REPUBLIC BANCORP INC /KY/ - Quarter Report: 2014 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

For the quarterly period ended March 31, 2014

 

or

 

 

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 April 30, 2014, was 18,537,025 and 2,257,646, respectively.

 

 

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TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION			3
Item 1.		Financial Statements.	3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.	53
Item 3.		Quantitative and Qualitative Disclosures about Market Risk.	85
Item 4.		Controls and Procedures.	85
PART II — OTHER INFORMATION			85
Item 1.		Legal Proceedings.	85
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.	86
Item 6.		Exhibits.	87
		SIGNATURES	88

 

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PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)

 

		March 31,			December 31,
		2014			2013
ASSETS
Cash and cash equivalents		$	343,386		$	170,863
Securities available for sale		416,425			432,893
Securities held to maturity (fair value of $49,645 in 2014 and $50,768 in 2013)		49,577			50,644
Mortgage loans held for sale, at fair value		2,414			3,506
Loans		2,574,334			2,589,792
Allowance for loan losses		(22,367		)	(23,026		)
Loans, net		2,551,967			2,566,766
Federal Home Loan Bank stock, at cost		28,310			28,342
Premises and equipment, net		32,948			32,908
Goodwill		10,168			10,168
Other real estate owned		16,914			17,102
Bank owned life insurance		30,277			25,086
Other assets and accrued interest receivable		24,786			33,626
TOTAL ASSETS		$	3,507,172		$	3,371,904
LIABILITIES
Deposits:
Non interest-bearing		$	568,162		$	488,642
Interest-bearing		1,516,050			1,502,215
Total deposits		2,084,212			1,990,857
Securities sold under agreements to repurchase and other short-term borrowings		222,174			165,555
Federal Home Loan Bank advances		582,000			605,000
Subordinated note		41,240			41,240
Other liabilities and accrued interest payable		26,688			26,459
Total liabilities		2,956,314			2,829,111
Commitments and contingent liabilities (Footnote 9)		—			—
STOCKHOLDERS’ EQUITY
Preferred stock, no par value		—			—
Class A Common Stock and Class B Common Stock, no par value		4,891			4,894
Additional paid in capital		133,103			133,012
Retained earnings		409,863			401,766
Accumulated other comprehensive income		3,001			3,121
Total stockholders’ equity		550,858			542,793
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,507,172		$	3,371,904

 

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
		March 31,
		2014			2013
INTEREST INCOME:
Loans, including fees		$	30,162		$	31,914
Taxable investment securities		1,859			2,040
Federal Home Loan Bank stock and other		476			447
Total interest income		32,497			34,401
INTEREST EXPENSE:
Deposits		978			1,055
Securities sold under agreements to repurchase and other short-term borrowings		22			29
Federal Home Loan Bank advances		3,564			3,558
Subordinated note		629			629
Total interest expense		5,193			5,271
NET INTEREST INCOME		27,304			29,130
Provision for loan losses		(703		)	(625		)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		28,007			29,755
NON-INTEREST INCOME:
Service charges on deposit accounts		3,295			3,210
Net refund transfer fees		14,388			12,014
Mortgage banking income		486			3,274
Debit card interchange fee income		1,935			1,811
Bargain purchase gain - First Commercial Bank		—			1,324
Net gain on sale of other real estate owned		402			277
Increase in cash surrender value of bank owned life insurance		191			—
Other		763			615
Total non-interest income		21,460			22,525
NON-INTEREST EXPENSES:
Salaries and employee benefits		14,483			16,114
Occupancy and equipment, net		5,822			5,577
Communication and transportation		1,026			1,030
Marketing and development		592			902
FDIC insurance expense		569			413
Bank franchise tax expense		2,339			1,715
Data processing		841			716
Debit card interchange expense		954			843
Supplies		440			354
Other real estate owned expense		1,070			889
Legal expense		412			430
Other		2,396			2,319
Total non-interest expenses		30,944			31,302
INCOME BEFORE INCOME TAX EXPENSE		18,523			20,978
INCOME TAX EXPENSE		6,539			7,622
NET INCOME		$	11,984		$	13,356
BASIC EARNINGS PER SHARE:
Class A Common Stock		$	0.58		$	0.64
Class B Common Stock		$	0.56		$	0.63
DILUTED EARNINGS PER SHARE:
Class A Common Stock		$	0.58		$	0.64
Class B Common Stock		$	0.56		$	0.62
DIVIDENDS DECLARED PER COMMON SHARE:
Class A Common Stock		$	0.176		$	0.165
Class B Common Stock		$	0.160		$	0.150

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands, except per share data)

 

		Three Months Ended
		March 31,
		2014			2013
Net income		$	11,984		$	13,356
OTHER COMPREHENSIVE INCOME (LOSS)
Change in fair value of derivatives used for cash flow hedges		(239		)	—
Unrealized gain (loss) on securities available for sale		2			(398		)
Change in unrealized loss on securities available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings		54			184
Net unrealized losses		(183		)	(214		)
Tax effect		63			75
Net of tax		(120		)	(139		)
COMPREHENSIVE INCOME		$	11,864		$	13,217

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2014

 

		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, 2014		18,541		2,260		$	4,894		$	133,012		$	401,766		$	3,121		$	542,793
Net income		—		—		—			—			11,984			—			11,984
Net change in accumulated other comprehensive income		—		—		—			—			—			(120		)	(120		)
Dividend declared Common Stock:
Class A ($0.176 per share)		—		—		—			—			(3,262		)	—			(3,262		)
Class B ($0.160 per share)		—		—		—			—			(362		)	—			(362		)
Stock options exercised, net of shares redeemed		2		—		—			34			(14		)	—			20
Repurchase of Class A Common Stock		(15	)	—		(3		)	(95		)	(249		)	—			(347		)
Net change in notes receivable on Common Stock		—		—		—			(7		)	—			—			(7		)
Deferred director compensation expense - Common Stock		2		—		—			53			—			—			53
Stock based compensation - restricted stock		—		—		—			75			—			—			75
Stock based compensation expense - options		—		—		—			31			—			—			31
Balance, March 31, 2014		18,530		2,260		$	4,891		$	133,103		$	409,863		$	3,001		$	550,858

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (in thousands)

 

		2014			2013
OPERATING ACTIVITIES:
Net income		$	11,984		$	13,356
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net		(167		)	462
Provision for loan losses		(703		)	(625		)
Net gain on sale of mortgage loans held for sale		(498		)	(3,284		)
Origination of mortgage loans held for sale		(14,110		)	(84,593		)
Proceeds from sale of mortgage loans held for sale		15,700			77,765
Net realized recovery of mortgage servicing rights		—			(152		)
Net gain on sale of other real estate owned		(402		)	(277		)
Writedowns of other real estate owned		884			366
Deferred director compensation expense - Company Stock		53			51
Stock based compensation expense		106			139
Bargain purchase gain on acquisition		—			(1,324		)
Increase in cash surrender value of bank owned life insurance		(191		)	—
Net change in other assets and liabilities:
Accrued interest receivable		270			309
Accrued interest payable		(112		)	30
Other assets		8,256			2,862
Other liabilities		157			12,782
Net cash provided by operating activities		21,227			17,867
INVESTING ACTIVITIES:
Purchases of securities available for sale		(30,000		)	(19,697		)
Purchases of securities to be held to maturity		—			(10,000		)
Proceeds from calls, maturities and paydowns of securities available for sale		45,868			36,476
Proceeds from calls, maturities and paydowns of securities to be held to maturity		1,472			3,710
Proceeds from sales of Federal Home Loan Bank stock		32			35
Proceeds from sales of other real estate owned		2,627			8,261
Net change in loans		14,701			54,016
Purchase of bank owned life insurance		(5,000		)	—
Net purchases of premises and equipment		(1,403		)	(1,573		)
Net cash provided by investing activities		28,297			71,228
FINANCING ACTIVITIES:
Net change in deposits		93,355			88,868
Net change in securities sold under agreements to repurchase and other short-term borrowings		56,619			(130,667		)
Payments of Federal Home Loan Bank advances		(48,000		)	(30		)
Proceeds from Federal Home Loan Bank advances		25,000			30,000
Repurchase of Common Stock		(347		)	(4,094		)
Net proceeds from Common Stock options exercised		20			—
Cash dividends paid		(3,648		)	(3,412		)
Net cash provided by (used in) financing activities		122,999			(19,335		)
NET CHANGE IN CASH AND CASH EQUIVALENTS		172,523			69,760
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		170,863			137,691
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	343,386		$	207,451
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest		$	5,305		$	5,302
Income taxes		397			2,169
SUPPLEMENTAL NONCASH DISCLOSURES
Transfers from loans to real estate acquired in settlement of loans		$	3,070		$	897
Loans provided for sales of other real estate owned		149			61
Change in fair value of derivatives used for cash flow hedges		(239		)	—

 

See accompanying footnotes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — MARCH 31, 2014 AND 2013 (UNAUDITED) AND DECEMBER 31, 2013

 

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”). 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.

 

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.

 

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 months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.

 

As of March 31, 2014, the Company was divided into three distinct business operating segments: Traditional Banking, Mortgage Banking and Republic Processing Group (“RPG”). Tax Refund Solutions (“TRS”), Republic Payment Solutions (“RPS”) and Republic Credit Solutions (“RCS”) operate as divisions of the RPG segment. The RPS and RCS divisions are considered immaterial for segment reporting.

 

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

 

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

 

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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 commercial and consumer loans primarily secured by real estate and/or personal property. 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. The Bank also provides short-term, revolving credit facilities to mortgage bankers across the Nation through warehouse lines of credit. These credit facilities are secured by single family, first lien residential real estate loans.

 

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 costs 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 sole source of repayment. While RALs were terminated in 2012, TRS has received and expects to continue receiving recoveries from previously charged-off RALs in the near-term.

 

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.

 

Accounting Standards Update (“ASU”) 2014-04 — Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.

 

The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for the Company beginning January 1, 2015 and are not expected to have a material impact on the Company’s financial statements.

 

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 prior years’ net income.

 

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2.                                                        INVESTMENT SECURITIES

 

Securities available for sale:

 

The gross amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

		Gross			Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
March 31, 2014 (in thousands)		Cost			Gains			Losses			Value
U.S. Treasury securities and U.S. Government agencies		$	98,230		$	382		$	(54	)	$	98,558
Private label mortgage backed security		4,471			799			—			5,270
Mortgage backed securities - residential		137,845			4,552			(133		)	142,264
Collateralized mortgage obligations		155,179			1,077			(1,955		)	154,301
Mutual fund		1,000			—			—			1,000
Corporate bonds		15,014			43			(25		)	15,032
Total securities available for sale		$	411,739		$	6,853		$	(2,167	)	$	416,425

 

		Gross			Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
December 31, 2013 (in thousands)		Cost			Gains			Losses			Value
U.S. Treasury securities and U.S. Government agencies		$	97,157		$	409		$	(101	)	$	97,465
Private label mortgage backed security		4,740			745			—			5,485
Mortgage backed securities - residential		146,087			4,288			(288		)	150,087
Collateralized mortgage obligations		164,264			1,228			(1,546		)	163,946
Mutual fund		1,000			—			(5		)	995
Corporate bonds		15,015			50			(150		)	14,915
Total securities available for sale		$	428,263		$	6,720		$	(2,090	)	$	432,893

 

Securities held to maturity:

 

The carrying value, gross unrecognized gains and losses, and fair value of securities held to maturity were as follows:

 

					Gross			Gross
		Carrying			Unrecognized			Unrecognized			Fair
March 31, 2014 (in thousands)		Value			Gains			Losses			Value
U.S. Treasury securities and U.S. Government agencies		$	2,293		$	7		$	(12	)	$	2,288
Mortgage backed securities - residential		416			47			—			463
Collateralized mortgage obligations		41,868			323			(280		)	41,911
Corporate bonds		5,000			—			(17		)	4,983
Total securities held to maturity		$	49,577		$	377		$	(309	)	$	49,645

 

					Gross			Gross
		Carrying			Unrecognized			Unrecognized			Fair
December 31, 2013 (in thousands)		Value			Gains			Losses			Value
U.S. Treasury securities and U.S. Government agencies		$	2,311		$	7		$	(13	)	$	2,305
Mortgage backed securities - residential		420			43			—			463
Collateralized mortgage obligations		42,913			387			(184		)	43,116
Corporate bonds		5,000			—			(116		)	4,884
Total securities held to maturity		$	50,644		$	437		$	(313	)	$	50,768

 

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At March 31, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

Sales of Securities Available for Sale

 

During the three months ended March 31, 2014 and 2013, there were no sales or calls of securities available for sale.

 

The tax provision related to the Bank’s realized gains totaled $0 and $0 for the three months ended March 31, 2014 and 2013, respectively.

 

Investment Securities by Contractual Maturity

 

The amortized cost and fair value of the investment securities portfolio by contractual maturity at March 31, 2014 follows. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.

 

		Securities						Securities
		available for sale						held to maturity
		Amortized			Fair			Carrying			Fair
March 31, 2014 (in thousands)		Cost			Value			Value			Value
Due in one year or less		$	24,445		$	24,752		$	504		$	507
Due from one year to five years		77,799			77,882			1,789			1,781
Due from five years to ten years		11,000			10,956			5,000			4,983
Due beyond ten years		—			—			—			—
Private label mortgage backed security		4,471			5,270			—			—
Mortgage backed securities - residential		137,845			142,264			416			463
Collateralized mortgage obligations		155,179			154,301			41,868			41,911
Mutual fund		1,000			1,000			—			—
Total securities		$	411,739		$	416,425		$	49,577		$	49,645

 

Corporate Bonds

 

During 2013, the Bank purchased $20 million in floating rate corporate bonds with an initial weighted average yield of 1.36%. The bonds, which have a weighted average life of seven years, were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 4% of the Bank’s investment portfolio as of both March 31, 2014 and December 31, 2013.

 

Mortgage Backed Securities

 

At March 31, 2014, with the exception of the $5.3 million private label mortgage backed security, all other mortgage backed securities held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac and the Federal National Mortgage Association (“Fannie Mae” or “FNMA”), institutions that the government has affirmed its commitment to support. At March 31, 2014 and December 31, 2013, there were gross unrealized/unrecognized losses of $2.1 million and $1.8 million related to available for sale mortgage backed securities. Because the decline in fair value of these mortgage backed securities is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these mortgage backed securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired.

 

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