REPUBLIC BANCORP INC /KY/ - Quarter Report: 2015 March (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 March 31, 2015

 

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 twelve 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 twelve 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, 2015, was 18,615,567 and 2,245,492.

 

 

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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.	61
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	97
Item 4.	Controls and Procedures.	97
PART II — OTHER INFORMATION		97
Item 1.	Legal Proceedings.	97
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	98
Item 6.	Exhibits.	99
	SIGNATURES	100

 

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PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)

 

		March 31, 2015			December 31, 2014
ASSETS
Cash and cash equivalents		$	136,349		$	72,878
Securities available for sale		464,145			435,911
Securities held to maturity (fair value of $45,133 in 2015 and $45,807 in 2014)		44,574			45,437
Mortgage loans held for sale, at fair value		12,748			6,388
Loans		3,155,436			3,040,495
Allowance for loan and lease losses		(24,631		)	(24,410		)
Loans, net		3,130,805			3,016,085
Federal Home Loan Bank stock, at cost		28,208			28,208
Premises and equipment, net		31,817			32,987
Premises, held for sale		1,284			1,317
Goodwill		10,168			10,168
Other real estate owned		6,736			11,243
Bank owned life insurance		51,764			51,415
Other assets and accrued interest receivable		33,589			34,976
TOTAL ASSETS		$	3,952,187		$	3,747,013
LIABILITIES
Deposits:
Non interest-bearing		$	666,166		$	502,569
Interest-bearing		1,714,051			1,555,613
Total deposits		2,380,217			2,058,182
Securities sold under agreements to repurchase and other short-term borrowings		332,534			356,108
Federal Home Loan Bank advances		596,500			707,500
Subordinated note		41,240			41,240
Other liabilities and accrued interest payable		32,225			25,252
Total liabilities		3,382,716			3,188,282
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		4,906			4,904
Additional paid in capital		135,168			134,889
Retained earnings		424,483			414,623
Accumulated other comprehensive income		4,914			4,315
Total stockholders’ equity		569,471			558,731
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,952,187		$	3,747,013

 

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,
		2015			2014
INTEREST INCOME:
Loans, including fees		$	31,591		$	30,162
Taxable investment securities		1,773			1,859
Federal Home Loan Bank stock and other		397			476
Total interest income		33,761			32,497
INTEREST EXPENSE:
Deposits		1,144			978
Securities sold under agreements to repurchase and other short-term borrowings		38			22
Federal Home Loan Bank advances		2,928			3,564
Subordinated note		629			629
Total interest expense		4,739			5,193
NET INTEREST INCOME		29,022			27,304
Provision for loan and lease losses		185			(703		)
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		28,837			28,007
NON INTEREST INCOME:
Service charges on deposit accounts		3,039			3,295
Net refund transfer fees		15,335			14,388
Mortgage banking income		1,353			486
Interchange fee income		2,194			2,044
Net gain (loss) on other real estate owned		(119		)	(482		)
Increase in cash surrender value of bank owned life insurance		349			191
Other		835			793
Total non interest income		22,986			20,715
NON INTEREST EXPENSES:
Salaries and employee benefits		15,277			14,483
Occupancy and equipment, net		5,201			5,822
Communication and transportation		1,046			1,026
Marketing and development		585			528
FDIC insurance expense		674			569
Bank franchise tax expense		2,401			2,339
Data processing		966			797
Interchange related expense		1,007			997
Supplies		361			440
Other real estate owned expense		219			390
Legal and professional fees		1,615			1,011
Other		1,722			1,797
Total non interest expenses		31,074			30,199
INCOME BEFORE INCOME TAX EXPENSE		20,749			18,523
INCOME TAX EXPENSE		6,961			6,539
NET INCOME		$	13,788		$	11,984
BASIC EARNINGS PER SHARE:
Class A Common Stock		$	0.66		$	0.58
Class B Common Stock		$	0.65		$	0.56
DILUTED EARNINGS PER SHARE:
Class A Common Stock		$	0.66		$	0.58
Class B Common Stock		$	0.64		$	0.56
DIVIDENDS DECLARED PER COMMON SHARE:
Class A Common Stock		$	0.187		$	0.176
Class B Common Stock		$	0.170		$	0.160

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

		Three Months Ended
		March,
		2015			2014
Net income		$	13,788		$	11,984
OTHER COMPREHENSIVE INCOME
Change in fair value of derivatives used for cash flow hedges		(396		)	(339		)
Reclassification amount for derivative losses realized in income		101			100
Change in unrealized gain (loss) on securities available for sale		1,238			2
Change in unrealized gain on security available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings		(22		)	54
Net unrealized gains (losses)		921			(183		)
Tax effect		(322		)	63
Total other comprehensive income (loss), net of tax		599			(120		)
COMPREHENSIVE INCOME		$	14,387		$	11,864

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2015

 

		Common Stock													Accumulated
		Class A		Class B					Additional						Other			Total
		Shares		Shares					Paid In			Retained			Comprehensive			Stockholders’
(in thousands)		Outstanding		Outstanding		Amount			Capital			Earnings			Income			Equity
Balance, January 1, 2015		18,603		2,245		$	4,904		$	134,889		$	414,623		$	4,315		$	558,731
Net income		—		—		—			—			13,788			—			13,788
Net change in accumulated other comprehensive income		—		—		—			—			—			599			599
Dividend declared Common Stock:
Class A Shares		—		—		—			—			(3,481		)	—			(3,481		)
Class B Shares		—		—		—			—			(382		)	—			(382		)
Stock options exercised, net of shares redeemed		8		—		2			182			(65		)	—			119
Net change in notes receivable on Class A Common Stock		—		—		—			(48		)	—			—			(48		)
Deferred director compensation expense - Class A Common Stock		5		—		—			67			—			—			67
Stock based compensation - restricted stock		—		—		—			73			—			—			73
Stock based compensation expense - options		—		—		—			5			—			—			5
Balance, March 31, 2015		18,616		2,245		$	4,906		$	135,168		$	424,483		$	4,914		$	569,471

 

See accompanying footnotes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)

 

		Three Months Ended
		March,
		2015			2014
OPERATING ACTIVITIES:
Net income		$	13,788		$	11,984
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization on investment securities, net		154			283
Accretion on loans, net		(310		)	(2,650		)
Depreciation of premises and equipment		1,577			1,363
Amortization of mortgage servicing rights		338			314
Provision for loan and lease losses		185			(703		)
Net gain on sale of mortgage loans held for sale		(1,222		)	(498		)
Origination of mortgage loans held for sale		(45,835		)	(14,110		)
Proceeds from sale of mortgage loans held for sale		40,697			15,700
Net gain realized on sale of other real estate owned		(365		)	(402		)
Writedowns of other real estate owned		484			884
Deferred director compensation expense - Company Stock		67			53
Stock based compensation expense		78			106
Increase in cash surrender value of bank owned life insurance		(349		)	(191		)
Net change in other assets and liabilities:
Accrued interest receivable		(78		)	270
Accrued interest payable		9			(112		)
Other assets		1,127			8,256
Other liabilities		6,329			157
Net cash provided by operating activities		16,674			20,704
INVESTING ACTIVITIES:
Purchases of securities available for sale		(767,299		)	(30,000		)
Proceeds from maturities and paydowns of securities available for sale		740,141			45,868
Proceeds from maturities and paydowns of securities held to maturity		850			1,472
Net change in outstanding warehouse lines of credit		(103,724		)	13,314
Purchase of loans, including premiums paid		(19,531		)	—
Net change in other loans		10,370			1,910
Proceeds from redemption of Federal Home Loan Bank stock		—			32
Proceeds from sales of other real estate owned		2,630			2,627
Net purchases of premises and equipment		(374		)	(1,403		)
Purchase of bank owned life insurance		—			(5,000		)
Net cash (used in)/provided by investing activities		(136,937		)	28,820
FINANCING ACTIVITIES:
Net change in deposits		322,035			93,355
Net change in securities sold under agreements to repurchase and other short-term borrowings		(23,574		)	56,619
Payments of Federal Home Loan Bank advances		(198,000		)	(48,000		)
Proceeds from Federal Home Loan Bank advances		87,000			25,000
Repurchase of Common Stock		—			(347		)
Net proceeds from Common Stock options exercised		119			20
Cash dividends paid		(3,846		)	(3,648		)
Net cash provided by used in financing activities		183,734			122,999
NET CHANGE IN CASH AND CASH EQUIVALENTS		63,471			172,523
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		72,878			170,863
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	136,349		$	343,386
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for:
Interest		$	4,730		$	5,305
Income taxes		585			397
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to real estate acquired in settlement of loans		$	332		$	3,070
Loans provided for sales of other real estate owned		2,090			149

 

See accompanying footnotes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — MARCH 31, 2015 and 2014 (UNAUDITED) AND DECEMBER 31, 2014

 

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” or the “Bank”) and Republic Insurance Services, Inc. (the “Captive”). The Bank is a Kentucky-based, state chartered non-member financial institution. The Captive, which was formed during the third quarter of 2014, is a wholly-owned insurance subsidiary of the Company.  The Captive provides property and casualty insurance coverage to the Company and the Bank as well as five other third-party insurance captives for which insurance may not be available or economically feasible.  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.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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. 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2014.

 

As of March 31, 2015, the Company was divided into four distinct business operating segments: Traditional Banking, Warehouse Lending (“Warehouse”), Mortgage Banking and Republic Processing Group (“RPG”). Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” activities. The Warehouse segment was reported as a division of the Traditional Banking segment prior to the fourth quarter of 2014, but realized the quantitative and qualitative nature of a segment by the end of 2014. All prior periods have been reclassified to conform to the current presentation.

 

Traditional Banking, Warehouse Lending and Mortgage Banking (collectively “Core Banking”)

 

As of March 31, 2015 in addition to Internet Banking and Correspondent Lending delivery channels, Republic had 40 full-service banking centers with locations as follows:

 

·                  Kentucky — 32

·                  Metropolitan Louisville — 19

·                  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 — 2

·                  Metropolitan Cincinnati, Ohio — 1

·                  Metropolitan Nashville, Tennessee — 2

 

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

 

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. Federal Home Loan Bank (“FHLB”) advances have traditionally been a significant borrowing source for the Bank.

 

Other sources of Core Banking income include service charges on deposit accounts, debit and credit card interchange fee income, title insurance commissions, fees charged to clients for trust services, increase in the cash surrender value of Bank Owned Life Insurance (“BOLI”) 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, interchange related expenses, marketing and development expenses, Federal Deposit Insurance Corporation (“FDIC”) insurance expense, franchise tax 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.

 

The Core Bank began acquiring single family, first lien mortgage loans for investment through its Correspondent Lending channel in May 2014. Correspondent Lending generally involves the Bank acquiring, primarily from its Warehouse clients, closed loans that meet the Bank’s specifications. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium.

 

The Core Bank provides short-term, revolving credit facilities to mortgage bankers across the Nation through its Warehouse segment in the form of warehouse lines of credit.  These credit facilities are secured by single family, first lien residential real estate loans. Outstanding balances on these credit facilities may be subject to significant fluctuations consistent with the overall market demand for mortgage loans.

 

Republic Processing Group

 

All divisions of the RPG segment operate through the Bank. Nationally, RPG facilitates the receipt and payment of federal and state tax refunds under the Tax Refund Solutions (“TRS”) division, primarily through refund transfers (“RTs”). RTs are products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost 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 client’s anticipated tax refund, which represented the sole source of repayment. While RALs were terminated in 2012, TRS may receive recoveries from previously charged-off RALs.

 

The Republic Payment Solutions (“RPS”) division is an issuing bank offering general purpose reloadable prepaid debit cards through third party program managers.

 

The Republic Credit Solutions (“RCS”) division offers short-term consumer credit products.

 

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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
		Amortized			Unrealized			Unrealized			Fair
March 31, 2015 (in thousands)		Cost			Gains			Losses			Value
U.S. Treasury securities and U.S. Government agencies		$	186,819		$	1,119		$	(1	)	$	187,937
Private label mortgage backed security		4,037			1,198			—			5,235
Mortgage backed securities - residential		112,764			5,330			(121		)	117,973
Collateralized mortgage obligations		136,172			1,144			(709		)	136,607
Freddie Mac preferred stock		—			271			—			271
Mutual fund		1,000			27			—			1,027
Corporate bonds		15,011			84			—			15,095
Total securities available for sale		$	455,803		$	9,173		$	(831	)	$	464,145

 

		Gross			Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
December 31, 2014 (in thousands)		Cost			Gains			Losses			Value
U.S. Treasury securities and U.S. Government agencies		$	146,625		$	312		$	(15	)	$	146,922
Private label mortgage backed security		4,030			1,220			—			5,250
Mortgage backed securities - residential		118,836			5,511			(91		)	124,256
Collateralized mortgage obligations		143,283			1,034			(1,146		)	143,171
Freddie Mac preferred stock		—			231			—			231
Mutual fund		1,000			18			—			1,018
Corporate bonds		15,011			52			—			15,063
Total securities available for sale		$	428,785		$	8,378		$	(1,252	)	$	435,911

 

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, 2015 (in thousands)		Value			Gains			Losses			Value
U.S. Treasury securities and U.S. Government agencies		$	1,549		$	12		$	(5	)	$	1,556
Mortgage backed securities - residential		145			19			—			164
Collateralized mortgage obligations		37,880			600			—			38,480
Corporate bonds		5,000			—			(67		)	4,933
Total securities held to maturity		$	44,574		$	631		$	(72	)	$	45,133

 

					Gross			Gross
		Carrying			Unrecognized			Unrecognized			Fair
December 31, 2014 (in thousands)		Value			Gains			Losses			Value
U.S. Treasury securities and U.S. Government agencies		$	1,747		$	1		$	(7	)	$	1,741
Mortgage backed securities - residential		147			20			—			167
Collateralized mortgage obligations		38,543			423			(4		)	38,962
Corporate bonds		5,000			—			(63		)	4,937
Total securities held to maturity		$	45,437		$	444		$	(74	)	$	45,807

 

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At March 31, 2015 and December 31, 2014, 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, 2015 and 2014, there were no sales or calls of securities available for sale.

 

Investment Securities by Contractual Maturity

 

The amortized cost and fair value of the investment securities portfolio by contractual maturity at March 31, 2015 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, 2015 (in thousands)		Cost			Value			Value			Value
Due in one year or less		$	10,043		$	10,085		$	1,027		$	1,039
Due from one year to five years		181,787			182,901			522			517
Due from five years to ten years		10,000			10,046			5,000			4,933
Due beyond ten years		—			—			—			—
Private label mortgage backed security		4,037			5,235			—			—
Mortgage backed securities - residential		112,764			117,973			145			164
Collateralized mortgage obligations		136,172			136,607			37,880			38,480
Freddie Mac preferred stock		—			271			—			—
Mutual fund		1,000			1,027			—			—
Total securities		$	455,803		$	464,145		$	44,574		$	45,133

 

Freddie Mac Preferred Stock

 

During 2008, the U.S. Treasury, the Federal Reserve Board, and the Federal Housing Finance Agency (“FHFA”) announced that the FHFA was placing Freddie Mac under conservatorship and giving management control to the FHFA. The Bank contemporaneously determined that its 40,000 shares of Freddie Mac preferred stock were fully impaired and recorded an other-than-temporarily impaired (“OTTI”) charge of $2.1 million in 2008.  The OTTI charge brought the carrying value of the stock to $0.  During the second quarter of 2014, based on active trading volume of Freddie Mac preferred stock, the Company determined it appropriate to record an unrealized gain to Other Comprehensive Income (“OCI”) related to its Freddie Mac preferred stock holdings.  Based on the stock’s market closing price as of March 31, 2015, the Company’s unrealized gain for its Freddie Mac preferred stock totaled $271,000.

 

Mortgage Backed Securities and Collateralized Mortgage Obligations

 

At March 31, 2015, with the exception of the $5.2 million private label mortgage backed security, all other mortgage backed securities and collateralized mortgage obligations (“CMOs”) 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, 2015 and December 31, 2014, there were gross unrealized losses of $830,000 and $1.2 million related to available for sale mortgage backed securities and CMOs. Because the decline in fair value of these 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 OTTI.

 

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