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RBCAA > SEC Filings for RBCAA > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for REPUBLIC BANCORP INC /KY/



Annual Report

Item 7. 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 II Item 8 "Financial Statements and Supplementary Data."

On January 27, 2014, RB&T filed an application with the Federal Deposit Insurance Corporation ("FDIC") and the Kentucky Department of Financial Institutions ("KDFI") to merge RB&T and RB, with RB&T, a Kentucky-based, state chartered non-member institution, being the resulting institution and continuing to operate under the name Republic Bank & Trust Company.

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") included under Part 1 Item 1A "Risk Factors."

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

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 provisions for loan losses;

future credit quality, 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 income, net interest spread, net income, liquidity and

          the future impact of Company strategies to mitigate interest rate

          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 ("MSR"s);

          the future financial performance of the Tax Refund Solutions ("TRS")
division of Republic Processing Group ("RPG);

          future Refund Transfer ("RT") volume for TRS;

          the future net revenues associated with RTs at TRS;

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

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

          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 but not limited to 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 future business acquisitions, in general, and the two FDIC-assisted acquisitions 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."


Republic's consolidated financial statements and accompanying footnotes have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). 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, accounting and regulatory guidance 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 GAAP. 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.

Republic believes its critical accounting policies and estimates relate to:

          Allowance and Provision for Loan Losses

          Acquisition Accounting

          Goodwill and Other Intangible Assets

          Mortgage Servicing Rights

          Income Tax Accounting

          Investment Securities


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Allowance and Provision for Loan Losses - The Bank maintains an allowance for probable incurred credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit Committee and the Board of Directors on a quarterly basis.

The Allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component is based on historical loss experience adjusted for qualitative factors.

A Bank-originated loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. A Purchased Credit Impaired ("PCI") loan is considered impaired when, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management's initial estimate. Loans that meet the following classifications are considered impaired:

             All loans internally rated as "Substandard," "Doubtful" or "Loss;"

             All loans internally rated in a PCI category with cash flows that
have deteriorated from management's initial estimate;

             All loans on non-accrual status and non-PCI loans past due 90
days-or-more still on accrual;

             All retail and commercial TDRs; and

             Any other situation where the full collection of the total amount
due for a loan is improbable or otherwise meets the definition of impaired.

The Bank's classified and special mention loans are generally commercial and industrial ("C&I") and commercial real estate ("CRE") loans but also include large single family residential and home equity loans, as well as TDRs, whether retail or commercial in nature. The Bank reviews and monitors these loans on a regular basis. Generally, loans are designated as classified or special mention to ensure more frequent monitoring. These loans are reviewed to ensure proper earning status and management strategy. If it is determined that there is serious doubt as to performance in accordance with original or modified contractual terms, then the loan is generally downgraded and often placed on non-accrual status.

GAAP recognizes three methods to measure specific loan impairment, including:

Cash Flow Method - The recorded investment in the loan is measured against the present value of expected future cash flows discounted at the loan's effective interest rate. The Bank employs this method for a significant portion of its impaired TDRs. Impairment amounts under this method are reflected in the Bank's Allowance as specific reserves on the respective impaired loan. These specific reserves are adjusted quarterly based upon reevaluation of the loan's expected future cash flows and changes in the recorded investment in such loans.

Collateral Method - The recorded investment in the loan is measured against the fair value of the loan's collateral value less applicable selling costs. The Bank employs the fair value of collateral method for its impaired loans when the loan's repayment is based solely on the sale of or the operations of the underlying collateral. Collateral fair value is typically based on the most recent real estate appraisal on file. Measured impairment under this method is classified loss and charged off. The Bank's selling costs for its collateral dependent loans typically range from 10-13% of the fair value of the underlying collateral, depending on the loan class. Selling costs are not applicable for collateral dependent loans whose repayment is based solely on the operations of the underlying collateral.

Market Value Method - The recorded investment in the loan is measured against the loan's obtainable market value. The Bank does not currently employ this technique, as it is typically found impractical.

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In addition to obtaining appraisals at the time of loan origination, the Bank typically updates appraisals and/or broker price opinions for loans with potential impairment. Updated valuations for commercial related loans exhibiting an increased risk of loss are typically obtained within one year of the last appraisal. Collateral values for past due residential mortgage loans and home equity loans are generally updated prior to a loan becoming 90 days delinquent, but no more than 180 days past due. When determining the amount of reserve, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons, the Bank discounts the valuation of the collateral primarily based on the age of the appraisal and the real estate market conditions of the location of the underlying collateral.

The general component of the Allowance covers loans collectively evaluated for impairment and is based on historical loss experience with potential adjustments for current relevant qualitative factors. The historical loss experience is determined by loan performance and class and is based on the actual loss history experienced by the Bank. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are included in the general component unless the loans are classified as TDRs.

In determining the historical loss rates for each respective loan class, management evaluates the following historical loss rate scenarios:

          Rolling four quarter average

          Rolling eight quarter average

          Rolling twelve quarter average

          Rolling sixteen quarter average

          Rolling twenty quarter average

          Current year to date historical loss factor average

          Peer group loss factors

For the Bank's current Allowance methodology, management uses the higher of the rolling eight, twelve, or sixteen quarter averages for each loan class when determining its historical loss factors for its "Pass" rated and nonrated loans.

Loan classes are also evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those classes. Management assigns risk multiples to certain classes to account for qualitative factors such as:

          Changes in nature, volume and seasoning of the loan portfolio;

          Changes in experience, ability, and depth of lending management and
other relevant staff;

          Changes in the quality of the Bank's loan review program;

    Changes in lending policies and procedures, including changes in

underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

Changes in the volume and severity of past due, nonaccrual and classified loans;

Changes in the value of underlying collateral for collateral-dependent loans;

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the loan portfolio, including the condition of various market segments;

The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

The effect of other external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the Bank's existing portfolio.

As this analysis, or any similar analysis, is an imprecise measure of loss, the Allowance is subject to ongoing adjustments. Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.

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Prior to January 1, 2012, the Bank's Allowance calculation was supported with qualitative factors which included a nominal "unallocated" Allowance component totaling $2.0 million as of December 31, 2011. The Bank believed that historically the "unallocated" allowance properly reflected estimated credit losses determined in accordance with GAAP. The unallocated allowance was primarily related to RB&T's loan portfolio, which is highly concentrated in the Kentucky and Southern Indiana real estate markets. These markets have remained relatively stable during the recent economic downturn, as compared to other parts of the U.S. With the Bank's 2012 expansion, its plans to pursue future acquisitions into potentially new markets through FDIC-assisted transactions, and its offering of new loan products, such as mortgage warehouse lines of credit, the Bank revised its methodology to provide a more detailed calculation when estimating the impact of qualitative factors over the Bank's various loan categories. This methodology change did not have a material impact on the Bank's provision for loan losses for the year ended December 31, 2012.

In executing this methodology change, the Bank primarily focused on large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and are generally not included in the scope of Accounting Standards Codification ("ASC") Topic 310-10-35, Accounting by Creditors for Impairment of a Loan.

The Bank performs two calculations at year end in order to confirm the reasonableness of its Allowance. In the first calculation, the Bank compares its beginning Allowance to the net charge offs for the most recent calendar year. The ratio of net charge offs to the beginning allowance indicates how adequately the allowance accommodated subsequent charge offs. Higher ratios suggest the beginning of year allowance may not have been large enough to absorb impending charge offs, while inordinately low ratios might indicate a bank was accumulating excessive allowances. The Bank's net charge off ratio to the beginning Allowance was 19% at December 31, 2013, compared to 35% for December 31, 2012. The Bank's five year annual average for this ratio was 36% as of December 31, 2013.

For the second calculation, the Bank assesses the Allowance exhaustion rate. Exhaustion rates indicate the time (expressed in years) taken to use the beginning of year Allowance in the form of actual charge offs. The Bank believes an exhaustion rate that indicates a reasonable Allowance is between two and four years. The Bank's allowance exhaustion rate at December 31, 2013 and 2012 was 3.0 years and 2.8 years compared to the five year annual average of 2.5 years.

Based on management's calculation, an Allowance of $23 million, or 0.89%, of total loans was an adequate estimate of probable incurred losses within the loan portfolio as of December 31, 2013 compared to $24 million, or 0.90%, at December 31, 2012. This estimate resulted in Traditional Bank provision for loan losses of $3.8 million during 2013 compared to $8.2 million in 2012. If the mix and amount of future charge off percentages differ significantly from those assumptions used by management in making its determination, an adjustment to the Allowance and the resulting effect on the income statement could be material.

The Bank did not carryover any Allowance for loans acquired in its 2012 FDIC-assisted acquisitions. Such loans were recorded at fair value as of the acquisition date, and subsequent to the acquisition date receive allowance allocations based on circumstances and events that occur after the date of acquisition as further discussed below under "Acquisition Accounting" in this section of the filing.

Acquisition Accounting - The Bank accounts for its acquisitions in accordance with the acquisition method as outlined in ASC Topic 805, Business Combinations. The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any noncontrolling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.

Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in acquirees are generally recognized at their acquisition date ("day-one") fair values based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, these recast adjustments for loans and other real estate owned may be made, as market value data, such as appraisals, are received by the bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.

Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.

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Loans purchased in an acquisition are accounted for using one of the following accounting standards:

ASC Topic 310-20, Non Refundable Fees and Other Costs, is used to value loans that have not demonstrated post origination credit quality deterioration and the acquirer expects to collect all contractually required payments from the borrower. For these loans, the difference between the loan's day-one fair value and amortized cost would be amortized or accreted into income using the interest method.

ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, is used to value loans with post origination credit quality deterioration. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial investment in the loan, or fair value, represent the "accretable yield," which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans.

Purchased Loans (ASC Topic 310-20) - Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank's standard practices and procedures. In addition, these loans are considered in the determination of the Allowance once day-one fair values are final.

Purchased Credit Impaired Loans (ASC Topic 310-30) - In determining the day-one fair values of PCI loans, management considers a number of factors including, among other things, the estimated remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods and net present value of cash flows expected to be received. For the Company's 2012 FDIC-assisted acquisitions, RB&T elected to account for PCI loans individually, as opposed to aggregating the loans into pools based on common risk characteristics such as loan type.

Management separately monitors the PCI portfolio and on a quarterly basis reviews the loans contained within this portfolio against the factors and assumptions used in determining the day-one fair values. In addition to its quarterly evaluation, a loan is typically reviewed when it is modified or extended, or when material information becomes available to the Bank that provides additional insight regarding the loan's performance, estimated life, the status of the borrower, or the quality or value of the underlying collateral.

To the extent that a PCI loan's performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified in the Purchased Credit Impaired - Group 1 ("PCI-1") category; whose credit risk is considered equivalent to a non-PCI "Special Mention" loan within the Bank's credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management's initial estimate. Provisions for loan losses are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management's initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

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