Act. The rule, among other things, requires lenders to consider a consumer's ability to repay a mortgage loan before extending credit to the consumer and limits prepayment penalties. The rule also establishes certain protections from liability for mortgage lenders with regard to qualified mortgage loans ("QML"s) they originate. For this purpose, the rule defines QMLs to include loans with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") while they operate under Federal conservatorship or receivership, and loans eligible for insurance or guarantee by the Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture. Additionally, QMLs may not: (i) contain excess upfront points and fees; (ii) have a term greater than 30 years; or (iii) include interest-only or negative amortization payments. The rule is effective January 10, 2014, and the Company is currently evaluating its full impact on the Bank's mortgage operations.

On January 17, 2013, the CFPB issued a series of final rules as part of an ongoing effort to address mortgage servicing reforms and create uniform standards for the mortgage servicing industry. The rules increase requirements for communications with borrowers, address requirements around the maintenance of customer account records, govern procedural requirements for responding to written borrower requests and complaints of errors, and provide guidance around servicing of delinquent loans, foreclosure proceedings and loss mitigation efforts, among other measures. These rules will also be effective January 10, 2014 and will likely lead to increased costs to service loans across the mortgage industry. The Company is continuing to evaluate these rules and their impact on the Bank's mortgage operations.


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BUSINESS SEGMENT COMPOSITION

As of September 30, 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 RPG segment. Along with the TRS division, Republic Payment Solutions ("RPS") and Republic Credit Solutions ("RCS") 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 and nine months ended September 30, 2013 and 2012 are presented below:

                                 Three Months Ended September 30, 2013
                                                     Republic
                      Traditional     Mortgage      Processing
(in thousands)          Banking        Banking        Group        Total Company

Net income            $      6,283    $     265    $     (1,945 ) $         4,603
Segment assets*          3,305,689       15,697          10,495         3,331,881
Net interest margin           3.54 %         NM              NM              3.54 %




                                 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 %




                                 Nine Months Ended September 30, 2013
                                                     Republic
                      Traditional      Mortgage     Processing
(in thousands)          Banking        Banking        Group        Total Company

Net income            $     18,855    $    2,882   $      2,341   $        24,078
Segment assets*          3,305,689        15,697         10,495         3,331,881
Net interest margin           3.57 %          NM             NM              3.55 %




                                 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 %



* - Segment assets are report as of the end of the period.

NM - Not Meaningful

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

Part I Item 1 "Financial Statements."


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(I) Traditional Banking segment

As of September 30, 2013, in addition to an Internet delivery channel, Republic had 45 full-service banking centers with locations as follows:

          Kentucky - 34

          Metropolitan Louisville - 20

          Central Kentucky - 11

          Elizabethtown - 1

          Frankfort - 1

          Georgetown - 1

          Lexington - 5

          Owensboro - 2

          Shelbyville - 1

          Northern Kentucky - 3

          Covington - 1

          Florence - 1

          Independence - 1

          Southern Indiana - 3

          Floyds Knobs - 1

          Jeffersonville - 1

          New Albany - 1

          Metropolitan Tampa, Florida - 4

          Metropolitan Cincinnati, Ohio - 1

          Metropolitan Nashville, Tennessee - 2

          Metropolitan Minneapolis, Minnesota - 1

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

(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.

Traditional Banking and Mortgage Banking are collectively referred to as ("Core Banking").

(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. Through RB, the RPS division is an issuing bank offering general purpose reloadable prepaid debit cards through third party program managers. Through RB&T, the RCS division is piloting short-term consumer credit products.

OVERVIEW (Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012)

Net income for the three months ended September 30, 2013 was $4.6 million, representing a decrease of $16.1 million, or 78%, compared to the same period in 2012. Diluted earnings per Class A Common Share decreased to $0.22 for the quarter ended September 30, 2013 compared to $0.98 for the same period in 2012. The decrease is primarily the result of a $27.1 million pre-tax bargain purchase gain the Company recorded during the third quarter of 2012 related to the FDIC-assisted acquisition of specific assets and substantially all of the liabilities of First Commercial Bank ("FCB"), in Bloomington, Minnesota.

For additional discussion of period to period comparability related to the 2012 FDIC-assisted acquisitions of failed banks, see the Overview for the nine months ended September 30, 2013 compared to September 30, 2012 in this section of the filing.


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General highlights by segment for the quarter ended September 30, 2013 consisted of the following:

Traditional Banking segment

Net income decreased $14.7 million, or 70%, for the third quarter of 2013 compared to the same period in 2012 primarily due to the previously mentioned $27.1 million pre-tax bargain purchase gain in the third quarter of 2012 for an FDIC-assisted acquisition of a failed bank.

Net interest income decreased $54,000, or less than 1%, for the third quarter of 2013 to $28.4 million. The Traditional Banking segment net interest margin was unchanged at 3.54% for the third quarter of 2013.

Provision for loan losses was $2.3 million for the third quarter of 2013 compared to $2.5 million for the same period in 2012.

Total non-interest income decreased $26.1 million, or 81%, for the third quarter of 2013 compared to the same period in 2012, reflecting the effects of the aforementioned 2012 bargain purchase gain.

Total non-interest expenses decreased $3.9 million, or 15%, during the third quarter of 2013 compared to the third quarter of 2012.

Total non-performing loans to total loans for the Traditional Banking segment was 0.79% at September 30, 2013, compared to 0.82% at December 31, 2012 and 0.80% at September 30, 2012.

Total delinquent loans to total loans for the Traditional Banking segment was 0.59% at September 30, 2013, compared to 0.79% at December 31, 2012 and 0.68% at September 30, 2012.

Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income decreased $1.2 million, or 55%, during the third quarter of 2013 compared to the same period in 2012.

While long-term interest rates at September 30, 2013 were relatively low as compared to historical levels, significant increases in these rates during the latter part of the second quarter of 2013 negatively impacted third quarter loan application volume, with mortgage refinancing activity primarily impacted. This rise in interest rates is expected to continue to negatively impact future loan application volume during the remainder of 2013 and beyond.

Republic Processing Group segment

Net loss increased $662,000, or 52%, for the third quarter of 2013 compared to the same period in 2012.

With RB&T's resolution of its differences with the FDIC through a Stipulation Agreement and Consent Order (collectively, the "FDIC Agreement"), RB&T discontinued RALs effective April 30, 2012. Without the ability to originate RALs, RB&T continues to face increased competition in the RT marketplace.

Due to recoveries of prior period RAL losses, RPG recorded a credit to the provision for loan losses of $57,000 for the third quarter of 2013, compared to a net credit of $460,000 for the same period in 2012.

Non-interest income was $251,000 for the third quarter of 2013 compared to $250,000 for the same period in 2012.

Non-interest expenses were $3.3 million for the third quarter of 2013 compared to $2.8 million for the same period in 2012.


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RESULTS OF OPERATIONS (Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012)

Net Interest Income

Banking results of 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 Federal Home Loan Bank ("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 $33,000, or less than 1%, for the third quarter of 2013 compared to the same period in 2012. The total Company net interest margin remained at 3.54% from period to period. 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 decreased $54,000, or less than 1%, for the quarter ended September 30, 2013 compared to the same period in 2012. The Traditional Banking net interest margin was 3.54% for both the third quarter of 2012 and 2013. The net interest margin during 2013 was significantly and positively impacted by the following factors:

The Bank accreted $551,000 to interest income on loans during the third quarter of 2013 from discounts on its acquired TCB portfolio compared to $87,000 for the same period in 2012.

The Bank accreted $1.5 million to interest income on loans during the third quarter of 2013 from discounts on its acquired FCB portfolio compared to no similar accretion for the same period in 2012 as the acquisition occurred near the end of the third quarter of 2012.

The total discount accretion of $2.0 million during the third quarter of 2013 resulting from the TCB and FCB acquisitions positively impacted the Company's third quarter net interest margin by 25 basis points, while the overall operations of the acquisitions contributed $3.4 million in net interest income and added 30 basis points to the net interest margin. Management projects accretion of loan discounts related to the 2012 FDIC-assisted acquisitions to be approximately $600,000 for the remainder of 2013. The accretion estimate for the remainder of 2013 could be positively impacted by positive workout arrangements in which RB&T receives final loan payoffs for amounts greater than the carrying values of the loans being paid off.

The Traditional Banking segment continues to experience downward repricing in its loan and investment portfolios resulting from ongoing paydowns and early payoffs. As expected, the yield in both the loan and investment portfolios of the Bank declined from the third quarter of 2012 to the third quarter of 2013. The impact of this downward repricing to the Traditional Bank's net interest income during the third quarter of 2013 more than offset the positive benefit in net interest income that resulted from the accretion of discounts for the Bank's FDIC-assisted acquisitions in Tennessee and Minnesota.

While the overall yield for each of the earning asset classes declined from the third quarter of 2013 compared to the third quarter of 2012, the percentage of average loans to average interest-earning assets increased during those same periods (80% vs. 78%) thereby aiding the Traditional Bank in its ability to maintain its overall yield on interest-earning assets and its related net interest margin.


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The downward repricing of interest-earning assets is expected to continue to cause compression in Republic's net interest income and net interest margin in the future. Additionally, because the Federal Funds Target Rate ("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 Market Committee of the Federal Reserve System ("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 determine the ultimate negative impact to the Bank's net interest spread and margin in the future because several factors remain unknown, such as future demand for its 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 the table titled "Traditional Banking Interest Rate Sensitivity for 2013" in this section of the filing.


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Table 1 provides detailed total Company information as to average balances, interest income/expense and rates by major balance sheet category for the three months ended September 30, 2013 and 2012.

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