10-Q 1 a14-13887_110q.htm 10-Q

Table of Contents

 

 

 

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, 2014

 

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)

 

Kentucky

 

61-0862051

(State of other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

601 West Market Street, Louisville, Kentucky

 

40202

(Address of principal executive offices)

 

(Zip Code)

 

(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.

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Smaller reporting company o

 

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, 2014, was 18,548,340 and 2,245,492, respectively.

 

 

 




Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

84,273

 

$

170,863

 

Securities available for sale

 

463,646

 

432,893

 

Securities held to maturity (fair value of $48,594 in 2014 and $50,768 in 2013)

 

48,338

 

50,644

 

Mortgage loans held for sale, at fair value

 

6,809

 

3,506

 

Loans

 

2,725,017

 

2,589,792

 

Allowance for loan losses

 

(22,772

)

(23,026

)

Loans, net

 

2,702,245

 

2,566,766

 

Federal Home Loan Bank stock, at cost

 

28,208

 

28,342

 

Premises and equipment, net

 

32,481

 

32,908

 

Goodwill

 

10,168

 

10,168

 

Other real estate owned

 

11,613

 

17,102

 

Bank owned life insurance

 

50,656

 

25,086

 

Other assets and accrued interest receivable

 

26,887

 

33,626

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

3,465,324

 

$

3,371,904

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Non interest-bearing

 

$

519,651

 

$

488,642

 

Interest-bearing

 

1,485,332

 

1,502,215

 

Total deposits

 

2,004,983

 

1,990,857

 

 

 

 

 

 

 

Securities sold under agreements to repurchase and other short-term borrowings

 

197,439

 

165,555

 

Federal Home Loan Bank advances

 

640,000

 

605,000

 

Subordinated note

 

41,240

 

41,240

 

Other liabilities and accrued interest payable

 

26,371

 

26,459

 

 

 

 

 

 

 

Total liabilities

 

2,910,033

 

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

 

4,893

 

4,894

 

Additional paid in capital

 

133,320

 

133,012

 

Retained earnings

 

412,338

 

401,766

 

Accumulated other comprehensive income

 

4,740

 

3,121

 

 

 

 

 

 

 

Total stockholders’ equity

 

555,291

 

542,793

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

3,465,324

 

$

3,371,904

 

 

See accompanying footnotes to consolidated financial statements.

 

3



Table of Contents

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

30,110

 

$

31,735

 

$

60,272

 

$

63,649

 

Taxable investment securities

 

1,908

 

1,976

 

3,767

 

4,016

 

Federal Home Loan Bank stock and other

 

387

 

408

 

863

 

855

 

Total interest income

 

32,405

 

34,119

 

64,902

 

68,520

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

937

 

975

 

1,915

 

2,030

 

Securities sold under agreements to repurchase and other short-term borrowings

 

22

 

13

 

44

 

42

 

Federal Home Loan Bank advances

 

3,267

 

3,735

 

6,831

 

7,293

 

Subordinated note

 

629

 

629

 

1,258

 

1,258

 

Total interest expense

 

4,855

 

5,352

 

10,048

 

10,623

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

27,550

 

28,767

 

54,854

 

57,897

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

693

 

905

 

(10

)

280

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

26,857

 

27,862

 

54,864

 

57,617

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

3,563

 

3,498

 

6,858

 

6,708

 

Net refund transfer fees

 

1,836

 

1,683

 

16,224

 

13,697

 

Mortgage banking income

 

812

 

2,180

 

1,298

 

5,454

 

Debit card interchange fee income

 

1,738

 

1,656

 

3,673

 

3,467

 

Bargain purchase gain - First Commercial Bank

 

 

 

 

1,324

 

Net gain on sale of other real estate owned

 

264

 

1,034

 

666

 

1,311

 

Increase in cash surrender value of bank owned life insurance

 

379

 

 

570

 

 

Other

 

920

 

732

 

1,683

 

1,347

 

Total non-interest income

 

9,512

 

10,783

 

30,972

 

33,308

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

13,965

 

15,086

 

28,448

 

31,200

 

Occupancy and equipment, net

 

5,508

 

5,315

 

11,330

 

10,892

 

Communication and transportation

 

856

 

991

 

1,882

 

2,021

 

Marketing and development

 

983

 

880

 

1,575

 

1,782

 

FDIC insurance expense

 

414

 

402

 

983

 

815

 

Bank franchise tax expense

 

831

 

857

 

3,170

 

2,572

 

Data processing

 

913

 

792

 

1,754

 

1,508

 

Debit card interchange expense

 

807

 

718

 

1,761

 

1,561

 

Supplies

 

60

 

218

 

500

 

572

 

Other real estate owned expense

 

560

 

945

 

1,630

 

1,834

 

Legal expense

 

88

 

1,338

 

500

 

1,768

 

Other

 

1,730

 

2,157

 

4,126

 

4,476

 

Total non-interest expenses

 

26,715

 

29,699

 

57,659

 

61,001

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

 

9,654

 

8,946

 

28,177

 

29,924

 

INCOME TAX EXPENSE

 

3,332

 

2,827

 

9,871

 

10,449

 

NET INCOME

 

$

6,322

 

$

6,119

 

$

18,306

 

$

19,475

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.31

 

$

0.30

 

$

0.88

 

$

0.94

 

Class B Common Stock

 

$

0.29

 

$

0.28

 

$

0.85

 

$

0.91

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.30

 

$

0.30

 

$

0.88

 

$

0.94

 

Class B Common Stock

 

$

0.29

 

$

0.28

 

$

0.85

 

$

0.90

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.187

 

$

0.176

 

$

0.363

 

$

0.341

 

Class B Common Stock

 

$

0.170

 

$

0.160

 

$

0.330

 

$

0.310

 

 

See accompanying footnotes to consolidated financial statements.

 

4



Table of Contents

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,322

 

$

6,119

 

$

18,306

 

$

19,475

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

(265

)

 

(505

)

 

Unrealized gain (loss) on securities available for sale

 

2,626

 

(2,566

)

2,628

 

(2,965

)

Change in unrealized gain on securities available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings

 

315

 

238

 

369

 

422

 

Net unrealized gains (losses)

 

2,676

 

(2,328

)

2,492

 

(2,543

)

Tax effect

 

(937

)

815

 

(873

)

891

 

Total other comprehensive income (loss), net of tax

 

1,739

 

(1,513

)

1,619

 

(1,652

)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

8,061

 

$

4,606

 

$

19,925

 

$

17,823

 

 

See accompanying footnotes to consolidated financial statements.

 

5



Table of Contents

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 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

 

 

 

 

 

18,306

 

 

18,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in accumulated other comprehensive income

 

 

 

 

 

 

1,619

 

1,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A shares ($0.363 per share)

 

 

 

 

 

(6,727

)

 

(6,727

)

Class B shares ($0.330 per share)

 

 

 

 

 

(744

)

 

(744

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised, net of shares redeemed

 

7

 

 

2

 

129

 

(14

)

 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Class A Common Stock

 

(15

)

 

(3

)

(95

)

(249

)

 

(347

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class B Common Stock to Class A Common Stock

 

15

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Class A Common Stock

 

 

 

 

(85

)

 

 

(85

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred director compensation expense - Class A Common Stock

 

2

 

 

 

91

 

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation - restricted stock

 

(2

)

 

 

255

 

 

 

255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - options

 

 

 

 

13

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2014

 

18,548

 

2,245

 

$

4,893

 

$

133,320

 

$

 

412,338

 

$

4,740

 

$

555,291

 

 

See accompanying footnotes to consolidated financial statements.

 

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Table of Contents

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (in thousands)

 

 

 

2014

 

2013

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

18,306

 

$

19,475

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization of premises and equipment

 

3,386

 

2,715

 

Amortization (accretion) on investment securitites, net

 

330

 

337

 

Amortization (accretion) on loans, net

 

(4,494

)

(4,989

)

Provision for loan losses

 

(10

)

280

 

Net gain on sale of mortgage loans held for sale

 

(1,166

)

(5,408

)

Origination of mortgage loans held for sale

 

(33,284

)

(208,094

)

Proceeds from sale of mortgage loans held for sale

 

31,147

 

199,942

 

Net realized recovery of mortgage servicing rights

 

 

(312

)

Net gain on sale of other real estate owned

 

(666

)

(1,311

)

Writedowns of other real estate owned

 

1,217

 

884

 

Deferred director compensation expense - Company Stock

 

91

 

89

 

Stock based compensation expense

 

268

 

274

 

Bargain purchase gain on acquisition

 

 

(1,324

)

Increase in cash surrender value of bank owned life insurance

 

(570

)

 

Net change in other assets and liabilities:

 

 

 

 

 

Accrued interest receivable

 

189

 

604

 

Accrued interest payable

 

(198

)

11

 

Other assets

 

5,887

 

(2,123

)

Other liabilities

 

(1,549

)

723

 

Net cash provided by operating activities

 

18,884

 

1,773

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of securities available for sale

 

(109,549

)

(78,205

)

Purchases of securities to be held to maturity

 

 

(15,000

)

Proceeds from calls, maturities and paydowns of securities available for sale

 

81,567

 

93,401

 

Proceeds from calls, maturities and paydowns of securities to be held to maturity

 

2,269

 

5,806

 

Proceeds from sales of Federal Home Loan Bank stock

 

134

 

35

 

Proceeds from sales of other real estate owned

 

8,136

 

15,055

 

Net change in other loans

 

(25,008

)

(5,520

)

Net change in outstanding warehouse lines of credit

 

(94,555

)

38,886

 

Purchase of loans, including premiums paid

 

(14,695

)

 

Purchase of bank owned life insurance

 

(25,000

)

 

Net purchases of premises and equipment

 

(2,297

)

(667

)

Net cash provided by (used in) investing activities

 

(178,998

)

53,791

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Net change in deposits

 

14,126

 

(11,881

)

Net change in securities sold under agreements to repurchase and other short-term borrowings

 

31,884

 

(122,352

)

Payments of Federal Home Loan Bank advances

 

(83,000

)

(556

)

Proceeds from Federal Home Loan Bank advances

 

118,000

 

50,000

 

Repurchase of Common Stock

 

(347

)

(4,095

)

Net proceeds from Common Stock options exercised

 

117

 

111

 

Cash dividends paid

 

(7,256

)

(6,792

)

Net cash provided by (used in) financing activities

 

73,524

 

(95,565

)

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(86,590

)

(40,001

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

170,863

 

137,691

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

84,273

 

$

97,690

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

10,246

 

$

10,612

 

Income taxes

 

7,304

 

20,100

 

 

 

 

 

 

 

SUPPLEMENTAL NONCASH DISCLOSURES:

 

 

 

 

 

Transfers from loans to real estate acquired in settlement of loans

 

$

4,492

 

$

4,242

 

Loans provided for sales of other real estate owned

 

1,294

 

569

 

Change in fair value of derivatives used for cash flow hedges

 

(505

)

 

 

See accompanying footnotes to consolidated financial statements.

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — JUNE 30, 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 subsidiary, Republic Bank & Trust Company (“RB&T” or the “Bank”). The Bank is a Kentucky-based, state chartered non-member financial institution. 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 May 9, 2014, Republic Bank, the Company’s wholly-owned, federally chartered savings institution, merged into RB&T. The merged institution operates under the name Republic Bank & Trust Company. The merger did not materially impact the Company’s consolidated financial statements.

 

Subsequent to June 30, 2014, the Company formed Republic Insurance Services, Inc. (the “Captive”). The Captive is a wholly-owned insurance subsidiary of the Company that will provide property and casualty insurance coverage to the Company and the Bank and reinsurance to five other third party insurance captives for which insurance may not be currently available or economically feasible in today’s insurance marketplace.

 

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, 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 June 30, 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 separate and independent segment reporting.

 

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Table of Contents

 

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

 

As of June 30, 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.

 

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. FHLB advances have traditionally been a significant borrowing source for the Bank.

 

The Bank provides short-term, revolving credit facilities to mortgage bankers across the Nation through mortgage warehouse lines of credit.  These credit facilities are secured by single family, first lien residential real estate loans.

 

The Bank began acquiring single family mortgage loans for investment through its Correspondent Lending division in May 2014. Correspondent lending generally involves the Bank acquiring closed loans that meet the Bank’s specifications from its Mortgage Warehouse clients. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium.  Premiums on loans held for investment acquired though the Correspondent Lending division are amortized into income on the level-yield method over the expected life of the loan.

 

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 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.

 

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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 TRS division, primarily through refund transfers (“RT”s). 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 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.

 

The RPS division is an issuing bank offering general purpose reloadable prepaid debit cards through third party program managers. The RCS division is piloting short-term consumer credit products.

 

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.

 

Accounting Standards Update (“ASU”) 2014-08 — Presentation of Financial Statements and Property, Plant and Equipment (Topic 205 and Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.

 

The amendments in this ASU change the criteria for reporting discontinued operations for all public and nonpublic entities. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. 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.

 

ASU 2014-11 — Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures.

 

The amendments in this ASU require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. 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.

 

ASU 2014-12 — Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That Performance Targets Could Be Achieved after the Requisite Service Period.

 

The amendments in this ASU are intended to resolve the diverse accounting treatment of share-based awards that require a specific performance target. 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.

 

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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

 

June 30, 2014 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

144,821

 

$

640

 

$

(17

)

$

145,444

 

Private label mortgage backed security

 

4,347

 

1,114

 

 

5,461

 

Mortgage backed securities - residential

 

131,702

 

4,803

 

(87

)

136,418

 

Collateralized mortgage obligations

 

159,137

 

1,308

 

(912

)

159,533

 

Freddie Mac preferred stock

 

 

718

 

 

718

 

Mutual fund

 

1,000

 

11

 

 

1,011

 

Corporate bonds

 

15,013

 

52

 

(4

)

15,061

 

Total securities available for sale

 

$

456,020

 

$

8,646

 

$

(1,020

)

$

463,646

 

 

 

 

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

 

June 30, 2014 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

2,275

 

$

5

 

$

(8

)

$

2,272

 

Mortgage backed securities - residential

 

412

 

53

 

 

465

 

Collateralized mortgage obligations

 

40,651

 

387

 

(52

)

40,986

 

Corporate bonds

 

5,000

 

 

(129

)

4,871

 

Total securities held to maturity

 

$

48,338

 

$

445

 

$

(189

)

$

48,594

 

 

 

 

 

 

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 June 30, 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 and six months ended June 30, 2014 and 2013, there were no sales or calls of securities available for sale or applicable tax provisions for such transactions.

 

Investment Securities by Contractual Maturity

 

The amortized cost and fair value of the investment securities portfolio by contractual maturity at June 30, 2014 follows. Expected maturities may differ from contractual maturities if securities issuers 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

 

June 30, 2014 (in thousands)

 

Cost

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

23,493

 

$

23,715

 

$

500

 

$

502

 

Due from one year to five years

 

126,341

 

126,794

 

1,775

 

1,771

 

Due from five years to ten years

 

10,000

 

9,996

 

5,000

 

4,870

 

Due beyond ten years

 

 

 

 

 

Private label mortgage backed security

 

4,347

 

5,461

 

 

 

Mortgage backed securities - residential

 

131,702

 

136,418

 

412

 

465

 

Collateralized mortgage obligations

 

159,137

 

159,533

 

40,651

 

40,986

 

Freddie Mac preferred stock

 

 

718

 

 

 

Mutual fund

 

1,000

 

1,011

 

 

 

Total securities

 

$

456,020

 

$

463,646

 

$

48,338

 

$

48,594

 

 

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 Temporary Impairment (“OTTI”) charge of $2.1 million for the shares.  The OTTI charge brought the carrying value of the stock down to $0.  During the second quarter of 2014, based on the active trading volume and price 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 June 30, 2014, the Company’s unrealized gain for its Freddie Mac preferred stock totaled $718,000.

 

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 June 30, 2014 and December 31, 2013.

 

Mortgage Backed Securities

 

At June 30, 2014, with the exception of the $5.5 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 June 30, 2014 and December 31, 2013, there were gross unrealized/unrecognized losses of $999,000 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

 

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securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired.

 

Market Loss Analysis

 

Securities with unrealized losses at June 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

June 30, 2014 (in thousands)

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

2,106

 

$

(17

)

$

 

$

 

$

2,106

 

$

(17

)

Mortgage backed securities - residential

 

8,312

 

(87

)

 

 

8,312

 

(87

)

Collateralized mortgage obligations

 

56,578

 

(778

)

7,567

 

(134

)

64,145

 

(912

)

Corporate bonds

 

9,996

 

(4

)

 

 

9,996

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

76,992

 

$

(886

)

$

7,567

 

$

(134

)

$

84,559

 

$

(1,020

)

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

521

 

$

(8

)

$

 

$

 

$

521

 

$

(8

)

Collateralized mortgage obligations

 

18,274

 

(52

)

 

 

18,274

 

(52

)

Corporate bonds

 

4,871

 

(129

)

 

 

4,871

 

(129

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

 

$

23,666

 

$

(189

)

$

 

$

 

$

23,666

 

$

(189

)

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

December 31, 2013 (in thousands)

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

44,041

 

$

(101

)

$

 

$

 

$

44,041

 

$

(101

)

Mortgage backed securities - residential

 

19,494

 

(288

)

 

 

19,494

 

(288

)

Collateralized mortgage obligations

 

55,927

 

(1,546

)

 

 

55,927

 

(1,546

)

Mutual fund

 

995

 

(5

)

 

 

995

 

(5

)

Corporate bonds

 

9,850

 

(150

)

 

 

9,850

 

(150

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

130,307

 

$

(2,090

)

$

 

$

 

$

130,307

 

$

(2,090

)

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

521

 

$

(13

)

$

 

$

 

$

521

 

$

(13

)

Collateralized mortgage obligations

 

18,686

 

(184

)

 

 

18,686

 

(184

)

Corporate bonds

 

4,884

 

(116

)

 

 

4,884

 

(116

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

 

$

24,091

 

$

(313

)

$

 

$

 

$

24,091

 

$

(313

)

 

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At June 30, 2014, the Bank’s security portfolio consisted of 162 securities, 19 of which were in an unrealized loss position. At December 31, 2013, the Bank’s security portfolio consisted of 162 securities, 27 of which were in an unrealized loss position.

 

Other-than-temporary Impairment

 

Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-temporary.” Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in value below amortized cost is other-than-temporary. In conducting this assessment, the Bank evaluates a number of factors including, but not limited to:

 

·                  The length of time and the extent to which fair value has been less than the amortized cost basis;

·                  The Bank’s intent to hold until maturity or sell the debt security prior to maturity;

·                  An analysis of whether it is more likely than not that the Bank will be required to sell the debt security before its anticipated recovery;

·                  Adverse conditions specifically related to the security, an industry, or a geographic area;

·                  The historical and implied volatility of the fair value of the security;

·                  The payment structure of the security and the likelihood of the issuer being able to make payments;

·                  Failure of the issuer to make scheduled interest or principal payments;

·                  Any rating change by a rating agency; and

·                  Recoveries or additional decline in fair value subsequent to the balance sheet date.

 

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.

 

The Bank owns one private label mortgage backed security with a total carrying value of $5.5 million at June 30, 2014. This security, with an average remaining life currently estimated at four years, is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

 

See additional discussion regarding the Bank’s private label mortgage backed security under Footnote 6 “Fair Value” in this section of the filing.

 

Pledged Investment Securities

 

Investment securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other purposes, as required or permitted by law are as follows:

 

(in thousands)

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Carrying amount

 

$

249,532

 

$

224,693

 

Fair value

 

249,659

 

224,989

 

 

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3.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The Bank’s financing receivables consist primarily of loans and a minimal amount of lease financing receivables (together referred to as “loans”). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums or discounts, deferred loan fees and costs and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

 

Lease financing receivables, all of which are direct financing leases, are reported at their principal balance outstanding net of any unearned income, deferred fees and costs and applicable allowance for losses.  Leasing income is recognized on a basis that achieves a constant periodic rate of return on the outstanding lease financing balances over the lease terms.

 

The composition of loans follows:

 

(in thousands)

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

Owner occupied - bank originated

 

$

1,127,519

 

$

1,097,795

 

Owner occupied - correspondent*

 

11,785

 

 

Non owner occupied - bank originated

 

98,644

 

110,809

 

Commercial real estate

 

758,676

 

773,173

 

Commercial real estate - purchased whole loans

 

34,534

 

34,186

 

Construction & land development

 

41,109

 

44,351

 

Commercial & industrial

 

146,334

 

127,763

 

Lease financing receivables

 

310

 

 

Warehouse lines of credit

 

244,131

 

149,576

 

Home equity

 

235,919

 

226,782

 

Consumer:

 

 

 

 

 

RPG loans

 

3,022

 

1,827

 

Credit cards

 

9,321

 

9,030

 

Overdrafts

 

1,105

 

944

 

Other consumer

 

12,608

 

13,556

 

 

 

 

 

 

 

Total loans**

 

2,725,017

 

2,589,792

 

Less: Allowance for loan losses

 

22,772

 

23,026

 

 

 

 

 

 

 

Total loans, net

 

$

2,702,245

 

$

2,566,766

 

 


* - Loans acquired through the Bank’s Correspondent Lending channel are generally outside of the Bank’s historical market footprint.

** - Total loans are presented net of premiums, discounts and net loan origination fees and costs.

 

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Purchased Credit Impaired (“PCI”) Loans

 

The contractual amount of PCI loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, decreased from $58 million as of December 31, 2013 to $39 million as of June 30, 2014. The carrying value of these loans was $41 million as of December 31, 2013 compared to $27 million as of June 30, 2014.

 

The table below reconciles the contractually required and carrying amounts of PCI loans at June 30, 2014 and December 31, 2013:

 

(in thousands)

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Contractually-required principal

 

$

38,934

 

$

57,992

 

Non-accretable amount

 

(9,292

)

(13,582

)

Accretable amount

 

(2,487

)

(3,457

)

Carrying value of loans

 

$

27,155

 

$

40,953

 

 

The following table presents a rollforward of the accretable amount on PCI loans for the three and six months ended June 30, 2014 and 2013:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(2,765

)

$

(2,300

)

$

(3,457

)

$

(3,231

)

Transfers between non-accretable and accretable

 

(1,029

)

(712

)

(2,340

)

(1,696

)

Net accretion into interest income on loans, including loan fees

 

1,307

 

1,631

 

3,310

 

3,263

 

Other changes

 

 

 

 

283

 

Balance, end of period

 

$

(2,487

)

$

(1,381

)

$

(2,487

)

$

(1,381

)

 

16



Table of Contents

 

Credit Quality Indicators

 

Based on the Bank’s internal analysis performed, the risk category of loans by class as defined in Republic’s Form 10-K for the year ended December 31, 2013 follows:

 

 

 

 

 

 

 

 

 

 

 

Purchased

 

Purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired

 

Impaired

 

Total

 

June 30, 2014

 

 

 

Special

 

 

 

Doubtful /

 

Loans -

 

Loans -

 

Rated

 

(in thousands)

 

Pass

 

Mention *

 

Substandard *

 

Loss

 

Group 1

 

Substandard

 

Loans**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied - bank originated

 

$

 

$

28,233

 

$

13,182

 

$

 

$

1,779

 

$

 

$

43,194

 

Owner occupied - correspondent

 

 

 

 

 

 

 

 

Non owner occupied - bank originated

 

 

1,678

 

2,048

 

 

4,600

 

 

8,326

 

Commercial real estate

 

713,947

 

9,589

 

16,736

 

 

18,361

 

43

 

758,676

 

Commercial real estate -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased whole loans

 

34,534

 

 

 

 

 

 

34,534

 

Construction & land development

 

37,725

 

124

 

2,388

 

 

872

 

 

41,109

 

Commercial & industrial

 

142,056

 

901

 

1,899

 

 

1,263

 

215

 

146,334

 

Lease financing receivables

 

310

 

 

 

 

 

 

310

 

Warehouse lines of credit

 

244,131

 

 

 

 

 

 

244,131

 

Home equity

 

 

 

2,246

 

 

 

 

2,246

 

Consumer: