REPUBLIC BANCORP INC /KY/ - Quarter Report: 2013 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2013

 

or

 

o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 0-24649

 

 

REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

(502) 584-3600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes x No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of July 31, 2013, was 18,522,139 and 2,260,095 respectively.

 

 

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TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements.
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.
Item 4.	Controls and Procedures.
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings.
Item 1A.	Risk Factors.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6.	Exhibits.
	SIGNATURES

 

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PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)

 

		June 30,			December 31,
		2013			2012
ASSETS
Cash and cash equivalents		$	97,690		$	137,691
Securities available for sale		420,331			438,246
Securities to be held to maturity (fair value of $55,704 in 2013 and $46,416 in 2012)		55,169			46,010
Mortgage loans held for sale		24,174			10,614
Loans, net of allowance for loan losses of $22,491 and $23,729 (2013 and 2012)		2,595,538			2,626,468
Federal Home Loan Bank stock, at cost		28,342			28,377
Premises and equipment, net		32,629			33,197
Goodwill		10,168			10,168
Other real estate owned		15,248			26,203
Other assets and accrued interest receivable		37,776			37,425
TOTAL ASSETS		$	3,317,065		$	3,394,399
LIABILITIES
Deposits
Non interest-bearing		$	487,787		$	479,046
Interest-bearing		1,483,260			1,503,882
Total deposits		1,971,047			1,982,928
Securities sold under agreements to repurchase and other short-term borrowings		128,532			250,884
Federal Home Loan Bank advances		592,044			542,600
Subordinated note		41,240			41,240
Other liabilities and accrued interest payable		40,135			40,045
Total liabilities		2,772,998			2,857,697
STOCKHOLDERS’ EQUITY
Preferred stock, no par value		—			—
Class A Common Stock and Class B Common Stock, no par value		4,890			4,932
Additional paid in capital		132,005			132,686
Retained earnings		403,212			393,472
Accumulated other comprehensive income		3,960			5,612
Total stockholders’ equity		544,067			536,702
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,317,065		$	3,394,399

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
INTEREST INCOME:
Loans, including fees		$	31,735		$	30,534		$	63,649		$	105,826
Taxable investment securities		1,976			2,904			4,016			6,171
Federal Home Loan Bank stock and other		408			376			855			1,404
Total interest income		34,119			33,814			68,520			113,401
INTEREST EXPENSE:
Deposits		975			1,213			2,030			2,752
Securities sold under agreements to repurchase and other short-term borrowings		13			118			42			230
Federal Home Loan Bank advances		3,735			3,540			7,293			7,626
Subordinated note		629			631			1,258			1,261
Total interest expense		5,352			5,502			10,623			11,869
NET INTEREST INCOME		28,767			28,312			57,897			101,532
Provision for loan losses		905			466			280			11,636
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		27,862			27,846			57,617			89,896
NON-INTEREST INCOME:
Service charges on deposit accounts		3,498			3,286			6,708			6,589
Net refund transfer fees		1,683			6,147			13,697			77,896
Mortgage banking income		2,180			1,963			5,454			3,317
Debit card interchange fee income		1,656			1,441			3,467			2,997
Bargain purchase gain - Tennessee Commerce Bank		—			(96		)	—			27,803
Bargain purchase gain - First Commercial Bank		—			—			1,324			—
Gain on sale of securities available for sale		—			—			—			56
Other		1,766			1,345			2,658			2,237
Total non-interest income		10,783			14,086			33,308			120,895
NON-INTEREST EXPENSES:
Salaries and employee benefits		15,086			14,313			31,200			31,284
Occupancy and equipment, net		5,315			5,144			10,892			11,218
Communication and transportation		991			961			2,021			3,622
Marketing and development		880			904			1,782			1,842
FDIC insurance expense		402			291			815			721
Bank franchise tax expense		857			703			2,572			2,634
Data processing		792			1,195			1,508			2,416
Debit card interchange expense		718			660			1,561			1,261
Supplies		218			529			572			1,478
Other real estate owned expense		945			555			1,834			1,160
Charitable contributions		227			200			463			2,878
Legal expense		1,338			527			1,768			895
FHLB advance prepayment expense		—			—			—			2,436
Other		1,930			1,469			4,013			4,759
Total non-interest expenses		29,699			27,451			61,001			68,604
INCOME BEFORE INCOME TAX EXPENSE		8,946			14,481			29,924			142,187
INCOME TAX EXPENSE		2,827			4,903			10,449			50,137
NET INCOME		$	6,119		$	9,578		$	19,475		$	92,050
BASIC EARNINGS PER SHARE:
Class A Common Stock		$	0.30		$	0.46		$	0.94		$	4.40
Class B Common Stock		$	0.28		$	0.44		$	0.91		$	4.37
DILUTED EARNINGS PER SHARE:
Class A Common Stock		$	0.30		$	0.46		$	0.94		$	4.38
Class B Common Stock		$	0.28		$	0.44		$	0.90		$	4.35

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Net income		$	6,119		$	9,578		$	19,475		$	92,050
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on securities available for sale		(2,566		)	(63		)	(2,965		)	1,675
Change in unrealized loss on available for sale security for which a portion of an other-than-temporary impairment has been recognized in earnings		238			58			422			37
Reclassification adjustment for gains recognized in earnings		—			—			—			(55		)
Net unrealized gains (losses)		(2,328		)	(5		)	(2,543		)	1,657
Tax effect		815			2			891			(580		)
Net of tax		(1,513		)	(3		)	(1,652		)	1,077
COMPREHENSIVE INCOME		$	4,606		$	9,575		$	17,823		$	93,127

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2013

 

		Common Stock													Accumulated
		Class A		Class B					Additional						Other			Total
		Shares		Shares					Paid In			Retained			Comprehensive			Stockholders’
(in thousands, except per share data)		Outstanding		Outstanding		Amount			Capital			Earnings			Income			Equity
Balance, January 1, 2013		18,694		2,271		$	4,932		$	132,686		$	393,472		$	5,612		$	536,702
Net income		—		—		—			—			19,475			—			19,475
Net change in accumulated other comprehensive income		—		—		—			—			—			(1,652		)	(1,652		)
Dividend declared Common Stock:
Class A ($0.341 per share)		—		—		—			—			(6,212		)	—			(6,212		)
Class B ($0.310 per share)		—		—		—			—			(701		)	—			(701		)
Stock options exercised, net of shares redeemed		5		—		1			110			—			—			111
Repurchase of Class A Common Stock		(193	)	—		(43		)	(1,230		)	(2,822		)	—			(4,095		)
Conversion of Class B Common Stock to Class A Common Stock		11		(11	)	—			—			—			—			—
Net change in notes receivable on Common Stock		—		—		—			76			—			—			76
Deferred director compensation expense - Company Stock		5		—		—			89			—			—			89
Stock based compensation expense - restricted stock		—		—		—			149			—			—			149
Stock based compensation expense - options		—		—		—			125			—			—			125
Balance, June 30, 2013		18,522		2,260		$	4,890		$	132,005		$	403,212		$	3,960		$	544,067

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (in thousands)

 

		2013			2012
OPERATING ACTIVITIES:
Net income		$	19,475		$	92,050
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net		(216		)	5,197
Provision for loan losses		280			11,636
Net gain on sale of mortgage loans held for sale		(5,408		)	(3,722		)
Origination of mortgage loans held for sale		(208,094		)	(100,418		)
Proceeds from sale of mortgage loans held for sale		199,942			104,439
Proceeds from loans repurchased by the FDIC		—			17,003
Net realized impairment (recovery) of mortgage servicing rights		(312		)	(31		)
Net realized gain on sales, calls and impairment of securities		—			(56		)
Net gain on sale of other real estate owned		(1,311		)	(419		)
Writedowns of other real estate owned		884			341
Deferred director compensation expense - Company Stock		89			90
Stock based compensation expense		274			537
Bargain purchase gain on acquisition		(1,324		)	(27,803		)
Net change in other assets and liabilities:
Accrued interest receivable		604			224
Accrued interest payable		11			(319		)
Other assets		(2,123		)	18,389
Other liabilities		723			11,231
Net cash provided by operating activities		3,494			128,369
INVESTING ACTIVITIES:
Net cash received in FDIC-assisted transaction		—			846,390
Purchases of securities available for sale		(78,205		)	(58,552		)
Purchases of securities to be held to maturity		(15,000		)	—
Proceeds from calls, maturities and paydowns of securities available for sale		93,401			131,216
Proceeds from calls, maturities and paydowns of securities to be held to maturity		5,806			2,295
Proceeds from sales of securities available for sale		—			35,225
Proceeds from sales of Federal Home Loan Bank stock		35			48
Proceeds from sales of other real estate owned		15,055			14,597
Net change in loans		31,645			(122,704		)
Net purchases of premises and equipment		(667		)	(1,078		)
Net cash provided by investing activities		52,070			847,437
FINANCING ACTIVITIES:
Net change in deposits		(11,881		)	(776,136		)
Net change in securities sold under agreements to repurchase and other short-term borrowings		(122,352		)	(35,819		)
Payments of Federal Home Loan Bank advances		(556		)	(566,075		)
Proceeds from Federal Home Loan Bank advances		50,000			170,000
Repurchase of Common Stock		(4,095		)	(147		)
Net proceeds from Common Stock options exercised		111			147
Cash dividends paid		(6,792		)	(6,390		)
Net cash used in financing activities		(95,565		)	(1,214,420		)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(40,001		)	(238,614		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		137,691			362,971
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	97,690		$	124,357
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest		$	10,612		$	12,188
Income taxes		20,100			24,512
SUPPLEMENTAL NONCASH DISCLOSURES
Transfers from loans to real estate acquired in settlement of loans		$	4,242		$	12,078
Loans provided for sales of other real estate owned		569			564

 

See accompanying footnotes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — JUNE 30, 2013 AND 2012 (UNAUDITED) AND DECEMBER 31, 2012

 

1.                                            BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation — The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries: Republic Bank & Trust Company (“RB&T”) and Republic Bank (“RB”) (collectively referred together as the “Bank”), and Republic Invest Co. 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 (“RBCT”) is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc. All companies are collectively referred to as “Republic” or the “Company.” All significant intercompany balances and transactions are eliminated in consolidation.

 

Republic Invest Co. 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.

 

The inactive subsidiaries of RB&T: Republic Financial Services, LLC, TRS RAL Funding, LLC and Republic Insurance Agency, LLC were dissolved in the second quarter of 2013.

 

In May 2013, management requested regulatory approval to merge RB&T and RB under one national bank charter. With the approved internal merger, the Bank would operate with the name Republic Bank, National Association (“RBNA”) with the Office of the Comptroller of the Currency (“OCC”) as its primary regulator. The OCC is currently the primary regulator of RB, with RB&T currently regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”).

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in Republic’s Form 10-K for the year ended December 31, 2012.

 

As of June 30, 2013, the Company was divided into three distinct business operating segments: Traditional Banking, Mortgage Banking and Republic Processing Group (“RPG”). During the second quarter of 2012, the Company realigned the previously reported Tax Refund Solutions (“TRS”) segment as a division of the newly formed RPG segment. Along with the TRS division, Republic Payment Solutions (“RPS”) and Republic Credit Solutions (“RCS”) also operate as divisions of the RPG segment.

 

Traditional Banking and Mortgage Banking (collectively “Core Banking”)

 

Republic operates 44 banking centers, primarily in the retail banking industry, and conducts its Core Banking operations predominately in metropolitan Louisville, Kentucky; Central Kentucky; Northern Kentucky; Southern Indiana; metropolitan Tampa, Florida; metropolitan Cincinnati, Ohio; metropolitan Nashville, Tennessee; metropolitan Minneapolis, Minnesota and through an Internet banking delivery channel.

 

Core Banking results of operations are primarily dependent upon net interest income, which represents the difference between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning Core Banking assets represent investment securities and real estate, commercial and consumer loans. Interest-bearing liabilities primarily consist of interest-bearing deposit accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources. In June 2011 the Bank began offering its warehouse lending product. With this product, the Bank provides short-term, revolving credit facilities to mortgage bankers across the nation. These credit facilities are secured by single family, first lien residential real estate loans.

 

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Other sources of Core Banking income include service charges on deposit accounts, debit card interchange fee income, title insurance commissions, fees charged to customers for trust services and revenue generated from Mortgage Banking activities. Mortgage Banking activities represent both the origination and sale of loans in the secondary market and the servicing of loans for others, primarily the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”).

 

Core Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, data processing, debit card interchange expenses, marketing and development expenses, FDIC insurance expense, and various general and administrative costs. Core Banking results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory agencies.

 

Republic Processing Group

 

Nationally, through RB&T, RPG facilitates the receipt and payment of federal and state tax refunds under the TRS division, primarily through refund transfers (“RT”s). RTs are products whereby a tax refund is issued to the taxpayer after RB&T has received the refund from the federal or state government. There is no credit risk or borrowing cost for RB&T associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority.  Fees earned on RTs, net of rebates, are the primary source of revenue for the TRS division and the RPG segment, and are reported as non-interest income under the line item “Net refund transfer fees.”

 

The TRS division historically originated and obtained a significant source of revenue from Refund Anticipation Loans (“RAL”s), but terminated this product effective April 30, 2012. RALs were short-term consumer loans offered to taxpayers that were secured by the customer’s anticipated tax refund, which represented the source of repayment. The fees earned on RALs for the applicable reporting period in 2012 are reported as interest income under the line item “Loans, including fees”.

 

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.

 

Reclassifications and recasts — Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported prior periods’ net income. Additionally, as discussed in Footnote 2 “2012 Acquisitions of Failed Banks,” during the first quarter of 2013 the Bank posted adjustments to the First Commercial Bank (“FCB”) acquired assets in the determination of acquisition day fair values, or (“day-one”) fair values, which resulted in a $1.3 million increase to the bargain purchase gain presented.

 

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2.                                      2012 ACQUISITIONS OF FAILED BANKS

 

OVERVIEW

 

During 2012, the Bank acquired two failed institutions in FDIC-assisted transactions. The Bank acquired certain assets and assumed certain liabilities of Tennessee Commerce Bank (“TCB”) during the first quarter of 2012 and First Commercial Bank (“FCB”) during the third quarter of 2012. The Bank did not raise capital to complete either of these acquisitions.

 

The Bank determined that the acquisitions of these failed banks constituted “business acquisitions” as defined by Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed have been presented at their estimated fair values, as required. Fair values are determined over a measurement period 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 these day-one fair values requires management to make material estimates about discount rates, future expected cash flows, market conditions and other future events that are highly 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, recast adjustments for loans and other real estate owned are made as market value data, such as appraisals, are received by the Bank. Increases or decreases to day-one fair values have been reflected with a corresponding increase or decrease to goodwill or bargain purchase gain.

 

Tennessee Commerce Bank

 

On January 27, 2012, the Bank acquired specific assets and assumed substantially all of the deposits and specific other liabilities of TCB, headquartered in Franklin, Tennessee from the FDIC, as receiver for TCB, pursuant to the terms of a Purchase and Assumption Agreement (“P&A”) — Whole Bank; All Deposits entered into among RB&T, the FDIC as receiver of TCB and the FDIC. On January 30, 2012, TCB’s sole location re-opened as a division of RB&T.

 

The Bank acquired approximately $221 million in notional assets from the FDIC as receiver for TCB. In addition, the Bank also recorded a receivable from the FDIC for approximately $785 million, which represented the net difference between the assets acquired and the liabilities assumed, adjusted for the discount the Bank received for the acquisition. The FDIC paid approximately $771 million of this receivable on January 30, 2012 with the remaining $14 million paid on February 15, 2012.

 

During the first quarter of 2012, the Bank recorded an initial bargain purchase gain of $27.9 million as a result of the TCB acquisition. The bargain purchase gain was realized because the overall price paid by the Bank was substantially less than the fair value of the TCB assets acquired and liabilities assumed in the acquisition. In the second and third quarters of 2012, the Bank posted adjustments to the acquired assets for its FDIC-assisted acquisition in the determination of day-one fair values and recorded a net decrease to the bargain purchase gain of $285,000, as additional information relative to the day-one fair values became available.

 

Information obtained subsequent to January 27, 2012 and through September 30, 2012 was considered in forming TCB estimates of cash flows and collateral values as of the January 27, 2012 acquisition date, i.e., TCB’s day-one fair values. Day-one fair values for TCB were considered final as of September 30, 2012, which is the date the Bank believed it had received all the information necessary to determine TCB’s day-one fair values.

 

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A summary of the assets acquired and liabilities assumed in the TCB acquisition, including 2012 recast adjustments, follows:

 

Tennessee Commerce Bank

 

		January 27, 2012
		As Previously Reported						As Recasted
		Contractual			Fair Value			2012 Recast			Fair
(in thousands)		Amount			Adjustments			Adjustments			Value
Assets acquired:
Cash and cash equivalents		$	61,943		$	(89	)	$	(2	)	$	61,852
Securities available for sale		42,646			—			—			42,646
Loans to be repurchased by the FDIC, net of discount		19,800			(2,797		)	—			17,003
Loans		79,112			(22,666		)	830			57,276
Federal Home Loan Bank stock, at cost		2,491			—			—			2,491
Other real estate owned		14,189			(3,359		)	(1,113		)	9,717
Core deposit intangible		—			64			—			64
Discount		(56,970		)	56,970			—			—
FDIC settlement receivable		784,545			—			—			784,545
Other assets and accrued interest receivable		945			(60		)	—			885
Total assets acquired		$	948,701		$	28,063		$	(285	)	$	976,479
Liabilities assumed:
Deposits
Non interest-bearing		$	19,754		$	—		$	—		$	19,754
Interest-bearing		927,641			54			—			927,695
Total deposits		947,395			54			—			947,449
Accrued income taxes payable		—			9,988			(100		)	9,888
Other liabilities and accrued interest payable		1,306			110			—			1,416
Total liabilities assumed		$	948,701		$	10,152		$	(100	)	$	958,753
Equity
Bargain purchase gain, net of taxes		—			17,911			(185		)	17,726
Total liabilities assumed and equity		$	948,701		$	28,063		$	(285	)	$	976,479

 

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