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RBCAA > SEC Filings for RBCAA > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for REPUBLIC BANCORP INC /KY/

Form 10-Q for REPUBLIC BANCORP INC /KY/


9-May-2014

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 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."

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. The Company expects the merger to be effective in May 2014.

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" of the Company's 2013 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 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, capital and economic value of equity ("EVE");

          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, warehouse lines of credit and correspondent lending;

          the future value of mortgage servicing rights ("MSR"s);

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

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

          the future net revenue 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 Bank's 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" of the Company's 2013 Annual Report on Form 10-K.


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BUSINESS SEGMENT COMPOSITION

As of March 31, 2014, the Company was divided into three distinct business operating segments: Traditional Banking, Mortgage Banking and Republic Processing Group ("RPG"). Along with the Tax Refund Solutions ("TRS") division, Republic Payment Solutions ("RPS") and Republic Credit Solutions ("RCS") also operate as divisions of the 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, 2014 and 2013 are presented below:

                                   Three Months Ended March 31, 2014
                                                     Republic
                       Traditional     Mortgage     Processing
(in thousands)           Banking        Banking       Group        Total Company

Net income            $       5,781    $    (393 ) $      6,596   $        11,984
Segment assets            3,441,183        8,062         57,927         3,507,172
Net interest margin            3.29 %         NM             NM              3.24 %




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

Segment assets are reported as of the respective period ends while income and margin data are reported for the respective periods.

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 March 31, 2014, in addition to an Internet delivery channel, Republic had 42 full-service banking centers with locations as follows:

          Kentucky - 33

          Metropolitan Louisville - 20

          Central Kentucky - 8

          Elizabethtown - 1

          Frankfort - 1

          Georgetown - 1

          Lexington - 4

          Shelbyville - 1

          Western Kentucky - 2

          Owensboro - 2

          Northern Kentucky - 3

          Covington - 1

          Florence - 1

          Independence - 1

          Southern Indiana - 3

          Floyds Knobs - 1

          Jeffersonville - 1

          New Albany - 1

          Metropolitan Tampa, Florida - 3

          Metropolitan Cincinnati, Ohio - 1

          Metropolitan Nashville, Tennessee - 2

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

(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 7 "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 the 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 and RB, the RCS division is piloting short-term consumer credit products.


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OVERVIEW

Net income for the three months ended March 31, 2014 was $12.0 million, representing a decrease of $1.4 million, or 10%, compared to the same period in 2013. Diluted earnings per Class A Common Share decreased to $0.58 for the quarter ended March 31, 2014 compared to $0.64 for the same period in 2013.

Within the Company's Traditional Banking segment, net income for the first quarter of 2014 decreased $781,000 from the same period in 2013 primarily due to compression within its net interest income.

The Company's Mortgage Banking segment reflected a net loss of $393,000 for the first quarter of 2014 compared to net income of $1.6 million from the same period in 2013 primarily due to lower demand for mortgage products after a sharp rise in long-term interest rates, which began in May 2013.

RPG's first quarter 2014 net income increased $1.4 million, or 28%, over the same period in 2013. The higher profitability was primarily driven by the TRS division, which experienced a 77% increase in the dollar volume of tax refunds processed. This increase was driven by a rise in self-prepared, on-line product volume in combination with growth in retail store-front traffic, a direct result of new contracts between the Company and third party tax preparation companies.

The TRS division of the RPG segment derives substantially all of its revenue 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, 2014 consisted of the following:

Traditional Banking segment

Net income decreased $781,000, or 12%, for the first quarter of 2014 compared to the same period in 2013.

Provision for loan losses was a net credit of $240,000 for the quarter ended March 31, 2014 compared to a net credit of $26,000 for the same period in 2013.

Net interest income decreased $1.8 million, or 6%, for the first quarter of 2014 to $27.1 million. The Traditional Banking segment net interest margin decreased 31 basis points for the quarter ended March 31, 2014 to 3.29%.

Total non-interest income decreased $902,000, or 13%, for the first quarter of 2014 compared to the same period in 2013 primarily due to a positive $1.3 million adjustment to the bargain purchase gain line item related to the Bank's September 2012 First Commercial Bank ("FCB") transaction.

Total non-interest expense decreased $575,000, or 2%, during the first quarter of 2014 compared to the first quarter of 2013.

Total non-performing loans to total loans for the Traditional Banking segment was 0.93% at March 31, 2014, compared to 0.81% at December 31, 2013 and 0.80% at March 31, 2013.

RB&T's Warehouse Lending portfolio had $136 million in loans outstanding at March 31, 2014 compared to $150 million at December 31, 2013 and $173 million at March 31, 2013.

Gross Traditional Bank loans decreased by $14 million, or 1%, from December 31, 2013 to March 31, 2014.

Traditional Bank deposits grew by $45 million, or 2%, from December 31, 2013 to March 31, 2014.

Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income decreased $2.8 million, or 85%, during the first quarter of 2014 compared to the same period in 2013.

Overall, Republic's proceeds from the sale of secondary market loans totaled $16 million during the first quarter of 2014 compared to $78 million during the same period in 2013. The first quarter of 2013 volume significantly benefited from favorable long-term interest rates. Increases in long-term interest rates, which began during May 2013, continue to negatively impact demand for mortgage refinances in particular, with this impact expected to continue through 2014.


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Republic Processing Group segment

Net income increased $1.4 million, or 28%, for the first quarter of 2014 compared to the same period in 2013.

The total dollar volume of tax refunds processed during the first quarter 2014 tax season increased $2.9 billion, or 77%, from the first quarter 2013 tax season due primarily to a rise in self-prepared, on-line product volume in combination with growth in retail store-front traffic, a direct result of new contracts between the Company and third party tax preparation companies.

Net RT revenue increased $2.4 million, or 20%, during the first quarter of 2014 compared to the first quarter of 2013.

While RB&T permanently discontinued the offering of its Refund Anticipation Loan ("RAL") product effective April 30, 2012, the Bank still records recoveries on RAL loans charged-off in prior periods. RPG recorded a credit to the provision for loan losses of $463,000 for the first quarter of 2014, compared to a $599,000 credit for the same period in 2013.

Non-interest income was $15.1 million for the first quarter of 2014 compared to $12.5 million for the same period in 2013.

Non-interest expenses were $5.1 million for the first quarter of 2014 compared to $5.3 million for the same period in 2013.

RB&T resolved its contract dispute with Liberty Tax Service ("Liberty") during January 2014. With the matter resolved, RB&T entered into a new two-year agreement with Liberty in which it will begin processing refunds for Liberty clients in January 2015. Beginning with the first quarter 2015 tax season, the contract is expected to increase RPG's annual net revenue for the two-year term of the contract by an average of approximately 16% over its 2013 net annual revenue level. Additional overhead expenses with the new contract are expected to be minimal.

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 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 $1.8 million, or 6%, for the first quarter of 2014 compared to the same period in 2013. The total Company net interest margin decreased from 3.55% during the first quarter of 2013 to 3.24% for the first quarter of 2014. The primary driver of the decrease in total Company net interest income and net interest margin was a continuing general decline in the Company's earning asset yields without a similar decline in funding costs. Further contributing to the contraction in the Company's net interest income and net interest margin was a general lack of growth in the Company's average interest earning-assets over the past 12 months, which increased only 3% over this time 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 $1.8 million, or 6%, for the quarter ended March 31, 2014 compared to the same period in 2013. The Traditional Banking net interest margin decreased 31 basis points from the same period in 2013 to 3.29%. The decrease in the Traditional Bank's net interest income and net interest margin during 2014 was primarily attributable to the following factors:

Excluding the mortgage warehouse loan portfolio (discussed below), the Traditional Banking segment continued to experience downward repricing in its loans and investment portfolios during the first quarter of 2014 resulting from ongoing paydowns and early payoffs. As a result, the yield in both the loan and investment portfolios declined from the first quarter 2013 to the same period in 2014.


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Traditional Bank loans, excluding mortgage warehouse loans, experienced yield compression of 23 basis points from the first quarter of 2013 compared to the same period in 2014. Average loans outstanding, excluding mortgage warehouse loans, were $2.42 billion with a weighted average yield of 4.98% during the first quarter of 2013 compared to $2.43 billion with a weighted average yield of 4.75% during the same period 2014.

Traditional Bank taxable investment securities experienced yield compression of 16 basis points for the first quarter of 2013 compared to the same period in 2014. Average taxable investment securities outstanding were $508 million with a weighted average yield of 1.86% during the first quarter of 2013 compared to $500 million with a weighted average yield of 1.70% during the same period in 2014.

Average outstanding balances for the mortgage warehouse loan portfolio decreased $31 million from the first quarter of 2013 to the same period in 2014 primarily due to a higher interest rate environment during the first quarter of 2014, which contributed to a decreased demand for the product. More specifically, long-term residential mortgage rates increased approximately 100 basis points in May 2013. The rapid rise in rates greatly diminished refinance demand for consumer mortgage products through the Bank's mortgage company clients, thereby decreasing the mortgage company clients' usage of their mortgage warehouse lines of credit. Average mortgage warehouse loans outstanding were $117 million during the first quarter of 2014 with a weighted-average yield of 4.20%, compared to average loans outstanding of $148 million with a weighted-average yield of 4.53% for the same period in 2013. As a result, interest income on mortgage warehouse lines of credit decreased $451,000 during the first quarter of 2014 compared to the same period in 2013.

Partially offsetting the decreases above, net interest income continued to benefit from discount accretion on loans acquired from the Company's 2012 FDIC-assisted acquisitions. Altogether, this discount accretion totaled $2.1 million for the first quarter of 2014 compared to $1.5 million for the first quarter of 2013, adding 25 and 18 basis points, respectively, to the net interest margin for these periods. Management projects accretion of loan discounts related to the 2012 FDIC-assisted acquisitions to be approximately $1.1 million for the remainder of 2014. Similar to the first quarter 2014, the accretion estimate for the remainder of 2014 could be positively impacted by positive workout arrangements in which RB&T receives loan payoffs for amounts greater than the loans' respective carrying values.

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 near future. 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 Bank ("FRB") are possible, exacerbating the compression to the Bank's net interest income and net interest-bearing margin caused by its repricing loans and investments.

In addition to the margin compression challenges noted above, the Bank has employed certain strategies over the past 12 to 15 months to improve its net interest income. These strategies have expectedly had a negative impact on the Bank's interest rate risk position in a rising rate environment. Management's future strategies to improve its net interest income will likely continue to be impacted by the Bank's overall interest rate risk position at that time.

The Bank is unable to precisely determine its net interest income and net interest margin in the future because several factors remain unknown, including, but not limited to, the future demand for the Bank's financial products and its overall future liquidity needs, among many other factors.

See additional detail regarding the Bank's interest rate risk position and interest rate risk mitigation strategies under the section titled "Asset/Liability Management and Market Risk" in this section of the filing.


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Table 1 - Total Company Average Balance Sheets and Interest Rates for the Three
Months Ended March 31, 2014 and 2013



                               Three Months Ended March 31, 2014              Three Months Ended March 31, 2013
                              Average                                        Average
(dollars in thousands)        Balance       Interest     Average Rate        Balance       Interest     Average Rate

ASSETS

Interest-earning assets:
Taxable investment
securities, including
FHLB stock(1)              $     499,698   $    2,123           1.70%     $     509,006    $   2,359           1.85%
Federal funds sold and
other interest-earning
deposits                         306,535          212           0.28%           186,237          128           0.27%
Bank loans and
fees(2)(3)                     2,564,188       30,162           4.71%         2,582,932       31,914           4.94%

Total interest-earning
assets                         3,370,421       32,497           3.86%         3,278,175       34,401           4.20%

Allowance for loan
losses                           (22,947 )                                      (23,851 )

Non interest-earning
assets:
Non interest-earning
cash and cash
equivalents                      116,612                                        109,903
Premises and equipment,
net                               33,032                                         33,507
Other assets(1)                   73,943                                         51,947
Total assets               $   3,571,061                                  $   3,449,681

LIABILITIES AND
STOCKHOLDERS' EQUITY

Interest-bearing
liabilities:
Transaction accounts       $     725,719   $      118           0.07%     $     652,151    $     112           0.07%
Money market accounts            486,141          192           0.16%           528,964          168           0.13%
Time deposits                    177,557          272           0.61%           204,191          392           0.77%
Brokered money market
and brokered CD's                115,403          396           1.37%           126,600          383           1.21%

Total interest-bearing
deposits                       1,504,820          978           0.26%         1,511,906        1,055           0.28%

Securities sold under
agreements to repurchase
. . .
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