10-Q 1 a15-11993_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, 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)

 

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 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.

 

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, 2015, was 18,603,369 and 2,245,492.

 

 

 




Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)

 

 

 

June 30, 2015

 

December 31, 2014

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,766

 

$

72,878

 

Securities available for sale

 

456,612

 

435,911

 

Securities held to maturity (fair value of $43,600 in 2015 and $45,807 in 2014)

 

43,070

 

45,437

 

Mortgage loans held for sale, at fair value

 

10,277

 

6,388

 

Other loans held for sale, at the lower of cost or fair value

 

1,542

 

 

Loans

 

3,323,977

 

3,040,495

 

Allowance for loan and lease losses

 

(25,248

)

(24,410

)

Loans, net

 

3,298,729

 

3,016,085

 

Federal Home Loan Bank stock, at cost

 

28,208

 

28,208

 

Premises and equipment, net

 

31,092

 

32,987

 

Premises, held for sale

 

2,468

 

1,317

 

Goodwill

 

10,168

 

10,168

 

Other real estate owned

 

2,920

 

11,243

 

Bank owned life insurance

 

52,117

 

51,415

 

Other assets and accrued interest receivable

 

36,250

 

34,976

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

4,066,219

 

$

3,747,013

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Non interest-bearing

 

$

598,572

 

$

502,569

 

Interest-bearing

 

1,681,038

 

1,555,613

 

Total deposits

 

2,279,610

 

2,058,182

 

 

 

 

 

 

 

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

 

229,825

 

356,108

 

Federal Home Loan Bank advances

 

916,500

 

707,500

 

Subordinated note

 

41,240

 

41,240

 

Other liabilities and accrued interest payable

 

26,072

 

25,252

 

 

 

 

 

 

 

Total liabilities

 

3,493,247

 

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

 

4,903

 

4,904

 

Additional paid in capital

 

135,246

 

134,889

 

Retained earnings

 

428,475

 

414,623

 

Accumulated other comprehensive income

 

4,348

 

4,315

 

 

 

 

 

 

 

Total stockholders’ equity

 

572,972

 

558,731

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

4,066,219

 

$

3,747,013

 

 

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,

 

June,

 

 

 

2015

 

2014

 

2015

 

2014

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

33,616

 

$

30,110

 

$

65,207

 

$

60,272

 

Taxable investment securities

 

1,779

 

1,908

 

3,552

 

3,767

 

Federal Home Loan Bank stock and other

 

327

 

387

 

724

 

863

 

Total interest income

 

35,722

 

32,405

 

69,483

 

64,902

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,021

 

937

 

2,165

 

1,915

 

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

 

17

 

22

 

55

 

44

 

Federal Home Loan Bank advances

 

2,997

 

3,267

 

5,925

 

6,831

 

Subordinated note

 

629

 

629

 

1,258

 

1,258

 

Total interest expense

 

4,664

 

4,855

 

9,403

 

10,048

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

31,058

 

27,550

 

60,080

 

54,854

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

904

 

693

 

1,089

 

(10

)

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

 

30,154

 

26,857

 

58,991

 

54,864

 

 

 

 

 

 

 

 

 

 

 

NON INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

3,247

 

3,563

 

6,286

 

6,858

 

Net refund transfer fees

 

1,907

 

1,836

 

17,242

 

16,224

 

Mortgage banking income

 

1,224

 

812

 

2,577

 

1,298

 

Interchange fee income

 

2,044

 

1,681

 

4,238

 

3,725

 

Gain on call of security available for sale

 

88

 

 

88

 

 

Net loss on other real estate owned

 

(155

)

(69

)

(274

)

(551

)

Increase in cash surrender value of bank owned life insurance

 

353

 

379

 

702

 

570

 

Other

 

777

 

879

 

1,612

 

1,672

 

Total non interest income

 

9,485

 

9,081

 

32,471

 

29,796

 

 

 

 

 

 

 

 

 

 

 

NON INTEREST EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

14,323

 

13,965

 

29,600

 

28,448

 

Occupancy and equipment, net

 

5,142

 

5,508

 

10,343

 

11,330

 

Communication and transportation

 

771

 

856

 

1,817

 

1,882

 

Marketing and development

 

977

 

803

 

1,562

 

1,331

 

FDIC insurance expense

 

474

 

414

 

1,148

 

983

 

Bank franchise tax expense

 

847

 

831

 

3,248

 

3,170

 

Data processing

 

1,092

 

874

 

2,058

 

1,671

 

Interchange related expense

 

931

 

847

 

1,938

 

1,844

 

Supplies

 

219

 

60

 

580

 

500

 

Other real estate owned expense

 

120

 

308

 

339

 

698

 

Legal and professional fees

 

528

 

438

 

2,143

 

949

 

Other

 

1,741

 

1,380

 

3,463

 

3,677

 

Total non interest expenses

 

27,165

 

26,284

 

58,239

 

56,483

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

 

12,474

 

9,654

 

33,223

 

28,177

 

INCOME TAX EXPENSE

 

4,154

 

3,332

 

11,115

 

9,871

 

NET INCOME

 

$

8,320

 

$

6,322

 

$

22,108

 

$

18,306

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.40

 

$

0.31

 

$

1.07

 

$

0.88

 

Class B Common Stock

 

$

0.37

 

$

0.29

 

$

0.97

 

$

0.85

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.40

 

$

0.30

 

$

1.07

 

$

0.88

 

Class B Common Stock

 

$

0.36

 

$

0.29

 

$

0.97

 

$

0.85

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.198

 

$

0.187

 

$

0.385

 

$

0.363

 

Class B Common Stock

 

$

0.180

 

$

0.170

 

$

0.350

 

$

0.330

 

 

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,

 

June,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,320

 

$

6,322

 

$

22,108

 

$

18,306

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

175

 

(364

)

(221

)

(704

)

Reclassification adjustment for derivative losses recognized in income

 

103

 

99

 

204

 

199

 

Change in unrealized gain (loss) on securities available for sale

 

(1,056

)

2,626

 

182

 

2,628

 

Reclassification adjustment for gain on security available for sale recognized in earnings

 

(88

)

 

(88

)

 

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

 

(4

)

315

 

(26

)

369

 

Net unrealized gains (losses)

 

(870

)

2,676

 

51

 

2,492

 

Tax effect

 

304

 

(937

)

(18

)

(873

)

Total other comprehensive income (loss), net of tax

 

(566

)

1,739

 

33

 

1,619

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

7,754

 

$

8,061

 

$

22,141

 

$

19,925

 

 

See accompanying footnotes to consolidated financial statements.

 

5



Table of Contents

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 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

 

 

 

 

 

22,108

 

 

22,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in accumulated other comprehensive income

 

 

 

 

 

 

33

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares

 

 

 

 

 

(7,167

)

 

(7,167

)

Class B Shares

 

 

 

 

 

(786

)

 

(786

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised, net of shares redeemed

 

8

 

 

2

 

182

 

(65

)

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Class A Common Stock

 

(14

)

 

(3

)

(86

)

(238

)

 

(327

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Class A Common Stock

 

 

 

 

(51

)

 

 

(51

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred director compensation expense - Class A Common Stock

 

5

 

 

 

109

 

 

 

109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation - restricted stock

 

 

 

 

147

 

 

 

147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - options

 

 

 

 

56

 

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2015

 

18,602

 

2,245

 

$

4,903

 

$

135,246

 

$

428,475

 

$

4,348

 

$

572,972

 

 

See accompanying footnotes to consolidated financial statements.

 

6



Table of Contents

 

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

 

 

 

Six Months Ended

 

 

 

June,

 

 

 

2015

 

2014

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

22,108

 

$

18,306

 

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

 

 

 

 

 

Amortization on investment securities, net

 

380

 

330

 

Accretion on loans, net

 

(1,649

)

(4,494

)

Depreciation of premises and equipment

 

3,251

 

2,724

 

Amortization of mortgage servicing rights

 

716

 

662

 

Provision for loan and lease losses

 

1,089

 

(10

)

Net gain on sale of mortgage loans held for sale

 

(2,353

)

(1,166

)

Origination of mortgage loans held for sale

 

(96,008

)

(33,284

)

Proceeds from sale of mortgage loans held for sale

 

94,472

 

31,147

 

Origination of other loans held for sale

 

(24,410

)

 

Proceeds from sale of other loans held for sale

 

22,868

 

 

Gain on call of security available for sale

 

(88

)

 

Net gain realized on sale of other real estate owned

 

(430

)

(666

)

Writedowns of other real estate owned

 

704

 

1,217

 

Deferred director compensation expense - Company Stock

 

109

 

91

 

Stock based compensation expense

 

203

 

268

 

Increase in cash surrender value of bank owned life insurance

 

(702

)

(570

)

Net change in other assets and liabilities:

 

 

 

 

 

Accrued interest receivable

 

(131

)

189

 

Accrued interest payable

 

(55

)

(198

)

Other assets

 

(1,859

)

5,887

 

Other liabilities

 

581

 

(1,549

)

Net cash provided by operating activities

 

18,796

 

18,884

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of securities available for sale

 

(889,325

)

(109,549

)

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

 

868,424

 

81,567

 

Proceeds from maturities and paydowns of securities held to maturity

 

2,342

 

2,269

 

Net change in outstanding warehouse lines of credit

 

(169,474

)

(94,555

)

Purchase of loans, including premiums paid

 

(63,163

)

(14,695

)

Net change in other loans

 

(48,458

)

(25,008

)

Proceeds from redemption of Federal Home Loan Bank stock

 

 

134

 

Proceeds from sales of other real estate owned

 

7,009

 

8,136

 

Net purchases of premises and equipment

 

(2,507

)

(2,297

)

Purchase of bank owned life insurance

 

 

(25,000

)

Net cash used in investing activities

 

(295,152

)

(178,998

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Net change in deposits

 

221,428

 

14,126

 

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

 

(126,283

)

31,884

 

Payments of Federal Home Loan Bank advances

 

(208,000

)

(83,000

)

Proceeds from Federal Home Loan Bank advances

 

417,000

 

118,000

 

Repurchase of Common Stock

 

(327

)

(347

)

Net proceeds from Common Stock options exercised

 

119

 

117

 

Cash dividends paid

 

(7,693

)

(7,256

)

Net cash provided by financing activities

 

296,244

 

73,524

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

19,888

 

(86,590

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

72,878

 

170,863

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

92,766

 

$

84,273

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

9,458

 

$

10,246

 

Income taxes

 

6,130

 

7,304

 

 

 

 

 

 

 

SUPPLEMENTAL NONCASH DISCLOSURES:

 

 

 

 

 

 

 

 

 

 

 

Transfers from loans to real estate acquired in settlement of loans

 

$

1,922

 

$

4,492

 

Loans provided for sales of other real estate owned

 

2,962

 

1,294

 

 

See accompanying footnotes to consolidated financial statements.

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — JUNE 30, 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 and six months ended June 30, 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 June 30, 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.

 

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Table of Contents

 

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

 

The Traditional Bank provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 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

 

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, increases 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.

 

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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.

 

Accounting Standards Update (“ASU”) 2015-3 — Interest — Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issuance Costs

 

To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. This ASU is 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

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

June 30, 2015 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

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

 

$

198,071

 

$

905

 

$

(125

)

$

198,851

 

Private label mortgage backed security

 

4,037

 

1,194

 

 

5,231

 

Mortgage backed securities - residential

 

103,378

 

4,631

 

(129

)

107,880

 

Collateralized mortgage obligations

 

127,922

 

1,065

 

(727

)

128,260

 

Freddie Mac preferred stock

 

 

231

 

 

231

 

Mutual fund

 

1,000

 

15

 

 

1,015

 

Corporate bonds

 

15,010

 

134

 

 

15,144

 

Total securities available for sale

 

$

449,418

 

$

8,175

 

$

(981

)

$

456,612

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

June 30, 2015 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,536

 

$

5

 

$

(2

)

$

1,539

 

Mortgage backed securities - residential

 

144

 

18

 

 

162

 

Collateralized mortgage obligations

 

36,390

 

554

 

 

36,944

 

Corporate bonds

 

5,000

 

 

(45

)

4,955

 

Total securities held to maturity

 

$

43,070

 

$

577

 

$

(47

)

$

43,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 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 and six months ended June 30, 2015, the Bank recognized a gain of $88,000 on the call of one available for sale security.

 

During the three and six months ended June 30, 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 June 30, 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

 

June 30, 2015 (in thousands)

 

Cost

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

10,020

 

$

10,041

 

$

1,016

 

$

1,021

 

Due from one year to five years

 

193,061

 

193,854

 

5,520

 

5,473

 

Due from five years to ten years

 

10,000

 

10,100

 

 

 

Due beyond ten years

 

 

 

 

 

Private label mortgage backed security

 

4,037

 

5,231

 

 

 

Mortgage backed securities - residential

 

103,378

 

107,880

 

144

 

162

 

Collateralized mortgage obligations

 

127,922

 

128,260

 

36,390

 

36,944

 

Freddie Mac preferred stock

 

 

231

 

 

 

Mutual fund

 

1,000

 

1,015

 

 

 

Total securities

 

$

449,418

 

$

456,612

 

$

43,070

 

$

43,600

 

 

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 impairment (“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 June 30, 2015, the Company’s unrealized gain for its Freddie Mac preferred stock totaled $231,000.

 

Mortgage Backed Securities and Collateralized Mortgage Obligations

 

At June 30, 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 June 30, 2015 and December 31, 2014, there were gross unrealized losses of $856,000 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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Market Loss Analysis

 

Securities with unrealized losses at June 30, 2015 and December 31, 2014, 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, 2015 (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

 

$

19,880

 

$

(120

)

$

995

 

$

(5

)

$

20,875

 

$

(125

)

Mortgage backed securities - residential

 

6,602

 

(129

)

 

 

6,602

 

(129

)

Collateralized mortgage obligations

 

3,963

 

(142

)

28,736

 

(585

)

32,699

 

(727

)

Total securities available for sale

 

$

30,445

 

$

(391

)

$

29,731

 

$

(590

)

$

60,176

 

$

(981

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

518

 

$

(2

)

$

 

$

 

$

518

 

$

(2

)

Corporate bonds

 

4,955

 

(45

)

 

 

4,955

 

(45

)

Total securities held to maturity

 

$

5,473

 

$

(47

)

$

 

$

 

$

5,473

 

$

(47

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

December 31, 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

 

$

2,089

 

$

(15

)

$

 

$

 

$

2,089

 

$

(15

)

Mortgage backed securities - residential

 

7,535

 

(91

)

 

 

7,535

 

(91

)

Collateralized mortgage obligations

 

46,058

 

(881

)

12,534

 

(265

)

58,592

 

(1,146

)

Total securities available for sale

 

$

55,682

 

$

(987

)

$

12,534

 

$

(265

)

$

68,216

 

$

(1,252

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

517

 

$

(7

)

$

 

$

 

$

517

 

$

(7

)

Collateralized mortgage obligations

 

9,045

 

(4

)

 

 

9,045

 

(4

)

Corporate bonds

 

4,936

 

(63

)

 

 

4,936

 

(63

)

Total securities held to maturity

 

$

14,498

 

$

(74

)

$

 

$

 

$

14,498

 

$

(74

)

 

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At June 30, 2015, the Bank’s security portfolio consisted of 159 securities, 19 of which were in an unrealized loss position. At December 31, 2014, the Bank’s security portfolio consisted of 157 securities, 17 of which were in an unrealized loss position.

 

Other-than-temporary impairment (“OTTI”)

 

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 changes 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 $5.2 million at June 30, 2015. This security, with an average remaining life currently estimated at five 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, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Carrying amount

 

$

328,844

 

$

409,868

 

Fair value

 

329,417

 

410,307

 

 

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3.             LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The composition of the loan portfolio at June 30, 2015 and December 31, 2014 follows:

 

(in thousands)

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

Owner occupied

 

$

1,100,133

 

$

1,118,341

 

Owner occupied - correspondent*

 

243,140

 

226,628

 

Non owner occupied

 

101,765

 

96,492

 

Commercial real estate

 

799,158

 

772,309

 

Commercial real estate - purchased whole loans*

 

35,277

 

34,898

 

Construction & land development

 

47,038

 

38,480

 

Commercial & industrial

 

202,456

 

157,339

 

Lease financing receivables

 

7,242

 

2,530

 

Warehouse lines of credit

 

488,905

 

319,431

 

Home equity

 

267,570

 

245,679

 

Consumer:

 

 

 

 

 

RPG loans

 

6,467

 

4,095

 

Credit cards

 

10,942

 

9,573

 

Overdrafts

 

1,404

 

1,180

 

Purchased whole loans*

 

3,607

 

4,626

 

Other consumer

 

8,873

 

8,894

 

Total loans**

 

3,323,977

 

3,040,495

 

Allowance for loan and lease losses

 

(25,248

)

(24,410

)

 

 

 

 

 

 

Total loans, net

 

$

3,298,729

 

$

3,016,085

 

 


* - Identifies loans to borrowers located primarily outside of the Bank’s historical market footprint.

** - Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. See table directly below for expanded detail.

 

The table below reconciles the contractually receivable and carrying amounts of loans at June 30, 2015 and December 31, 2014:

 

(in thousands)

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Contractually receivable

 

$

3,329,849

 

$

3,050,599

 

Unearned income(1)

 

(635

)

(174

)

Unamortized premiums(2)

 

4,191

 

4,490

 

Unaccreted discounts(3)

 

(10,859

)

(15,675

)

Net unamortized deferred origination fees and costs

 

1,431

 

1,255

 

Carrying value of loans

 

$

3,323,977

 

$

3,040,495

 

 


(1) — Unearned income relates to lease financing receivables.

(2) - Premiums predominately relate to loans acquired through the Bank’s Correspondent Lending channel.

(3) - Discounts predominately relate to loans acquired in the Bank’s 2012 FDIC-assisted transactions.

 

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Loan Purchases

 

In May 2014, the Bank began acquiring single family, first lien mortgage loans for investment within its loan portfolio through its Correspondent Lending channel. Correspondent Lending generally involves the Bank acquiring, primarily from Warehouse clients, closed loans that meet the Bank’s specifications. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium. Loans acquired through the Correspondent Lending channel generally reflect borrowers outside of the Bank’s historical market footprint, with 83% of such loans as of June 30, 2015 secured by collateral in the state of California.

 

In addition to secured mortgage loans acquired through its Correspondent Lending channel, the Bank also began acquiring unsecured consumer installment loans for investment from a third-party originator in April 2014. Such consumer loans are purchased at par and are selected by the Bank based on certain underwriting characteristics.

 

The table below reflects the purchased activity of single family, first lien mortgage loans and unsecured consumer loans, by class, during the three and six months ended June 30, 2015 and 2014.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Owner occupied - correspondent*

 

$

43,632

 

$

12,067

 

$

62,802

 

$

12,067

 

Consumer:

 

 

 

 

 

 

 

 

 

Purchased whole loans*

 

 

2,628

 

361

 

2,628

 

Total purchased loans

 

$

43,632

 

$

14,695

 

$

63,163

 

$

14,695

 

 


* - Represents origination amount, inclusive of purchase premiums, where applicable.

 

Purchased Credit Impaired (“PCI”) Loans

 

PCI loans acquired during the Bank’s 2012 FDIC-assisted transactions are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

 

The table below reconciles the contractually required and carrying amounts of PCI loans at June 30, 2015 and December 31, 2014:

 

(in thousands)

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Contractually-required principal

 

$

20,080

 

$

26,571

 

Non-accretable amount

 

(2,076

)

(6,784

)

Accretable amount

 

(4,323

)

(2,297

)

Carrying value of PCI loans

 

$

13,681

 

$

17,490

 

 

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The following table presents a rollforward of the accretable amount on PCI loans for the three and six months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(2,170

)

$

(2,765

)

$

(2,297

)

$

(3,457

)

Transfers between non-accretable and accretable

 

(3,378

)

(1,029

)

(3,354

)

(2,340

)

Net accretion into interest income on loans, including loan fees

 

1,225

 

1,307

 

1,328

 

3,310

 

Balance, end of period

 

$

(4,323

)

$

(2,487

)

$

(4,323

)

$

(2,487

)

 

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Table of Contents

 

Credit Quality Indicators

 

Based on the Bank’s internal analyses performed as of June 30, 2015 and December 31, 2014, the following tables reflect loans by risk category. Risk categories are defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

Purchased

 

Purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired

 

Impaired

 

Total

 

 

 

 

 

Special

 

 

 

Doubtful /

 

Loans -

 

Loans -

 

Rated

 

June 30, 2015 (in thousands)

 

Pass

 

Mention *

 

Substandard *

 

Loss

 

Group 1

 

Substandard

 

Loans**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

24,473

 

$

15,456

 

$

 

$

927

 

$

 

$

40,856

 

Owner occupied - correspondent

 

 

 

 

 

 

 

 

Non owner occupied

 

 

1,544

 

1,983

 

 

1,203

 

 

4,730

 

Commercial real estate

 

770,583

 

7,455

 

10,842

 

 

10,278

 

 

799,158

 

Commercial real estate - purchased whole loans

 

35,277

 

 

 

 

 

 

35,277

 

Construction & land development

 

44,199

 

115

 

2,687

 

 

37

 

 

47,038

 

Commercial & industrial

 

198,956

 

2,063

 

201

 

 

1,236

 

 

202,456

 

Lease financing receivables

 

7,242

 

 

 

 

 

 

7,242

 

Warehouse lines of credit

 

488,905

 

 

 

 

 

 

488,905

 

Home equity

 

 

 

2,658