CONSOLIDATED STATEMENTS OF INCOME ( UNAUDITED )
( in thousands, except per share data )1
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2012				2011				2012				2011
INTEREST INCOME:
Loans, including fees		$	31,292			$	30,225			$	137,118			$	148,229
Taxable investment securities			2,483				3,864				8,654				11,549
Federal Home Loan Bank stock and other			353				337				1,757				1,730
Total interest income			34,128				34,426				147,529				161,508
INTEREST EXPENSE:
Deposits			1,197				2,057				3,949				7,267
Securities sold under agreements to repurchase and other short-term borrowings			110				111				340				535
Federal Home Loan Bank advances			3,619				4,467				11,245				13,857
Subordinated note			630				628				1,891				1,886
Total interest expense			5,556				7,263				17,425				23,545
NET INTEREST INCOME			28,572				27,163				130,104				137,963
Provision for loan losses			2,083				(140	)			13,719				17,503
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			26,489				27,303				116,385				120,460
NON INTEREST INCOME:
Service charges on deposit accounts			3,438				3,421				10,027				10,581
Refund transfer fees			231				425				78,127				88,071
Mortgage banking income			2,274				1,352				5,591				3,092
Debit card interchange fee income			1,390				1,415				4,387				4,392
Bargain purchase gain - Tennessee Commerce Bank			(189	)			-				27,614				-
Bargain purchase gain - First Commercial Bank			27,112				-				27,112				-
Gain on sale of banking center			-				2,856				-				2,856
Gain on sale of securities available for sale			-				301				56				2,208
Total impairment losses on investment securities			-				-				-				(279	)
Gain recognized in other comprehensive income			-				-				-				-
Net impairment loss recognized in earnings			-				-				-				(279	)
Other			589				706				2,826				2,235
Total non interest income			34,845				10,476				155,740				113,156
NON INTEREST EXPENSES:
Salaries and employee benefits			14,921				13,145				46,205				43,634
Occupancy and equipment, net			5,718				5,138				16,936				16,436
Communication and transportation			1,045				1,081				4,667				4,468
Marketing and development			828				736				2,670				2,508
FDIC insurance expense			287				918				1,008				3,718
Bank franchise tax expense			729				713				3,363				2,992
Data processing			1,030				787				3,446				2,352
Debit card interchange expense			648				566				1,909				1,690
Supplies			270				409				1,748				1,617
Other real estate owned expense			1,328				608				2,488				1,467
Charitable contributions			232				178				3,110				5,710
Legal expense			388				784				1,283				3,123
FDIC civil money penalty			-				-				-				2,000
FHLB advance prepayment expense			-				-				2,436				-
Other			2,338				1,375				7,097				6,067
Total non interest expenses			29,762				26,438				98,366				97,782
INCOME BEFORE INCOME TAX EXPENSE			31,572				11,341				173,759				135,834
INCOME TAX EXPENSE			10,904				3,471				61,041				47,889
NET INCOME		$	20,668			$	7,870			$	112,718			$	87,945
BASIC EARNINGS PER SHARE:
Class A Common Stock		$	0.99			$	0.38			$	5.38			$	4.20
Class B Common Stock			0.97				0.36				5.34				4.16
DILUTED EARNINGS PER SHARE:
Class A Common Stock		$	0.98			$	0.38			$	5.36			$	4.19
Class B Common Stock			0.97				0.36				5.32				4.15

See accompanying footnotes to consolidated financial statements.

 

 

 

See accompanying footnotes to consolidated financial statements.

 

 

 

See accompanying footnotes to consolidated financial statements.

 

 

 

See accompanying footnotes to consolidated financial statements.

 

 

1.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation – The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries: Republic Bank & Trust Company (“RB&T”) and Republic Bank (“RB”) (collectively referred together as the “Bank”), Republic 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.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

 

As of September 30, 2012, the Company was divided into three distinct business operating segments: Traditional Banking, Mortgage Banking and Republic Processing Group (“RPG”). During 2012, the Company realigned the previously reported Tax Refund Solutions (“TRS”) segment as a division of the newly formed RPG segment. Along with the TRS division, Republic Payment Solutions (“RPS”) and Republic Credit Solutions (“RCS”) also operate as divisions of the newly formed RPG segment.

 

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

 

Republic operates 44 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; metropolitan Nashville, Tennessee, metropolitan Minneapolis, Minnesota and through an Internet banking delivery channel.

 

Effective January 27, 2012, RB&T acquired certain assets and assumed substantially all of the deposits and certain other liabilities of Tennessee Commerce Bank (“TCB”), headquartered in Franklin, Tennessee from the FDIC, as receiver for TCB. This acquisition of a failed bank represented a single banking center located in metropolitan Nashville and was also RB&T’s initial entrance into the Tennessee market

 

Effective September 7, 2012 RB&T acquired substantially all of the assets and assumed substantially all of the liabilities of First Commercial Bank (“FCB”), headquartered in Bloomington, Minnesota from the FDIC, as receiver for FCB. This acquisition of a failed bank represented a single banking center located in metropolitan Minneapolis and was also RB&T’s initial entrance into the Minnesota market. See additional discussion regarding the TCB and FCB acquisitions under Footnote 2 “Acquisitions of Failed Banks” of Part I Item 1 “ Financial Statements. ”

 

Core Banking results of operations are primarily dependent upon net interest income, which represents the difference between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning Core Banking assets represent investment securities and real estate mortgage, commercial and consumer loans. Interest-bearing liabilities primarily consist of interest-bearing deposit accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources.

 

Other sources of Core Banking income include service charges on deposit accounts, debit card interchange fee income, title insurance commissions, fees charged to customers for trust services and revenue generated from Mortgage Banking activities. Mortgage Banking activities represent both the origination and sale of loans in the secondary market and the servicing of loans for others. Additionally, in June 2011, the Bank commenced business in its newly established warehouse lending division. Through this division, the Bank provides short-term, revolving credit facilities to mortgage bankers across the nation. These credit facilities are secured by single family residential real estate loans.

 

 

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Core Banking 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 expense, and various general and administrative costs. Core Banking results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory agencies.

 

RPG

 

Nationally, through RB&T, RPG facilitates the receipt and payment of federal and state tax refund products under the TRS division. Nationally, through RB, the RPS division is preparing to become an issuing bank to offer general purpose reloadable prepaid debit, payroll, gift and incentive cards through third party program managers. Nationally, through RB&T, the RCS division is preparing to pilot short-term consumer credit products through multiple channels.

 

TRS division:

 

Republic, through its TRS division, is one of a limited number of financial institutions that facilitates the payment of federal and state tax refund products through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers. The TRS division’s three primary tax-related products have historically included: Refund Transfers (“RTs”) (formerly referred to as Electronic Refund Checks/Electronic Refund Deposits or “ERCs/ERDs” or “ARs/ARDs”) and Refund Anticipation Loans (“RALs”). Substantially all of the business generated by the TRS division occurs in the first quarter of the year. The TRS division traditionally operates at a loss during the second half of the year, during which time the division incurs costs preparing for the upcoming year’s first quarter tax season.

 

As previously disclosed, effective December 8, 2011, RB&T entered into an agreement with the FDIC resolving its differences regarding the TRS division. RB&T’s resolution with the FDIC was in the form of a Stipulation Agreement and a Consent Order (collectively, the “Agreement”). As part of the Agreement, RB&T and the FDIC settled all matters set out in the FDIC’s Amended Notice of Charges dated May 3, 2011 and the lawsuit filed against the FDIC by RB&T. As required by this settlement, RB&T discontinued its offering of the RAL product effective April 30, 2012.

 

RTs are products whereby a tax refund is issued to the taxpayer after RB&T has received the refund from the federal or state government. There is no credit risk or borrowing cost for RB&T associated with these products because they are only delivered to the taxpayer upon receipt of the refund directly from the Internal Revenue Service (“IRS”). Fees earned on RTs are reported as non interest income under the line item “Refund Transfer fees.”

 

RALs were short-term consumer loans offered to taxpayers that were secured by the customer’s anticipated tax refund, which represented the source of repayment. The fees earned on RALs are reported as interest income under the line item “Loans, including fees.”

 

For additional discussion regarding the Agreement, see the Company’s Form 8-K filed with the SEC on December 9, 2011, including Exhibits 10.1 and 10.2.

 

 

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Termination of Material TRS Contracts:

 

On August 27, 2012, RB&T received a termination notice to the Amended and Restated Marketing and Servicing Agreement, dated November 29, 2011, with Liberty Tax Service (“Liberty”) related to RB&T’s RT products, as well as RB&T’s previously offered RAL product. Approximately 19% and 20% of the TRS division’s gross revenue for the nine months ended as of September 30, 2012 and 2011 was derived from Liberty tax offices.

 

On September 18, 2012, RB&T received a termination notice to the Amended and Restated Program Agreement, dated August 3, 2011, with Jackson Hewitt Technology Services LLC (“JHTSL”) related to RB&T’s RT products, as well as RB&T’s previously offered RAL product. Approximately 40% of the TRS division’s gross revenue for the nine months ended as of September 30, 2012 and 2011 was derived from JHTSL’s tax offices.

 

For additional discussion regarding TRS, a division of RPG, see the following sections:

 

	●	Part I Item 1 “Financial Statements:”
		o	Footnote 4 “Loans and Allowance for Loan Losses”
		o	Footnote 6 “Federal Home Loan Bank Advances”
		o	Footnote 11 “Segment Information”
		o	Management’s Discussion and Analysis
	●	Part I Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
		o	Business Segment Composition
			■	RPG Segment
				●	Discontinuance of the RAL Product and Future Competition
				●	Termination of Material TRS Contracts
	●	Part II Item 1A “Risk Factors”

 

RPS division:

 

Nationally, through RB, the RPS division is preparing to become an issuing bank to offer general purpose reloadable prepaid debit, payroll, gift and incentive cards through third party program managers. If successful, this program is expected to:

 

	o	Generate a low-cost deposit source;
	o	Generate float revenue from the previously mentioned low cost deposit source;
	o	Serve as a source of fee income; and
	o	Generate debit card interchange revenue.

 

For the projected near-term, as the prepaid card program is being established, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the RPG business operating segment. The RPS division will not be reported as a separate business operating segment until such time, if any, that it becomes material to the Company’s overall results of operations.

 

The Company divides prepaid cards into two general categories: reloadable and non-reloadable cards.

 

Reloadable Cards: These types of cards are considered general purpose reloadable (“GPR”) cards. These cards may take the form of payroll cards issued to an employee by an employer to receive the direct deposit of their payroll. GPR cards can also be issued to a consumer at a retail location or mailed to a consumer after completing an on-line application. GPR cards can be reloaded multiple times with a consumer’s payroll, government benefit, a federal or state tax refund or through cash reload networks located at retail locations. Reloadable cards are generally open loop cards as described below.

 

Non-Reloadable Cards : These are generally one-time use cards that are only active until the funds initially loaded to the card are spent. These types of cards are considered gift or incentive cards. These cards may be open loop or closed loop, as described below. Normally these types of cards are used for the purchase of goods or services at retail locations and cannot be used to receive cash.

 

Prepaid cards may be open loop, closed loop or semi-closed loop. Open loop cards can be used to receive cash at ATM locations or purchase goods or services by PIN or signature at retail locations. These cards can be used virtually anywhere that Visa ® or MasterCard ® is accepted. Closed loop cards can only be used at a specific merchant. Semi-closed loop cards can be used at several merchants such as a shopping mall.

 

 

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The prepaid card market is one of the fastest growing segments of the payments industry in the U.S. This market has experienced significant growth in recent years due to consumers and merchants embracing improved technology, greater convenience, more product choices and greater flexibility. Prepaid cards have also proven to be an attractive alternative to traditional bank accounts for certain segments of the population, particularly those without, or who could not qualify for, a checking or savings account.

 

The RPS division will work with various third parties to distribute prepaid cards to consumers throughout the U.S. The Company will also likely work with these third parties to develop additional financial services for consumers to increase the functionality of the program and prepaid card usage.

 

See additional discussion under Part II Item 1A “Risk Factors.”

 

RCS division:

 

Nationally, through RB&T, the RCS division is preparing to pilot short-term consumer credit products through multiple channels. In general, the credit products are expected to be unsecured small dollar consumer loans with maturities of 30 days or more, and are dependent on various factors including the consumer's ability to repay. All RCS programs will be piloted for a period of time to ensure all aspects are meeting expectations before continuation.

 

RB&T management preliminarily expects to fund RCS during its pilot phase with a nominal amount of capital. At the conclusion of its pilot phase, RB&T management will determine whether or not to expand or modify the program based on the results of the pilot phase. As with most start-up ventures, management expects the pilot to operate at a loss in its initial stages. Given the speculative nature of the program, management cannot currently predict how much money the program may lose during the pilot phase, however, RB&T does not plan to put more than $5 million of capital at risk until such time the program may become profitable.

 

Summary of New Significant Accounting Policies Related to the Acquisitions of Failed Banks:

 

Loans purchased in the acquisitions of failed banks may be accounted for using the following accounting standards:

 

	●	FASB Accounting Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality , is used to value loans with post origination credit quality deterioration. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial investment in the loan (fair value) represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans.
	●	ASC Topic 310-20, Non refundable Fees and Other Costs , is used to value loans that have not demonstrated post origination credit quality deterioration and the acquirer expects to collect all contractually required payments from the borrower. For these loans, the difference between the fair value of the loan at acquisition and the amortized cost of the loan would be amortized or accreted into income using the interest method. The Bank has historically applied this ASC to its deferred loan fees and costs associated with its traditional loan portfolio. In 2012, the Bank expanded the scope of this ASC to account for discounts on purchased loans.

 

Purchased Credit Impaired Loans (ASC Topic 310-30) – Management individually evaluates substantially all purchased credit impaired loans. This evaluation allows management to determine the estimated fair value of the purchased credit impaired loans and includes no carryover of any previously recorded allowance for loan losses. In determining the estimated fair value of purchased credit impaired loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received. To the extent that any purchased credit impaired loan acquired in a FDIC-assisted acquisition is not specifically reviewed, management applies a loss estimate to that loan based on the average expected loss rates for the purchased credit impaired loans that were individually reviewed in that purchased loan portfolio. For the TCB and FCB acquisitions, RB&T elected to account for purchased credit impaired loans individually, as opposed to aggregating the loans into pools based on common risk characteristics such as loan type.

 

As provided for under GAAP, management has up to twelve months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities. Material events that occur during the measurement period will be analyzed to determine if the new information reflected facts and circumstances that existed as of the acquisition date that if known, would have affected the measurement of fair value of the amounts recognized as of the acquisition date. The measurement period ends as soon as the Bank receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns more information is not obtainable. As previously mentioned, the measurement period is limited to one year from the acquisition date. Once management has finalized the fair values of acquired assets and assumed liabilities within this twelve month period, management considers such values to be the final “day-one fair values.”

 

 

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In determining the day-one fair values of purchased credit impaired loans, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans). The non-accretable difference is the difference between the contractually required payments and the cash flows expected to be collected in accordance with management’s determination of the day-one fair values. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in cash flows will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income. The accretable difference on purchased credit impaired loans is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the level yield method over the expected cash flow periods of the loans.

 

With regard to purchased credit-impaired loans which are accounted for under ASC Topic 310-30, management separately monitors this portfolio and on a quarterly basis and reviews the loans contained within this portfolio against the factors and assumptions used in determining the day-one fair values. In addition to its quarterly evaluation, a loan is typically reviewed when it is modified or extended, or when material information becomes available to the Bank that provides additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral.

 

To the extent that a purchased credit impaired loan’s performance deteriorates from management’s expectation established in conjunction with the determination of the day-one fair values, such loan will be considered an impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. Any improvement in the expected performance of a purchased credit impaired loan would result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

Purchased Loans (ASC Topic 310-20) – Purchased loans accounted for under ASC Topic 310-20 are accounted for as would any other Bank-originated loan including presentation in any of the credit quality ratios, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, purchased loans accounted for under ASC Topic 310-20 are considered in the determination of the required allowance for loan and lease losses once day-one fair value have been finalized.

 

Reclassifications and recasts – Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on prior years’ net income. Additionally, as discussed above and in Footnote 2 “Acquisitions of Failed Banks,” during the second and third quarters of 2012 the Bank posted adjustments to the TCB acquired assets in the determination of day-one fair values, which resulted in an immaterial overall adjustment to the bargain purchase gain.

 

 

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2.           ACQUISITIONS OF FAILED BANKS

 

OVERVIEW

 

As Republic entered the 2012 calendar year, it implemented an acquisition strategy to selectively grow its franchise as a complement to its internal growth strategies.

 

During 2012, RB&T acquired two failed institutions in FDIC-assisted transactions. RB&T acquired Tennessee Commerce Bank (“TCB”) during the first quarter of 2012 and First Commercial Bank (“FCB”) during the third quarter of 2012. The Company did not raise capital to complete either of the above acquisitions.

 

RB&T determined that the acquisitions of these failed banks constituted “business acquisitions” as defined by ASC Topic 805, Business Combinations . Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values, as required. Fair values were determined based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures . In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change.

 

TCB

 

On January 27, 2012, RB&T acquired specific assets and assumed substantially all of the deposits and specific other liabilities of TCB, headquartered in Franklin, Tennessee from the FDIC, as receiver for TCB, pursuant to the terms of a Purchase and Assumption Agreement — Whole Bank; All Deposits entered into among RB&T, the FDIC as receiver of TCB and the FDIC. On January 30, 2012, TCB’s sole location re-opened as a division of RB&T.

 

RB&T acquired approximately $221 million in notional assets from the FDIC as receiver for TCB. In addition, RB&T also recorded a receivable from the FDIC for approximately $785 million, which represented the net difference between the assets acquired and the liabilities assumed adjusted for the discount RB&T received for the acquisition. The FDIC paid approximately $771 million of this receivable on January 30, 2012 with the remaining $14 million paid on February 15, 2012.

 

FCB

 

On September 7, 2012, RB&T acquired specific assets and assumed substantially all of the liabilities of FCB, headquartered in Bloomington, Minnesota from the FDIC, as receiver for FCB, pursuant to the terms of a Purchase and Assumption Agreement — Whole Bank; All Deposits, entered into among RB&T, the FDIC as receiver of FCB and the FDIC. On September 10, 2012, FCB’s sole location re-opened as a division of RB&T.

 

RB&T acquired approximately $215 million in notional assets from the FDIC as receiver for FCB. In addition, RB&T also recorded a receivable from the FDIC for approximately $64 million, which represented the net difference between the assets acquired and the liabilities assumed adjusted for the discount RB&T received for the acquisition. The FDIC paid substantially all of this receivable to RB&T on September 10, 2012.

 

 

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ACQUISITION SUMMARY

 

A summary of the assets acquired and liabilities assumed in the TCB and FCB acquisitions, including recast adjustments, follows:

 

Tennessee Commerce Bank		January 27, 2012
		As Previously Reported								As Recasted
		Contractual				Fair Value				Recast				Fair
(in thousands)		Amount				Adjustments				Adjustments				Value
Assets acquired
Cash and cash equivalents		$	61,943			$	(89	)		$	(2	)		$	61,852
Securities available for sale			42,646				-				-				42,646
Loans to be repurchased by the FDIC, net of discount			19,800				(2,797	)			-				17,003
Loans			79,112				(22,666	)			830				57,276
Federal Home Loan Bank stock, at cost			2,491				-				-				2,491
Other assets and accrued interest receivable			945				(60	)			-				885
Other real estate owned			14,189				(3,359	)			(1,113	)			9,717
Core deposit intangible			-				64				-				64
Discount			(56,970	)			56,970				-				-
FDIC settlement receivable			784,545				-				-				784,545
Total assets acquired		$	948,701			$	28,063			$	(285	)		$	976,479
Liabilities assumed
Deposits
Non interest-bearing		$	19,754			$	-			$	-			$	19,754
Interest-bearing			927,641				54				-				927,695
Total deposits			947,395				54				-				947,449
Accrued income taxes payable			-				9,988				(100	)			9,888
Other liabilities and accrued interest payable			1,306				110				-				1,416
Total liabilities assumed		$	948,701			$	10,152			$	(100	)		$	958,753
Equity
Bargain purchase gain, net of taxes			-				17,911				(185	)			17,726
Other operating loss, net of taxes			-				-				-				-
Accumulated other comprehensive loss			-				-				-				-
Total liabilities assumed and equity		$	948,701			$	28,063			$	(285	)		$	976,479