UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x Quarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the quarterly period ended March 31, 2009
or
¨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)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
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.
þ Yes ¨
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
|
¨
|
|
Accelerated
filer
|
þ
|
Non-accelerated
filer
|
¨
|
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes þ No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
The
number of shares outstanding of the registrant’s Class A Common Stock and Class
B Common Stock, as of April 24, 2009, was 18,438,155and 2,310,381,
respectively.
TABLE
OF CONTENTS
PART
I – FINANCIAL INFORMATION
|
3
|
|
|
|
Item
1.
|
Financial
Statements.
|
3 |
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
32
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
55
|
|
|
|
Item
4.
|
Controls
and Procedures.
|
55
|
|
|
|
PART
II – OTHER INFORMATION
|
55
|
|
|
|
Item
1.
|
Legal
Proceedings.
|
55
|
|
|
|
Item
1A.
|
Risk
Factors.
|
55
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
55
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
56
|
|
|
|
Item
6.
|
Exhibits.
|
57
|
|
|
|
|
SIGNATURES
|
58
|
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements.
CONSOLIDATED BALANCE
SHEETS (in thousands)
(unaudited)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
442,039 |
|
|
$ |
616,303 |
|
Securities
available for sale
|
|
|
402,206 |
|
|
|
853,909 |
|
Securities
to be held to maturity (fair value of $49,777 in 2009 and $49,224 in
2008)
|
|
|
50,576 |
|
|
|
50,765 |
|
Mortgage
loans held for sale
|
|
|
11,499 |
|
|
|
11,298 |
|
Loans,
net of allowance for loan losses of $17,878 and $14,832 (2009 and
2008)
|
|
|
2,296,811 |
|
|
|
2,289,025 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
26,248 |
|
|
|
25,082 |
|
Premises
and equipment, net
|
|
|
40,700 |
|
|
|
42,885 |
|
Goodwill
|
|
|
10,168 |
|
|
|
10,168 |
|
Other
assets and accrued interest receivable
|
|
|
57,398 |
|
|
|
39,933 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
3,337,645 |
|
|
$ |
3,939,368 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest-bearing
|
|
$ |
380,039 |
|
|
$ |
273,203 |
|
Interest-bearing
|
|
|
1,588,756 |
|
|
|
2,470,166 |
|
Total
deposits
|
|
|
1,968,795 |
|
|
|
2,743,369 |
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase and other short-term
borrowings
|
|
|
325,214 |
|
|
|
339,012 |
|
Federal
Home Loan Bank advances
|
|
|
635,191 |
|
|
|
515,234 |
|
Subordinated
note
|
|
|
41,240 |
|
|
|
41,240 |
|
Other
liabilities and accrued interest payable
|
|
|
63,622 |
|
|
|
24,591 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
3,034,062 |
|
|
|
3,663,446 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value
|
|
|
- |
|
|
|
- |
|
Class
A Common Stock and Class B Common Stock, no par value
|
|
|
4,899 |
|
|
|
4,878 |
|
Additional
paid in capital
|
|
|
124,453 |
|
|
|
123,441 |
|
Retained
earnings
|
|
|
169,956 |
|
|
|
146,983 |
|
Accumulated
other comprehensive income
|
|
|
4,275 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
303,583 |
|
|
|
275,922 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
3,337,645 |
|
|
$ |
3,939,368 |
|
See
accompanying footnotes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except per share
data)
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
91,326 |
|
|
$ |
57,780 |
|
Taxable
investment securities
|
|
|
5,154 |
|
|
|
6,996 |
|
Tax
exempt investment securities
|
|
|
6 |
|
|
|
24 |
|
Federal
Home Loan Bank stock and other
|
|
|
871 |
|
|
|
2,960 |
|
Total
interest income
|
|
|
97,357 |
|
|
|
67,760 |
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,338 |
|
|
|
14,301 |
|
Securities
sold under agreements to repurchase and
|
|
|
|
|
|
|
|
|
other
short-term borrowings
|
|
|
339 |
|
|
|
2,767 |
|
Federal
Home Loan Bank advances
|
|
|
5,244 |
|
|
|
5,437 |
|
Subordinated
note
|
|
|
620 |
|
|
|
627 |
|
Total
interest expense
|
|
|
16,541 |
|
|
|
23,132 |
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME
|
|
|
80,816 |
|
|
|
44,628 |
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
25,665 |
|
|
|
10,499 |
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME AFTER PROVISION
|
|
|
|
|
|
|
|
|
FOR
LOAN LOSSES
|
|
|
55,151 |
|
|
|
34,129 |
|
|
|
|
|
|
|
|
|
|
NON
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
4,422 |
|
|
|
4,545 |
|
Electronic
refund check fees
|
|
|
22,905 |
|
|
|
13,960 |
|
Net
RAL securitization income
|
|
|
412 |
|
|
|
12,587 |
|
Mortgage
banking income
|
|
|
4,174 |
|
|
|
1,602 |
|
Debit
card interchange fee income
|
|
|
1,159 |
|
|
|
1,149 |
|
Net
loss on sales, calls and impairment of securities
|
|
|
(3,125 |
) |
|
|
(219 |
) |
Other
|
|
|
555 |
|
|
|
320 |
|
Total
non interest income
|
|
|
30,502 |
|
|
|
33,944 |
|
|
|
|
|
|
|
|
|
|
NON
INTEREST EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
14,516 |
|
|
|
14,500 |
|
Occupancy
and equipment, net
|
|
|
5,909 |
|
|
|
4,672 |
|
Communication
and transportation
|
|
|
1,923 |
|
|
|
1,338 |
|
Marketing
and development
|
|
|
10,977 |
|
|
|
6,759 |
|
FDIC
insurance assessments
|
|
|
1,050 |
|
|
|
59 |
|
Bank
franchise tax expense
|
|
|
635 |
|
|
|
723 |
|
Data
processing
|
|
|
770 |
|
|
|
717 |
|
Debit
card interchange expense
|
|
|
674 |
|
|
|
576 |
|
Supplies
|
|
|
878 |
|
|
|
556 |
|
Other
real estate owned expense
|
|
|
1,711 |
|
|
|
25 |
|
Other
|
|
|
4,599 |
|
|
|
3,755 |
|
Total
non interest expenses
|
|
|
43,642 |
|
|
|
33,680 |
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
42,011 |
|
|
|
34,393 |
|
INCOME
TAX EXPENSE
|
|
|
16,252 |
|
|
|
12,270 |
|
NET
INCOME
|
|
$ |
25,759 |
|
|
$ |
22,123 |
|
(continued)
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
(continued)
(in thousands, except per share
data)
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
OTHER
COMPREHENSIVE INCOME, NET OF TAX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on securities available for sale
|
|
$ |
1,624 |
|
|
$ |
(4,211 |
) |
Realized
amount on securities impairment recorded, net
|
|
|
2,031 |
|
|
|
442 |
|
Realized
amount on securities sold, net
|
|
|
- |
|
|
|
(300 |
) |
Other
comprehensive income (loss)
|
|
|
3,655 |
|
|
|
(4,069 |
) |
|
|
|
|
|
|
|
|
|
COMPREHENISVE
INCOME
|
|
$ |
29,414 |
|
|
$ |
18,054 |
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
$ |
1.25 |
|
|
$ |
1.09 |
|
Class
B Common Stock
|
|
|
1.24 |
|
|
|
1.08 |
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
$ |
1.24 |
|
|
$ |
1.07 |
|
Class
B Common Stock
|
|
|
1.23 |
|
|
|
1.06 |
|
See
accompanying footnotes to consolidated financial statements.
CONSOLIDATED STATEMENT OF
STOCKHOLDERS’ EQUITY (UNAUDITED)
|
|
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, 2009
|
|
|
18,318 |
|
|
|
2,310 |
|
|
$ |
4,878 |
|
|
$ |
123,441 |
|
|
$ |
146,983 |
|
|
$ |
620 |
|
|
$ |
275,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,759 |
|
|
|
- |
|
|
|
25,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,655 |
|
|
|
3,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
declared Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A ($0.121 per share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,224 |
) |
|
|
- |
|
|
|
(2,224 |
) |
Class
B ($0.110 per share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(255 |
) |
|
|
- |
|
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options exercised, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
redeemed
|
|
|
100 |
|
|
|
- |
|
|
|
22 |
|
|
|
892 |
|
|
|
(200 |
) |
|
|
- |
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of Class A Common Stock
|
|
|
(6 |
) |
|
|
- |
|
|
|
(1 |
) |
|
|
(38 |
) |
|
|
(107 |
) |
|
|
- |
|
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
receivable on Common Stock, net of cash
payments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(90 |
) |
|
|
- |
|
|
|
- |
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
director compensation expense - Company
Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
65 |
|
|
|
- |
|
|
|
- |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
183 |
|
|
|
- |
|
|
|
- |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2009
|
|
|
18,412 |
|
|
|
2,310 |
|
|
$ |
4,899 |
|
|
$ |
124,453 |
|
|
$ |
169,956 |
|
|
$ |
4,275 |
|
|
$ |
303,583 |
|
See
accompanying footnotes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE
MONTHS ENDED MARCH 31, 2009 AND 2008 (in
thousands)
|
|
2009
|
|
|
2008
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
25,759 |
|
|
$ |
22,123 |
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion, net
|
|
|
3,017 |
|
|
|
2,348 |
|
Federal
Home Loan Bank stock dividends
|
|
|
- |
|
|
|
(307 |
) |
Provision
for loan losses
|
|
|
25,665 |
|
|
|
10,499 |
|
Net
gain on sale of mortgage loans held for sale
|
|
|
(3,974 |
) |
|
|
(1,611 |
) |
Origination
of mortgage loans held for sale
|
|
|
(183,563 |
) |
|
|
(78,066 |
) |
Proceeds
from sale of mortgage loans held for sale
|
|
|
187,336 |
|
|
|
73,089 |
|
Net
realized recovery of mortgage servicing rights
|
|
|
(1,133 |
) |
|
|
- |
|
Net
gain on sale of RALs
|
|
|
- |
|
|
|
(8,371 |
) |
Increase
in RAL securitization residual
|
|
|
412 |
|
|
|
(4,216 |
) |
Origination
of RALs sold
|
|
|
- |
|
|
|
(1,098,717 |
) |
Proceeds
from sale of RALs
|
|
|
- |
|
|
|
1,009,698 |
|
Paydown
of trading securities
|
|
|
(412 |
) |
|
|
104,201 |
|
Net
realized loss on sales, calls and impairment of securities
|
|
|
3,125 |
|
|
|
219 |
|
Net
gain on sale of other real estate owned
|
|
|
(20 |
) |
|
|
(42 |
) |
Write
downs of other real estate owned
|
|
|
1,663 |
|
|
|
- |
|
Net
gain on sale of premises and equipment
|
|
|
- |
|
|
|
(43 |
) |
Deferred
director compensation expense – Company Stock
|
|
|
65 |
|
|
|
43 |
|
Employee
Stock Ownership Plan compensation expense
|
|
|
- |
|
|
|
200 |
|
Stock
based compensation expense
|
|
|
183 |
|
|
|
195 |
|
Net
change in other assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
2,042 |
|
|
|
(3,569 |
) |
Accrued
interest payable
|
|
|
(2,749 |
) |
|
|
(1,972 |
) |
Other
assets
|
|
|
(19,352 |
) |
|
|
(4,068 |
) |
Other
liabilities
|
|
|
39,800 |
|
|
|
33,989 |
|
Net
cash provided by operating activities
|
|
|
77,864 |
|
|
|
55,622 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of securities available for sale
|
|
|
(300,114 |
) |
|
|
(1,107,155 |
) |
Purchases
of Federal Home Loan Bank stock
|
|
|
(1,166 |
) |
|
|
(531 |
) |
Proceeds
from calls, maturities and paydowns of securities available for
sale
|
|
|
754,338 |
|
|
|
1,129,766 |
|
Proceeds
from calls, maturities and paydowns of securities to be held to
maturity
|
|
|
188 |
|
|
|
428 |
|
Proceeds
from the sale of Federal Home Loan Bank stock
|
|
|
- |
|
|
|
360 |
|
Proceeds
from sales of other real estate owned
|
|
|
473 |
|
|
|
828 |
|
Net
(increase) decrease in loans
|
|
|
(34,210 |
) |
|
|
27,097 |
|
Purchases
of premises and equipment
|
|
|
(1,320 |
) |
|
|
(1,773 |
) |
Proceeds
from sale of premises and equipment
|
|
|
- |
|
|
|
848 |
|
Net
cash provided by investing activities
|
|
|
418,189 |
|
|
|
49,868 |
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
decrease in deposits
|
|
|
(774,574 |
) |
|
|
(163,377 |
) |
Net
decrease in securities sold under agreements to repurchase
|
|
|
|
|
|
|
|
|
and
other short-term borrowings
|
|
|
(13,798 |
) |
|
|
(68,824 |
) |
Payments
on Federal Home Loan Bank advances
|
|
|
(5,043 |
) |
|
|
(52,970 |
) |
Proceeds
from Federal Home Loan Bank advances
|
|
|
125,000 |
|
|
|
198,000 |
|
Repurchase
of Common Stock
|
|
|
(146 |
) |
|
|
- |
|
Net
proceeds from Common Stock options exercised
|
|
|
714 |
|
|
|
439 |
|
Cash
dividends paid
|
|
|
(2,470 |
) |
|
|
(2,209 |
) |
Net
cash used in financing activities
|
|
|
(670,317 |
) |
|
|
(88,941 |
) |
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(174,264 |
) |
|
|
16,549 |
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
616,303 |
|
|
|
86,177 |
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
442,039 |
|
|
$ |
102,726 |
|
(continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
THREE
MONTHS ENDED MARCH 31, 2009 AND 2008 (in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$ |
19,290 |
|
|
$ |
25,104 |
|
Income
taxes
|
|
|
63 |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
NONCASH DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
from loans to real estate acquired in settlement of loans
|
|
$ |
669 |
|
|
$ |
941 |
|
Retained
securitization residual
|
|
|
- |
|
|
|
102,059 |
|
See
accompanying footnotes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – MARCH 31, 2009 AND 2008 (UNAUDITED) AND
DECEMBER 31, 2008
1.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis of Presentation – The
consolidated financial statements include the accounts of Republic Bancorp, Inc.
(the “Parent Company”) and its wholly-owned subsidiaries: Republic Bank &
Trust Company (“RB&T”) and Republic Bank (collectively referred together
with RB&T as the “Bank”), Republic Funding Company and Republic Invest Co.
Republic Invest Co. includes its subsidiary, Republic Capital LLC. The
consolidated financial statements also include the wholly-owned subsidiaries of
RB&T: Republic Financial Services, LLC, TRS RAL Funding, LLC and Republic
Insurance Agency, LLC. Republic Bancorp Capital Trust (“RBCT”) is a Delaware
statutory business trust that is a wholly-owned unconsolidated finance
subsidiary of Republic Bancorp, Inc. All companies are collectively referred to
as “Republic” or the “Company.” All significant intercompany balances and
transactions are eliminated in consolidation.
Republic
operates 45 banking centers, primarily in the retail banking industry, and
conducts its operations predominately in metropolitan Louisville, Kentucky,
central Kentucky, northern Kentucky, southern Indiana, metropolitan Tampa,
Florida, metropolitan Cincinnati, Ohio and through an Internet banking delivery
channel. Republic’s consolidated 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 assets represent
securities and real estate mortgage, commercial and consumer loans.
Interest-bearing liabilities primarily consist of interest-bearing deposit
accounts, as well as short-term and long-term borrowing sources.
Other
sources of banking income include service charges on deposit accounts, debit
card interchange fee income, title insurance commissions, fees charged to
customers for trust services and revenue generated from Mortgage Banking
activities, which represents both the origination and sale of loans in the
secondary market and the servicing of loans for others.
Republic’s
operating expenses consist primarily of salaries and employee benefits,
occupancy and equipment expenses, communication and transportation costs,
marketing and development expenses, Federal Deposit Insurance Corporation
(“FDIC”) insurance assessments, bank franchise tax expense, data processing,
debit card interchange expense and other general and administrative costs.
Republic’s results of operations are significantly impacted by general economic
and competitive conditions, particularly changes in market interest rates,
government laws and policies and actions of regulatory agencies.
Republic,
through its Tax Refund Solutions (“TRS”) business operating segment, is one of a
limited number of financial institutions which facilitates the payment of
federal and state tax refunds through third party tax-preparers located
throughout the U.S., as well as tax-preparation software providers. The Company
facilitates the payment of these tax refunds through three primary products:
Electronic Refund Checks (“ERCs”), Electronic Refund Deposits (“ERDs”) and
Refund Anticipation Loans (“RALs”). Substantially all of the business generated
by TRS occurs in the first quarter of the year.
ERCs/ERDs
are products whereby a tax refund is issued to the taxpayer after the Company
has received the refund from the federal or state government. There is no credit
risk or borrowing cost for the Company for these products because ERCs/ERDs are
only delivered to the taxpayer upon receipt of the refund directly from the
Internal Revenue Service (“IRS”). Fees earned on ERCs/ERDs are reported as non
interest income under the line item “Electronic refund check fees.”
RALs are
short-term consumer loans offered to taxpayers that are secured by the
customer’s anticipated tax refund, which represents the source of repayment. The
Company underwrites the RAL application through an automated credit review
process utilizing information contained in the taxpayer’s tax return and the
tax-preparer’s history. If the application is approved, the Company advances the
amount of the refund due on the taxpayer’s return up to specified amounts less
the loan fee due to the Company and, if requested by the taxpayer, the fees due
for preparation of the return to the tax-preparer. As part of the RAL
application process, each taxpayer signs an agreement directing the IRS to send
the taxpayer’s refund directly to the Company. The refund received from the IRS
is used by the Company to pay off the RAL. Any amount due the taxpayer above the
amount of the RAL is remitted to the taxpayer once the refund is received by the
Company. The funds advanced by the Company are generally repaid by the IRS
within two weeks. The fees earned on RALs are reported as interest income under
the line item “Loans, including fees.”
For
additional discussion regarding TRS, see the following sections:
· Part I Item 1 “Financial
Statements:”
o Footnote 3 “Loans and Allowance for
Loan Losses”
o Footnote 10 “Segment
Information”
o Footnote 11
“Securitization”
· Part I Item 1A “Risk Factors” of the
Company’s 2008 Annual Report on Form 10-K
Securitization – During the
2008, 2007 and 2006, the Company utilized a securitization structure to fund a
portion of the RALs originated during the respective tax seasons. From mid
January to the end of February of each year, RALs which, upon origination, met
certain underwriting criteria related to refund amount and Earned Income Tax
Credit amount, were classified as loans held for sale and sold into the
securitization. All other RALs originated were retained by the Company. There
were no RALs held for sale as of any quarter end. The Company retained a related
residual value in the securitization, which was classified on the balance sheet
as a trading security. The initial residual interest had a weighted average life
of approximately one month, and as such, substantially all of its cash flows
were received by the end of the first quarter. The disposition of the remaining
anticipated cash flows occurred within the remainder of the calendar year. At
its initial valuation, and on a quarterly basis thereafter, the Company adjusted
the carrying amount of the residual value to its fair value, which was
determined based on expected future cash flows and was significantly influenced
by the anticipated credit losses of the underlying RALs.
The
Company chose not to utilize a securitization structure to fund its RAL
portfolio during the first quarter of 2009. During the first quarter of 2008,
the securitization consisted of a total of $1.1 billion of RALs originated and
sold. The Company’s continuing involvement in RALs sold into the securitization
was limited to only servicing of the RALs. Compensation for servicing of the
securitized RALs was not contingent upon performance of the securitized
RALs.
The
Company concluded that the securitization was a sale as defined in Statement of
Financial Accounting Standard (“SFAS”) 140 “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities-a replacement
of FASB Statement No. 125.” This conclusion was based on, among other
things, legal isolation of assets, the ability of the purchaser to pledge or
sell the assets and the absence of a right or obligation of the Company to
repurchase the financial assets.
For
additional discussion regarding TRS, see the following sections:
· Part I Item 1 “Financial
Statements:”
o Footnote 3 “Loans and Allowance for
Loan Losses”
o Footnote 10 “Segment
Information”
o Footnote 11
“Securitization”
· Part I Item 1A “Risk Factors” of the
Company’s 2008 Annual Report on Form 10-K
Recently Issued Accounting
Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
141(R), “Business
Combinations,” which established principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. The adoption of this standard did not have a material
effect on the Company’s results of operations or financial
position.
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51,” which
changed the accounting and reporting for minority interests. The adoption of
this standard did not have a material effect on the Company’s results of
operations or financial position.
|
In
March 2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133.” SFAS
161 amended and expanded the disclosure requirements of SFAS No. 133 for
derivative instruments and hedging activities. SFAS 161 requires
qualitative disclosure about objectives and strategies for using
derivative and hedging instruments, quantitative disclosures about fair
value amounts of the instruments and gains and losses on such instruments,
as well as disclosures about credit-risk features in derivative
agreements. The Company adopted SFAS 161 at the beginning of the first
quarter of 2009, and has included the expanded disclosures required by
that statement.
|
On April
9, 2009, the FASB finalized four FASB Staff Positions (“FSPs”) regarding the
accounting treatment for investments including mortgage-backed securities. These
FSPs changed the method for determining if an Other-than-temporary impairment
(“OTTI”) exists and the amount of OTTI to be recorded through an entity’s income
statement. The changes brought about by the FSPs provide greater clarity and
reflect a more accurate representation of the credit and noncredit components of
an OTTI event. The four FSPs are as follows:
|
·
|
FSP
“SFAS 157-3 Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active” clarifies the application of SFAS 157, “Fair Value
Measurements,” in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of
a financial asset when the market for that financial asset is not
active.
|
|
·
|
FSP
“SFAS 157-4 Determining
Fair Value When the Volume and Level of Activity for the Assets or
Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly” provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS 157,
“Fair Value
Measurements.”
|
|
·
|
FSP
“SFAS 115-2 and SFAS
124-2, Recognition and Presentation of Other-than-temporary impairments”
provides additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment losses on
securities.
|
|
·
|
FSP
“SFAS 107-1 and APB
28-1, Interim
Disclosures about Fair Value of Financial Instruments” enhances
consistency in financial reporting by increasing the frequency of fair
value disclosures.
|
These
staff positions are effective for financial statements issued for periods ending
after June 15, 2009, with early application possible for the first quarter of
2009. The Company elected not to adopt any of the above positions early. The
Company has not completed its evaluation of the impact of these standards on its
results of operation and financial position.
Reclassifications – Certain
amounts presented in prior periods have been reclassified to conform to the
current period presentation.
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 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 three months ended
March 31, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009. 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, 2008.
Securities
available for sale:
The
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
|
|
|
|
|
March 31, 2009 (in
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
$ |
17,029 |
|
|
$ |
286 |
|
|
$ |
(2 |
) |
|
$ |
17,313 |
|
Private
label mortgage backed and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
private
label mortgage-related securities
|
|
|
10,623 |
|
|
|
106 |
|
|
|
- |
|
|
|
10,729 |
|
Mortgage
backed securities
|
|
|
288,123 |
|
|
|
6,810 |
|
|
|
(37 |
) |
|
|
294,896 |
|
Collateralized
mortgage obligations
|
|
|
79,855 |
|
|
|
70 |
|
|
|
(657 |
) |
|
|
79,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities available for sale
|
|
$ |
395,630 |
|
|
$ |
7,272 |
|
|
$ |
(696 |
) |
|
$ |
402,206 |
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
December 31, 2008 (in
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
$ |
458,245 |
|
|
$ |
596 |
|
|
$ |
(1 |
) |
|
$ |
458,840 |
|
Private
label mortgage backed and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
private
label mortgage-related securities
|
|
|
14,678 |
|
|
|
- |
|
|
|
- |
|
|
|
14,678 |
|
Mortgage
backed securities
|
|
|
305,902 |
|
|
|
2,829 |
|
|
|
(496 |
) |
|
|
308,235 |
|
Collateralized
mortgage obligations
|
|
|
74,130 |
|
|
|
- |
|
|
|
(1,974 |
) |
|
|
72,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities available for sale
|
|
$ |
852,955 |
|
|
$ |
3,425 |
|
|
$ |
(2,471 |
) |
|
$ |
853,909 |
|
Securities
to be held to maturity:
The carrying value, gross
unrecognized gains and losses, and fair value of securities to be held to
maturity were as follows:
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
March 31, 2009 (in
thousands)
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
$ |
4,672 |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
4,673 |
|
Obligations
of states and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
384 |
|
|
|
26 |
|
|
|
- |
|
|
|
410 |
|
Mortgage
backed securities
|
|
|
3,367 |
|
|
|
81 |
|
|
|
(2 |
) |
|
|
3,446 |
|
Collateralized
mortgage obligations
|
|
|
42,153 |
|
|
|
5 |
|
|
|
(910 |
) |
|
|
41,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities to be held to maturity
|
|
$ |
50,576 |
|
|
$ |
113 |
|
|
$ |
(912 |
) |
|
$ |
49,777 |
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
December 31, 2008 (in
thousands)
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
$ |
4,670 |
|
|
$ |
7 |
|
|
$ |
- |
|
|
$ |
4,677 |
|
Obligations
of states and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
384 |
|
|
|
17 |
|
|
|
- |
|
|
|
401 |
|
Mortgage
backed securities
|
|
|
3,527 |
|
|
|
63 |
|
|
|
(2 |
) |
|
|
3,588 |
|
Collateralized
mortgage obligations
|
|
|
42,184 |
|
|
|
- |
|
|
|
(1,626 |
) |
|
|
40,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities to be held to maturity
|
|
$ |
50,765 |
|
|
$ |
87 |
|
|
$ |
(1,628 |
) |
|
$ |
49,224 |
|
Market
Loss Analysis
Securities
with unrealized losses at March 31, 2009 and December 31, 2008, 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
|
|
March 31, 2009 (in
thousands)
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and U.S.
Government
agencies
|
|
$ |
8,047 |
|
|
$ |
(2 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8,047 |
|
|
$ |
(2 |
) |
Mortgage
backed securities, including collateralized mortgage
obligations
|
|
|
103,914 |
|
|
|
(1,604 |
) |
|
|
57 |
|
|
|
(2 |
) |
|
|
103,971 |
|
|
|
(1,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
111,961 |
|
|
$ |
(1,606 |
) |
|
$ |
57 |
|
|
$ |
(2 |
) |
|
$ |
112,018 |
|
|
$ |
(1,608 |
) |
December 31, 2008 (in
thousands)
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and U.S.
Government
agencies
|
|
$ |
24,999 |
|
|
$ |
(1 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
24,999 |
|
|
$ |
(1 |
) |
Mortgage
backed securities, including collateralized mortgage
obligations
|
|
|
178,864 |
|
|
|
(4,092 |
) |
|
|
77 |
|
|
|
(6 |
) |
|
|
178,941 |
|
|
|
(4,098 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
203,863 |
|
|
$ |
(4,093 |
) |
|
$ |
77 |
|
|
$ |
(6 |
) |
|
$ |
203,940 |
|
|
$ |
(4,099 |
) |
|
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 their
value below amortized cost is other-than-temporary. In conducting this
assessment, the Company evaluates a number of factors including, but not limited
to:
|
·
|
how
much fair value has declined below amortized
cost;
|
|
·
|
how
long the decline in fair value has
existed;
|
|
·
|
the
financial condition of the issuer;
|
|
·
|
contractual
or estimated cash flows of the
security;
|
|
·
|
underlying
supporting collateral;
|
|
·
|
past
events, current conditions and
forecasts;
|
|
·
|
significant
rating agency changes on the issuer;
and
|
|
·
|
the
Company’s intent and ability to hold the security for a period of time
sufficient to allow for any anticipated recovery in fair
value.
|
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.
Nationally,
residential real estate values have declined significantly since 2007. These
declines in value, coupled with the reduced ability of certain homeowners to
refinance or repay their residential real estate obligations, have led to
elevated delinquencies and losses in residential real estate loans. Many of
these loans have previously been securitized and sold to investors as private
label mortgage backed and other private label mortgage-related securities. The
Company owned and continues to own five private label mortgage backed and other
private label mortgage-related securities with a fair value of $10.7 million at
March 31, 2009. These securities are not guaranteed by government agencies.
Approximately $5.4 million (Securities 1 through 4 in the table
below) of these securities are mostly backed by “Alternative A” first
lien mortgage loans. The remaining $5.3 million (Security 5 in the table
below) represents an asset backed security with an insurance “wrap” or
guarantee. The average life of these securities is currently estimated to be
approximately five years. Due to current market conditions, all of these assets
are extremely illiquid, and as such, the Company determined that these
securities are Level 3 securities in accordance with SFAS 157 “Fair Value Measurements.”
Based on this determination, the Company utilized an income valuation
model (present value model) approach, in determining the fair value of these
securities. 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 these
investments.
All
respective unrealized losses related to the private label mortgage backed and
other private label mortgage-related securities have been transferred from
accumulated other comprehensive loss to an immediate reduction of earnings
classified as net loss on sales, calls and impairments of securities in the
consolidated statement of income and comprehensive income. In the future, with
the adoption of the FSPs, all unrealized losses in the Company’s private label
securities which are deemed to be non-credit in nature will be recorded as a
reduction to other comprehensive income. Those losses deemed to be credit in
nature will be transferred from accumulated other comprehensive loss to an
immediate reduction of earnings classified as net loss on sales, calls and
impairments of securities in the consolidated statement of income and
comprehensive income.
During
the first quarter of 2009, the Company recognized total non cash OTTI charges to
the income statement of $3.1 million for its available for sale private label
mortgage backed securities and other private label mortgage-related securities
(Security 1 through Security 5
in the table below). During the first quarter of 2008, the Company
recognized a net loss on sales, calls and impairment on securities of $219,000.
During the first quarter of 2008, management determined that its Federal Home
Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) preferred stock investment,
with a cost basis of $2 million, was “other-than-temporarily impaired” and
recorded an impairment charge of $680,000. This impairment charge was partially
offset by a mandatory partial redemption of the Company’s Visa, Inc. Class B
Common Stock holdings of $311,000 related to Visa’s initial public offering, as
well as $150,000 in realized gains booked related to unamortized discount
accretion on a portion of callable U.S. Government agencies that were called
before their maturity during the first quarter of 2008.
For the
year ended December 31, 2008, the Company recorded total non cash OTTI charges
of $14.2 million related to its available for sale private label mortgage backed
securities and other private label mortgage-related securities (Security 1 through Security 5 in the
table below). In determining these securities were other-than-temporarily
impaired, the Company gave considerable weight to the significance of the
downgrades of the securities by the various rating agencies throughout the year.
These downgrades raised doubt about the ability of the Company to continue to
collect future principal and interest payments from the security in accordance
with its original terms. In addition, the Company recorded additional impairment
charges, as the Company’s model indicated further credit deterioration of the
underlying loans. In other words, the Company modeled future anticipated cash
flows and projected a shortfall, or loss of contractual principal and
interest.
Further
deterioration in economic conditions and/or new or additional downgrades from
applicable rating agencies could cause the Company to record additional
impairment charges up to $10.6 million, which is the current carrying amount of
its private label mortgage backed securities and other private label
mortgage-related securities. Realized and unrealized loss detail for the
Company’s private label mortgage backed and other private label mortgage-related
securities as of and for the three months ended March 31, 2009
follows:
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Realized
|
|
|
Ratings
as of the filing date
|
|
(in thousands)
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
S&P
|
|
|
Fitch
|
|
|
Moody's
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
1
|
|
$ |
1,869 |
|
|
$ |
1,869 |
|
|
$ |
(1,870 |
) |
|
B
|
|
|
-
|
|
|
Ca
|
|
Security
2
|
|
|
240 |
|
|
|
240 |
|
|
|
(247 |
) |
|
BB
|
|
|
-
|
|
|
Ca
|
|
Security
3
|
|
|
2,263 |
|
|
|
2,263 |
|
|
|
(707 |
) |
|
BB
|
|
|
CCC
|
|
|
-
|
|
Security
4
|
|
|
1,010 |
|
|
|
1,010 |
|
|
|
(301 |
) |
|
AA
|
|
|
B
|
|
|
-
|
|
Security
5
|
|
|
5,241 |
|
|
|
5,347 |
|
|
|
- |
|
|
AA
|
|
|
-
|
|
|
-
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,623 |
|
|
$ |
10,729 |
|
|
$ |
(3,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
The
ratings above range from extremely speculative (Moody’s Ca) to high grade
(S&P AA).
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)
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
$ |
410,688 |
|
|
$ |
595,156 |
|
Fair
value
|
|
|
409,800 |
|
|
|
593,922 |
|
3.
|
LOANS
AND ALLOWANCE FOR LOAN LOSSES
|
The
composition of the loan portfolio follows:
|
|
March 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
1,111,319 |
|
|
$ |
1,095,540 |
|
Commercial
real estate
|
|
|
641,257 |
|
|
|
653,048 |
|
Real
estate construction
|
|
|
95,996 |
|
|
|
99,395 |
|
Commercial
|
|
|
107,593 |
|
|
|
111,604 |
|
Consumer
|
|
|
44,242 |
|
|
|
28,056 |
|
Overdrafts
|
|
|
971 |
|
|
|
2,796 |
|
Home
equity
|
|
|
313,311 |
|
|
|
313,418 |
|
Total
loans
|
|
|
2,314,689 |
|
|
|
2,303,857 |
|
Less:
Allowance for loan losses
|
|
|
17,878 |
|
|
|
14,832 |
|
|
|
|
|
|
|
|
|
|
Loans,
net
|
|
$ |
2,296,811 |
|
|
$ |
2,289,025 |
|
Activity
in the allowance for loan losses follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Allowance
for loan losses, at beginning of period
|
|
$ |
14,832 |
|
|
$ |
12,735 |
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
25,665 |
|
|
|
10,499 |
|
|
|
|
|
|
|
|
|
|
Charge
offs – Banking
|
|
|
(895 |
) |
|
|
(1,060 |
) |
Charge
offs – Tax Refund Solutions
|
|
|
(27,054 |
) |
|
|
(7,873 |
) |
Total
Charge offs
|
|
|
(27,949 |
) |
|
|
(8,933 |
) |
|
|
|
|
|
|
|
|
|
Recoveries
– Banking
|
|
|
155 |
|
|
|
186 |
|
Recoveries
– Tax Refund Solutions
|
|
|
5,175 |
|
|
|
538 |
|
Total
Recoveries
|
|
|
5,330 |
|
|
|
724 |
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses, at end of period
|
|
$ |
17,878 |
|
|
$ |
15,025 |
|
Information
regarding Republic’s impaired loans follows:
|
|
March
31,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Loans
with no allocated allowance for loan losses
|
|
$ |
- |
|
|
$ |
- |
|
Loans
with allocated allowance for loan losses
|
|
|
25,205 |
|
|
|
12,108 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
25,205 |
|
|
$ |
12,108 |
|
|
|
|
|
|
|
|
|
|
Amount
of the allowance for loan losses allocated
|
|
$ |
4,432 |
|
|
$ |
1,998 |
|
Average
of individually impaired loans during period
|
|
|
2,291 |
|
|
|
13,355 |
|
Interest
income recognized during impairment
|
|
|
- |
|
|
|
- |
|
Cash
basis interest income recognized
|
|
|
- |
|
|
|
- |
|
Detail of
non-performing loans and non-performing assets follows:
(dollars in thousands)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
Loans
on non-accrual status
|
|
$ |
24,133 |
|
|
$ |
11,324 |
|
Loans
past due 90 days or more and still on accrual
|
|
|
352 |
|
|
|
2,133 |
|
Total
non-performing loans
|
|
|
24,485 |
|
|
|
13,457 |
|
Other
real estate owned
|
|
|
6,386 |
|
|
|
5,737 |
|
Total
non-performing assets
|
|
$ |
30,871 |
|
|
$ |
19,194 |
|
Non-performing
loans to total loans
|
|
|
1.06 |
% |
|
|
0.58 |
% |
Non-performing
assets to total loans (including OREO)
|
|
|
1.33 |
|
|
|
0.83 |
|
The
composition of non performing loans follows:
|
|
March
31,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
9,625 |
|
|
$ |
7,147 |
|
Commercial
real estate
|
|
|
6,243 |
|
|
|
2,665 |
|
Real
estate construction
|
|
|
6,987 |
|
|
|
2,749 |
|
Commercial
|
|
|
577 |
|
|
|
243 |
|
Consumer
|
|
|
38 |
|
|
|
86 |
|
Home
equity
|
|
|
1,015 |
|
|
|
567 |
|
Total
non performing loans
|
|
$ |
24,485 |
|
|
$ |
13,457 |
|
The
following table details RAL originations and loss reserves for three months
ended March 31, 2009 and 2008:
Three
Months Ended March 31, (in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RALs
originated and retained on balance sheet
|
|
$ |
2,455,183 |
|
|
$ |
672,258 |
|
RALs
originated and securitized
|
|
|
- |
|
|
|
1,090,473 |
|
Total
RALs originated
|
|
$ |
2,455,183 |
|
|
$ |
1,762,731 |
|
|
|
|
|
|
|
|
|
|
Estimated
RAL losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
losses for RALs retained on balance sheet, net
|
|
$ |
22,008 |
|
|
$ |
7,453 |
|
Net
reduction to estimated future expected cash
|
|
|
|
|
|
|
|
|
flows
for securitized RALs
|
|
|
- |
|
|
|
7,174 |
|
Total
Estimated RAL losses, net
|
|
$ |
22,008 |
|
|
$ |
14,627 |
|
RAL
Loss Reserves and Provision for Loan Losses:
Due to
the excessive costs of securitization structures, which resulted from a
significant lack of liquidity in the credit markets during the latter half of
2008, the Company elected not to obtain funding from a securitization structure
for the first quarter 2009 tax season. Instead, the Company utilized its
traditional borrowing sources, including brokered certificates of deposit, as
its primary RAL funding source for the first quarter 2009 tax season. Accounting
for this change in funding strategy caused, and will continue to cause
throughout the year, differences among some income and expense items when
comparing results of operations for 2009 to 2008. The securitization had the
effect during 2008 of reclassifying for securitized RALs the fee income earned,
interest expense paid and provision expense into “Net RAL securitization
income,” which is a component of non interest income. During 2009, these items
were, and will continue to be, classified in interest income on loans, interest
expense on deposits and provision for loan losses,
respectively.
While the
RAL application form is completed by the taxpayer in the tax-preparer’s office,
the credit approval criteria is established by TRS and the underwriting decision
is made by TRS. TRS reviews and evaluates all tax returns to determine the
likelihood of IRS payment. If any attribute of the tax return appears to fall
outside of predetermined parameters, TRS will not originate the
RAL.
Substantially
all RALs issued by the Company each year are made during the first quarter.
Losses associated with RALs result from the IRS not remitting taxpayer refunds
to the Company associated with a particular tax return. This occurs for a number
of reasons, including errors in the tax return, tax return fraud and tax debts
not disclosed to the Company during its underwriting process. At March 31st of
each year, with adjustments each quarter end thereafter, the Company reserves
for its estimated RAL losses based on current year and historical funding
patterns and information received from the IRS regarding current year payment
processing.
Profitability
in the Company’s TRS business operating segment is primarily driven by the
volume of RAL transactions processed and the loss rate incurred on RALs, and is
particularly sensitive to both measures. During the first quarter of 2009, the
Company processed 39% more in dollars of RALs originated compared to the same
period in 2008. As of March 31, 2009, $34.9 million of total RALs
originated were outstanding past their expected funding date from the IRS
compared to $19.2 million (includes $9.4 of securitized RALs) at March 31, 2008,
representing 1.43% and 1.11% of total gross RALs originated during the
respective tax years by the Company. The increase in estimated losses associated
with RALs was primarily due the increased overall volume coupled with higher
estimated RAL losses as a percent of total originations related to an increase
in the amount of refunds held by the IRS for reasons such as audits and liens
from prior debts. In addition, the overall dollar increase in uncollected RALs
was also driven by the year-over-year growth in volume.
The
Company expects the actual loss rate realized will be less than the current
uncollected amount as the Company will continue to receive payments from the IRS
throughout the year and make other collection efforts to obtain repayment on the
RALs. As a result of the higher current overall RAL uncollected rate, however,
the TRS segment’s provision for loan losses increased from $7.5 million during
the first quarter of 2008 to $22.0 million during the first quarter of 2009.
Included as a credit to the first quarter 2009 TRS provision for loan losses,
and as a recovery in the analysis of the allowance for loan losses, was $2.8
million, which represents a limited preparer-provided guarantee on RAL
product performance. The Company’s gross loss reserves for RALs equate to 1.10%
and 0.87% of total RALs originated during the first quarter of each year. Based
on the Company’s 2009 RAL volume, each 0.10% increase in the loss rate for RALs
represents approximately $2.5 million in additional provision for loan loss
expense.
The
following tables illustrates the effect on the 2009 provision for loan losses of
TRS if final losses of RALs differ from management’s current estimate by as much
as 33 basis points higher or lower:
As of March 31, 2009
(dollars in thousands)
Total
RALs retained on balance sheet during the current year tax
season:
|
|
$ |
2,455,183 |
|
|
|
|
|
|
Increase / (Decrease)
|
|
|
|
|
|
|
In Provision
|
|
If % of RALs That Do
|
|
Provision for
|
|
|
For Loan Losses
|
|
Not Payoff Changes
|
|
Loan Losses
|
|
|
From Current Estimate
|
|
|
|
|
|
|
|
|
Increase
33 basis points
|
|
$ |
30,110 |
|
|
$ |
8,102 |
|
Increase
30 basis points
|
|
|
29,374 |
|
|
|
7,366 |
|
Increase
25 basis points
|
|
|
28,146 |
|
|
|
6,138 |
|
Increase
20 basis points
|
|
|
26,918 |
|
|
|
4,910 |
|
Increase
15 basis points
|
|
|
25,691 |
|
|
|
3,683 |
|
Increase
10 basis points
|
|
|
24,463 |
|
|
|
2,455 |
|
Increase
5 basis points
|
|
|
23,236 |
|
|
|
1,228 |
|
Current
Estimate (Base)
|
|
|
22,008 |
|
|
|
- |
|
Decrease
5 basis points
|
|
|
20,780 |
|
|
|
(1,228 |
) |
Decrease
10 basis points
|
|
|
19,553 |
|
|
|
(2,455 |
) |
Decrease
15 basis points
|
|
|
18,325 |
|
|
|
(3,683 |
) |
Decrease
20 basis points
|
|
|
17,098 |
|
|
|
(4,910 |
) |
Decrease
25 basis points
|
|
|
15,870 |
|
|
|
(6,138 |
) |
Decrease
30 basis points
|
|
|
14,642 |
|
|
|
(7,366 |
) |
Decrease
33 basis points
|
|
|
13,906 |
|
|
|
(8,102 |
) |
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
Deposit
composition was as follows at March 31, 2009 and December 31, 2008:
|
|
March
31,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Demand
(NOW and SuperNOW)
|
|
$ |
222,388 |
|
|
$ |
202,607 |
|
Money
market accounts
|
|
|
576,427 |
|
|
|
555,346 |
|
Brokered
money market accounts
|
|
|
180,822 |
|
|
|
163,965 |
|
Internet
money market accounts
|
|
|
5,710 |
|
|
|
6,253 |
|
Savings
|
|
|
34,597 |
|
|
|
32,599 |
|
Individual
retirement accounts
|
|
|
37,052 |
|
|
|
38,142 |
|
Time
deposits, $100,000 and over
|
|
|
198,678 |
|
|
|
202,058 |
|
Other
certificates of deposit
|
|
|
189,482 |
|
|
|
221,179 |
|
Brokered
deposits
|
|
|
143,600 |
|
|
|
1,048,017 |
|
Total
interest-bearing deposits
|
|
|
1,588,756 |
|
|
|
2,470,166 |
|
Total
non interest-bearing deposits
|
|
|
380,039 |
|
|
|
273,203 |
|
Total
|
|
$ |
1,968,795 |
|
|
$ |
2,743,369 |
|
5.
|
FEDERAL
HOME LOAN BANK (“FHLB”) ADVANCES
|
At March
31, 2009 and December 31, 2008, FHLB advances outstanding were as
follows:
(in
thousands)
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Putable
fixed interest rate advances with a weighted average interest rate of
4.51%(1)
|
|
$ |
150,000 |
|
|
$ |
150,000 |
|
|
|
|
|
|
|
|
|
|
Fixed
interest rate advances with a weighted average interest rate of 3.55% due
through 2035
|
|
|
485,191 |
|
|
|
365,234 |
|
|
|
|
|
|
|
|
|
|
Total
FHLB advances
|
|
$ |
635,191 |
|
|
$ |
515,234 |
|
(1)
Represents putable advances with the FHLB. These advances have original fixed
rate periods ranging from one to five years with original maturities ranging
from three to ten years if not put back to the Company earlier by the FHLB. At
the end of their respective fixed rate periods and on a quarterly basis
thereafter, the FHLB has the right to require payoff of the advances by the
Company at no penalty. During the first quarter of 2007, the Company entered
into $100 million of putable advances with a final maturity of 10 years and a
fixed rate period of 3 years. Based on market conditions at this time, the
Company does not believe that any of its putable advances are likely to be “put
back” to the Company in the short-term by the FHLB.
Each FHLB
advance is payable at its maturity date, with a prepayment penalty for fixed
rate advances paid off earlier than maturity. FHLB advances are collateralized
by a blanket pledge of eligible real estate loans. At March 31, 2009,
Republic had available collateral to borrow an additional $327 million from the
FHLB. In addition to its borrowing line with the FHLB, Republic also had
unsecured lines of credit totaling $200 million available through various other
financial institutions.
Aggregate
future principal payments on FHLB advances, based on contractual maturity dates
are detailed below:
Year
|
|
(in
thousands)
|
|
|
|
|
|
2009
|
|
$ |
102,000 |
|
2010
|
|
|
92,370 |
|
2011
|
|
|
100,000 |
|
2012
|
|
|
85,000 |
|
2013
|
|
|
91,000 |
|
Thereafter
|
|
|
164,821 |
|
Total
|
|
$ |
635,191 |
|
The
following table illustrates real estate loans pledged to collateralize advances
and letters of credit from the FHLB:
|
|
March 31,
|
|
|
December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
First
lien, single family residential
|
|
$ |
811,740 |
|
|
$ |
799,932 |
|
Home
equity lines of credit
|
|
|
119,150 |
|
|
|
121,470 |
|
Multi-family,
commercial real estate
|
|
|
43,386 |
|
|
|
38,082 |
|
SFAS 157,
“Fair Value
Measurements.” establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1: Quoted prices
(unadjusted) for identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2: Significant other
observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data.
Level 3: Significant
unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.
In
certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. When that occurs, the Company classifies the
fair value hierarchy on the lowest level of input that is significant to the
fair value measurement. The Company uses the following methods and significant
assumptions to estimate fair value:
Securities available for sale:
For all securities available for sale, excluding private label mortgage backed
and other private label mortgage-related securities, fair value is typically
determined by obtaining quoted prices on nationally recognized securities
exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique
used widely in the industry to value debt securities without relying exclusively
on quoted prices for the specific securities, but rather by relying on the
securities’ relationship to other benchmark quoted securities (Level 2 inputs).
With the exception of private label mortgage backed and other private label
mortgage-related securities securities, all securities available for sale are
classified as Level 2 in the fair value hierarchy.
On April
9, 2009, the FASB finalized FOUR Staff Positions (“FSPs”) regarding the
accounting treatment for investments including mortgage-backed securities. These
FSPs changed the method for determining if an Other-than-temporary impairment
(“OTTI”) exists and the amount of OTTI to be recorded through an entity’s income
statement. The changes brought about by the FSPs provide greater clarity and
reflect a more accurate representation of the credit and noncredit components of
an OTTI event. These staff positions are effective for financial statements
issued for periods ending after June 15, 2009, with early application possible
for the first quarter of 2009. The Company elected not to adopt any of these
three positions early. The Company has not completed its evaluation of the
impact of these standards on its results of operation and financial
position.
See
Footnote 2 “Investment Securities” of Part I Item I “Financial Statements” for
additional discussion regarding the Company’s private label mortgage backed and
other private label mortgage-related securities.
Derivative instruments:
Mortgage Banking derivatives used in the ordinary course of business consist of
mandatory forward sales contracts (“forward contracts”) and rate lock loan
commitments. The fair value of the Company’s derivative instruments is primarily
measured by obtaining pricing from broker-dealers recognized to be market
participants. The pricing is derived from market observable inputs that can
generally be verified and do not typically involve significant judgment by the
Company. Forward contracts and loan commitments are classified as Level 2 in the
fair value hierarchy.
Mortgage loans held for sale:
The fair value of mortgage loans held for sale is determined using quoted
secondary-market prices. Mortgage loans held for sale are classified as Level 2
in the fair value hierarchy.
Impaired Loans: The fair value
of impaired loans with specific allocations of the allowance for loan losses is
generally based on recent real estate appraisals. These appraisals may utilize a
single valuation approach or a combination of approaches including comparable
sales and the income approach. Adjustments are routinely made in the appraisal
process by the appraisers to adjust for differences between the comparable sales
and income data available. Such adjustments are typically significant and result
in a Level 3 classification of the inputs for determining fair
value.
Mortgage Servicing Rights: The
fair value of mortgage servicing rights is based on a valuation model that
calculates the present value of estimated net servicing income. The valuation
model incorporates assumptions that market participants would use in estimating
future net servicing income. The Company is able to compare the valuation model
inputs and results to widely available published industry data for
reasonableness. Mortgage servicing rights are classified as Level 2 in the fair
value hierarchy.
Assets and liabilities
measured on a recurring basis at March 31, 2009
(in
thousands)
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance
as of
March
31, 2009
|
|
Securities
available for sale
|
|
$ |
- |
|
|
$ |
391,477 |
|
|
$ |
10,729 |
|
|
$ |
402,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
contracts
|
|
|
- |
|
|
|
(748 |
) |
|
|
- |
|
|
|
(748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
lock loan commitments
|
|
|
- |
|
|
|
1,626 |
|
|
|
- |
|
|
|
1,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans held for sale
|
|
|
- |
|
|
|
11,499 |
|
|
|
- |
|
|
|
11,499 |
|
Rollforwards
of activity for the Company’s Significant Unobservable Inputs (Level 3),
follows:
Securities available for
sale - Private label mortgage backed and other private label mortgage-related
securities
Three months
ended March 31, (in
thousands)
|
|
2009
|
|
|
|
|
|
Balance,
January 1, 2009
|
|
$ |
14,678 |
|
Net
realized OTTI loss
|
|
|
(3,125 |
) |
Net
change in unrealized gain/ (loss) |
|
|
106 |
|
Principal
paydowns
|
|
|
(930 |
) |
Balance,
March 31, 2009
|
|
$ |
10,729 |
|
Assets and liabilities
measured on a non-recurring basis at March 31, 2009
(in
thousands)
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance
as of
December
31,
2008
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
20,773 |
|
|
$ |
20,773 |
|
Mortgage
servicing rights
|
|
|
- |
|
|
|
8,380 |
|
|
|
- |
|
|
|
8,380 |
|
The
following represent impairment charges recognized during the
period:
The
Company recorded realized impairment loss related to its Level 3 private label
mortgage backed and other private label mortgage-related securities totaling
$3.1 million and $0 for the three months ended March 31, 2009 and 2008. See Footnote 2 “Investment
Securities” for additional detail.
Due
primarily to a decline in the expected prepayment speed of the Company’s sold
loan portfolio with servicing retained, the fair value of the Company’s Mortgage
Servicing Rights (“MSR”) increased during the first quarter of 2009. As a result
of this increase, the Company reduced its corresponding valuation allowance to
$122,000 at March 31, 2009, a reduction of $1.1 million.
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $25.2 million, with a
valuation allowance of $4.4 million, resulting in an additional provision for
loan losses of $1.3 million and $1.5 million for the three months ended March
31, 2009 and 2008, respectively.
7. MORTGAGE
BANKING ACTIVITIES
Activity for mortgage loans held for
sale was as follows:
March 31, (in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$ |
11,298 |
|
|
$ |
4,278 |
|
Origination
of mortgage loans held for sale
|
|
|
183,563 |
|
|
|
78,066 |
|
Proceeds
from the sale of mortgage loans held for sale
|
|
|
(187,336 |
) |
|
|
(73,089 |
) |
Net
gain on sale of mortgage loans held for sale
|
|
|
3,974 |
|
|
|
1,611 |
|
Less:
Allowance to adjust to lower of cost or market
|
|
|
- |
|
|
|
- |
|
Balance,
end of period
|
|
$ |
11,499 |
|
|
$ |
10,866 |
|
Mortgage
banking activities primarily include residential mortgage originations and
servicing. The following table presents the components of mortgage banking
income:
March 31, (in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
gain on sale of mortgage loans held for sale
|
|
$ |
3,974 |
|
|
$ |
1,611 |
|
Decrease
in valuation allowance for MSR impairment
|
|
|
1,133 |
|
|
|
- |
|
Net
loan servicing income, net of amortization
|
|
|
(933 |
) |
|
|
(9 |
) |
Mortgage
banking income
|
|
$ |
4,174 |
|
|
$ |
1,602 |
|
Activity
for capitalized mortgage servicing rights was as follows:
March 31, (in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$ |
5,809 |
|
|
$ |
6,706 |
|
Additions
|
|
|
1,604 |
|
|
|
877 |
|
Amortized
to expense
|
|
|
(1,601 |
) |
|
|
(633 |
) |
Change
in valuation allowance
|
|
|
1,133 |
|
|
|
- |
|
Balance,
end of period
|
|
$ |
6,945 |
|
|
$ |
6,950 |
|
Activity
for the valuation allowance for capitalized mortgage servicing rights was as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$ |
(1,255 |
) |
|
$ |
- |
|
Additions
to expense
|
|
|
- |
|
|
|
- |
|
Decrease
in valuation allowance for MSR impairment
|
|
|
1,133 |
|
|
|
- |
|
|
|
|
- |
|
|
|
- |
|
Balance,
end of period
|
|
$ |
(122 |
) |
|
$ |
- |
|
The fair
value of MSRs was $8.4 million and $7.0 million at March 31, 2009 and December
31, 2008. The fair value at March 31, 2009 was calculated using a discount rate
of 9% with prepayment speeds ranging from 194% to 408%, depending on the
stratification of the specific MSR, and a weighted average default rate of
1.50%. The fair value for year end 2008 was calculated using a discount rate of
12% with prepayment speeds ranging from 187% to 509%, depending on the
stratification of the specific MSR, and a weighted average default rate of
1.50%.
Due to
the significant reduction in long-term interest rates during December of 2008,
the fair value of the MSR portfolio declined as pre-payment speed assumptions
were adjusted upwards resulting in an impairment charge of $1.3 million for the
fourth quarter and year ended December 31, 2008. During the first quarter of
2009, prepayment speed assumptions stabilized to levels last seen prior to
December of 2008 and the Company reversed $1.1 million from the valuation
allowance. At March 31, 2009 five of the total 22 tranches remained impaired for
a total of $122,000. There were no impairment charges recorded prior to the
fourth quarter of 2008.
Mortgage
Banking derivatives used in the ordinary course of business consist of mandatory
forward sales contracts and rate lock loan commitments. Forward contracts
represent future commitments to deliver loans at a specified price and date and
are used to manage interest rate risk on loan commitments and mortgage loans
held for sale. Rate lock commitments represent commitments to fund loans at a
specific rate. These derivatives involve underlying items, such as interest
rates, and are designed to transfer risk. Substantially all of these instruments
expire within 90 days from the date of issuance. Notional amounts are amounts on
which calculations and payments are based, but which do not represent credit
exposure, as credit exposure is limited to the amounts required to be received
or paid.
The
Company adopted SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133” at the beginning of the first quarter of 2009, and has included here
the expanded disclosures required by that statement.
The
following tables include the notional amounts and realized gain (loss) for
mortgage banking derivatives recognized in Mortgage Banking income for the
period end March 31, 2009 and December 31, 2008:
(in thousands)
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Forward
contracts:
|
|
|
|
|
|
|
Notional
amount
|
|
$ |
111,800 |
|
|
$ |
43,865 |
|
Loss
on change in market value of forward contracts
|
|
|
(748 |
) |
|
|
(451 |
) |
|
|
|
|
|
|
|
|
|
Rate
lock loan commitments:
|
|
|
|
|
|
|
|
|
Notional
amount
|
|
$ |
129,382 |
|
|
$ |
66,902 |
|
Gain
on change in market value of rate lock commitments
|
|
|
1,626 |
|
|
|
543 |
|
Forward
contracts also contain an element of risk in that the counterparties may be
unable to meet the terms of such agreements. In the event the parties to deliver
commitments are unable to fulfill their obligations, the Company could
potentially incur significant additional costs by replacing the positions at
then current market rates. The Company manages its risk of exposure by limiting
counterparties to those banks and institutions deemed appropriate by management
and the Board of Directors. The Company does not expect any counterparty to
default on their obligations and therefore, the Company does not expect to incur
any cost related to counterparty default.
The
Company is exposed to interest rate risk on loans held for sale and rate lock
loan commitments. As market interest rates increase or decrease, the fair value
of mortgage loans held for sale and rate lock commitments will decline or
increase. To offset this interest rate risk, the Company enters into derivatives
such as forward contracts to sell loans. The fair value of these forward
contracts will change as market interest rates change, and the change in the
value of these instruments is expected to largely, though not entirely, offset
the change in fair value of loans held for sale and rate lock commitments. The
objective of this activity is to minimize the exposure to losses on rate lock
commitments and loans held for sale due to market interest rate fluctuations.
The net effect of derivatives on earnings will depend on risk management
activities and a variety of other factors, including market interest rate
volatility, the amount of rate lock commitments that close, the ability to fill
the forward contracts before expiration, and the time period required to close
and sell loans.
On
November 5, 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) 109, “Written Loan Commitments Recorded at
Fair Value through Earnings.” Previously, SAB 105, “Application of Accounting Principles
to Loan Commitments,” stated that in measuring the fair value of a
derivative loan commitment, a company should not incorporate the expected net
future cash flows related to the associated servicing of the loan. SAB 109
supersedes SAB 105 and indicates that the expected net future cash flows related
to the associated servicing of the loan should be included in measuring fair
value for all written loan commitments that are accounted for at fair value
through earnings. SAB 105 also indicated that internally-developed intangible
assets should not be recorded as part of the fair value of a derivative loan
commitment, and SAB 109 retains that view. The Company adopted SAB 109 on
January 1, 2008 which effectively caused Mortgage Banking revenue to be
recognized on the date the Company enters into the rate lock commitment with the
customer.
8.
|
OFF
BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT
LIABILITIES
|
Republic
is a party to financial instruments with off balance sheet risk in the normal
course of business in order to meet the financing needs of its customers. These
financial instruments primarily include commitments to extend credit and standby
letters of credit. The contract or notional amounts of these instruments reflect
the potential future obligations of Republic pursuant to those financial
instruments. Creditworthiness for all instruments is evaluated on a case by case
basis in accordance with Republic’s credit policies. Collateral from the
customer may be required based on the Company’s credit evaluation of the
customer and may include business assets of commercial customers, as well as
personal property and real estate of individual customers or
guarantors.
Republic
also extends binding commitments to customers and prospective customers. Such
commitments assure the borrower of financing for a specified period of time at a
specified rate. The risk to Republic under such loan commitments is limited by
the terms of the contracts. For example, Republic may not be obligated to
advance funds if the customer’s financial condition deteriorates or if the
customer fails to meet specific covenants. An approved but unfunded loan
commitment represents a potential credit risk once the funds are advanced to the
customer. Unfunded loan commitments also represent liquidity risk since the
customer may demand immediate cash that would require funding and interest rate
risk as market interest rates may rise above the rate committed. In addition,
since a portion of these loan commitments normally expire unused, the total
amount of outstanding commitments at any point in time may not require future
funding.
As of
March 31, 2009, exclusive of mortgage banking loan commitments, Republic had
outstanding loan commitments of $511 million, which included unfunded home
equity lines of credit totaling $319 million. At December 31, 2008, Republic had
outstanding loan commitments of $550 million, which included unfunded home
equity lines of credit totaling $331 million. These commitments generally have
open ended maturities and variable rates. At March 31, 2009 rates primarily
ranged from 4.00% to 7.50% with a weighted average rate of
5.01%.
Standby
letters of credit are conditional commitments issued by Republic to guarantee
the performance of a customer to a third party. The terms and risk of loss
involved in issuing standby letters of credit are similar to those involved in
issuing loan commitments and extending credit. Commitments outstanding under
standby letters of credit totaled $21 million and $14 million at March 31, 2009
and December 31, 2008. In addition to credit risk, the Company also has
liquidity risk associated with standby letters of credit because funding for
these obligations could be required immediately. The Company does not deem this
risk to be material.
At March
31, 2009 and December 31, 2008, Republic had a $12 million letter of credit from
the FHLB issued on behalf of one RB&T client. This letter of credit was used
as a credit enhancement for a client bond offering and reduced RB&T’s
available borrowing line at the FHLB. The Company uses a blanket pledge of
eligible real estate loans to secure the letter of credit.
Class A
and Class B shares participate equally in undistributed earnings. The difference
in earnings per share between the two classes of common stock results solely
from the 10% per share cash dividend premium paid on Class A Common Stock over
that paid on Class B Common Stock. The Class A Common shares are entitled to
cash dividends equal to 110% of the cash dividend paid per share on Class B
Common Stock. Class A Common shares have one vote per share and Class B Common
shares have ten votes per share. Class B Common shares may be converted, at the
option of the holder, to Class A Common shares on a share for share basis. The
Class A Common shares are not convertible into any other class of Republic’s
capital stock.
A
reconciliation of the combined Class A and Class B Common Stock numerators and
denominators of the earnings per share and diluted earnings per share
computations is presented below:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(in
thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
25,759 |
|
|
$ |
22,123 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
20,662 |
|
|
|
20,339 |
|
Effect
of dilutive securities
|
|
|
170 |
|
|
|
276 |
|
Average
shares outstanding including dilutive securities
|
|
|
20,832 |
|
|
|
20,615 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
Class
A Common Share
|
|
$ |
1.25 |
|
|
$ |
1.09 |
|
Class
B Common Share
|
|
|
1.24 |
|
|
|
1.08 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
Class
A Common Share
|
|
$ |
1.24 |
|
|
$ |
1.07 |
|
Class
B Common Share
|
|
|
1.23 |
|
|
|
1.06 |
|
Stock
options excluded from the detailed earnings per share calculation because their
impact was antidilutive are as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Antidilutive
stock options
|
|
|
665,644 |
|
|
|
516,445 |
|
10. SEGMENT
INFORMATION
The
reportable segments are determined by the type of products and services offered,
distinguished between banking operations, mortgage banking operations and Tax
Refund Solutions (“TRS”). Loans, investments and deposits provide the majority
of the net revenue from banking operations; servicing fees and loan sales
provide the majority of revenue from mortgage banking operations; RAL fees,
ERC/ERD fees and Net RAL securitization income provide the majority of the
revenue from TRS. All Company segments are domestic.
The
accounting policies used for Republic’s reportable segments are the same as
those described in the summary of significant accounting policies. Income taxes
are allocated based on income before income tax expense. Transactions among
reportable segments are made at fair value.
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
Segment
information for the three months ended March 31, 2009 and 2008
follows:
|
|
Three Months Ended March 31, 2009
|
|
(dollars in thousands)
|
|
Banking
|
|
|
Tax Refund
Solutions
|
|
|
Mortgage Banking
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
27,958 |
|
|
$ |
52,574 |
|
|
$ |
284 |
|
|
$ |
80,816 |
|
Provision
for loan losses
|
|
|
3,657 |
|
|
|
22,008 |
|
|
|
- |
|
|
|
25,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
Refund Check fees
|
|
|
- |
|
|
|
22,905 |
|
|
|
- |
|
|
|
22,905 |
|
Net
RAL securitization income
|
|
|
- |
|
|
|
412 |
|
|
|
- |
|
|
|
412 |
|
Mortgage
banking income
|
|
|
- |
|
|
|
- |
|
|
|
4,174 |
|
|
|
4,174 |
|
Other
revenue
|
|
|
2,834 |
|
|
|
15 |
|
|
|
162 |
|
|
|
3,011 |
|
Total
non interest income
|
|
|
2,834 |
|
|
|
23,332 |
|
|
|
4,336 |
|
|
|
30,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non interest expenses
|
|
|
24,307 |
|
|
|
18,901 |
|
|
|
434 |
|
|
|
43,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
operating profit
|
|
|
2,828 |
|
|
|
34,997 |
|
|
|
4,186 |
|
|
|
42,011 |
|
Income
tax expense
|
|
|
697 |
|
|
|
14,112 |
|
|
|
1,443 |
|
|
|
16,252 |
|
Net
income
|
|
$ |
2,131 |
|
|
$ |
20,885 |
|
|
$ |
2,743 |
|
|
$ |
25,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
$ |
3,187,188 |
|
|
$ |
137,555 |
|
|
$ |
12,902 |
|
|
$ |
3,337,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
3.85 |
% |
|
NM
|
|
|
NM
|
|
|
|
8.12 |
% |
|
|
Three Months Ended March 31, 2008
|
|
(dollars in thousands)
|
|
Banking
|
|
|
Tax Refund
Solutions
|
|
|
Mortgage Banking
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
25,130 |
|
|
$ |
19,396 |
|
|
$ |
102 |
|
|
$ |
44,628 |
|
Provision
for loan losses
|
|
|
3,046 |
|
|
|
7,453 |
|
|
|
- |
|
|
|
10,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
Refund Check fees
|
|
|
- |
|
|
|
13,960 |
|
|
|
- |
|
|
|
13,960 |
|
Net
RAL securitization income
|
|
|
- |
|
|
|
12,587 |
|
|
|
- |
|
|
|
12,587 |
|
Mortgage
banking income
|
|
|
- |
|
|
|
- |
|
|
|
1,602 |
|
|
|
1,602 |
|
Other
revenue
|
|
|
6,121 |
|
|
|
9 |
|
|
|
(335 |
) |
|
|
5,795 |
|
Total
non interest income
|
|
|
6,121 |
|
|
|
26,556 |
|
|
|
1,267 |
|
|
|
33,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non interest expenses
|
|
|
20,877 |
|
|
|
12,564 |
|
|
|
239 |
|
|
|
33,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
operating profit
|
|
|
7,328 |
|
|
|
25,935 |
|
|
|
1,130 |
|
|
|
34,393 |
|
Income
tax expense
|
|
|
2,499 |
|
|
|
9,385 |
|
|
|
386 |
|
|
|
12,270 |
|
Net
income
|
|
$ |
4,829 |
|
|
$ |
16,550 |
|
|
$ |
744 |
|
|
$ |
22,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
$ |
2,852,709 |
|
|
$ |
260,379 |
|
|
$ |
10,943 |
|
|
$ |
3,124,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
3.84 |
% |
|
NM
|
|
|
NM
|
|
|
|
5.57 |
% |
11. SECURITIZATION
In
January 2006, the Company established TRS RAL Funding, LLC (“TRS RAL, LLC”), a
qualified special purpose entity (“QSPE”) and wholly-owned subsidiary
corporation of RB&T. The QSPE securitized and sold a portion of the RAL
portfolio to independent third parties during the first quarter of 2008. The
purpose of the securitization was to provide a funding source for the Company’s
RAL portfolio and also reduce the impact of the RAL program on the Company’s
regulatory capital.
As part
of the securitization, the Company established a two step structure to handle
the sale of the assets to third party investors. In the first step, a sale
provided for TRS RAL, LLC to purchase the assets from RB&T as Originator and
Servicer. In the second step, a sale and administration agreement was entered
into by and among TRS RAL, LLC and various other third parties, with TRS RAL,
LLC retaining a residual interest in an over-collateralization.
During
2008, 2007 and 2006, the Company utilized a securitization structure to fund a
portion of the RALs originated during the respective tax seasons. From mid
January to the end of February of each year, RALs which, upon origination, met
certain underwriting criteria related to refund amount and Earned Income Tax
Credit amount, were classified as loans held for sale and sold into the
securitization. All other RALs originated were retained by the Company. There
were no RALs held for sale as of any quarter end. The Company retained a related
residual value in the securitization, which was classified on the balance sheet
as a trading security. The initial residual interest had a weighted average life
of approximately one month, and as such, substantially all of its cash flows
were received by the end of the first quarter. The disposition of the remaining
anticipated cash flows occurred within the remainder of the calendar year. At
its initial valuation, and on a quarterly basis thereafter, the Company adjusted
the carrying amount of the residual value to its fair value, which was
determined based on expected future cash flows and was significantly influenced
by the anticipated credit losses of the underlying RALs.
The
Company chose not to utilize a securitization structure to fund its RAL
portfolio during the first quarter of 2009. During the first quarter of 2008 the
securitization consisted of a total of $1.1 billion of RALs originated and sold.
The Company’s continuing involvement in RALs sold into the securitization was
limited to only servicing of the RALs. Compensation for servicing of the
securitized RALs was not contingent upon performance of the securitized RALs.
The residual value related to the securitization was presented as a trading
security on the balance sheet and was $2.0 million at March 31,
2008.
The
Company concluded that the securitization was a sale as defined in SFAS 140
“Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities-a replacement
of FASB Statement No. 125.” This conclusion was based on, among other
things, legal isolation of assets, the ability of the purchaser to pledge or
sell the assets, and the absence of a right or obligation of the Company to
repurchase the financial assets.
Due to
the excessive costs of securitization structures, which resulted from a
significant lack of liquidity in the credit markets during the latter half of
2008, the Company elected not to obtain funding from a securitization structure
for the first quarter 2009 tax season. Instead, the Company utilized brokered
certificates of deposits and its traditional borrowing lines of credit as its
primary RAL funding source for the first quarter 2009 tax season. Accounting for
this change in funding strategy has caused differences among some income and
expense items when comparing income statement results for 2009 to results in
2008. The securitization had the effect during 2008 of reclassifying for
securitized RALs the fee income earned, interest expense paid and provision
expense into “Net RAL securitization income,” which is a component of non
interest income. During 2009, these items were, and will continue to be,
classified in interest income on loans, interest expense on deposits and
provision for loan losses, respectively. The Company recognized net RAL
securitization income of $12.6 million and sold $1.1 billion RALs into the
securitization during the first quarter of 2008.
Detail of
Net RAL securitization income follows:
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
gain on sale of RALs
|
|
$ |
- |
|
|
$ |
8,371 |
|
Increase
in securitization residual
|
|
|
412 |
|
|
|
4,216 |
|
Net
RAL securitization income
|
|
$ |
412 |
|
|
$ |
12,587 |
|
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
Effective
January 10, 2009, RB&T made public its Community Reinvestment Act
Performance Evaluation (the “CRA Evaluation”). The CRA Evaluation assesses
RB&T’s initiatives and performance that are designed to help meet the credit
needs of the areas it serves, including low and moderate-income individuals,
neighborhoods and businesses. The CRA Evaluation also includes a review of the
RB&T’s community development services and investments in the RB&T’s
assessment areas.
RB&T
received “High Satisfactory” ratings on the Investment Test component and the
Service Test component evaluated as part of the CRA Evaluation. Based on issues
identified within RB&T’s Refund Anticipation Loan (“RAL”) program, RB&T
received a “Needs to Improve” rating on the Lending Test component, and as a
result, on its overall rating.
Effective
February 25, 2009, RB&T entered into a Stipulation and Consent Agreement
with the FDIC agreeing to the issuance of a Cease and Desist Order (the “Order”)
predominately related to required improvements and increased oversight of
RB&T’s compliance management system. The Company filed the final Order as
Exhibit 10.62 of its 2008 Annual Report on Form 10-K.
As stated
in the CRA Evaluation, the FDIC concluded that RB&T violated Regulation B
(“Reg B”), which implements the Equal Credit Opportunity Act (“ECOA”),
specifically related to RB&T’s tax refund business and its RAL program. The
Reg B issues involved RB&T’s requirement that both spouses who file a joint
tax return sign a RAL proceeds check, even if one spouse opted out of the RAL
transaction. The RAL is ultimately repaid to RB&T by the IRS with funds made
payable to both spouses. The Reg B issues also involved a claim that in 2008 one
electronic return originator (“ERO”) did not allow spouses to opt out of a RAL
transaction. In 2008, which is the period covered by the FDIC’s CRA Evaluation,
RB&T offered its tax related products through over 8,000 EROs
nationwide.
In
response to the CRA Evaluation, RB&T changed certain procedures and
processes to address the Reg B issues raised by the FDIC. By statute, a
financial holding company, such as the Company, that controls a Bank with a
“Needs to Improve” CRA rating has limitations on certain future business
activities, including the ability to branch and to make acquisitions, until its
CRA rating improves. As also required by statute, the FDIC referred their
conclusions regarding the alleged Reg B violations to the Department of Justice
(“DOJ”). As of the time of this filing, the Company has not received a
communication from, nor has any corrective action been imposed by, the
DOJ.
The Order
cites insufficient oversight of RB&T’s consumer compliance programs, most
notably in RB&T’s RAL program. The Order requires increased compliance
oversight of the RAL program by RB&T’s management and board of directors,
which is subject to review and approval by the FDIC. Under the Order, RB&T
must increase its training and audits of its ERO partners, who make RB&T’s
tax products available to taxpayers across the nation. In addition, various
components of the Order require RB&T to meet certain implementation,
completion and reporting timelines, including the establishment of a compliance
management system to appropriately assess, measure, monitor and control third
party risk and ensure compliance with consumer laws.
In
addition to the compliance issues cited in regard to the RAL program, the Order
also required RB&T to correct Home Mortgage Disclosure Act (“HMDA”)
reporting errors. As part of the Order, RB&T made corrections to its 2006
and 2007 HMDA reporting, in December of 2008. As a result of the errors in its
2006 and 2007 HMDA reporting, RB&T paid a $22,000 civil money penalty during
the first quarter of 2009.
The Order
also reflected other alleged consumer compliance violations. RB&T has
addressed these other alleged violations and management believes it has
implemented all necessary and required corrective actions regarding these items
in accordance with the expectations of its regulator.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations of
Republic Bancorp, Inc. (“Republic” or the “Company”) analyzes the major elements
of Republic’s consolidated balance sheets and statements of income. Republic, a
bank holding company headquartered in Louisville, Kentucky, is the Parent
Company of Republic Bank & Trust Company, (“RB&T”), Republic Bank
(collectively referred together with RB&T as the “Bank”), Republic Funding
Company and Republic Invest Co. Republic Invest Co. includes its subsidiary,
Republic Capital LLC. The consolidated financial statements also include the
wholly-owned subsidiaries of RB&T: Republic Financial Services, LLC, TRS RAL
Funding, LLC and Republic Insurance Agency, LLC. Republic Bancorp Capital Trust
is a Delaware statutory business trust that is a 100%-owned unconsolidated
finance subsidiary of Republic Bancorp, Inc. Management’s Discussion and
Analysis of Financial Condition and Results of Operations of Republic should be
read in conjunction with Part I Item 1 “Financial
Statements.”
This
discussion includes various forward-looking statements with respect to credit
quality, including but not limited to, delinquency trends and the adequacy of
the allowance for loan losses, business operating segments, corporate
objectives, the Company’s interest rate sensitivity model and other financial
and business matters. Broadly speaking, forward-looking statements may
include:
|
·
|
projections
of revenue, expenses, income, losses, earnings per share, capital
expenditures, dividends, capital structure or other financial
items;
|
|
·
|
descriptions
of plans or objectives for future operations, products or
services;
|
|
·
|
forecasts
of future economic performance; and
|
|
·
|
descriptions
of assumptions underlying or relating to any of the
foregoing.
|
The
Company may make forward-looking statements discussing management’s expectations
about various matters, including:
|
·
|
delinquencies,
future credit losses, non-performing loans and non-performing
assets;
|
|
·
|
the
adequacy of the allowance for loans
losses;
|
|
·
|
anticipated
future funding sources for Tax Refund Solutions
(“TRS”);
|
|
·
|
potential
impairment on securities;
|
|
·
|
the
future value of mortgage servicing
rights;
|
|
·
|
the
impact of new accounting
pronouncements;
|
|
·
|
future
short-term and long-term interest rates and the respective impact on net
interest margin, net interest spread, net income, liquidity and
capital;
|
|
·
|
legal
and regulatory matters including results and consequences of regulatory
examinations; and
|
|
·
|
future
capital expenditures.
|
Forward-looking
statements discuss matters that are not historical facts. As forward-looking
statements discuss future events or conditions, the statements often include
words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,”
“project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” or
similar expressions. Do not rely on forward-looking statements. Forward-looking
statements detail management’s expectations regarding the future and are not
guarantees. Forward-looking statements are assumptions based on information
known to management only as of the date the statements are made and management
may not update them to reflect changes that occur subsequent to the date the
statements are made. See additional discussion under Part I Item 1A “Risk Factors” of the
Company’s 2008 Annual Report on Form 10-K.
As used
in this report, the terms “Republic,” the “Company,” “we,” “our” and “us” refer
to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp,
Inc. and its subsidiaries; and the term the “Bank” refers to the Company’s
subsidiary banks: Republic Bank & Trust Company and Republic
Bank.
OVERVIEW
Net
income for the first quarter of 2009 was $25.8 million, representing an increase
of $3.6 million, or 16%, compared to the same period in 2008. Diluted earnings
per Class A Common Share increased 16% to $1.24 for the first quarter of 2009
compared to $1.07 for the same period in 2008.
General
highlights for the first quarter of 2009 by business segment consist of the
following:
Traditional
Banking
|
·
|
Traditional
Banking business operating segment net income decreased $2.7 million, or
56%, for the quarter ended March 31, 2009 compared to the same period in
2008. The fluctuation in the traditional Banking segment net income
resulted primarily from an Other-than-temporary impairment (“OTTI”) charge
recorded for a portion of the Company’s investment portfolio, which was
partially offset by an increase in net interest income resulting from the
year over year decline in short-term interest rates. In addition, the
Company recorded significant write-downs during the first quarter of 2009
for two of its Other Real Estate Owned (“OREO”)
properties.
|
|
·
|
Net
interest income within the traditional Banking segment increased $2.8
million, or 11%, for the quarter to $28.0 million. During the first
quarter of 2009, net interest income within the traditional Banking
segment continued to benefit from declining short-term interest rates in
combination with a “steepening” of the yield curve. Overall, the Banking
segment’s net interest margin increased to 3.85% for first quarter of
2009.
|
|
·
|
The
Banking segment provision for loan losses was $3.7 million for the quarter
ended March 31, 2009 compared to $3.0 million for the same period in 2008.
The increase in the traditional Banking segment provision expense related
to the increase in classified, delinquent and non-performing loans.
Approximately $1.9 million of the first quarter 2008 provision for loan
loss related to one land development loan in
Florida.
|
|
·
|
Non
interest income decreased $3.3 million, or 53%, for the first quarter of
2009 compared to the same period in 2008. The Company recognized a net
loss on sales, calls and impairment on securities of $3.1 million during
the first quarter of 2009 compared to $219,000 during the first quarter of
2008. During the first quarter of 2009, the Company recorded additional
non cash OTTI charges related to its available for sale private label
mortgage backed securities and other private label mortgage-related
securities. See Footnote
2 “Investment Securities” of Part I Item I “Financial Statements” for
additional discussion.
|
|
·
|
Total
non interest expense within the traditional Banking segment increased $3.4
million, or 16%, during the first quarter of 2009 compared to the first
quarter of 2008. The Company recorded $1.7 million in write-downs during
the first quarter of 2009 for two of its OREO properties. Excluding the
OREO write downs, the increase in non interest expense was modest despite
a growth in banking centers from the prior year. The remaining increase
was predominantly in the occupancy and equipment and FDIC insurance
categories. See
additional discussion below under “Non interest
Expenses.”
|
|
·
|
Total
non-performing loans to total loans increased to 1.06% at March 31, 2009,
from 0.58% at December 31, 2008, as the total balance of non-performing
loans increased by $11 million for the same period. The increase in non
performing loans was primarily within the real estate construction,
commercial real estate and residential real estate categories and is
attributable to general declines in the housing market over the past few
years, falling home prices and increasing foreclosures. In addition,
unemployment and under-employment have negatively impacted the credit
performance of real estate related loans, in general. This market turmoil
and tightening of credit have led to an increased level of commercial and
consumer delinquencies, lack of consumer confidence, increased market
volatility and widespread reduction of general business activity. If
current levels of market disruption and volatility continue or worsen,
there can be no assurance that the Company will not experience an adverse
effect, which may be material, on the Company’s ability to access capital
and on its business, financial condition and results of operations. Ten
relationships classified as non performing for the first time during the
first quarter of 2009 represented $8.0 million, or 72%, of the increase
from December 31, 2009. As a result of these additions, the Company
recorded additional provision for loan loss expense of approximately $1.4
million during the first quarter of 2009. The Company does not anticipate
a substantial increase in losses resulting from the current rise in the
level of these non-performing loans at this time. See additional discussion at
Part I Item 1A
“Risk Factors” of the Company’s 2008 Annual Report on Form
10-K.
|
Tax Refund Solutions
(“TRS”)
|
·
|
Republic
ended the quarter with total assets of $3.3 billion, representing an
increase of $214 million, or 7%, compared to March 31, 2008 and a decline
of $602 million, or 15%, compared to December 31, 2008. The majority of
the decrease in total assets from December 31, 2008 resulted from a
decline in excess cash which the Company used to pay down maturing
brokered certificates of deposit. During the fourth quarter of 2008, the
Company obtained $918 million in brokered certificates of deposits to be
used as funding for expected Refund Anticipation Loan (“RAL”) volume
during the first quarter 2009 tax season. Substantially all of these
brokered certificates of deposits matured during the first quarter of
2009. Federal Home Loan Bank Advances (“FHLB”) were used to replace the
maturing brokered certificates of deposits when excess cash was not
available to pay off the maturity.
|
|
·
|
Due
to the excessive costs of securitization structures, which resulted from a
significant lack of liquidity in the credit markets during the latter half
of 2008, the Company elected not to obtain funding from a securitization
structure for the first quarter 2009 tax season. Instead, the Company
utilized its traditional borrowing sources, including brokered
certificates of deposit, as its primary RAL funding source for the first
quarter 2009 tax season. Accounting for this change in funding strategy
caused, and will continue to cause throughout the year, differences among
some income and expense items when comparing results of operations for
2009 to 2008. The securitization had the effect during 2008 of
reclassifying for securitized RALs the fee income earned, interest expense
paid and provision expense into “Net RAL securitization income,” which is
a component of non interest income. During 2009, these items were, and
will continue to be, classified in interest income on loans, interest
expense on deposits and provision for loan losses,
respectively.
|
|
·
|
TRS
business operating segment net income increased $4.3 million, or 26%, for
the first quarter of 2009 compared to the same period in 2008 primarily
due to the overall growth in volume offset by higher estimated RAL losses
as a percent of total originations. The total dollar volume of tax return
refunds processed during the first quarter 2009 tax season increased $2.2
billion, or 45%, over the same period in 2008. Total RAL dollar volume
increased from $1.8 billion during the first three months of 2008 to $2.5
billion during the first three months of 2009. The increase in overall
volume discussed above was offset by higher estimated losses and the
increase in non interest expenses. See additional discussion below under
“RAL Provision for Loan
Losses” and “Non interest
expenses.”
|
|
·
|
In
addition to the increased RAL volume, Electronic Refund Checks (“ERC”) and
Electronic Refund Deposits (“ERD”) dollar volume also increased
approximately 47% over the first quarter of 2008. The growth during 2009
related to additional business obtained through the Company’s Jackson
Hewitt relationship and through the Company’s independent tax-preparer
customer base.
|
|
·
|
Net
interest income within the TRS segment increased $33.2 million or 171% for
the quarter to $52.6 million. The increase in net interest income within
the TRS segment was due to a 39% growth in the volume of RALs originated
combined with the change in funding strategy for TRS from the prior year.
During the first quarter 2009 tax season, all $56.8 million in RAL fee
income was included in interest income on loans. During the first quarter
of 2008, $18.4 million in RAL fees were included in interest income on
loans with approximately $21.7 million included as a component of Net RAL
securitization income.
|
|
·
|
Non
interest income within the TRS segment decreased $3.2 million, or 12%,
during the first quarter of 2009. The decrease in non interest income
within the TRS segment was due primarily to the change in the Company’s
funding strategy for the tax business. The Company recognized net RAL
securitization income of $12.6 million during the first quarter of 2008.
All fee and expense components that would have made up this amount in 2009
are included within interest income on loans, interest expense on deposits
and provision for loan losses due to the change in funding strategy. In
addition to the change in Net RAL securitization income, Electronic Refund
Check (“ERC”) fees increased $8.9 million, or 64% during the first quarter
of 2009 consistent with the overall growth in the
business.
|
|
·
|
Profitability
in the Company’s TRS business operating segment is primarily driven by the
volume of RAL transactions processed and the loss rate incurred on RALs,
and is particularly sensitive to both measures. Through March 31, 2009,
the Company processed 39% more in dollars of RALs originated compared to
the same period in 2008. As of March 31, 2009, $34.9 million of total RALs
originated were outstanding past their expected funding date from the IRS
compared to $19.2 million at March 31, 2008, representing 1.43% and 1.11%
of total gross RALs originated during the respective tax years by the
Company. The March 31, 2008 uncollected RAL amount includes $9.4 million
for RALs that were securitized by the Company. The higher year-over-year
uncollected RAL rate was primarily related to an increase in the amount of
refunds held by the IRS for reasons such as audits and liens from prior
debts. In addition, the overall dollar increase in uncollected RALs was
also driven by the year-over-year growth in
volume.
|
|
·
|
The
Company expects the actual loss rate realized will be less than the
current delinquency rate as the Company will continue to receive payments
from the IRS throughout the year and make other collection efforts to
obtain repayment on the RALs. As a result of the higher current overall
RAL delinquency rate, however, the TRS segment’s provision for loan losses
increased from $7.5 million during the first quarter of 2008 to $22.0
million during the first quarter of 2009. Included as a credit to the
first quarter 2009 TRS provision for loan losses, and as a recovery in the
analysis of the allowance for loan losses, was $2.8 million, which
represents a limited preparer-provided guarantee on RAL product
performance. The Company’s loss reserves for RALs equate to 1.10% and
0.87% of total RALs originated during the first quarter of each year. The
higher estimated year over year loss rate was primarily related to an
increase in the amount of refunds held by the IRS for reasons such as
audits and liens from prior debts. In addition, the overall dollar
increase in estimated losses was also driven by the year-over-year growth
in RAL volume. Based on the Company’s 2009 RAL volume, each 0.10% increase
in the loss rate for RALs represents approximately $2.5 million in
additional provision for loan loss
expense.
|
|
·
|
Total
non interest expenses within the TRS segment increased $6.3 million, or
50%, during the first quarter of 2009 compared to 2008. This overall
increase was related primarily to the overall growth in the
program.
|
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations:”
|
|
o
|
“Business Segment
Composition”
|
|
o
|
“Results of
Operations”
|
|
o
|
“Comparison of Financial
Condition”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
Mortgage
Banking
|
·
|
Within
the Mortgage Banking segment, mortgage banking income increased $2.6
million during the first quarter of 2009 compared to the same period in
2008. The majority of this increase was in the “gain on sale of loan”
category, as a meaningful decline in short-term interest rates caused an
increase in demand for 15 and 30 year fixed rate loans, which the Company
sells into the secondary market. The Company sold $187 million in fixed
rate loans into the secondary market during the first quarter of 2009
compared to $73 million during the first quarter of 2008. As of March 31,
2009, the Company had $12 million in loans held for sale with $129 million
in fixed rate loan commitments to its customers and $112 million in
mandatory forward sales contracts primarily to the Federal Home Loan
Mortgage Corporation (“FHLMC” or “Freddie Mac”). At March 31, 2008, the
Company had $11 million in loans held for sale with $27 million in fixed
rate loan commitments to its customers and $32 million in mandatory
forward sales contracts primarily to Freddie Mac. In accordance with Staff
Accounting Bulletin (“SAB”) 109, “Written Loan Commitments
Recorded at Fair Value Through Earnings” and Statement of Financial
Accounting Standard (“SFAS”) 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” the Company carries
its loans held for sale, fixed rate loan commitments to its customers and
mandatory forward commitments to Freddie Mac at fair value. As previously
discussed, mortgage banking income during the first quarter of 2009 was
also positively impacted by the reversal of $1.1 million of the valuation
allowance related to the MSR
portfolio.
|
BUSINESS
SEGMENT COMPOSITION
As of
March 31, 2009, the Company was divided into three distinct business operating
segments: Banking, Tax Refund Solutions and Mortgage Banking.
Net
income, total assets and net interest margin by business operating segment for
the three months ended March 31, 2009 and 2008 are presented
below:
|
|
Three Months Ended March 31, 2009
|
|
(in thousands)
|
|
Banking
|
|
|
Tax Refund
Solutions
|
|
|
Mortgage
Banking
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,131 |
|
|
$ |
20,885 |
|
|
$ |
2,743 |
|
|
$ |
25,759 |
|
Segment
assets
|
|
|
3,187,188 |
|
|
|
137,555 |
|
|
|
12,902 |
|
|
|
3,337,645 |
|
Net
interest margin
|
|
|
3.85 |
% |
|
NM
|
|
|
NM
|
|
|
|
8.12 |
% |
|
|
Three Months Ended March 31, 2008
|
|
(in thousands)
|
|
Banking
|
|
|
Tax Refund
Solutions
|
|
|
Mortgage
Banking
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,829 |
|
|
$ |
16,550 |
|
|
$ |
744 |
|
|
$ |
22,123 |
|
Segment
assets
|
|
|
2,852,709 |
|
|
|
260,379 |
|
|
|
10,943 |
|
|
|
3,124,031 |
|
Net
interest margin
|
|
|
3.84 |
% |
|
NM
|
|
|
NM
|
|
|
|
5.57 |
% |
NM – Not
Meaningful
(I) Banking
As of
March 31, 2009, Republic had 45 full-service banking centers with 36 located in
Kentucky, five located in metropolitan Tampa, Florida, three located in southern
Indiana and one located in metropolitan Cincinnati, Ohio. RB&T’s primary
market areas are located in metropolitan Louisville, Kentucky, central Kentucky,
northern Kentucky and southern Indiana. Louisville, the largest city in
Kentucky, is the location of Republic’s headquarters, as well as 20 banking
centers. RB&T’s central Kentucky market includes 12 banking centers in the
following Kentucky cities: Bowling Green (1); Elizabethtown (1); Frankfort (1);
Georgetown (1); Lexington, the second largest city in Kentucky (5); Owensboro
(2); and Shelbyville (1). RB&T’s northern Kentucky market includes banking
centers in Covington, Florence, Fort Wright and Independence. Based on
RB&T’s most recent banking center evaluation, one of its four northern
Kentucky locations will be closed in the third quarter of 2009. RB&T also
has banking centers located in Floyds Knobs, Jeffersonville and New Albany,
Indiana. Republic Bank has locations in Hudson, New Port Richey, Palm Harbor,
Port Richey and Temple Terrace, Florida, as well as metropolitan Cincinnati,
Ohio.
(II) Tax
Refund Solutions (“TRS”)
Republic,
through its TRS business operating segment, is one of a limited number of
financial institutions which facilitates the payment of federal and state tax
refunds through third party tax-preparers located throughout the U.S., as well
as tax preparation software providers. The Company facilitates the payment of
these tax refunds through three primary products: Electronic Refund Checks
(“ERCs”), Electronic Refund Deposits (“ERDs”) and Refund Anticipation Loans
(“RALs”). Substantially all of the business generated by TRS occurs in the first
quarter of the year.
ERCs/ERDs
are products whereby a tax refund is issued to the taxpayer after the Company
has received the refund from the federal or state government. There is no credit
risk or borrowing cost for the Company for these products because ERCs/ERDs are
only delivered to the taxpayer upon receipt of the refund directly from the
Internal Revenue Service (“IRS”). Fees earned on ERCs/ERDs are reported as non
interest income under the line item “Electronic refund check fees.”
RALs are
short-term consumer loans offered to taxpayers that are secured by the
customer’s anticipated tax refund, which represents the source of repayment. The
Company underwrites the RAL application through an automated credit review
process utilizing information contained in the taxpayer’s tax return and the
tax-preparer’s history. If the application is approved, the Company advances the
amount of the refund due on the taxpayer’s return up to specified amounts less
the loan fee due to the Company and, if requested by the taxpayer, the fees due
for preparation of the return to the tax-preparer. As part of the RAL
application process, each taxpayer signs an agreement directing the IRS to send
the taxpayer’s refund directly to the Company. The refund received from the IRS
is used by the Company to pay off the RAL. Any amount due the taxpayer above the
amount of the RAL is remitted to the taxpayer once the refund is received by the
Company. The funds advanced by the Company are generally repaid by the IRS
within two weeks. The fees earned on RALs are reported as interest income under
the line item “Loans, including fees.”
Rebate Accruals
The
Company makes rebate payments to third party technology and service providers
within its TRS business operating segment. These rebates are reflected in the
financial statements as a reduction to RAL fees and ERC fees. All rebate
payments to an individual technology and service provider are based on the
product volume funded by the IRS with various rebate tiers at different volume
levels. In addition, rebate payments made to the service providers are
significantly influenced by RAL losses. While the rebates paid to the Company’s
technology providers are typically paid throughout the year, the rebate payments
paid to the third party service providers are typically
paid subsequent to the first quarter.
Accounting
for the Company’s rebates payable requires management’s judgment since the
substantial majority of these liabilities are established in the first quarter
of each year and accounted for based on cash flow modeling techniques that
require management to make estimates regarding the amount and timing of expected
future IRS payments, including assumptions regarding credit losses and final
product volume tiers.
The
Company accrued $30.0 million in total rebates during the first quarter of 2009
compared to $26.3 million during the same period in 2008. While total TRS gross
product revenue increased 38% during the first quarter of 2009 compared to the
same period in 2008, rebate accruals increased 18% for the same period. The
overall increase in rebates was less than the increase in total gross revenue
during the first quarter of 2009 due to larger payments made through a fixed fee
component, in lieu of rebates. This fixed fee component is classified in non
interest expense on the income statement. In addition, the Company was able to
obtain more favorable contract terms during the first quarter 2009 tax season
which effectively lowered the Company’s anticipated payments to its service
providers.
TRS
Funding – First Quarter 2009 Tax Season
Due to
the excessive costs of securitization structures, which resulted from a
significant lack of liquidity in the credit markets during the latter half of
2008, the Company elected not to obtain funding from a securitization structure
for the first quarter 2009 tax season. Instead, the Company utilized brokered
certificates of deposits and its traditional borrowing lines of credit as its
primary RAL funding source for the first quarter 2009 tax season. Accounting for
this change in funding strategy has caused differences among some income and
expense items when comparing income statement results for 2009 to results in
2008. The securitization had the effect during 2008 of reclassifying for
securitized RALs the fee income earned, interest expense paid and provision
expense into “Net RAL securitization income,” which is a component of non
interest income. During 2009, these items were, and will continue to be,
classified in interest income on loans, interest expense on deposits and
provision for loan losses, respectively.
During
the fourth quarter of 2008, the Company obtained $918 million in brokered
certificates of deposits to be utilized to fund the RAL program. These brokered
certificates of deposits had a weighted average life of three months with a
weighted average rate of 2.71%. Also, during January of 2009, the Company
obtained an additional $375 million in brokered certificates of deposits. These
brokered certificates of deposits had a weighted average life of 45 days and a
weighted average interest rate of 1.27%.
TRS
Funding – First Quarter 2008 Tax Season
The
Company recognized net RAL securitization income of $12.6 million and sold $1.1
billion RALs into the securitization during the first quarter of 2008. During
2008, in addition to the securitization structure, the Company also utilized
brokered certificates of deposits to fund RALs retained on balance sheet. These
brokered certificates of deposits had a weighted average life of three months
with a weighted average interest rate of 5.09%. Also, during January of 2008,
the Company obtained an additional $200 million in brokered certificates of
deposits to fund additional RAL demand. These brokered certificates of deposits
had a weighted average life of three months and a weighted average interest rate
of 4.95%.
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations:”
|
|
o
|
“Results of
Operations”
|
|
o
|
“Comparison of Financial
Condition”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
For
additional discussion regarding RAL Provision for Loan Losses see Footnote 3
“Loans and Allowance for Loans Losses.” In addition, Footnote 3 contains a
detailed table illustrating the effect on the 2009 provision for loan losses of
TRS if final losses of RALs differ from management’s current estimate by as much
as 33 basis points higher or lower.
(III) Mortgage
Banking
Mortgage
Banking activities primarily include 15, 20 and 30-year fixed term single family
residential rate real estate loans that are sold into the secondary market,
primarily to Freddie Mac. Since 2003, the Bank has historically retained
servicing on substantially all loans sold into the secondary market.
Administration of loans with servicing retained by the Bank includes collecting
principal and interest payments, escrowing funds for property taxes and
insurance and remitting payments to secondary market investors. A fee is
received by the Bank for performing these standard servicing
functions.
As part
of the sale of loans with servicing retained, the Company records as part of the
transaction a MSR. MSRs represent an estimate of the present value of future
cash servicing income, net of estimated costs that Republic expects to receive
on loans sold with servicing retained by the Company. MSRs are capitalized as
separate assets when loans are sold and servicing is retained. This transaction
is posted to net gain on sale of loans, a component of “Mortgage Banking income”
in the income statement. Management considers all relevant factors, in addition
to pricing considerations from other servicers, to estimate the fair value of
the MSRs to be recorded when the loans are initially sold with servicing
retained by the Company. The carrying value of MSRs is initially amortized in
proportion to and over the estimated period of net servicing income and
subsequently adjusted based on the weighted average remaining life. The
amortization is recorded as a reduction to Mortgage Banking income.
The
carrying value of the MSRs asset is reviewed monthly for impairment based on the
fair value of the MSRs, using groupings of the underlying loans by interest
rates. Any impairment of a grouping would be reported as a valuation allowance.
A primary factor influencing the fair value is the estimated life of the
underlying loans serviced. The estimated life of the loans serviced is
significantly influenced by market interest rates. During a period of declining
interest rates, the fair value of the MSRs is expected to decline due to
anticipated prepayments within the portfolio. Alternatively, during a period of
rising interest rates, the fair value of MSRs is expected to increase as
prepayments on the underlying loans would be anticipated to decline. Management
utilizes an independent third party on a monthly basis to assist with the fair
value estimate of the MSRs.
See
additional detail regarding Mortgage Banking above under “Overview” and under
Footnote 10 “Segment Information” of Part I Item 1 “Financial
Statements.”
RESULTS
OF OPERATIONS
Net
Interest Income
The
largest source of Republic’s revenue is net interest income. Net interest income
is the difference between interest income on interest-earning assets, such as
loans and investment securities and the interest expense on liabilities used to
fund those assets, such as interest-bearing deposits and borrowings. Net
interest income is impacted by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities, as well as market
interest rates. The overall reduction in the Company’s cost of funds is
illustrated in Table 2 “Volume/Rate Variance Analysis.” A detailed analysis of
the change in net interest income by business segment is as
follows:
Traditional Banking
segment
The
traditional Banking segment net interest margin increased 1 basis point to 3.85%
for first quarter of 2009 compared to the same period in 2008. The increase in
the traditional Banking segment’s net interest margin was primarily tied to
decreases in the Federal Funds Target rate (“FFTR”). From September 2007 through
December 2008, the Federal Open Markets Committee (“FOMC”) of the Federal
Reserve Bank (“FRB”) lowered the FFTR by 425 basis points. In December of 2008,
the FFTR was lowered once again to end the year at an unprecedented “target
range” between 0.00% and 0.25%. The FFTR is the index which many of the
Company’s short-term deposit rates track. Because the Company’s interest bearing
liabilities continue to be more sensitive to interest rate movements than its
assets, the decreases in the FFTR have significantly benefited the Company’s net
interest income and net interest margin since the fourth quarter of
2007.
The
positive earnings impact of the FFTR reductions by the FOMC during the first
quarter of 2009 were not as significant as those experienced by Republic in the
past, due to the inability of the Company to further reduce deposit costs as
short-term market rates have approached and/or reached zero percent. In
addition, the general lack of liquidity in the wholesale markets has caused a
large part of the Company’s incremental funding costs to increase, a trend that
has also offset some of the positive impact to the Company’s net interest margin
it received from declining short-term rates.
The
Company also continues to experience paydowns in its loan and investment
portfolios. These paydowns have caused, and will continue to cause, compression
in Republic’s net interest income and net interest margin, as the cash received
from these paydowns is reinvested at lower yields. Additionally, because the
FFTR is now at a target range between 0.00% and 0.25%, no future FFTR decreases
from the FOMC are possible, exacerbating the compression to the Company’s net
interest income and net interest margin caused by its repricing loans and
investments. The Company is unable to precisely determine the ultimate negative
impact to the Company’s net interest spread and margin in the future because
several factors remain unknown at this time, such as future demand for financial
products and the overall future need for liquidity, among many other
factors.
TRS
segment
Net
interest income within the TRS segment increased $33.2 million or 171% for the
quarter to $52.6 million. The increase in net interest income within the TRS
segment was due to a 39% growth in the volume of RALs originated volume combined
with the change in funding strategy for TRS from the prior year. During the
first quarter 2009 tax season, all $56.8 million in RAL fee income was included
in interest income on loans. During the first quarter of 2009, TRS earned $56.8
million in net RAL fee income, compared to $40.1 million (includes $21.7 million
in RAL fees recorded as a component of net RAL securitization income) for the
same period in 2008.
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations:”
|
|
o
|
“Business Segment
Composition”
|
|
o
|
“Results of
Operations”
|
|
o
|
“Comparison of Financial
Condition”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
For
additional information on the potential future effect of
changes in short-term interest rates on Republic’s net interest income, see
section titled “Interest Rate Sensitivity” in this section of the
document.
Table 1
provides detailed information as to average balances, interest income/expense
and rates by major balance sheet category for the three month periods ended
March 31, 2009 and 2008. Table 2 provides an analysis of the changes in net
interest income attributable to changes in rates and changes in volume of
interest-earning assets and interest-bearing liabilities.
Table
1 – Average Balance Sheets and Interest Rates for the Three Months Ended March
31, 2009 and 2008
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2009
|
|
|
March
31, 2008
|
|
(dollars
in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities(1)
|
|
$ |
570,862 |
|
|
$ |
5,434 |
|
|
|
3.81 |
% |
|
$ |
622,687 |
|
|
$ |
9,049 |
|
|
|
5.81 |
% |
Tax
exempt investment securities(4)
|
|
|
1,832 |
|
|
|
6 |
|
|
|
2.02 |
|
|
|
1,783 |
|
|
|
24 |
|
|
|
8.28 |
|
Federal
funds sold and other
|
|
|
795,834 |
|
|
|
591 |
|
|
|
0.30 |
|
|
|
119,573 |
|
|
|
907 |
|
|
|
3.03 |
|
Loans
and fees(2)(3)
|
|
|
2,612,313 |
|
|
|
91,326 |
|
|
|
13.98 |
|
|
|
2,463,090 |
|
|
|
57,780 |
|
|
|
9.38 |
|
Total
earning assets
|
|
|
3,980,841 |
|
|
|
97,357 |
|
|
|
9.78 |
|
|
|
3,207,133 |
|
|
|
67,760 |
|
|
|
8.45 |
|
Less:
Allowance for loan losses
|
|
|
29,605 |
|
|
|
|
|
|
|
|
|
|
|
16,059 |
|
|
|
|
|
|
|
|
|
Non-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
147,611 |
|
|
|
|
|
|
|
|
|
|
|
132,229 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
43,069 |
|
|
|
|
|
|
|
|
|
|
|
39,885 |
|
|
|
|
|
|
|
|
|
Other
assets(1)
|
|
|
32,867 |
|
|
|
|
|
|
|
|
|
|
|
29,998 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
4,174,783 |
|
|
|
|
|
|
|
|
|
|
$ |
3,393,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
accounts
|
|
$ |
239,703 |
|
|
$ |
35 |
|
|
|
0.06 |
% |
|
$ |
225,940 |
|
|
$ |
294 |
|
|
|
0.52 |
% |
Money
market accounts
|
|
|
560,101 |
|
|
|
728 |
|
|
|
0.52 |
|
|
|
621,600 |
|
|
|
4,116 |
|
|
|
2.65 |
|
Time
deposits
|
|
|
447,223 |
|
|
|
3,521 |
|
|
|
3.15 |
|
|
|
438,722 |
|
|
|
4,811 |
|
|
|
4.39 |
|
Brokered
deposits
|
|
|
1,108,720 |
|
|
|
6,054 |
|
|
|
2.18 |
|
|
|
394,218 |
|
|
|
5,080 |
|
|
|
5.15 |
|
Total
deposits
|
|
|
2,355,747 |
|
|
|
10,338 |
|
|
|
1.76 |
|
|
|
1,680,480 |
|
|
|
14,301 |
|
|
|
3.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements and other short-term borrowings
|
|
|
327,006 |
|
|
|
339 |
|
|
|
0.41 |
|
|
|
405,214 |
|
|
|
2,767 |
|
|
|
2.73 |
|
Federal
Home Loan Bank advances
|
|
|
547,540 |
|
|
|
5,244 |
|
|
|
3.83 |
|
|
|
519,637 |
|
|
|
5,437 |
|
|
|
4.19 |
|
Subordinated
note
|
|
|
41,240 |
|
|
|
620 |
|
|
|
6.01 |
|
|
|
41,240 |
|
|
|
627 |
|
|
|
6.08 |
|
Total
interest-bearing liabilities
|
|
|
3,271,533 |
|
|
|
16,541 |
|
|
|
2.02 |
|
|
|
2,646,571 |
|
|
|
23,132 |
|
|
|
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
liabilities and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
deposits
|
|
|
531,496 |
|
|
|
|
|
|
|
|
|
|
|
435,867 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
78,298 |
|
|
|
|
|
|
|
|
|
|
|
56,012 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
293,456 |
|
|
|
|
|
|
|
|
|
|
|
254,736 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
4,174,783 |
|
|
|
|
|
|
|
|
|
|
$ |
3,393,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
80,816 |
|
|
|
|
|
|
|
|
|
|
$ |
44,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
7.76 |
% |
|
|
|
|
|
|
|
|
|
|
4.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
8.12 |
% |
|
|
|
|
|
|
|
|
|
|
5.57 |
% |
(1)
|
For
the purpose of this calculation, the fair market value adjustment on
investment securities resulting from SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities” is included as a component of
other assets.
|
(2)
|
The
amount of loan fee income included in total interest income was $57.8
million and $19.4 million for the three months ended March 31, 2009 and
2008.
|
(3)
|
Average
balances for loans include the principal balance of non accrual
loans.
|
(4)
|
Yields
on tax exempt securities have been computed based on a fully
tax-equivalent basis using the federal income tax rate of
35%.
|
Table 2
illustrates the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities impacted
Republic’s interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume) and (iii) net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
Table
2 – Volume/Rate Variance Analysis
|
|
Three
Months Ended March 31, 2009
Compared
to
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
Increase/(Decrease)
Due
to
|
|
(in
thousands)
|
|
Total
Net Change
|
|
|
Volume
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
$ |
(3,615 |
) |
|
$ |
(703 |
) |
|
$ |
(2,912 |
) |
Tax
exempt investment securities
|
|
|
(18 |
) |
|
|
1 |
|
|
|
(19 |
) |
Federal
funds sold and other
|
|
|
(316 |
) |
|
|
1,139 |
|
|
|
(1,455 |
) |
Loans
and fees
|
|
|
33,546 |
|
|
|
43,529 |
|
|
|
(9,983 |
) |
Net
change in interest income
|
|
|
29,597 |
|
|
|
43,966 |
|
|
|
(14,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
accounts
|
|
|
(259 |
) |
|
|
17 |
|
|
|
(276 |
) |
Money
market accounts
|
|
|
(3,388 |
) |
|
|
(371 |
) |
|
|
(3,017 |
) |
Time
deposits
|
|
|
(1,290 |
) |
|
|
92 |
|
|
|
(1,382 |
) |
Brokered
deposits
|
|
|
974 |
|
|
|
5,182 |
|
|
|
(4,208 |
) |
Repurchase
agreements and other short-term borrowings
|
|
|
(2,428 |
) |
|
|
(450 |
) |
|
|
(1,978 |
) |
Federal
Home Loan Bank advances
|
|
|
(193 |
) |
|
|
282 |
|
|
|
(475 |
) |
Subordinated
note
|
|
|
(7 |
) |
|
|
- |
|
|
|
(7 |
) |
Net
change in interest expense
|
|
|
(6,591 |
) |
|
|
4,752 |
|
|
|
(11,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in net interest income
|
|
$ |
36,188 |
|
|
$ |
39,214 |
|
|
$ |
(3,026 |
) |
Non
interest Income
Non
interest income decreased $3.4 million, or 10%, for the first quarter of 2009
compared to the same period in 2008. A detailed analysis of the change in non
interest income by business segment follows:
Traditional Banking
segment
Service
charges on deposit accounts decreased $123,000, or 3%, during the first quarter
of 2009 compared to the same period in 2008. The decrease was due primarily to a
decline in the Company’s checking account base in combination with a reduction
in the marketing of certain retail checking products. While certain retail
checking products historically produced higher deposit fee revenue, they also
experienced significantly higher account closings and charge-offs. As a result,
management decided to reduce the Company’s marketing efforts on these more labor
intensive accounts and focus more on its traditional retail checking account
offerings. The overall decline in service charges on deposits was offset by a 3%
increase in the Company’s per item overdraft fee which occurred in March of
2008. Included in service charges on deposits are net per item overdraft fees of
$2.8 million and $3.2 million for the first quarters of 2009 and 2008,
respectively.
The
Company recognized a net loss on sales, calls and impairment on securities of
$3.1 million during the first quarter of 2009 compared to $219,000 during the
first quarter of 2008. During the first quarter of 2009, the Company recorded
total non cash other-than-temporary impairment charges of $3.1 million related
to its available for sale private label mortgage backed securities and other
private label mortgage-related securities. See Footnote 2 “Investment
Securities” of Part I Item I “Financial Statements” for additional
discussion.
TRS
segment
Approximately
$12.2 million of the decrease in non interest income was due to the change in
the Company’s funding strategy for the tax business during the first quarter of
2009. The securitization utilized during the first quarter of 2008 had the
effect of reclassifying the fee income earned, interest expense paid for
securitized RALs and provision expense for securitized RALS into “Net RAL
securitization income,” which is a component of non interest income. During the
first quarter of 2009, these items were classified in interest income on loans,
interest expense on deposits and provision for loan losses, respectively. The
Company recognized net RAL securitization income of $12.6 million and sold $1.1
billion RALs into the securitization during the first quarter of
2008.
ERC fees
increased $8.9 million, or 64%, for the first quarter of 2009 compared to the
same period in 2008 attributable to the overall increase in volume at TRS during
the tax season. The increase in ERC fees was consistent with the growth in the
overall tax program, which resulted from an increase in the Company’s tax
preparer base.
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations:”
|
|
o
|
“Business Segment
Composition”
|
|
o
|
“Results of
Operations”
|
|
o
|
“Comparison of Financial
Condition”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
Mortgage Banking
segment
Within
the Mortgage Banking segment, mortgage banking income increased $2.6 million for
the first quarter of 2009 compared to the same period in 2008. The majority of
this increase was in the “gain on sale of loan” category, as a meaningful
decline in short-term interest rates caused an increase in demand for 15 and 30
year fixed rate loans, which the Company sells into the secondary market. The
Company sold $187 million in fixed rate loans into the secondary market during
the first quarter of 2009 compared to $73 million during the first quarter of
2008. As of March 31, 2009, the Company had $12 million in loans held for sale
with $129 million in fixed rate loan commitments to its customers and $112
million in mandatory forward sales contracts primarily to Freddie Mac. At March
31, 2008, the Company had $11 million in loans held for sale with $27 million in
fixed rate loan commitments to its customers and $32 million in mandatory
forward sales contracts primarily to Freddie Mac. In accordance with Staff
Accounting Bulletin (“SAB”) 109, “Written Loan Commitments Recorded
at Fair Value Through Earnings” and Statement of Financial Accounting
Standard (“SFAS”) 159, “The
Fair Value Option for Financial Assets and Financial Liabilities,” the
Company carries its loans held for sale, fixed rate loan commitments to its
customers and mandatory forward commitments to Freddie Mac at fair
value.
Due to
the significant reduction in long-term interest rates during December of 2008,
the fair value of the Mortgage Servicing Rights (“MSR”) portfolio declined as
pre-payment speed assumptions were adjusted upwards resulting in an impairment
charge of $1.3 million for the fourth quarter and year ended December 31, 2008.
During the first quarter of 2009, prepayment speed assumptions stabilized to
levels last seen prior to December of 2008 and the Company reversed $1.1 million
from the valuation allowance. At March 31, 2009 five of the total 22 tranches
remained impaired for a total of $122,000. There were no impairment charges
recorded prior to the fourth quarter of 2008.
Non
interest Expenses
Non
interest expenses increased $10.0 million, or 30%, for the first quarter of 2009
to $43.6 million. Approximately $6.3 million of the increase was related to TRS
and was driven by the significant year over year growth in the program. Within
the Company’s other operating segments, non interest expenses increased $3.7,
for the quarter, or 17%, over the first quarter of 2008. A detailed analysis of
the change in non interest income by business segment follows:
TRS
segment
TRS
occupancy and equipment expense increased $436,000 primarily due to higher
leased and rented equipment and facility rent expense, as the Company continued
to expand its infrastructure to accommodate the increased volume of the
business.
TRS
marketing and development expense increased $4.0 million due to expenses
associated with the Program and Technology Agreements related to the Jackson
Hewitt relationship. The increase in 2009 was the result of additional
transaction volume in conjunction with the amended agreements signed during the
fourth quarter of 2008.
TRS
communication and transportation expense and office supplies increased $694,000
and $290,000, respectively, consistent with the overall growth in the
program.
FDIC
insurance assessment expense increased $371,000 during the first quarter of 2009
compared to the same period in 2008. The increase related to primarily to higher
premium assessments and brokered certificates of deposits acquired by the
Company to fund the first quarter 2009 tax business.
Other
expenses at TRS increased $398,000 primarily due to expenses such as routine
professional fees, fraud detection and identification verification, and
correspondent banking relationships. Included in professional fees is the annual
review of the RAL underwriting by a third party consultant and increased routine
audits of tax preparation offices nationwide.
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations:”
|
|
o
|
“Business Segment
Composition”
|
|
o
|
“Results of
Operations”
|
|
o
|
“Comparison of Financial
Condition”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
Traditional Banking
segment
Occupancy
and equipment increased $827,000 primarily due to growth in the Company’s
infrastructure and banking center network, as well as increased leasing costs
and service agreements for the Company’s technology and operating systems. In
addition, the Company recorded a pre-tax charge in occupancy and equipment of
$138,000 associated with remaining scheduled lease payments and acceleration of
depreciation of leasehold improvements for one of its northern Kentucky
locations which is scheduled to close during the third quarter of
2009.
FDIC
insurance assessment expense increased $619,000 during the first quarter of 2009
compared to the same period in 2008. The increase related to primarily to higher
premium assessments from the FDIC.
Other
real estate owned expense increased $1.7 million primarily due to two write
downs related to Other real estate owned (“OREO”) held in Florida. The Company
currently has a sales contract pending for one of the properties.
COMPARISON
OF FINANCIAL CONDITION AT MARCH 31, 2009 AND DECEMBER 31, 2008
Investment
Securities
Investment
securities available for sale primarily consist of U.S. Treasury and U.S.
Government agency obligations, including agency mortgage backed securities
(“MBSs”), agency collateralized mortgage obligations (“CMOs”) and private label
mortgage backed and other private label mortgage-related investment securities.
The agency MBSs primarily consist of hybrid mortgage investment securities, as
well as other adjustable rate mortgage investment securities, underwritten and
guaranteed by Ginnie Mae (“GNMA”), Freddie Mac (“FHLMC”) and Fannie Mae
(“FNMA”). Agency CMOs held in the investment portfolio are substantially all
floating rate investment securities that adjust monthly. The Company primarily
uses the investment securities portfolio as collateral for securities sold under
agreements to repurchase (“repurchase agreements”). The Company has historically
invested in investment securities with shorter-term repricing features in order
to mitigate its risk position from rising interest rates. Strategies for the
investment securities portfolio may be influenced by economic and market
conditions, loan demand, deposit mix and liquidity needs.
U.S.
Treasury and U.S. Government agency obligations decreased $442 million at March
31, 2009 compared to December 31, 2008. As mentioned throughout this document,
during the fourth quarter of 2008, the Company obtained $918 million in brokered
certificates of deposits to be utilized to fund the first quarter 2009 tax
season. These brokered certificates of deposits had a weighted average life of
three months with a weighted average rate of 2.71%. During the fourth quarter of
2008, the Company invested a portion of the funds obtained from the brokered
certificates of deposits in short-term agency discount notes and callable
securities which were called during the first quarter.
During
the first quarter of 2009, Republic purchased $300 million in available for sale
investment securities and had maturities and calls of $754 million.
Substantially all of the investment securities purchased were agency discount
notes, which the Company utilized primarily for short-term collateral purposes.
The weighted average yield on these discount notes was 0.10% with an average
term of 8 days. Substantially all of the cash received from the maturities and
calls of the investment securities that was not reinvested into discount notes
was utilized to pay down advances from the FHLB.
Nationally,
residential real estate values have declined significantly since 2007. These
declines in value, coupled with the reduced ability of certain homeowners to
refinance or repay their residential real estate obligations, have led to
elevated delinquencies and losses in residential real estate loans. Many of
these loans have previously been securitized and sold to investors as private
label mortgage backed and other private label mortgage-related securities. The
Company owned and continues to own five private label mortgage backed and other
private label mortgage-related securities with a fair value of $10.7 million at
March 31, 2009. These securities are not guaranteed by government agencies.
Approximately $5.4 million of these securities are mostly backed by “Alternative
A” first lien mortgage loans. The remaining $5.3 million represents an asset
backed security with an insurance “wrap” or guarantee. The average life of these
securities is currently estimated to be approximately five years. Due to current
market conditions, all of these assets are extremely illiquid, and as such, the
Company determined that these securities are Level 3 securities in accordance
with SFAS 157 “Fair Value
Measurements.” Based on this determination, the Company utilized an
income valuation model (present value model) approach, in determining the fair
value of these securities. 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 these
investments.
As a
result of the impairment charges noted above, all respective unrealized losses
during 2008 and the first quarter of 2009 were transferred from accumulated
other comprehensive loss to an immediate reduction of earnings classified as net
loss on sales, calls and impairments of securities in the consolidated statement
of income and comprehensive income. See additional discussion above
under Footnote 2 “Investment Securities” of Item 1 “Financial
Statements.”
Loan
Portfolio
Net
loans, primarily consisting of secured real estate loans, within the Banking
segment decreased by $11.3 million during the first quarter of 2009 to $2.3
billion at March 31, 2009. The Company continued to experience a decline in all
loan categories during the first quarter of 2009 due to several factors,
including the current economic environment, stricter underwriting guidelines
implemented in 2008 and continued in 2009 and higher pricing requirements for
portfolio level loans. The Company currently expects to maintain these pricing
and underwriting strategies until it sees improvement in these conditions and,
as a result, the Company anticipates a continued decline in loan balances
throughout the remainder of the year. In addition, the Company experienced more
borrowers opting for its secondary market fixed rate product over its portfolio
ARM product during the first quarter of 2009 due to the historically low fixed
rate environment. This shift in demand for fixed rate residential real estate
loans also contributed to the overall decline in the Company’s loan portfolio
during the quarter.
Allowance
for Loan Losses and Provision for Loan Losses
The
allowance for loan losses as a percent of total loans increased to 0.77% at
March 31, 2009 compared to 0.64% at December 31, 2008. In general, the increase
in the allowance for loan losses as a percentage of total loans was primarily
attributable to additional reserves recorded based on the increase in past due
loan balances, non-performing loan balances and classified loans. The Company
believes, based on information presently available, that it has adequately
provided for loan losses at March 31, 2009.
The
Company recorded a provision for loan losses of $25.7 million for the quarter
ended March 31, 2009, compared to $10.5 million for the same period in 2008.
Included in the provision for loan losses for 2009 and 2008 was $22.0 million
and $7.5 million for net estimated losses associated with RALs retained on
balance sheet. The increase in estimated losses associated with RALs was
primarily due to increased volume and an increase in the amount of refunds held
by the IRS for reasons such as audits and liens from prior debts. In addition,
as previously discussed within this filing, TRS’ prior year funding strategy had
the effect of reclassifying $7.3 in losses on securitized RALs as a decrease to
Net RAL securitization income because these losses represented a reduction to
the future estimated cash flows of the Company’s residual interest. The
Company’s current year funding strategy of keeping all RALs on-balance sheet
caused all losses to be recorded through the allowance for loan losses like a
traditional loan.
Within
the traditional Banking segment the provision for loan losses for the first
quarter of 2009 was $3.7 million compared to $3.0 million during the first
quarter of 2008. Approximately $1.9 million of the decrease in the provision for
loan losses within the traditional Banking segment was attributable to a reserve
recorded during the first quarter of 2008 related to one land development loan
in Florida placed on non accrual status. The decrease in the provision related
to the one specific land development loan was largely offset by provisions
during the first quarter of 2009 primarily related to increases in past due loan
balances, non-performing loan balances and classified loans.
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations:”
|
|
o
|
“Business Segment
Composition”
|
|
o
|
“Results of
Operations”
|
|
o
|
“Comparison of Financial
Condition”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
An
analysis of the changes in the allowance for loan losses and selected ratios
follows:
Table
3 – Summary of Loan Loss Experience
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
Allowance
for loan losses at beginning of period
|
|
$ |
14,832 |
|
|
$ |
12,735 |
|
Charge
offs:
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
Residential
|
|
|
(254 |
) |
|
|
(546 |
) |
Commercial
|
|
|
- |
|
|
|
- |
|
Construction
|
|
|
(4 |
) |
|
|
- |
|
Commercial
|
|
|
(19 |
) |
|
|
- |
|
Consumer
|
|
|
(371 |
) |
|
|
(450 |
) |
Home
Equity
|
|
|
(247 |
) |
|
|
(64 |
) |
Tax
Refund Solutions
|
|
|
(27,054 |
) |
|
|
(7,873 |
) |
Total
|
|
|
(27,949 |
) |
|
|
(8,933 |
) |
Recoveries:
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
Residential
|
|
|
9 |
|
|
|
42 |
|
Commercial
|
|
|
16 |
|
|
|
18 |
|
Construction
|
|
|
- |
|
|
|
- |
|
Commercial
|
|
|
7 |
|
|
|
3 |
|
Consumer
|
|
|
113 |
|
|
|
119 |
|
Home
Equity
|
|
|
10 |
|
|
|
4 |
|
Tax
Refund Solutions
|
|
|
5,175 |
|
|
|
538 |
|
Total
|
|
|
5,330 |
|
|
|
724 |
|
|
|
|
|
|
|
|
|
|
Net
loan charge offs
|
|
|
(22,619 |
) |
|
|
(8,209 |
) |
Provision
for loan losses
|
|
|
25,665 |
|
|
|
10,499 |
|
Allowance
for loan losses at end of period
|
|
$ |
17,878 |
|
|
$ |
15,025 |
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to total loans
|
|
|
0.77 |
% |
|
|
0.64 |
% |
Allowance
for loan losses to non-performing loans
|
|
|
73 |
|
|
|
83 |
|
Allowance
for loan losses to non-performing assets
|
|
|
58 |
|
|
|
79 |
|
Annualized
net loan charge offs to average loans outstanding - Total
Company
|
|
|
3.46 |
|
|
|
1.32 |
|
Annualized
net loan charge offs to average loans outstanding - Traditional Banking
Segment
|
|
|
0.13 |
|
|
|
0.14 |
|
Asset
Quality
The
Company maintains a “watch list” of commercial and commercial real estate loans
and reviews those loans on a regular basis. Generally, assets are designated as
“watch list” loans to ensure more frequent monitoring. Watch list assets are
reviewed to ensure proper earning status and management strategy. If it is
determined that there is serious doubt as to performance in accordance with
original terms of the contract, then the loan is placed on non accrual
status.
Management
evaluates the loan portfolio by reviewing the historical loss rate for each
respective loan type, assigning risk multiples to certain categories to account
for qualitative factors including current economic conditions. Both an average
five-year loss rate and a loss rate based on heavier weighting of the previous
two years’ loss experience are reviewed in the analysis. Management makes
allocations within the allowance for loan losses for specifically classified
loans regardless of loan amount, collateral or loan type. In addition,
historical loss rates for non accrual loans and loans that are past due 90 days
or more and that are not specifically classified are analyzed and applied based
on respective balances and loan types.
Specialized
loan categories are evaluated utilizing subjective factors in addition to the
historical loss calculations to determine a loss allocation for each of those
types. As this analysis, or any similar analysis, is an imprecise measure of
loss, the allowance is subject to ongoing adjustments. Therefore, management
will often take into account other significant factors that may be necessary or
prudent in order to reflect probable incurred losses in the total loan
portfolio.
Loans,
including impaired loans under SFAS 114, “Accounting by Creditors for
Impairment of a Loan,” but excluding consumer loans, are typically placed
on non-accrual status when the loans become past due 75 days or more as to
principal or interest, unless the loans are adequately secured and in the
process of collection. Past due status is based on how recently payments have
been received. When loans are placed on non-accrual status, all unpaid interest
is reversed from interest income and accrued interest receivable. These loans
remain on non-accrual status until the borrower demonstrates the ability to
become and remain current or the loan or a portion of the loan is deemed
uncollectible and is charged off.
Consumer
loans are not placed on non-accrual status but are reviewed periodically and
generally charged off when the loans reach 120 days past due or at any earlier
point the loan is deemed uncollectible. RALs traditionally undergo a review in
March, June and July of each year and those RALs deemed uncollectible are
charged off against the allowance for loan losses.
Total
non-performing loans to total loans increased to 1.06% March 31, 2009, from
0.58% at December 31, 2008, as the total balance of non-performing loans
increased by $11 million for the same period. As detailed below in Table 5“Non Performing Loan
Composition,” the increase in non performing loans was primarily within
the real estate construction, commercial real estate and residential real estate
categories.
Deterioration
in the housing market over the past few years, reduced demand, falling home
prices and increasing foreclosures, unemployment and under-employment have
negatively impacted the credit performance of real estate related loans. This
market turmoil and tightening of credit have led to an increased level of
commercial and consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of general business activity. If
current levels of market disruption and volatility continue or worsen, there can
be no assurance that the Company will not experience an adverse effect, which
may be material, on the Company’s ability to access capital and on its business,
financial condition and results of operations. See additional discussion at
Part I Item 1A “Risk
Factors” of the Company’s 2008 Annual Report on Form 10-K.
Ten
relationships classified as non performing for the first time during the first
quarter of 2009 represented $8.0 million, or 72%, of the increase from December
31, 2008. As a result of these additions, the Company recorded additional
provision for loan loss expense of approximately $1.4 million during the first
quarter of 2009. The Company does not anticipate a substantial increase in
additional losses resulting from the current rise in the level of these
non-performing loans at this time.
Other
real estate owned (“OREO”) increased $649,000 at March 31, 2009 compared to
December 31, 2008. During the first quarter of 2009, the Company transferred
$805,000 from fixed assets to OREO, as management modified its intent to develop
a banking center on land acquired during the GulfStream Community Bank purchase.
The Company recorded an OREO write-down of $1.3 million related to this property
during the first quarter of 2009. Approximately $4.0 million of the OREO
category relates to one land development property in Florida. The Company
currently has a sales contract pending for this property. The pending sales
contract is expected to be finalized during the second quarter of 2009, and as a
result of the contract, the Company recorded an additional OREO write-down of
$372,000 during the first quarter of 2009.
Table
4 – Non-performing Loans and Non-performing Assets
(dollars
in thousands)
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Loans
on non-accrual status(1)
|
|
$ |
24,133 |
|
|
$ |
11,324 |
|
Loans
past due 90 days or more and still on accrual
|
|
|
352 |
|
|
|
2,133 |
|
Total
non-performing loans
|
|
|
24,485 |
|
|
|
13,457 |
|
Other
real estate owned
|
|
|
6,386 |
|
|
|
5,737 |
|
Total
non-performing assets
|
|
$ |
30,871 |
|
|
$ |
19,194 |
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans
|
|
|
1.06 |
% |
|
|
0.58 |
% |
Non-performing
assets to total loans (including OREO)
|
|
|
1.33 |
% |
|
|
0.83 |
|
(1)
|
Loans
on non-accrual status include impaired loans. See Footnote 3 “Loans and
Allowance for Loan Losses” of Item 1 “Financial Statements” for additional
discussion regarding impaired
loans.
|
Table
5 – Non-performing Loan Composition
|
|
March
31,
|
|
|
December
31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
9,625 |
|
|
$ |
7,145 |
|
Commercial
real estate
|
|
|
6,243 |
|
|
|
2,665 |
|
Real
estate construction
|
|
|
6,987 |
|
|
|
2,749 |
|
Commercial
|
|
|
577 |
|
|
|
243 |
|
Consumer
|
|
|
38 |
|
|
|
86 |
|
Home
equity
|
|
|
1,015 |
|
|
|
567 |
|
Total
non performing loans
|
|
$ |
24,485 |
|
|
$ |
13,457 |
|
Republic
defines impaired loans to be those commercial, commercial construction and
commercial real estate loans that are:
|
·
|
classified
as doubtful (collection of total amount due is
improbable);
|
|
·
|
classified
as loss (all or a portion of the loan has been written off or a specific
allowance for loss has been
provided);
|
|
·
|
classified
as substandard, with the aggregate relationship balance
exceeding $500,000; or
|
|
·
|
any
loan that would otherwise meet the definition of being
impaired.
|
Republic’s
policy is to charge off all or that portion of its investment in an impaired
loan upon a determination that it is probable the full amount will not be
collected. Impaired loans totaled $25.2 million at March 31, 2009 compared to
$12.1 million at December 31, 2008. The increase during the first quarter of
2009 related to five commercial real estate relationships that were downgraded
to substandard.
Deposits
Total
deposits decreased $775 million from December 31, 2008 to March 31, 2009 to $2.0
billion. Interest-bearing deposits decreased $881 million, or 36%, while non
interest-bearing deposits increased $106 million, or 39%, from December 31, 2008
to March 31, 2009. The increase in non interest bearing deposits was
substantially all related to short-term float for tax refund checks issued to
TRS clients.
The
decrease in interest-bearing accounts was heavily concentrated in the brokered
deposit category. Brokered deposits decreased $904 million during the first
quarter of 2009 to $144 million. During the fourth quarter of 2008, the Company
acquired approximately $918 million in brokered certificates of deposits to be
utilized in the first quarter of 2009 to fund RALs. These deposits had a
weighted average cost of 2.71% with an average life of three months. Also,
during January of 2009, the Company obtained an additional $375 million in
brokered certificates of deposits to fund anticipated RAL demand. These brokered
certificates of deposits had a weighted average life of 45 days and a weighted
average interest rate of 1.27%. FHLB advances were used to replace those
brokered certificates of deposit where enough excess cash was not available to
pay off the maturity.
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations:”
|
|
o
|
“Business Segment
Composition”
|
|
o
|
“Results of
Operations”
|
|
o
|
“Comparison of Financial
Condition”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
Securities
Sold Under Agreements to Repurchase and Other Short-term Borrowings
Securities
sold under agreements to repurchase and other short-term borrowings declined $14
million, or 4%, during 2009. The majority of the repurchase accounts are large
treasury management transaction relationships with normal recurring large
fluctuations in account balances. All of these accounts require security
collateral on behalf of Republic. The substantial majority of these accounts are
indexed to immediately repricing indices such as the Federal Funds target rate.
Based on the transactional nature of the Company’s treasury management accounts,
repurchase agreement balances are subject to large fluctuations on a daily
basis.
Federal
Home Loan Bank Advances
FHLB
advances increased $120 million during 2009 to $635 million. During the fourth
quarter of 2008, the Company utilized excess cash from the previously mentioned
brokered deposits to reduce overnight borrowings at the FHLB. FHLB advances were
used during the first quarter to replace those brokered deposits where enough
excess cash was not available to pay off the maturity.
Approximately
$150 million of the FHLB advances at March 31, 2009 and December 31, 2008 were
putable advances with original fixed rate periods ranging from one to five years
and original maturities ranging from three to ten years if not put back to the
Company earlier by the FHLB. At the end of their respective fixed rate periods
and on a quarterly basis thereafter, the FHLB has the right to require payoff of
the advances by the Company at no penalty. The weighted average coupon on all of
the Company’s putable advances at March 31, 2009 was 4.51%. Based on market
conditions at this time, the Company does not believe that any of its putable
advances are likely to be “put back” to the Company in the short-term by the
FHLB.
Liquidity
The
Company is significantly leveraged with a loan to deposit ratio (excluding
brokered deposits) of 140% at March 31, 2009 and 150% at December 31, 2008.
Traditionally, the Company has utilized secured and unsecured borrowing lines to
supplement its funding requirements. At March 31, 2009 and December 31, 2008,
Republic had available collateral to borrow an additional $327 million and $432
million, respectively from the FHLB. In addition to its borrowing line with the
FHLB, Republic also had unsecured lines of credit totaling $200 million
available through various other financial institutions as of March 31, 2009. If
the Company were to lose a significant funding source, such as a few major
depositors, or if any of its lines of credit were canceled, or if the Company
cannot obtain brokered deposits, the Company would be forced to offer above
market deposit interest rates to meet its funding and liquidity
needs.
Republic
maintains sufficient liquidity to fund routine loan demand and routine deposit
withdrawal activity. Liquidity is managed by maintaining sufficient liquid
assets in the form of investment securities. Funding and cash flows can also be
realized by the sale of securities available for sale, principal paydowns on
loans and MBSs and proceeds realized from loans held for sale. The Company’s
liquidity is impacted by its ability to sell certain investment securities,
which is limited due to the level of investment securities that are needed to
secure public deposits, securities sold under agreements to repurchase and for
other purposes, as required by law. At March 31, 2009 and December 31, 2008,
these investment securities had a fair value of $410 million and $594 million,
respectively. Republic’s banking centers and its website, www.republicbank.com,
provide access to retail deposit markets. These retail deposit products, if
offered at attractive rates, have historically been a source of additional
funding when needed.
At March
31, 2009, the Company had approximately $213 million in Premier First money
market accounts, which is the Bank’s primary deposit product offering for medium
to large business customers. These accounts do not require collateral,
therefore, cash from these accounts can generally be utilized to fund the loan
portfolio. The 25 largest Premier First relationships represent approximately
$91 million of the total balance. If any of these balances are moved from the
Bank, the Company would likely utilize overnight borrowings in the short-term to
replace the balances. On a longer-term basis, the Company would likely utilize
brokered deposits to replace withdrawn balances. Based on past experience
utilizing brokered deposits, the Company believes it can quickly obtain brokered
deposits if needed. The overall cost of gathering brokered deposits, however,
could be substantially higher than the traditional retail bank deposits they
replace, potentially decreasing the Company’s earnings.
The
Company’s first quarter 2009 and 2008 RAL programs required significantly more
liquidity than in prior tax seasons. In addition to the new business gained
through the Jackson Hewitt relationship, the Company also experienced
significant growth through its independent tax-preparer customer base. The
Company utilized a securitization structure in addition to brokered deposits in
2008 to fund the RAL portfolio. Due to the excessive costs of securitization
structures, which resulted from a significant lack of liquidity in the credit
markets during the latter half of 2008, the Company elected not to obtain
funding from a securitization structure for the first quarter 2009. Instead the
Company primarily utilized brokered deposits as its RAL funding source for the
first quarter 2009 tax season. FHLB advances were used during the first quarter
of 2009 to replace those brokered certificates of deposit where enough excess
cash was not available to pay off the maturity.
For
additional discussion regarding TRS, see the following sections:
|
·
|
Part I Item 1 “Financial
Statements:”
|
|
o
|
Footnote 1 “Summary of
Significant Accounting
Policies”
|
|
o
|
Footnote 3 “Loans and
Allowance for Loan Losses”
|
|
o
|
Footnote 10 “Segment
Information”
|
|
o
|
Footnote 11
“Securitization”
|
|
·
|
Part I Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations:”
|
|
o
|
“Business Segment
Composition”
|
|
o
|
“Results of
Operations”
|
|
o
|
“Comparison of Financial
Condition”
|
|
·
|
Part I Item 1A “Risk Factors”
of the Company’s 2008 Annual Report on Form
10-K
|
The
Parent Company’s principal source of funds for dividend payments are dividends
received from RB&T. Banking regulations limit the amount of dividends that
may be paid to the Parent Company by the Bank without prior approval of the
respective states’ banking regulators. Under these regulations, the amount of
dividends that may be paid in any calendar year is limited to the current year’s
net profits, combined with the retained net profits of the preceding two years.
At March 31, 2009 RB&T could, without prior approval, declare dividends of
approximately $56 million. The Company does not plan to pay dividends from its
Florida subsidiary, Republic Bank, in the foreseeable future.
Capital
Total
stockholders’ equity increased from $276 million at December 31, 2008 to $304
million at March 31, 2009. The increase in stockholders’ equity was primarily
attributable to net income earned during the first quarter of 2009 reduced by
cash dividends declared. In addition, stockholders’ equity also increased to a
lesser extent from stock option exercises during the quarter.
See
Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds”
for additional detail regarding stock repurchases and buy back
programs.
Regulatory
Capital Requirements – RB&T, Republic Bank and the Parent Company are
each subject to regulatory capital requirements administered by federal banking
agencies. RB&T is a Kentucky chartered commercial banking and trust company,
and as such, it is subject to supervision and regulation by the FDIC and the
Kentucky Department of Financial Institutions. Republic Bank is a federally
chartered savings bank institution, and as such, it is subject to supervision
and regulation by the OTS and secondarily by the FDIC, as the deposit insurer.
Capital adequacy guidelines and, additionally for banks, prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off balance sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet capital requirements can initiate
regulatory action.
Prompt
corrective action regulations provide five classifications: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent
overall financial condition. If adequately capitalized, regulatory approval is
required to accept brokered deposits. If undercapitalized, capital distributions
are limited, as is asset growth and expansion, and capital restoration plans are
required. At March 31, 2009 and December 31, 2008, the most recent regulatory
notifications categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution’s
category.
With
regard to Republic Bank, the Qualified Thrift Lender (“QTL”) test requires at
least 65% of assets be maintained in housing related loans and investments and
other specified areas for nine out of the twelve calendar months each year. If
this test is not met for at least nine out of twelve months, limits are placed
on growth, branching, new investments, FHLB advances and dividends, or Republic
Bank must convert to a commercial bank charter. Management currently believes
that Republic Bank will meet the requirements of the QTL test for at least nine
of out of twelve calendar months for 2009.
Banking
regulators have categorized the Bank as well-capitalized. To be categorized as
well-capitalized, the Bank must maintain minimum Total Risk Based, Tier I
Capital and Tier I Leverage Capital ratios. Regulatory agencies measure capital
adequacy within a framework that makes capital requirements, in part, dependent
on the individual risk profiles of financial institutions. Republic continues to
exceed the regulatory requirements for Total Risk Based Capital, Tier I Capital
and Tier I Leverage Capital. Republic and the Bank intend to maintain a capital
position that meets or exceeds the “well-capitalized” requirements as defined by
the Federal Reserve Bank, FDIC and the OTS. Republic’s average capital to
average assets ratio was 7.03% at March 31, 2009 compared to 8.28% at December
31, 2008. Formal measurements of the capital ratios for Republic and the Bank
are performed by the Company at each quarter end.
In 2004,
the Company executed an intragroup trust preferred transaction, with the purpose
of providing RB&T access to additional capital markets, if needed, in the
future. On a consolidated basis, this transaction has had no impact on the
capital levels and ratios of the Company. The subordinated debentures held by
RB&T, as a result of this transaction, however, are treated as Tier 2
Capital based on requirements administered by the Bank’s federal banking agency.
If RB&T’s Tier I Capital ratios should not meet the minimum requirement to
be well-capitalized, the Company could immediately modify the transaction in
order to maintain its well-capitalized status.
In 2005,
Republic Bancorp Capital Trust (“RBCT”), an unconsolidated trust subsidiary of
Republic Bancorp, Inc., was formed and issued $40 million in Trust Preferred
Securities (“TPS”). The TPS pay a fixed interest rate for ten years and adjust
with LIBOR + 1.42% thereafter. The TPS mature on September 30, 2035 and are
redeemable at the Company’s option after ten years. The subordinated debentures
are treated as Tier I Capital for regulatory purposes. The sole asset of RBCT
represents the proceeds of the offering loaned to Republic Bancorp, Inc. in
exchange for subordinated debentures which have terms that are similar to the
TPS. The subordinated debentures and the related interest expense, which are
payable quarterly at the annual rate of 6.015%, are included in the consolidated
financial statements. The proceeds obtained from the TPS offering have been and
will continue to be utilized to fund loan growth, support an existing stock
repurchase program and for other general business purposes such as the
acquisition of GulfStream Community Bank in October of 2006.
The
following table sets forth the Company’s risk based capital amounts and ratios
as of March 31, 2009 and December 31, 2008:
Table
6 – Capital Ratios
|
|
As
of March 31, 2009
|
|
|
As
of December 31, 2008
|
|
|
|
Actual
|
|
|
Actual
|
|
(dollars
in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Risk Based Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
Bancorp, Inc.
|
|
$ |
347,852 |
|
|
|
17.26
|
% |
|
$ |
319,087 |
|
|
|
15.43
|
% |
Republic
Bank & Trust Co.
|
|
|
319,588 |
|
|
|
16.31 |
|
|
|
301,001 |
|
|
|
14.97 |
|
Republic
Bank
|
|
|
39,593 |
|
|
|
51.64 |
|
|
|
12,522 |
|
|
|
22.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
Bancorp, Inc.
|
|
$ |
329,973 |
|
|
|
16.37
|
% |
|
$ |
304,255 |
|
|
|
14.72
|
% |
Republic
Bank & Trust Co.
|
|
|
278,783 |
|
|
|
14.23 |
|
|
|
263,213 |
|
|
|
13.09 |
|
Republic
Bank
|
|
|
39,069 |
|
|
|
50.96 |
|
|
|
12,028 |
|
|
|
21.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Leverage Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
Bancorp, Inc.
|
|
$ |
329,973 |
|
|
|
7.93
|
% |
|
$ |
304,255 |
|
|
|
8.80
|
% |
Republic
Bank & Trust Co.
|
|
|
278,783 |
|
|
|
6.79 |
|
|
|
263,213 |
|
|
|
7.76 |
|
Republic
Bank
|
|
|
39,069 |
|
|
|
10.08 |
|
|
|
12,028 |
|
|
|
15.70 |
|
Asset/Liability
Management and Market Risk
Asset/liability
management control is designed to ensure safety and soundness, maintain
liquidity and regulatory capital standards and achieve acceptable net interest
income. Interest rate risk is the exposure to adverse changes in net interest
income as a result of market fluctuations in interest rates. The Company, on an
ongoing basis, monitors interest rate and liquidity risk in order to implement
appropriate funding and balance sheet strategies. The Company considers interest
rate risk to be Republic’s most significant market risk.
The
interest sensitivity profile of Republic at any point in time will be affected
by a number of factors. These factors include the mix of interest sensitive
assets and liabilities, as well as their relative pricing schedules. It is also
influenced by market interest rates, deposit growth, loan growth and other
factors.
Republic
utilized an earnings simulation model to analyze net interest income
sensitivity. Potential changes in market interest rates and their subsequent
effects on net interest income are evaluated with the model. The model projects
the effect of instantaneous movements in interest rates of both 100 and 200
basis point increments equally across all points on the yield curve. These
projections are computed based on various assumptions, which are used to
determine the 100 and 200 basis point increments, as well as the base case
(which is a twelve month projected amount) scenario. Assumptions based on growth
expectations and on the historical behavior of Republic’s deposit and loan rates
and their related balances in relation to changes in interest rates are also
incorporated into the model. These assumptions are inherently uncertain and, as
a result, the model cannot precisely measure future net interest income or
precisely predict the impact of fluctuations in market interest rates on net
interest income. Actual results will differ from the model’s simulated results
due to timing, magnitude and frequency of interest rate changes, as well as
changes in market conditions and the application and timing of various
management strategies. Additionally, actual results could differ materially from
the model if interest rates do not move equally across all points on the yield
curve. As with the Company’s previous simulation models, the March 31, 2009
simulation analysis continues to indicate that an increase in interest rates
would generally have a negative effect on net interest income. The Company did
not run a model simulation for declining interest rates as of March 31, 2009,
because the FOMC effectively lowered the Federal Funds Target rate to 0.00% in
December 2008 and therefore, no further short-term rate reductions can occur. As
the Company implements strategies to mitigate the negative impact of rising
interest rates in the future, these strategies will lessen the Company’s
forecasted “base case” net interest income in the event of no interest rate
changes.
Item
3. Quantitative and Qualitative Disclosures
about Market Risk.
Information
required by this item is included under Part I, Item 2., “Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.”
Item
4. Controls and Procedures.
As of the
end of the period covered by this report, an evaluation was carried out by
Republic Bancorp, Inc.’s management, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that these
disclosure controls and procedures were effective as of the end of the period
covered by this report. In addition, no change in the Company’s internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934) occurred during the fiscal quarter covered by this report
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings.
In the
ordinary course of operations, Republic and the Bank are defendants in various
legal proceedings. In the opinion of management, there is no proceeding pending
or, to the knowledge of management, threatened litigation in which an adverse
decision could result in a material adverse change in the business or
consolidated financial position of Republic or the Bank.
Item
1A. Risk Factors.
Information
regarding risk factors appears in the Company’s Form 10-K for the year ending
December 31, 2008, under the heading titled “Cautionary Statement Regarding
Forward-Looking Statements” and in the Form 10-K Part I, Item 1A “Risk Factors.” There have
been no material changes from the risk factors previously disclosed in the
Company’s Form 10-K for the year ended December 31, 2008.
Item
2. Unregistered Sales of Equity Securities
and Use of Proceeds.
Details
of Republic’s Class A Common Stock purchases during the first quarter of 2009
are included in the following table:
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price
Paid per Share
|
|
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans or
Programs
|
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the Plan or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
Jan.
1– Jan. 31
|
|
|
4,450 |
|
|
$ |
26.21 |
|
|
|
4,450 |
|
|
Feb.
1– Feb. 28
|
|
|
7,895 |
|
|
|
13.51 |
|
|
|
1,821 |
|
|
March
1 – March 31
|
|
|
28,861 |
|
|
|
18.48 |
|
|
|
- |
|
|
Total
|
|
|
41,206
|
* |
|
$ |
18.36 |
|
|
|
6,271 |
|
79,182
|
*
- Represents 34,935 shares received by the Company in connection with stock
option exercises.
During
the first quarter of 2009, the Company repurchased 6,271 shares and there were
34,935 shares exchanged for stock option exercises. During the second quarter of
2007, the Company’s Board of Directors amended its existing share repurchase
program by approving the repurchase of an additional 300,000 shares from time to
time, as market conditions are deemed favorable to the Company. The repurchase
program will remain effective until the total number of shares authorized is
repurchased or until Republic’s Board of Directors terminates the program. As of
March 31, 2009, the Company had 79,182 shares which could be repurchased under
the current share repurchase programs.
During
the first quarter of 2009, there were no shares of Class A Common Stock issued
upon conversion of shares of Class B Common Stock by stockholders of Republic in
accordance with the share-for-share conversion provision option of the Class B
Common Stock. The exemption from registration of the newly issued Class A Common
Stock relied upon was Section (3)(a)(9) of the Securities Act of
1933.
There
were no equity securities of the registrant sold without registration during the
quarter covered by this report.
Item
4. Submission
of Matters to a Vote of Security Holders.
The
annual meeting of the shareholders of Republic Bancorp, Inc. was held on April
23, 2008. The following items were considered:
Election
of the following nominees to the Company’s Board of Directors for the ensuing
year:
Nominee
|
|
Votes For
|
|
|
Votes Withheld
|
|
|
|
|
|
|
|
|
Bernard
M. Trager
|
|
|
33,997,088 |
|
|
|
1,907,408 |
|
|
|
|
|
|
|
|
|
|
Steven
E. Trager
|
|
|
34,169,279 |
|
|
|
1,735,217 |
|
|
|
|
|
|
|
|
|
|
A.
Scott Trager
|
|
|
33,959,515 |
|
|
|
1,944,981 |
|
|
|
|
|
|
|
|
|
|
R.
Wayne Stratton
|
|
|
35,722,451 |
|
|
|
182,044 |
|
|
|
|
|
|
|
|
|
|
Michael
T. Rust
|
|
|
35,585,115 |
|
|
|
319,381 |
|
|
|
|
|
|
|
|
|
|
Sandra
Metts Snowden
|
|
|
35,720,327 |
|
|
|
184,168 |
|
|
|
|
|
|
|
|
|
|
Susan
Stout Tamme
|
|
|
35,488,898 |
|
|
|
415,597 |
|
|
|
|
|
|
|
|
|
|
Craig
A. Greenberg
|
|
|
33,330,001 |
|
|
|
2,574,495 |
|
Ratification
of the appointment of Crowe Horwath LLP as the independent registered public
accountants for the ensuing year:
For:
|
|
35,839,521 |
Against:
|
|
63,249 |
Abstain:
|
|
1,726 |
Item
6. Exhibits.
(a) Exhibits
The
following exhibits are filed or furnished as a part of this report:
Exhibit Number
|
|
Description of Exhibit
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to the Sarbanes-Oxley Act of
2002.
|
|
|
|
32*
|
|
Certification
of Principal Executive Officer and Principal Financial Officer, pursuant
to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
* -
|
This
certification shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, or otherwise subject to the liability
of that section, nor shall it be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
REPUBLIC
BANCORP, INC.
|
|
(Registrant)
|
|
|
|
Principal
Executive Officer:
|
|
|
|
|
|
|
April
24, 2009
|
By:
|
Steven
E. Trager
|
|
|
President
and Chief Executive Officer
|
|
|
|
Principal
Financial Officer:
|
|
|
|
|
|
|
April
24, 2009
|
By:
|
Kevin
Sipes
|
|
|
Executive
Vice President, Chief Financial
|
|
|
Officer
and Chief Accounting
Officer
|