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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

Commission File Number: 0-24649

 

 

REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Kentucky

 

61-0862051

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

 

 

601 West Market Street, Louisville, Kentucky

 

40202

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (502) 584-3600

 

Securities registered pursuant to Section 12(b) of the Act:

 

Class A Common Stock

 

NASDAQ Global Select Market

(Title of each class)

 

(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes  x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  o Yes  x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

Accelerated filer  x

Non-accelerated filer  o

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  o Yes  x No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $215,806,321 (for purposes of this calculation, the market value of the Class B Common Stock was based on the market value of the Class A Common Stock into which it is convertible).

 

The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of February 14, 2014 was 18,544,745 and 2,259,926.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes:

 

·                  Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held April 24, 2014 are incorporated by reference into Part III of this Form 10-K.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

Item 1.

Business.

 

Item 1A.

Risk Factors.

 

Item 1B.

Unresolved Staff Comments.

 

Item 2.

Properties.

 

Item 3.

Legal Proceedings.

 

Item 4.

Mine Safety Disclosures.

 

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Item 6.

Selected Financial Data.

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

Item 8.

Financial Statements and Supplementary Data.

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

Item 9A.

Controls and Procedures.

 

Item 9B.

Other Information.

 

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance.

 

Item 11.

Executive Compensation.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

Item 14.

Principal Accounting Fees and Services.

 

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules.

 

 

Signatures

 

 

Index to Exhibits

 

 

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Cautionary Statement Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K contains statements relating to future results of Republic Bancorp, Inc. that are considered “forward-looking” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part I Item 1 “Business,” Part I Item 1A “Risk Factors” and Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

As used in this filing, 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 (“RB&T”) and Republic Bank (“RB”).

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, recession, acquisitions and integrations of acquired businesses, technological changes, changes in law and regulations or the interpretation and enforcement thereof, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required, as well as other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”) included under Part 1 Item 1A “Risk Factors.”

 

Broadly speaking, forward-looking statements include:

 

·                  projections of revenue, income, expenses, 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:

 

·               loan delinquencies; non-performing, classified, or impaired loans; and troubled debt restructurings (“TDR”s);

·               further developments in the Bank’s ongoing review of and efforts to resolve possible problem credit relationships, which could result in, among other things, additional provisions for loan losses;

·               future credit quality, credit losses and the overall adequacy of the Allowance for Loan Losses (“Allowance”);

·               potential write-downs of other real estate owned (“OREO”);

·               future short-term and long-term interest rates and the respective impact on net interest income, net interest spread, net income, liquidity and capital;

·               the future impact of Company strategies to mitigate interest rate risk;

·               future long-term interest rates and their impact on the demand for Mortgage Banking products and warehouse lines of credit;

·               the future value of mortgage servicing rights (“MSR”s);

·               the future financial performance of the Tax Refund Solutions (“TRS”) division of Republic Processing Group (“RPG);

·               future Refund Transfer (“RT”) volume for TRS;

·               the future net revenues associated with RTs at TRS;

·               the future financial performance of the Republic Payment Solutions (“RPS”) division of RPG;

·               the future financial performance of the Republic Credit Solutions (“RCS”) division of RPG;

·               the potential impairment of investment securities;

·               the extent to which regulations written and implemented by the Consumer Financial Protection Bureau (“CFPB”), and other federal, state and local governmental regulation of consumer lending and related financial products and services, may limit or prohibit the operation of the Company’s business;

·               financial services reform and other current, pending or future legislation or regulation that could have a negative effect on the Company’s revenue and businesses: including but not limited to Basel III capital reforms; the Dodd-Frank Act; and legislation and regulation relating to overdraft fees (and changes to the Bank’s overdraft practices as a result thereof), debit card interchange fees, credit cards, and other bank services;

 

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·               the impact of new accounting pronouncements;

·               legal and regulatory matters including results and consequences of regulatory guidance, litigation, administrative proceedings, rule-making, interpretations, actions and examinations;

·               future capital expenditures;

·               the strength of the U.S. economy in general and the strength of the local economies in which the Company conducts operations;

·               the Bank’s ability to maintain current deposit and loan levels at current interest rates; and

·               the Company’s ability to successfully implement strategic plans, including, but not limited to, those related to future business acquisitions, in general, and its two Federal Deposit Insurance Corporation (“FDIC”)-assisted acquisitions in 2012.

 

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 the sections titled Part I Item 1 “Business,” Part I Item 1A “Risk Factors” and Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

PART I

 

Item 1. Business.

 

Republic Bancorp, Inc. (“Republic” or the “Company”) is a bank holding company headquartered in Louisville, Kentucky. Republic is the parent company of Republic Bank & Trust Company (“RB&T”) and Republic Bank (“RB”) (collectively referred together as the “Bank”). Republic Invest Co., a former subsidiary of RB&T, and its subsidiary, Republic Capital LLC, were dissolved in April 2013 in connection with the full repayment by RB&T of intragroup subordinated debentures issued by Republic Capital LLC in a 2004 intragroup trust preferred transaction. Republic Bancorp Capital Trust (“RBCT”) is a Delaware statutory business trust that is a wholly-owned, unconsolidated finance subsidiary of Republic. Incorporated in 1974, Republic became a bank holding company when RB&T became authorized to conduct commercial banking business in Kentucky in 1981.

 

On January 27, 2014, RB&T filed an application with the FDIC and the Kentucky Department of Financial Institutions (“KDFI”) to merge RB&T and RB, with RB&T, a Kentucky-based, state chartered non-member institution, being the resulting institution and continuing to operate under the name Republic Bank & Trust Company.

 

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As of December 31, 2013, in addition to an Internet delivery channel, Republic had 45 full-service banking centers with locations as follows:

 

·                  Kentucky — 34

·                  Metropolitan Louisville — 20

·                  Central Kentucky — 9

·                  Elizabethtown — 1

·                  Frankfort — 1

·                  Georgetown — 1

·                  Lexington — 5*

·                  Shelbyville — 1

·                  Western Kentucky — 2

·                  Owensboro — 2

·                  Northern Kentucky — 3

·                  Covington — 1

·                  Florence — 1

·                  Independence — 1

·                  Southern Indiana — 3

·                  Floyds Knobs — 1

·                  Jeffersonville — 1

·                  New Albany — 1

·                  Metropolitan Tampa, Florida — 4*

·                  Metropolitan Cincinnati, Ohio — 1

·                  Metropolitan Nashville, Tennessee — 2

·                  Metropolitan Minneapolis, Minnesota — 1*

 


* - One banking center in Palm Harbor, Florida, one in Lexington, Kentucky and Republic’s sole banking center in Minneapolis, Minnesota were closed in the first quarter of 2014, thereby reducing total banking centers to 42.

 

The principal business of Republic is directing, planning and coordinating the business activities of the Bank. The financial condition and results of operations of Republic are primarily dependent upon the results of operations of the Bank. At December 31, 2013, Republic had total assets of $3.4 billion, total deposits of $2.0 billion and total stockholders’ equity of $543 million. Based on total assets as of December 31, 2013, Republic ranked as the second largest Kentucky-based bank holding company. The executive offices of Republic are located at 601 West Market Street, Louisville, Kentucky 40202, telephone number (502) 584-3600. The Company’s website address is www.republicbank.com.

 

Website Access to Reports

 

The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, available free of charge through its website, www.republicbank.com, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

 

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General Business Overview

 

As of December 31, 2013, 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 RPG segment. The RPS and RCS divisions are considered immaterial for segment reporting. Net income, total assets and net interest margin by segment for the years ended December 31, 2013, 2012 and 2011 are presented below:

 

 

 

Year Ended December 31, 2013

 

 

 

 

 

 

 

Republic

 

 

 

 

 

Traditional

 

Mortgage

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Banking

 

Group

 

Company

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,928

 

$

2,887

 

$

(1,392

)

$

25,423

 

Total assets

 

3,354,850

 

9,307

 

7,747

 

3,371,904

 

Net interest margin

 

3.51

%

NM

 

NM

 

3.48

%

 

 

 

Year Ended December 31, 2012

 

 

 

 

 

 

 

Republic

 

 

 

 

 

Traditional

 

Mortgage

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Banking

 

Group

 

Company

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

55,174

 

$

3,279

 

$

60,886

 

$

119,339

 

Total assets

 

3,371,934

 

15,752

 

6,713

 

3,394,399

 

Net interest margin

 

3.64

%

NM

 

NM

 

4.82

%

 

 

 

Year Ended December 31, 2011

 

 

 

 

 

 

 

Republic

 

 

 

 

 

Traditional

 

Mortgage

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Banking

 

Group

 

Company

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

26,463

 

$

344

 

$

67,342

 

$

94,149

 

Total assets

 

3,099,426

 

10,880

 

309,685

 

3,419,991

 

Net interest margin

 

3.55

%

NM

 

NM

 

5.09

%

 


Segment assets are reported as of the respective period ends while income and margin data are reported for the respective periods.

NM — Not Meaningful

 

For expanded segment financial data see Footnote 22 “Segment Information” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

(I)  Traditional Banking segment

 

2012 FDIC-Assisted Acquisitions

 

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

 

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Lending Activities

 

The Bank principally markets its lending products and services through the following delivery channels:

 

Retail Mortgage Lending — A major component of the Bank’s lending activities consists of the origination of single family, first lien residential real estate loans collateralized by owner occupied property, predominately located in the Bank’s primary market areas. Additionally, the Bank offers home equity loans and home equity lines of credit. These loans are originated through the Bank’s retail banking center network. All mortgage loans retained on balance sheet are included as a component of the Company’s “Traditional Banking” segment and are discussed below and elsewhere in this filing.

 

The Bank offers single family, first lien residential real estate, adjustable rate mortgages (“ARM”s) with rate adjustments tied to various indices with specified minimum and maximum interest rate adjustments. The interest rates on a majority of ARMs are adjusted after their fixed rate periods on an annual basis, with most having limitations on upward adjustments over the life of the loan. These loans typically feature amortization periods of up to 30 years and have fixed rate periods that correspond to market conditions, with ARMs of longer fixed rate periods offered in a declining rate environment and shorter fixed rate periods offered in a rising rate environment.  While there is no requirement for a client to refinance their loan at the end of the fixed rate period, clients have historically done so the majority of the time, as most clients are interest rate risk-averse on their first mortgage loans. The Bank is able to mitigate interest rate risk with the ARM product because the substantial majority of these loans refinance at the end of their fixed rate periods.

 

The Bank generally charges a higher interest rate for its ARMs if the property is not owner occupied. It has been the Bank’s experience that the proportions of fixed rate and ARM originations depend in large part on the interest rate environment. As interest rates decline, there is generally a reduced demand for ARMs and an increased demand for fixed rate secondary market loans. Alternatively, as interest rates rise, there is generally an increased demand for ARMs, as consumer demand shifts away from fixed rate secondary market loans.

 

Depending on the term and amount of the ARM, loans collateralized by single family, owner-occupied first lien residential real estate, may be originated with a loan-to-value up to 90% and a combined loan-to-value up to 100%.  During the fourth quarter of 2013, the Bank introduced a 100% loan-to-value loan for home purchase transactions within its primary markets. The Bank does not require the borrower to obtain mortgage insurance for ARM loans with loan-to-values above 80%.  The Bank requires mortgagee’s title insurance on first lien residential real estate loans, except for the Bank’s Home Equity Amortizing Loan (“HEAL”) product under $150,000, to protect the Bank against defects in its liens on the properties that collateralize the loans. The Bank normally requires title, fire, and extended casualty insurance to be obtained by the borrower and when required by applicable regulations, flood insurance. The Bank maintains an errors and omissions insurance policy to protect the Bank against loss in the event a borrower fails to maintain proper fire and other hazard insurance policies.

 

ARMs originated prior to January 10, 2014 generally contain a prepayment penalty. Effective January 10, 2014, with the implementation of the Ability to Repay (“ATR”) Rule, the Bank eliminated prepayment penalties for newly originated ARMs.

 

Single family, first lien residential real estate loans with fixed rate periods of 15, 20 and 30 years are primarily sold into the secondary market. Mortgage servicing rights (“MSRs”) attached to the sold portfolio are either sold along with the loan or retained and included as a component of the Company’s “Mortgage Banking” segment as discussed below and elsewhere in this filing. Loans with fixed rate periods of greater than 15 years are understood to carry an elevated level of interest rate risk. The Bank may retain such loans from time to time within Bank approved interest rate risk policies to combat market compression.

 

For additional information regarding the Bank’s interest rate sensitivity, see the section titled “Asset/Liability Management and Market Risk” under Part II Item 7 “Management’s Discussion and Analysis of Financial condition and Results of Operations.”

 

The Bank does, on occasion, purchase single family, first lien residential real estate loans in low to moderate income areas in order to meet its obligations under the Community Reinvestment Act (“CRA”). The Bank generally applies secondary market underwriting criteria to these purchased loans and generally reserves the right to reject particular loans from a loan package being purchased that do not meet its underwriting criteria. In connection with loan purchases, the Bank receives various representations and warranties from the sellers of the loans regarding the quality and characteristics of the loans.

 

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Commercial Lending — The Bank’s commercial real estate (“CRE”) and multi-family loans are typically secured by improved property such as office buildings, medical facilities, retail centers, warehouses, apartment buildings, condominiums, schools, religious institutions and other types of commercial use property.

 

The Bank’s CRE loans are generally made to small-to-medium sized businesses in amounts up to 80% or 85% loan-to-value (“LTV”), depending on the market, of the lesser of the appraised value or purchase price of the property. CRE loans generally have 5-year fixed rate periods, or variable interest rates indexed to Prime, and have maturity terms of ten years.  CRE loans generally amortize over 15 to 20 years. Although the contractual loan payment period for these types of loans is generally a 20-year period, such loans often remain outstanding for only their fixed rate periods, which is significantly shorter than their contractual terms. The Bank generally charges a penalty for prepayment of CRE loans if the loans are refinanced prior to the completion of their fixed rate period.

 

Loans secured by CRE generally are larger and often involve potentially greater risks than single family, first lien residential real estate loans. Because payments on loans secured by CRE properties often are dependent on successful operation or management of the properties or businesses operated from the properties, repayment of such loans may be impacted to a greater extent by adverse conditions in the national and local economies. The Bank seeks to minimize these risks in a variety of ways, including limiting the size of CRE loans and generally restricting such loans to its primary market area. In determining whether to originate CRE loans, the Bank also considers such factors as the financial condition of the borrower and guarantor, the loan amount to collateral value and the debt service coverage of the property, as well as global cash flow, when applicable.

 

A broad range of short-to-medium-term collateralized commercial and industrial (“C&I”) loans are made available to businesses for working capital, business expansion (including acquisitions of real estate and improvements), and the purchase of equipment or machinery. These often represent term loans, lines of credit and equipment and receivables financing. Equipment loans are typically originated on a fixed-term basis ranging from one to five years.

 

As mentioned above, the availability of funds for the repayment of C&I loans may be substantially dependent on the success of the business itself. Further, the collateral underlying the loans, which may depreciate over time, usually cannot be appraised with as much precision as real estate and may fluctuate in value over the term of the loan.

 

Warehouse Lines of Credit — In June 2011, RB&T began offering warehouse lines of credit, through which RB&T provides short-term, revolving credit facilities to mortgage bankers across the nation. These credit facilities are secured by single family, first lien residential real estate loans. The credit facility enables the mortgage banking customers to close single family, first lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by RB&T. These individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold to the secondary market investor. RB&T receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage banking customer.

 

Construction and Land Development Lending — The Bank originates residential construction real estate loans to finance the construction of single family dwellings. Construction loans also are made to contractors to build single family dwellings under contract. Construction loans are generally offered on the same basis as other single family, first lien residential real estate loans, except that a larger percentage down payment is typically required.

 

The Bank finances the construction of individual owner occupied houses on the basis of written underwriting and construction loan management guidelines. Construction loans are structured either to be converted to permanent loans with the Bank at the end of the construction phase or to be paid off at closing. Construction loans on residential properties are generally made in amounts up to 80% of anticipated cost of construction. Construction loans to developers and builders generally have terms of nine to 12 months. Loan proceeds on builders’ projects are disbursed in increments as construction progresses and as property inspections warrant.

 

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The Bank also may make land development loans to real estate developers for the acquisition, development and construction of commercial projects. Such loans may involve additional risks because the funds are advanced to fund the project while under construction, and the project is of speculative value prior to completion. Moreover, because it is relatively difficult to evaluate completion value accurately, the total amount of funds required to complete a development may be subject to change. Repayments of these loans depend to a large degree on the conditions in the real estate market or the economy.

 

Consumer Lending — Traditional consumer loans made by the Bank include home improvement and home equity loans, as well as other secured and unsecured personal loans in addition to credit cards. With the exception of home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other traditional consumer loan products, while available, are not and have not been actively promoted in the Bank’s markets.

 

Private Banking — The Bank provides financial products and services to high net worth individuals through its Private Banking Department. The Bank’s Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of high net worth individuals.

 

Treasury Management Services — The Bank provides various deposit products designed for commercial business customers located throughout its market areas. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation and Automated Clearing House (“ACH”) processing are additional services offered to commercial businesses through the Bank’s Treasury Management Department.

 

Internet Banking — The Bank expands its market penetration and service delivery by offering customers Internet banking services and products through its website, www.republicbank.com.

 

Internet Lending — The Bank accepts online loan applications through its website, www.republicbank.com.  Loans originated through the internet are primary within the Bank’s traditional markets of Kentucky and Indiana.  The Bank plans to expand to other markets outside its traditional footprint in 2014.

 

Correspondent Lending — The Bank plans to launch a correspondent lending channel in the first quarter of 2014 whereby it will acquire residential mortgage loans from approved correspondents.  The Bank plans to acquire loans within and outside our primary markets by initially partnering with our warehouse lending clients.

 

Other Banking Services — The Bank also provides trust, title insurance and other financial institution related products and services.

 

See additional discussion regarding Lending Activities under the sections titled:

 

·                  Part I Item 1A “Risk Factors”

·                  Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

·                  Part II Item 8 “Financial Statements and Supplementary Data.”

·                  Footnote 4 “Loans and Allowance for Loan Losses”

·                  Footnote 22 “Segment Information”

 

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(II)  Mortgage Banking segment

 

Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single family, first lien residential real estate loans that are sold into the secondary market, primarily to the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). The Bank typically retains servicing on 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 Bank records mortgage servicing rights. MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs, which the Bank expects to receive on loans sold with servicing retained by the Bank. MSRs are capitalized as separate assets. 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 Bank. The carrying value of MSRs is initially amortized in proportion to and over the estimated period of net servicing income and subsequently adjusted quarterly based on the weighted average remaining life of the underlying loans. The amortization is recorded as a reduction to Mortgage Banking income.

 

With the assistance of an independent third party, 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 is 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 increased anticipated prepayment speed assumptions within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs is expected to increase, as prepayment speed assumptions on the underlying loans would be anticipated to decline.

 

Due to the reduction in long-term interest rates during 2012 and 2011, the fair value of the MSR portfolio declined as prepayment speed assumptions were adjusted upwards resulting in net impairment charges of $142,000 and $203,000 for the years ending December 31, 2012 and 2011.  Conversely, due to the increase in long-term interest rates during 2013, the fair value of the MSR portfolio increased as prepayment speed assumptions were adjusted downwards resulting in a reversal of prior impairment of $345,000 for the year ending December 31, 2013.

 

See additional discussion regarding Mortgage Banking under the sections titled:

 

·                  Part I Item 1A “Risk Factors”

·                  Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

·                  Part II Item 8 “Financial Statements and Supplementary Data”

·                  Footnote 6 “Mortgage Banking Activities”

·                  Footnote 22 “Segment Information”

 

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(III) Republic Processing Group segment

 

Nationally, through RB&T, RPG facilitates the receipt and payment of federal and state tax refund products under the TRS division. Through RB, the RPS division is an issuing bank offering general purpose reloadable prepaid debit cards through third party program managers.  Through RB&T, the RCS division is piloting short-term consumer credit products.

 

Tax Refund Solutions 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. 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.

 

Prior to April 30, 2012, the TRS division’s primary tax-related products included RTs and Refund Anticipation Loans (“RAL”s). 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. The Company’s RAL revenue was $45 million in 2012.

 

Additionally, as a result of the Agreement, TRS is subject to additional oversight requirements through its Electronic Return Originator Oversight (“ERO”) Plan, the (“ERO Plan”). The ERO Plan, developed by RB&T and approved by the FDIC, implemented increased training and audits of RB&T’s ERO partners, who make RB&T’s tax products available to taxpayers across the nation. In addition, various components of the Agreement required 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.

 

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.

 

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, net of rebates, are the primary source of revenue for the TRS division and the RPG segment, and are reported in the income statement as non-interest income under the line item “Net 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.”

 

Termination of Material Tax Refund Solutions Contracts

 

For the first quarter 2012 tax season, RB&T conducted business with Jackson Hewitt Inc. (“JHI”), a subsidiary of Jackson Hewitt Tax Service Inc. (“JH”), and JTH Tax Inc. d/b/a Liberty Tax Service (“Liberty”) to offer RAL and RT products. JH and Liberty provide preparation services of federal, state and local individual income tax returns in the U.S. through a nationwide network of franchised and company-owned tax-preparer offices.

 

On August 27, 2012, RB&T received a termination notice to the Amended and Restated Marketing and Servicing Agreement, dated November 29, 2011 (the “M&S Agreement”), with Liberty related to RB&T’s RT products, as well as RB&T’s previously offered RAL product.  Prior to its termination, the M&S Agreement had, among other things, set the term of the M&S Agreement to expire on October 16, 2014.

 

RB&T notified Liberty that RB&T believed there had been no occurrence that gave rise to termination of the M&S Agreement and that RB&T disagreed with Liberty’s interpretation of the M&S Agreement relative to Liberty’s ability to terminate.  RB&T and Liberty subsequently entered into mediation under the terms of the M&S Agreement.

 

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On September 18, 2012, RB&T received a termination notice to the Amended and Restated Program Agreement, dated August 3, 2011 (the “Program Agreement”), with JHI and Jackson Hewitt Technology Services LLC (“JHTSL”) related to RB&T’s RT products, as well as RB&T’s previously offered RAL product. Prior to its termination, the Program Agreement had, among other things, set the term of the Program Agreement to expire on October 14, 2014.

 

RB&T notified JHI that RB&T believed there had been no occurrence that gave rise to termination of the Program Agreement and that RB&T disagreed with JHI’s interpretation of its ability to terminate the Program Agreement.  RB&T and JHI subsequently entered into a binding arbitration under the terms of the Program Agreement.

 

Approximately 40% and 40% of the TRS division’s gross revenue was derived from JH tax offices for the years ended as of December 31, 2012 and 2011, with another 19% and 20% from Liberty tax offices for the same respective periods. Termination of these contracts had a material adverse impact to the Company’s results of operations in 2013 and is expected to prospectively.

 

RB&T’s third party arbitration with JHI was concluded during the fourth quarter of 2013. Legal related expenses associated with the arbitration totaled $2.2 million for 2013, with $1.4 million of those expenses being incurred during the fourth quarter of 2013. The Company does not anticipate any additional future legal expense associated with this matter. With the matter resolved, RB&T entered into a new two-year agreement with JHI pursuant to which it began processing refunds for JHI clients in January 2014.  The contract is expected to increase RPG’s annual net revenue by approximately 12% per year above its 2013 net revenue level.  Additional overhead expenses with the new contract are expected to be minimal.

 

RB&T’s contract dispute with Liberty was resolved during January 2014 with a nominal amount of related legal expense during 2013. The Company does not anticipate any additional future legal expense associated with this matter. With the matter resolved, RB&T entered into a new two-year agreement with Liberty in which it will begin processing refunds for Liberty clients in January 2015.  Beginning with the first quarter 2015 tax season, the contract is expected to increase RPG’s annual net revenues for the two year term of the contract by an average of approximately 16% over its 2013 net revenue level.  Additional overhead expenses with the new contract are expected to be immaterial.

 

Republic Payment Solutions division:

 

Through RB, the RPS division is an issuing bank offering general purpose reloadable prepaid cards through third party program managers. This program’s objectives include:

 

·                  generate a low-cost deposit source;

·                  generate float revenue from the previously mentioned low cost deposit source;

·                  serve as a source of fee income; and

·                  generate debit card interchange revenue.

 

For the projected near-term, as the prepaid card program matures, 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.

 

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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.

 

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.

 

Republic Credit Solutions division:

 

Through RB&T, the RCS division is piloting short-term consumer credit products. In general, the credit products are 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 products will be piloted for a period of time to ensure all aspects are meeting expectations before continuation.

 

RB&T management funded one of its RCS pilot products nominally during 2013, with $3 million in loans outstanding at December 31, 2013. At the conclusion of each pilot phase, RB&T management will determine whether or not to expand or modify each product based on piloted results. As with most start-ups, the RCS division did reflect an operating loss of approximately $77,000 during 2013, with September 2013 the first month reflecting revenues. Management expects the division to continue operating at a loss in the near-term and, given the speculative nature of the RCS products, management cannot currently predict the amount of additional losses the division may incur as products are piloted.

 

Employees

 

As of December 31, 2013, Republic had 736 full-time equivalent employees (“FTE”s). Altogether, Republic had 721 full-time and 29 part-time employees. None of the Company’s employees are subject to a collective bargaining agreement, and Republic has never experienced a work stoppage. The Company believes that its employee relations have been and continue to be good.

 

Executive Officers

 

See Part III, Item 10. “Directors, Executive Officers and Corporate Governance.” for information about the Company’s executive officers.

 

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Competition

 

Traditional Banking

 

The Traditional Bank encounters intense competition in its market areas in originating loans, attracting deposits, and selling other banking related financial services. The deregulation of the banking industry, the ability to create financial services holding companies to engage in a wide range of financial services other than banking and the widespread enactment of state laws which permit multi-bank holding companies, as well as the availability of nationwide interstate banking, has created a highly competitive environment for financial institutions. In one or more aspects of the Bank’s business, the Bank competes with local and regional retail and commercial banks, other savings banks, credit unions, finance companies, mortgage companies and other financial intermediaries operating in Kentucky, Indiana, Florida, Ohio, and Tennessee. The Bank also competes with insurance companies, consumer finance companies, investment banking firms and mutual fund managers. Some of the Company’s competitors are not subject to the same degree of regulatory review and restrictions that apply to the Company and the Bank. Many of the Bank’s primary competitors, some of which are affiliated with large bank holding companies or other larger financial based institutions, have substantially greater resources, larger established customer bases, higher lending limits, more extensive banking center networks, numerous automatic teller machines, and greater advertising and marketing budgets. They may also offer services that the Bank does not currently provide. These competitors attempt to gain market share through their financial product mix, pricing strategies and banking center locations. Legislative developments related to interstate branching and banking in general, by providing large banking institutions easier access to a broader marketplace, can act to create more pressure on smaller financial institutions to consolidate. It is anticipated that competition from both bank and non-bank entities will continue to remain strong in the foreseeable future.

 

The primary factors in competing for bank products are convenient office locations, flexible hours, interest rates, services, internet banking, range of lending services offered and lending fees. Additionally, the Bank believes that an emphasis on highly personalized service tailored to individual customer needs, together with the local character of the Bank’s business and its “community bank” management philosophy will continue to enhance the Bank’s ability to compete successfully in its market areas.

 

Mortgage Banking

 

The Bank competes with mortgage bankers, mortgage brokers and financial institutions for the origination and funding of mortgage loans. Many competitors have branch offices in the same areas where the Bank’s loan officers operate. The Bank also competes with mortgage companies whose focus is on telemarketing and internet lending.

 

Republic Processing Group

 

Tax Refund Solutions division

 

With regard to the TRS division, the discontinuance of the RAL product after April 30, 2012 and the previously mentioned termination of TRS contracts has had a material adverse impact on the profitability of RB&T’s RT products. The TRS division faces direct competition for RT market share from independently-owned processing groups partnered with banks. Independent processing groups that were unable to offer RAL products have historically been at a competitive disadvantage to banks who could offer RALs. Without the ability to originate RALs after the 2012 tax season, RB&T has faced increased competition in the RT marketplace. In addition to the loss of volume resulting from additional competitors, RB&T has incurred substantial pressure on its profit margin for its RT products as it competes with existing rebate and pricing incentives in the RT marketplace.

 

In addition, as a result of RB&T’s Agreement with the FDIC, the TRS division is subject to additional oversight requirements not currently imposed on its competitors. Management believes these additional requirements make attracting new relationships and retaining existing relationships more difficult for RB&T.

 

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Republic Credit Solutions division

 

The small dollar consumer loan industry is highly competitive. Management believes principal competitors for its small dollar loan pilot program will be billers who accept late payments for a fee, overdraft privilege programs of other banks and credit unions, as well as payday lenders.

 

New entrants to the small dollar consumer loan market must successfully implement underwriting and fraud prevention processes, overcome consumer brand loyalty and have sufficient capital to withstand early losses associated with unseasoned loan portfolios. In addition, there are substantial regulatory and compliance costs, including the need for expertise to customize products associated with licenses to lend in various states in the U.S.

 

Republic Payment Solutions division

 

The prepaid card industry is subject to intense and increasing competition. RB will compete with a number of companies that market different types of prepaid card products; such as GPR, gift, incentive and corporate disbursement cards. There is also competition from large retailers who are seeking to integrate more financial services into their product offerings. Increased competition is also expected from alternative financial services providers who are often well-positioned to service the underbanked and who may wish to develop their own prepaid card programs.

 

Supervision and Regulation

 

RB&T is a Kentucky-chartered commercial banking and trust corporation and as such, it is subject to supervision and regulation by the FDIC and the KDFI. RB is a federally-chartered savings bank subject to supervision and regulation by the Office of the Comptroller of Currency (“OCC”). RB is also subject to limited regulation by the FDIC which insures the Bank’s deposits.

 

All deposits, subject to regulatory prescribed limitations, held by the Bank are insured by the FDIC. Such supervision and regulation subjects the Bank to restrictions, requirements, potential enforcement actions and examinations by the FDIC, the OCC and KDFI. The Federal Reserve Bank (“FRB”) regulates the Company with monetary policies and operational rules that directly affect the Bank. The Bank is a member of the Federal Home Loan Bank (“FHLB”) System. As a member of the FHLB system, the Bank must also comply with applicable regulations of the Federal Housing Finance Board. Regulation by these agencies is intended primarily for the protection of the Bank’s depositors and the Deposit Insurance Fund (“DIF”) and not for the benefit of the Company’s stockholders. The Bank’s activities are also regulated under consumer protection laws applicable to the Bank’s lending, deposit and other activities. An adverse ruling against the Company under these laws could have a material adverse effect on results. The Bank and the Company are also subject to regulations issued by the Consumer Financial Protection Bureau (“CFPB”), an independent bureau of the FRB created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

 

The Company is a legal entity separate and distinct from the Bank and is subject to direct supervision by the FRB. The Company’s principal sources of funds are cash dividends from the Bank and other subsidiaries. The Company files regular routine reports with the FRB in addition to the Bank’s filings with the FDIC and OCC concerning business activities and financial condition. These regulatory agencies conduct periodic examinations to review the Company’s safety and soundness, and compliance with various compliance and regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a financial institution may engage and is intended primarily to provide protection for the DIF and the Bank’s depositors.

 

Regulators have extensive discretion in connection with their supervisory and enforcement authority and examination policies, including, but not limited to, policies that can materially impact the classification of assets and the establishment of adequate loan loss reserves. Any change in regulatory requirements and policies, whether by the FRB, the FDIC, the OCC, the CFPB, the KDFI or state or federal legislation, could have a material adverse impact on Company operations.

 

Enforcement Powers — Regulators have broad enforcement powers over banks and their holding companies, including, but not limited to: the power to mandate or restrict particular actions, activities, or divestitures; impose monetary fines and other penalties for violations of laws and regulations; issue cease and desist or removal orders; seek injunctions; publicly disclose such actions; and prohibit unsafe or unsound practices. This authority includes both informal and formal actions to effect corrective actions and/or sanctions. In addition, RB&T is subject to regulation and potential enforcement actions by other state and federal agencies.

 

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Certain regulatory requirements applicable to the Company and the Bank are referred to below or elsewhere in this filing. The description of statutory provisions and regulations applicable to banks and their holding companies set forth in this filing does not purport to be a complete description of such statutes and regulations. Their effect on the Company and the Bank is qualified in its entirety by reference to the actual laws and regulations.

 

Prepaid Cards Regulation

 

The cards marketed by the RPS division are subject to various federal and state laws and regulations, including regulations issued by the CFPB as well as those discussed below. Though not all prepaid card products are expressly subject to the provisions of the Electronic Fund Transfers Act (“EFTA”) and the FRB’s Regulation E, with the exception of those provisions comprising the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”); the Bank intends to treat prepaid products such as GPR cards as being subject to certain provisions of the EFTA and Regulation E when applicable, such as those related to disclosure requirements, periodic reporting, error resolution procedures and liability limitations.

 

State Wage Payment Laws and Regulations

 

The use of payroll card programs as means for an employer to remit wages or other compensation to its employees or independent contractors is governed by state labor laws related to wage payments. RPS payroll cards are designed to allow employers to comply with such applicable state wage and hour laws. Most states permit the use of payroll cards as a method of paying wages to employees either through statutory provisions allowing such use, or, in the absence of specific statutory guidance, the adoption by state labor departments of formal or informal policies allowing for the use of such cards. Nearly every state allowing payroll cards places certain requirements and/or restrictions on their use as a wage payment method. The most common of these requirements and/or restrictions involve obtaining the prior written consent of the employee, limitations on payroll card fees and disclosure requirements.

 

Card Association and Payment Network Operating Rules

 

In providing certain services, the Bank is required to comply with the operating rules promulgated by various card associations and network organizations, including certain data security standards, with such obligations arising as a condition to access or otherwise participate in the relevant card association or network organization. Each card association and network organization may audit the Bank from time to time to ensure compliance with these standards. The Bank maintains appropriate policies and programs and adapts business practices in order to comply with all applicable rules and standards of such associations and organizations.

 

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I.             The Company

 

Acquisitions — Republic is required to obtain the prior approval of the FRB under the Bank Holding Company Act (“BHCA”) before it may, among other things, acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of any class of the voting shares of such bank. In addition, the Bank must obtain regulatory approval prior to entering into certain transactions, such as adding new banking offices and mergers with, or acquisitions of, other financial institutions. In approving bank acquisitions by bank holding companies, the FRB is required to consider the financial and managerial resources and future prospects of the bank holding company and the target bank involved, the convenience and needs of the communities to be served and various competitive factors. Consideration of financial resources generally focuses on capital adequacy, which is discussed below. Consideration of convenience and needs issues includes the parties’ performance under the CRA. Under the CRA, all financial institutions have a continuing and affirmative obligation consistent with safe and sound operation to help meet the credit needs of their designated communities, specifically including low to moderate income persons and neighborhoods.

 

Under the BHCA, so long as it is at least adequately capitalized, adequately managed, has a satisfactory or better CRA rating and is not subject to any regulatory restrictions, the Company may purchase a bank, subject to regulatory approval. Similarly, an adequately capitalized and adequately managed bank holding company located outside of Kentucky or Florida may purchase a bank located inside Kentucky or Florida, subject to appropriate regulatory approvals. In either case, however, state law restrictions may be placed on the acquisition of a bank that has been in existence for a limited amount of time, or would result in specified concentrations of deposits. For example, Kentucky law prohibits a bank holding company from acquiring control of banks located in Kentucky if the holding company would then hold more than 15% of the total deposits of all federally insured depository institutions in Kentucky.

 

Financial Activities — The activities permissible for bank holding companies and their affiliates were substantially expanded by the Gramm-Leach-Bliley Act (“GLBA”). The GLBA permits bank holding companies that qualify as, and elect to be, Financial Holding Company’s (“FHCs”), to engage in a broad range of financial activities, including but not limited to, underwriting securities, dealing in and making a market in securities, insurance underwriting and agency activities without geographic or other limitation, as well as merchant banking. To maintain its status as a FHC, the Company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a “satisfactory” CRA rating. The Company currently qualifies as a FHC.

 

Subject to certain exceptions, insured state banks are permitted to control or hold an interest in a financial subsidiary that engages in a broader range of activities than are permissible for national banks to engage in directly, subject to any restrictions imposed on a bank under the laws of the state under which it is organized. Conducting financial activities through a bank subsidiary can impact capital adequacy and regulatory restrictions may apply to affiliate transactions between the bank and its financial subsidiaries.

 

Safe and Sound Banking Practice — The FRB does not permit bank holding companies to engage in unsafe and unsound banking practices. The FDIC, the KDFI and the OCC have similar restrictions with respect to the Bank.

 

Pursuant to the Federal Deposit Insurance Act (“FDIA”), the FDIC and OCC have adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

 

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Source of Strength Doctrine — Under FRB policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and to commit resources for their support. Such support may restrict the Company’s ability to pay dividends, and may be required at times when, absent this FRB policy, a holding company may not be inclined to provide it. A bank holding company may also be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary and cross-guarantee provisions (as between RB&T and RB and further described below under “Liability of Commonly Controlled Institutions”) generally apply to the Company. In addition, any capital loans by the Company to its bank subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of subsidiary banks will be assumed by the bankruptcy trustee and entitled to a priority of payment. The Dodd-Frank Act codifies the Federal Reserve Board’s existing “source of strength” policy that holding companies act as a source of strength to their insured institution subsidiaries by providing capital, liquidity and other support in times of distress.

 

Office of Foreign Asset Control (“OFAC”) — The Company and the Bank, like all U.S. companies and individuals, are prohibited from transacting business with certain individuals and entities named on the OFAC’s list of Specially Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The OFAC issued guidance for financial institutions in whereby it asserted that it may, in its discretion, examine institutions determined to be high risk or to be lacking in their efforts to comply with its requirements.

 

Code of Ethics — The Company has adopted a code of ethics that applies to all employees, including the Company’s principal executive, financial and accounting officers. A copy of the Company’s code of ethics is available on the Company’s website. The Company intends to disclose information about any amendments to, or waivers from, the code of ethics that are required to be disclosed under applicable SEC regulations by providing appropriate information on the Company’s website. If at any time the code of ethics is not available on the Company’s website, the Company will provide a copy of it free of charge upon written request.

 

II.            The Bank

 

The Kentucky and federal banking statutes prescribe the permissible activities in which a Kentucky bank or federal savings bank may engage and where those activities may be conducted. Kentucky’s statutes contain a super parity provision that permits a well-rated Kentucky banking corporation to engage in any banking activity in which a national or state bank operating in any other state or a federal savings association meeting the qualified thrift lender test and operating in any state could engage, provided it first obtains a legal opinion from counsel specifying the statutory or regulatory provisions that permit the activity.

 

Branching — Kentucky law generally permits a Kentucky chartered bank to establish a branch office in any county in Kentucky. A Kentucky bank may also, subject to regulatory approval and certain restrictions, establish a branch office outside of Kentucky. Well-capitalized Kentucky chartered banks that have been in operation at least three years and that satisfy certain criteria relating to, among other things, their composite and management ratings, may establish a branch in Kentucky without the approval of the Executive Director of the KDFI, upon notice to the KDFI and any other state bank with its main office located in the county where the new branch will be located. Branching by all other banks requires the approval of the Executive Director of the KDFI, who must ascertain and determine that the public convenience and advantage will be served and promoted and that there is a reasonable probability of the successful operation of the branch. In any case, the transaction must also be approved by the FDIC, which considers a number of factors, including financial condition, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers. Section 613 of the Dodd-Frank Act effectively eliminated any interstate branching restrictions as set forth in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Banks located in any state may de novo branch in any other state, including Kentucky. Such unlimited branching authority has the potential to increase competition within the markets in which the Company and the Bank operate.

 

Under federal regulations, RB may establish and operate branches in any state within the U.S. with the prior approval of the OCC. Highly rated federal savings banks that satisfy certain regulatory requirements may establish branches without prior OCC approval, provided the federal savings bank publishes public notice of its establishment of a new branch, and notifies the OCC of the establishment of the branch, and no person files a comment with the OCC opposing the proposed branch. A comment in opposition, in and of itself, does not preclude approval. OCC and FDIC regulations also restrict the Company’s ability to open new banking offices of RB&T or RB. In either case, the Company must publish notice of the proposed office in area newspapers and, if objections are made, the new office may be delayed or disapproved.

 

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Affiliate Transaction Restrictions — Transactions between the Bank and its affiliates, and in some cases the Bank’s correspondent banks, are subject to FDIC and OCC regulations, the FRB’s Regulations O and W, and Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act (“FRA”). In general, these transactions must be on terms and conditions that are consistent with safe and sound banking practices and substantially the same, or at least as favorable to the institution or its subsidiary, as those for comparable transactions with non-affiliated parties. In addition, certain types of these transactions referred to as “covered transactions” are subject to quantitative limits based on a percentage of the Bank’s capital, thereby restricting the total dollar amount of transactions the Bank may engage in with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between 100% and 130% of the covered transaction in order to receive loans from the Bank. In addition, applicable regulations prohibit a savings association from lending to any of its affiliates that engage in activities that are not permissible for bank holding companies and from purchasing low-quality assets from an affiliate or purchasing the securities of any affiliate, other than a subsidiary. Limitations are also imposed on loans and extensions of credit by a bank to its executive officers, directors and principal stockholders and each of their related interests.

 

The FRB promulgated Regulation W to implement Sections 23A and 23B of the FRA. That regulation contains many of the foregoing restrictions and also addresses derivative transactions, overdraft facilities and other transactions between a bank and its non-bank affiliates.

 

Restrictions on Distribution of Subsidiary Bank Dividends and Assets — Banking regulators may declare a dividend payment to be unsafe and unsound even if the Bank continues to meet its capital requirements after the dividend. Dividends paid by RB&T provide substantially all of the Company’s operating funds. Regulatory requirements limit the amount of dividends that may be paid by the Bank. Under federal regulations, the Bank cannot pay a dividend if, after paying the dividend, the Bank would be undercapitalized.

 

Under Kentucky and federal banking regulations, the dividends the Bank can pay during any calendar year are generally limited to its profits for that year, plus its retained net profits for the two preceding years, less any required transfers to surplus or to fund the retirement of preferred stock or debt, absent approval of the respective state or federal banking regulators. FDIC regulations also require all insured depository institutions to remain in a safe and sound condition, as defined in regulations, as a condition of having FDIC deposit insurance.

 

FDIC Deposit Insurance Assessments — All Bank deposits are insured to the maximum extent permitted by the DIF. These bank deposits are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the DIF.

 

In November 2009, the FDIC adopted the final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based assessment for the third quarter of 2009. Republic prepaid $11.5 million in deposit insurance assessments on December 30, 2009. In June 2013, the FDIC refunded RB&T $2.2 million in unapplied prepaid assessments.

 

In addition to the Deposit Insurance Premium, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize the predecessor to the DIF. These assessments will continue until the Financing Corporation (“FICO”) bonds mature between 2017 through 2019.

 

The FDIC’s risk-based premium system provides for quarterly assessments. Each insured institution is placed in one of four risk categories depending on supervisory and capital considerations. Within its risk category, an institution is assigned to an initial base assessment rate which is then adjusted to determine its final assessment rate based on its brokered deposits, secured liabilities and unsecured debt. The FDIC may adjust the scale uniformly from one quarter to the next, except that no adjustment can deviate more than three basis points from the base scale without notice and comment. No institution may pay a dividend if in default of paying FDIC deposit insurance assessments.

 

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On February 7, 2011, effective April 1, 2011, the FDIC Board of Directors adopted a final rule, which redefined the deposit insurance assessment base as required by the Dodd-Frank Act. The final rule:

 

·                  Redefined the deposit insurance assessment base as average consolidated total assets minus average tangible equity (defined as Tier I Capital);

·                  Made generally conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates;

·                  Created a depository institution debt adjustment;

·                  Eliminated the secured liability adjustment; and

·                  Adopted a new assessment rate schedule, and, in lieu of dividends, other rate schedules when the reserve ratio reaches certain levels.

 

The FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.50% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the DIF increase from 1.15% to 1.35% of insured deposits by September 30, 2020. Banks with assets of less than $10 billion are exempt from any additional assessments necessary to increase the reserve fund above 1.15%.

 

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It may also suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the Bank’s FDIC deposit insurance.

 

RB is required to pay regular assessments to the OCC to fund its operations. The general assessments, paid on a semi-annual basis, are based upon total assets, as reported in RB’s latest quarterly call report, as well as RB’s financial condition and the complexity of its asset portfolio.

 

Consumer Laws and Regulations — In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in their transactions with banks. While the discussion set forth in this filing is not exhaustive, these laws and regulations include Regulation E, the Truth in Savings Act, Check Clearing for the 21st Century Act and the Expedited Funds Availability Act, among others. These federal laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with consumers when accepting deposits. Certain laws also limit the Bank’s ability to share information with affiliated and unaffiliated entities. The Bank is required to comply with all applicable consumer protection laws and regulations, both state and federal, as part of its ongoing business operations.

 

Regulation E — A 2009 amendment to Regulation E prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine (“ATM”) and one-time debit card transactions, unless a consumer affirmatively consents, or opts in, to the overdraft service for those types of transactions. Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service and the consumer’s choices. The final rules require institutions to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any overdrafts it pays on ATM and one-time debit card transactions.

 

The Bank earns a substantial majority of its deposit fee income related to overdrafts from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. In addition, the Bank estimates that it has historically earned more than 60% of its fees on the electronic debits presented for payment. Both the per item fee and the daily fee assessed to the account resulting from its overdraft status, if computed as a percentage of the amount overdrawn, results in a high rate of interest when annualized and are thus considered excessive by some consumer groups.

 

Prohibitions Against Tying Arrangements — The Bank is subject to prohibitions on certain tying arrangements. A depository institution is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional product or service from the institution or its affiliates or not obtain services of a competitor of the institution.

 

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The USA Patriot Act (“Patriot Act”), Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) — The Patriot Act was enacted after September 11, 2001, to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in promulgation of several regulations that have a direct impact on financial institutions. There are a number of programs that financial institutions must have in place such as: (i) BSA/AML controls to manage risk; (ii) Customer Identification Programs to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorists or terrorist organizations; and (iii) monitoring for the timely detection and reporting of suspicious activity and reportable transactions. Title III of the Patriot Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, savings banks, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the Patriot Act imposes the following obligations on financial institutions:

 

·                  Establishment of enhanced anti-money laundering programs;

·                  Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts;

·                  Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering;

·                  Prohibitions on correspondent accounts for foreign shell banks; and

·                  Compliance with record keeping obligations with respect to correspondent accounts of foreign banks.

 

Depositor Preference — The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the U.S. and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

 

Liability of Commonly Controlled Institutions — FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of another FDIC-insured depository institution controlled by the same bank holding company, or for any assistance provided by the FDIC to another FDIC-insured depository institution controlled by the same bank holding company that is in danger of default. “Default” generally means the appointment of a conservator or receiver. “In danger of default” generally means the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. Such a “cross-guarantee” claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against that depository institution. At this time, RB&T and RB are the only insured depository institutions controlled by the Company for this purpose. However, if the Company were to control other FDIC-insured depository institutions in the future, the cross-guarantee would apply to all such FDIC-insured depository institutions.

 

Federal Home Loan Bank System — The FHLB offers credit to its members, which include savings banks, commercial banks, insurance companies, credit unions, and other entities. The FHLB system is currently divided into twelve federally chartered regional FHLBs which are regulated by the Federal Housing Finance Board. The Bank is a member and owns capital stock in FHLB Cincinnati and FHLB Atlanta. The amount of capital stock the Bank must own to maintain its membership depends on its balance of outstanding advances. It is required to acquire and hold shares in an amount at least equal to 1% of the aggregate principal amount of its unpaid single family residential real estate loans and similar obligations at the beginning of each year, or 1/20th of its outstanding advances from the FHLB, whichever is greater. Advances are secured by pledges of loans, mortgage backed securities and capital stock of the FHLB. FHLBs also purchase mortgages in the secondary market through their Mortgage Purchase Program (“MPP”). The Bank has never sold loans to the MPP.

 

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In the event of a default on an advance, the Federal Home Loan Bank Act establishes priority of the FHLB’s claim over various other claims. Regulations provide that each FHLB has joint and several liability for the obligations of the other FHLBs in the system. In the event a FHLB falls below its minimum capital requirements, the FHLB may seek to require its members to purchase additional capital stock of the FHLB. If problems within the FHLB system were to occur, it could adversely affect the pricing or availability of advances, the amount and timing of dividends on capital stock issued by FHLBs to its members, or the ability of members to have their FHLB capital stock redeemed on a timely basis. Congress continues to consider various proposals which could establish a new regulatory structure for the FHLB system, as well as for other government-sponsored entities. The Bank cannot predict at this time, which, if any, of these proposals may be adopted or what effect they would have on the Bank’s business.

 

Federal Reserve System — Under regulations of the FRB, the Bank is required to maintain non interest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts). The Bank is in compliance with the foregoing reserve requirements. Required reserves must be maintained in the form of vault cash, a non interest-bearing account at the FRB, or a pass-through account as defined by the FRB. The effect of this reserve requirement is to reduce the Bank’s interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the FDIC or OCC. The Bank is authorized to borrow from the FRB discount window.

 

General Lending Regulations

 

Pursuant to FDIC and OCC regulations, the Bank may extend credit subject to certain restrictions. Additionally, state law may impose additional restrictions. While the discussion of extensions of credit set forth in this filing is not exhaustive, federal laws and regulations include but are not limited to the following:

 

·                  Community Reinvestment Act

·                  Home Mortgage Disclosure Act

·                  Equal Credit Opportunity Act

·                  Truth in Lending Act

·                  Real Estate Settlement Procedures Act

·                  Fair Credit Reporting Act

·                  Card Act

 

Community Reinvestment Act (“CRA”) — Under the CRA, financial institutions have a continuing and affirmative obligation to help meet the credit needs of their designated community, including low and moderate income neighborhoods, consistent with safe and sound banking practices. The CRA does not establish specific lending requirements or programs for the Bank, nor does it limit the Bank’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. In particular, the CRA assessment system focuses on three tests:

 

·                  a lending test, to evaluate the institution’s record of making loans in its assessment areas;

·                  an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses in its assessment area or a broader area that includes its assessment area; and

·                  a service test, to evaluate the institution’s delivery of services through its retail banking channels and the extent and innovativeness of its community development services.

 

The CRA requires all institutions to make public disclosure of their CRA ratings. In December 2011, RB&T received a “Satisfactory” CRA Performance Evaluation. In August 2012 RB received an “Outstanding” CRA Performance Evaluation. A copy of each of the public section of each of those CRA Performance Evaluations is available to the public upon request.

 

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Home Mortgage Disclosure Act (“HMDA”) — The HMDA grew out of public concern over credit shortages in certain urban neighborhoods. One purpose of HMDA is to provide public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics, as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. The HMDA requires institutions to report data regarding applications for loans for the purchase or improvement of single family and multi-family dwellings, as well as information concerning originations and purchases of such loans. Federal bank regulators rely, in part, upon data provided under HMDA to determine whether depository institutions engage in discriminatory lending practices. The appropriate federal banking agency, or in some cases the Department of Housing and Urban Development, enforces compliance with HMDA and implements its regulations. Administrative sanctions, including civil money penalties, may be imposed by supervisory agencies for violations of the HMDA.

 

Equal Credit Opportunity Act; Fair Housing Act (“ECOA”) — The ECOA prohibits discrimination against an applicant in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs or good faith exercise of any rights under the Consumer Credit Protection Act. Under the Fair Housing Act, it is unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. Among other things, these laws prohibit a lender from denying or discouraging credit on a discriminatory basis, making excessively low appraisals of property based on racial considerations, or charging excessive rates or imposing more stringent loan terms or conditions on a discriminatory basis. In addition to private actions by aggrieved borrowers or applicants for actual and punitive damages, the U.S. Department of Justice and other regulatory agencies can take enforcement action seeking injunctive and other equitable relief or sanctions for alleged violations.

 

Truth in Lending Act (“TLA”) — The TLA is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As result of the TLA, all creditors must use the same credit terminology and expressions of rates, and disclose the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule for each proposed loan. Violations of the TLA may result in regulatory sanctions and in the imposition of both civil and, in the case of willful violations, criminal penalties. Under certain circumstances, the TLA also provides a consumer with a right of rescission, which if exercised within three business days would require the creditor to reimburse any amount paid by the consumer to the creditor or to a third party in connection with the loan, including finance charges, application fees, commitment fees, title search fees and appraisal fees. Consumers may also seek actual and punitive damages for violations of the TLA.

 

Real Estate Settlement Procedures Act (“RESPA”) — The RESPA requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. The RESPA also prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Violations of the RESPA may result in imposition of penalties, including: (i) civil liability equal to three times the amount of any charge paid for the settlement services or civil liability of up to $1,000 per claimant, depending on the violation; (ii) awards of court costs and attorneys’ fees; and (iii) fines of not more than $10,000 or imprisonment for not more than one year, or both.

 

Fair Credit Reporting Act (“FACT”) — The FACT requires the Bank to adopt and implement a written identity theft prevention program, paying particular attention to several identified “red flag” events. The program must assess the validity of address change requests for card issuers and for users of consumer reports to verify the subject of a consumer report in the event of notice of an address discrepancy. The FACT gives consumers the ability to challenge the Bank with respect to credit reporting information provided by the Bank. The FACT also prohibits the Bank from using certain information it may acquire from an affiliate to solicit the consumer for marketing purposes unless the consumer has been given notice and an opportunity to opt out of such solicitation for a period of five years.

 

Loans to One Borrower — Under current limits, loans and extensions of credit outstanding at one time to a single borrower and not fully secured generally may not exceed 15% of the institution’s unimpaired capital and unimpaired surplus. Loans and extensions of credit fully secured by certain readily marketable collateral may represent an additional 10% of unimpaired capital and unimpaired surplus.

 

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Interagency Guidance on Non Traditional Mortgage Product Risks — In 2006, final guidance was issued to address the risks posed by residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest (such as “interest-only” mortgages and “payment option” ARMs. The guidance discusses the importance of ensuring that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower’s repayment capacity. The guidance also suggests that banks i) implement strong risk management standards, ii) maintain capital levels commensurate with risk and iii) establish an Allowance that reflects the collectability of the portfolio. The guidance urges banks to ensure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making product or payment choices.

 

Loans to Insiders — The Bank’s authority to extend credit to its directors, executive officers and principal shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:

 

·                  be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with non-insiders and that do not involve more than the normal risk of repayment or present other features that are unfavorable to the Bank; and

·                  not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

 

The regulations allow small discounts on fees on residential mortgages for directors, officers and employees. In addition, extensions of credit to insiders in excess of certain limits must be approved by the Bank’s Board of Directors.

 

Qualified Thrift Lender Test (“QTL”) — Federal law requires savings banks to meet the QTL, as detailed in 12 U.S.C. §1467a(m). The QTL measures the proportion of a federal savings bank institution’s assets invested in loans or securities supporting residential construction and home ownership. Under the QTL, a federal savings bank is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage backed securities) in at least nine months out of each 12-month period. Qualified thrift investments include (i) housing-related loans and investments, (ii) obligations of the FDIC, (iii) loans to purchase or construct churches, schools, nursing homes and hospitals, (iv) consumer loans, (v) shares of stock issued by any FHLB, and (vi) shares of stock issued by the FHLMC or the Federal National Mortgage Association (“FNMA”). Legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.” If RB, a federally savings bank, fails to remain qualified under the QTL, it must either convert to a commercial bank charter or be subject to restrictions specified under OCC regulations. A savings bank may re-qualify under the QTL if it thereafter complies with the QTL. A savings bank also may satisfy the QTL by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code. At December 31, 2013, RB met the QTL requirements.

 

Ability to Repay (“ATR”) Rule and Qualified Mortgage Loans (“QM”s) — On January 10, 2013, the CFPB issued a final rule implementing the ATR requirement in the Dodd-Frank Act. The rule, among other things, requires lenders to consider a consumer’s ability to repay a mortgage loan before extending credit to the consumer and limits prepayment penalties. The rule also establishes certain protections from liability for mortgage lenders with regard to QMs they originate. For this purpose, the rule defines QMs to include loans with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by the FNMA or Freddie Mac while they operate under Federal conservatorship or receivership, and loans eligible for insurance or guarantee by the Federal Housing Administration (“FHA”), U.S. Department of Veterans Affairs (“VA”) or U.S. Department of Agriculture (“USDA”). Additionally, QMs may not: (i) contain excess upfront points and fees; (ii) have a term greater than 30 years; or (iii) include interest-only or negative amortization payments.

 

The Dodd-Frank Act did not specify whether the presumption of ATR compliance is conclusive (i.e., creates a safe harbor) or is rebuttable. For mortgages that are not QMs, the final rule describes certain minimum requirements for creditors making ATR determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.

 

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The ATR rule was effective January 10, 2014. While we do not anticipate the rule will have a material impact on our mortgage operations, we will not fully know the result of this regulation on our mortgage operations or the banking industry as a whole until later in 2014.

 

On January 17, 2013, the CFPB issued a series of final rules as part of an ongoing effort to address mortgage servicing reforms and create uniform standards for the mortgage servicing industry. The rules increase requirements for communications with borrowers, address requirements around the maintenance of customer account records, govern procedural requirements for responding to written borrower requests and complaints of errors, and provide guidance around servicing of delinquent loans, foreclosure proceedings and loss mitigation efforts, among other measures. These rules were also effective January 10, 2014 and will likely lead to increased costs to service loans across the mortgage industry. The Company is continuing to evaluate these rules and their impact on the Bank’s mortgage operations and profitability.

 

Capital Adequacy Requirements

 

Capital Guidelines — The FRB, FDIC and OCC have substantially similar risk based and leverage ratio guidelines for banking organizations, which are intended to ensure that banking organizations have adequate capital related to the risk levels of assets and off balance sheet instruments. Under the risk based guidelines, specific categories of assets are assigned different risk weights based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a risk weighted asset base. Under these regulations, a bank will be considered:

 

 

 

Total Risk Based
Capital Ratio

 

Tier 1 Risk-Based
Capital Ratio

 

Leverage Ratio

 

Other

Well Capitalized:

 

10% or greater

 

6% or greater

 

5% or greater

 

Not subject to any order or written directive to meet and maintain a specific capital level for any capital measure

Adequately Capitalized

 

8% or greater

 

4% or greater

 

4% or greater (3% in the case of a bank with a composite CAMEL rating of 1)

 

 

Undercapitalized

 

less than 8%

 

less than 4%

 

less than 4% (3% in the case of a bank with a composite CAMEL rating of 1)

 

 

Significantly Undercapitalized

 

less than 6%

 

less than 3%

 

less than 3%

 

 

Critically Undercapitalized

 

 

 

 

 

 

 

Ratio of tangible equity to total assets is less than or equal to 2%

 

The guidelines require a minimum total risk based capital ratio of 8%, of which at least 4% is required to consist of Tier I capital elements (generally, common shareholders’ equity, minority interests in the equity accounts of consolidated subsidiaries, non-cumulative perpetual preferred stock, less goodwill and certain other intangible assets). Total capital is the sum of Tier I and Tier II capital. Tier II capital generally may consist of limited amounts of subordinated debt, qualifying hybrid capital instruments, other preferred stock, loan loss reserves and unrealized gains on certain equity investment securities.

 

In addition to the risk based capital guidelines, the FRB utilizes a leverage ratio as a tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier I capital divided by its average total consolidated assets (less goodwill and certain other intangible assets).

 

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As of December 31, 2013 and 2012 the Company’s capital ratios were as follows:

 

 

 

2013

 

2012

 

As of December 31, (dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

Total Capital to risk weighted assets

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

592,531

 

26.71

%

$

581,189

 

25.28

%

Republic Bank & Trust Co.

 

439,143

 

20.61

 

451,898

 

20.37

 

Republic Bank

 

15,860

 

18.69

 

14,494

 

18.02

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (Core) Capital to risk weighted assets

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

569,505

 

25.67

%

558,982

 

24.31

%

Republic Bank & Trust Co.

 

418,348

 

19.63

 

407,261

 

18.36

 

Republic Bank

 

14,785

 

17.42

 

13,474

 

16.75

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage Capital to average assets

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

569,505

 

16.81

%

558,982

 

16.36

%

Republic Bank & Trust Co.

 

418,348

 

12.73

 

407,261

 

12.18

 

Republic Bank

 

14,785

 

14.41

 

13,474

 

13.43

 

 

The federal banking agencies’ risk based and leverage ratios represent minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory capital rating. Banking organizations not meeting these criteria are required to operate with capital positions above the minimum ratios. FRB guidelines also provide that banking organizations experiencing internal growth or making acquisitions may be expected to maintain strong capital positions above the minimum supervisory levels, without significant reliance on intangible assets. The FDIC and the OCC may establish higher minimum capital adequacy requirements if, for example, a bank or savings bank proposes to make an acquisition requiring regulatory approval, has previously warranted special regulatory attention, rapid growth presents supervisory concerns, or, among other factors, has a high susceptibility to interest rate and other types of risk. The Bank is not subject to any such individual minimum regulatory capital requirement.

 

Corrective Measures for Capital Deficiencies — The banking regulators are required to take “prompt corrective action” with respect to capital deficient institutions. As detailed in the table above, agency regulations define, for each capital category, the levels at which institutions are well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A bank is undercapitalized if it fails to meet any one of the ratios required to be adequately capitalized.

 

Undercapitalized institutions are required to submit a capital restoration plan, which must be guaranteed by the holding company of the institution. In addition, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment, and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. A bank’s capital classification will also affect its ability to accept brokered deposits. Under banking regulations, a bank may not lawfully accept, roll over or renew brokered deposits, unless it is either well-capitalized or it is adequately capitalized and receives a waiver from its applicable regulator.

 

If a banking institution’s capital decreases below acceptable levels, bank regulatory enforcement powers become more enhanced. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. Banking regulators have limited discretion in dealing with a critically undercapitalized institution and are normally required to appoint a receiver or conservator. Banks with risk based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

 

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In addition, a bank holding company may face significant consequences if its bank subsidiaries fail to maintain the required capital and management ratings, including entering into an agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. More specifically, the FRB’s regulations require a FHC to notify the FRB within 15 days of becoming aware that any depository institution controlled by the company has ceased to be well-capitalized or well-managed. If the FRB determines that a FHC controls a depository institution that is not well-capitalized or well-managed, the FRB will notify the FHC that it is not in compliance with applicable requirements and may require the FHC to enter into an agreement acceptable to the FRB to correct any deficiencies, or require the FHC to decertify as a FHC. Until such deficiencies are corrected, the FRB may impose any limitations or conditions on the conduct or activities of the FHC and its affiliates that the FRB determines are appropriate, and the FHC may not commence any additional activity or acquire control of any company under Section 4(k) of the BHC Act without prior FRB approval. Unless the period of time for compliance is extended by the FRB, if a FHC fails to correct deficiencies in maintaining its qualification for FHC status within 180 days of entering into an agreement with the FRB, the FRB may order divestiture of any depository institution controlled by the company. A company may comply with a divestiture order by ceasing to engage in any financial or other activity that would not be permissible for a bank holding company that has not elected to be treated as a FHC. The Company is currently classified as a FHC.

 

Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution which fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.

 

New Capital Rules — On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

 

The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and will refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Bank under the final rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

The final rules implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

 

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

 

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The final rules set forth certain changes for the calculation of risk-weighted assets, which the Bank will be required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.

 

Based on the Bank’s current capital composition and levels, management believes it will be in compliance with the requirements as set forth in the final rules.

 

Dodd-Frank Act — On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act is intended to effect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. As previously noted, the Dodd-Frank Act also created the CFPB to administer federal consumer protection laws.

 

The Dodd-Frank Act legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those provisions relating to the CFPB will increase the Company’s operating and compliance costs.

 

Among the Dodd-Frank Act provisions that are likely to affect the Company are the following:

 

Corporate Governance — The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. The legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

 

Transactions with Affiliates and Insiders — The Dodd-Frank Act applies Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The exemption from Section 23A for transactions with financial subsidiaries was effectively eliminated. The Dodd-Frank Act additionally prohibits an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.

 

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Consumer Financial Protection Bureau “CFPB” — The Dodd-Frank Act created the independent federal agency, the CFPB, which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the ECOA, TLA, RESPA, FACT Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the GLBA and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB, but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive acts and practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. Federal preemption of state consumer protection law requirements, traditionally an attribute of the federal savings association charter, has also been modified by the Dodd-Frank Act and now requires a case-by-case determination of preemption by the OCC and eliminates preemption for subsidiaries of a bank. Depending on the implementation of this revised federal preemption standard, the operations of the Bank could become subject to additional compliance burdens in the states in which it operates.

 

Deposit Insurance — The Dodd-Frank Act permanently increased the maximum deposit insurance amount for financial institutions to $250,000 per depositor, retroactive to January 1, 2009, and extended unlimited deposit insurance to non interest-bearing transaction accounts through December 31, 2012. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also required the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act eliminates the federal statutory prohibition against the payment of interest on business checking accounts.

 

Elimination of the Office of Thrift Supervision (“OTS”) — The Dodd-Frank Act eliminated the OTS, which was RB’s primary federal regulator. The OCC will generally have rulemaking, examination, supervision and oversight authority and the FDIC will retain secondary authority over RB. OTS guidance, orders, interpretations, policies and similar items will continue to remain in effect until they are superseded by new guidance and policies from the OCC.

 

Federal Preemption — A major benefit of the federal thrift charter has been the strong preemptive effect of HOLA, under which RB is chartered. Historically, the courts have interpreted the HOLA to “occupy the field” with respect to the operations of federal thrifts, leaving no room for conflicting state regulation. The Dodd-Frank Act, however, amended the HOLA to specifically provide that it does not occupy the field in any area of state law. Any preemption determination must currently be made in accordance with the standards applicable to national banks, which have themselves been scaled back to require case-by-case determinations of whether state consumer protection laws discriminate against national banks or interfere with the exercise of their powers before these laws may be pre-empted.

 

Qualified Thrift Lender Test — Federal law requires savings institutions (such as RB) to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.”

 

A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions. The Dodd-Frank Act subjects violations of the qualified thrift lender test to possible enforcement action for violation of law and imposes dividend restrictions on violating institutions. As of December 31, 2013, RB met the qualified thrift lender test.

 

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Capital — Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directed the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

 

Incentive Compensation — In 2011, seven federal agencies, including the FDIC, the OCC, the FRB and the SEC, issued a Notice of Proposed Rulemaking designed to implement section 956 of the Dodd-Frank Act, which applies only to financial institutions with total consolidated assets of $1 billion or more. This seeks to strengthen the incentive compensation practices at covered institutions by better aligning employee rewards with longer-term institutional objectives. The proposed orders are designed to:

 

·                       prohibit incentive-based compensation arrangements that encourage inappropriate risks by providing

covered persons with “excessive” compensation;

·                       prohibit incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons with compensation that “could lead to a material financial loss” to an institution;

·                       require disclosures that will enable the appropriate federal regulator to determine compliance with the rule; and

·                       require the institution to maintain policies and procedures to ensure compliance with these requirements and prohibitions commensurate with the size and complexity of the organization and the scope of its use of incentive compensation.

 

Volcker Rule — On December 10, 2013, in implementing section 619 of the Dodd-Frank Act, the final Volcker Rule was approved by the OCC, the FED, the FDIC, the SEC, and the Commodities Futures Trading Commission (“CFTC”) (collectively, the “Agencies”). The Volcker Rule attempts to reduce risk and banking system instability by restricting U.S. banks from investing in or engaging in proprietary trading and speculation and imposing a strict framework to justify exemptions for underwriting, market making and hedging activities. U.S. banks will be restricted from investing in funds with collateral comprised of less than 100% loans that are not registered with the SEC and from engaging in hedging activities that do not hedge a specific identified risk. The Bank does not believe the Volcker Rule will have a significant effect on operations.

 

Other Legislative Initiatives

 

The U.S. Congress and state legislative bodies continually consider proposals for altering the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether, or in what form, any of these potential proposals or regulatory initiatives will be adopted, the impact the proposals will have on the financial institutions industry or the extent to which the business or financial condition and operations of the Company and its subsidiaries may be affected.

 

Statistical Disclosures

 

The statistical disclosures required by Part I Item 1 “Business” are located under Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Item 1A.  Risk Factors.

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

 

An investment in the Company’s common stock is subject to risks inherent in its business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect its business, financial condition and results of operations in the future. The value or market price of the Company’s common stock could decline due to any of these identified or other risks, and an investor could lose all or part of their investment.

 

There are factors, many beyond the Company’s control, which may significantly change the results or expectations of the Company. Some of these factors are described below, however many are described in the other sections of this Annual Report on Form 10-K.

 

ACCOUNTING POLICIES/ESTIMATES, ACCOUNTING STANDARDS AND INTERNAL CONTROL

 

The Company’s accounting policies and estimates are critical components of the Company’s presentation of its financial statements. Management must exercise judgment in selecting and adopting various accounting policies and in applying estimates. Actual outcomes may be materially different than amounts previously estimated. Management has identified several accounting policies and estimates as being critical to the presentation of the Company’s financial statements. The Company’s management must exercise judgment in selecting and applying many accounting policies and methods in order to comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report the Company’s financial condition and results. In some cases, management may select an accounting policy which might be reasonable under the circumstances, yet might result in the Company’s reporting different results than would have been reported under a different alternative. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These policies are described in Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section titled “Critical Accounting Policies and Estimates.”

 

The Bank may experience future goodwill impairment, which could reduce its earnings. The Bank performed its annual goodwill impairment test during the fourth quarter of 2013 as of September 30, 2013. The evaluation of the fair value of goodwill requires management judgment. If management’s judgment was incorrect and an impairment of goodwill was deemed to exist, the Bank would be required to write down its assets resulting in a charge to earnings, which would adversely affect its results of operations, perhaps materially.

 

Changes in accounting standards could materially impact the Company’s financial statements. The Financial Accounting Standards Board (“FASB”) may change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. For example, the FASB has proposed new accounting standards related to fair value accounting and accounting for leases that could materially change the Company’s financial statements in the future.  In addition, those who interpret the accounting standards, such as the SEC, the banking regulators and the Company’s independent registered public accounting firm may amend or reverse their previous interpretations or conclusions regarding how various standards should be applied. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the Company recasting, or possibly restating, prior period financial statements.

 

If the Company does not maintain strong internal controls and procedures, it may impact profitability. Management reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures on a routine basis. This system is designed to provide reasonable, not absolute, assurances that the internal controls comply with appropriate regulatory guidance. Any undetected circumvention of these controls could have a material adverse impact on the Company’s financial condition and results of operations.

 

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If the Bank’s other real estate owned (“OREO”) portfolio is not properly valued or sufficiently reserved to cover actual losses, or if the Bank is required to increase its valuation reserves, the Bank’s earnings could be reduced. Management obtains updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as OREO and at certain other times during the asset’s holding period. The Bank’s net book value of the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A write-down is recorded for any excess in the asset’s net book value over its fair value. If the Bank’s valuation process is incorrect, or if property values decline, the fair value of the Bank’s OREO may not be sufficient to recover its carrying value in such assets, resulting in the need for additional writedowns or valuation allowances. Significant additional writedowns or valuation allowances to OREO could have a material adverse effect on the Bank’s financial condition and results of operations.

 

REPUBLIC PROCESSING GROUP

 

The Company’s lines of business and products, not typically associated with Traditional Banking, expose the Company’s earnings to additional risks and uncertainties.  The Republic Processing Group (“RPG”) is comprised of three distinct divisions: Tax Refund Solutions (“TRS”), Republic Payment Solutions (“RPS”) and Republic Credit Solutions (“RCS”).

 

As a result of RB&T’s Agreement with the FDIC, TRS is subject to additional oversight requirements through its ERO Plan. If RB&T is unable to comply with these requirements, the FDIC could require RB&T to cease offering RT products in the future. As disclosed above, RB&T developed an ERO Plan, which was agreed to by the FDIC. The ERO Plan articulates a framework for RB&T to continue to offer non-RAL tax related products and services with specified oversight of the tax preparers with which RB&T does business. The ERO Plan includes requirements for, among other things:

 

·                  positive affirmations by EROs of individual tax preparer training related to regulatory requirements applicable to bank products;

·                  annual audits covering 10% of active ERO locations and a significant sample of applications for Bank products. The audits will consist of on-site visits, document reviews, mystery shops of tax preparation offices, and tax product customer surveys;

·                  on-site audit confirmation of ERO agreements to adhere to laws, processes, procedures, disclosure requirements and physical and electronic security requirements;

·                  an advertising approval process that requires RB&T to approve all tax preparer advertisements prior to their issuance;

·                  monitoring of ERO offices for income tax return quality;

·                  monitoring of ERO offices for adherence to acceptable tax preparation fee parameters;

·                  monitoring for federal and state tax preparation requirements, including local and state tax preparer registration and posting and disclosure requirements relative to Bank products;

·                  RB&T to provide advance notification, as practicable, to the FDIC of any significant changes in the TRS line of business, including

·                  a change of more than 25% from the prior tax season in the number of EROs with which RB&T is doing business, or

·                  the addition of tax-related products offered by RB&T that it did not previously offer; and

 

·                  RB&T to provide advance notification, as practicable, to the FDIC when RB&T enters into a relationship with a new corporation that has multiple owned or franchised locations, when the relationship alone will represent an increase of more than 10% from the prior tax season in the number of EROs with which RB&T is doing business.

 

If the FDIC determines that RB&T is not in compliance with its ERO Plan, it has the authority to issue more restrictive enforcement actions. These enforcement actions could include significant additional penalties and/or requirements regarding the tax business which could significantly, negatively impact this segment’s profitability and cause RB&T to exit the business altogether.

 

As a result of RB&T’s Agreement with the FDIC, the TRS division is subject to additional oversight requirements not currently imposed on its competitors. Management believes these additional requirements have and will continue to make attracting new relationships and retaining existing relationships more difficult for RB&T. As disclosed above, the Agreement contains a provision for an ERO Plan which has been implemented by RB&T. The ERO Plan places additional oversight and training requirements on RB&T and its tax preparation partners that are not currently required by the regulators for RB&T’s competitors in the tax business. Management believes these additional requirements have and will continue to make attracting new relationships and retaining existing relationships more difficult for RB&T, potentially reducing RT volume. Further reductions in RT volume will have a material adverse impact to RB&T’s earnings.

 

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RB&T’s RT products represent a significant business risk, and with the elimination of the RAL product, management believes RB&T could be subject to additional regulatory and public pressure to exit the RT business. If RB&T can no longer offer these products it will have a material adverse effect on its profits. The TRS division offers bank products to facilitate the payment of tax refunds for customers that electronically file their tax returns. RB&T is one of only a few financial institutions in the U.S. that provides this service to taxpayers. In return, RB&T charges a fee for the service.

 

Various governmental, regulatory and consumer groups have, from time to time, questioned the fairness of the TRS RAL and RT products. With RB&T’s agreement to cease offering RALs, management believes these groups will focus more attention on the RT product. Actions of these groups and others could result in regulatory, governmental or legislative action or material litigation against RB&T.

 

Discontinuing the RT product by RB&T, either voluntarily or involuntarily, would significantly reduce RB&T’s earnings.

 

The TRS division represents a significant operational risk, and if RB&T were unable to properly service this business, it could materially impact earnings. This division requires continued increases in technology and employees to service its business. In order to process its business, RB&T must implement and test new systems, as well as train new employees. RB&T relies heavily on communications and information systems to conduct its TRS division. Any failure, sustained interruption or breach in security of these systems could result in failures or disruptions in customer relationship management and other systems. Significant operational problems could also cause a material portion of RB&T’s tax-preparer base to switch to a competitor to process their bank product transactions, significantly reducing RB&T’s projected revenue without a corresponding decrease in expenses.

 

Industry trends in relation to tax preparation companies assuming the role of program manager for tax-related bank products has and will continue to reduce RPG’s profitability.  The TRS division of RPG has historically earned RT revenues based on its role as program manager for bank products in the tax refund process.  Program managers for bank products in the tax refund processing business generally 1) supply marketing materials for bank products, 2) supply blank RT check stock for the tax offices, 3) supply tier-1 customer service to the taxpayers, which includes answering taxpayer phone calls related to the status of their RTs and the verification to third parties regarding the validity of the RT checks issued to the taxpayers by the Bank,  and 4) provide overall management of the movement of refunds when received from the government, which includes exception processing and the reconciliation of all funds received and disbursed, among other duties.

 

Industry trends reflect larger tax preparation companies assuming the role of the program manager for the bank products in the tax refund process, which includes the obligation and costs of those responsibilities of a program manager described in the previous paragraph.  In those cases where the tax preparation company is also assuming the role of the program manager, the tax preparation company is also earning more of the revenue for the associated bank products sold, as the Bank typically provides ACH services and third party risk management oversight duties.  This trend will likely continue to adversely affect the margin the Company earns on its tax-related products and the overall operating results and financial condition of the RPG segment.

 

The RPG segment incurred a net operating loss in 2013.  If RPG is unable to achieve an acceptable level of profitability in the future, the Company may decide to discontinue these operations and incur substantial costs to do so, which could materially negatively impact earnings.

 

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TRADITIONAL BANK LENDING AND THE ALLOWANCE FOR LOAN LOSSES (“ALLOWANCE”)

 

The Allowance could be insufficient to cover the Bank’s actual loan losses. The Bank makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of its loans. In determining the amount of the Allowance, among other things, the Bank reviews its loans and its loss and delinquency experience, and the Bank evaluates economic conditions. If its assumptions are incorrect, the Allowance may not be sufficient to cover losses inherent in its loan portfolio, resulting in additions to its allowance. In addition, regulatory agencies periodically review the Allowance and may require the Bank to increase its provision for loan losses or recognize further loan charge-offs. A material increase in the Allowance or loan charge-offs would have a material adverse effect on the Bank’s financial condition and results of operations.

 

Deterioration in the quality of the Traditional Banking loan portfolio may result in additional charge-offs, which would adversely impact the Bank’s operating results. Despite the various measures implemented by the Bank to address the current economic environment, there may be further deterioration in the Bank’s loan portfolio. When borrowers default on their loan obligations, it may result in lost principal and interest income and increased operating expenses associated with the increased allocation of management time and resources associated with the collection efforts. In certain situations where collection efforts are unsuccessful or acceptable “work out” arrangements cannot be reached or performed, the Bank may have to charge off loans, either in part or in whole. Additional charge-offs will adversely affect the Bank’s operating results and financial condition.

 

The Bank’s financial condition and earnings could be negatively impacted to the extent the Bank relies on borrower information that is false, misleading or inaccurate. The Bank relies on the accuracy and completeness of information provided by vendors, customers and other parties. In deciding whether to extend credit, or enter into transactions with other parties, the Bank relies on information furnished by, or on behalf of, customers or entities related to those customers or other parties. Additional charge-offs will adversely affect the Bank’s operating results and financial condition.

 

The Bank’s use of appraisals as part of the decision process to make a loan on or secured by real property does not ensure the value of the real property collateral. As part of the decision process to make a loan secured by real property, the Bank generally requires an appraisal of the real property.  An appraisal, however, is only an estimate of the value of the property at the time the appraisal is made.  An error in fact or judgment could adversely affect the reliability of the appraisal. In addition, events occurring after the initial appraisal may cause the value of the real estate to decrease. As a result of any of these factors, the value of collateral backing a loan may be less than supposed, and if a default occurs, the Bank may not recover the outstanding balance of the loan. Additional charge-offs will adversely affect the Bank’s operating results and financial condition.

 

The Bank is exposed to risk of environmental liabilities with respect to properties to which it takes title. In the course of its business, the Bank may own or foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Bank may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Bank is the owner or former owner of a contaminated site, the Bank may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect the Bank.

 

Prepayment of loans may negatively impact the Bank’s business. The Bank’s customers may prepay the principal amount of their outstanding loans at any time. The speeds at which such prepayments occur, as well as the size of such prepayments, are within the Bank’s customers’ discretion. If customers prepay the principal amount of their loans, and the Bank is unable to lend those funds to other customers or invest the funds at the same or higher interest rates, the Bank’s interest income will be reduced. A significant reduction in interest income would have a negative impact on the Bank’s results of operations and financial condition.

 

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RB&T is highly dependent upon programs administered by the Federal Home Loan Mortgage Corporation (“Freddie Mac” or the “FHLMC”).  Changes in existing U.S. government-sponsored mortgage programs or servicing eligibility standards could materially and adversely affect its business, financial position, results of operations and cash flows. RB&T’s ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by the FHLMC. This entity plays a powerful role in the residential mortgage industry, and RB&T has significant business relationships with it. RB&T’s status as an FHLMC approved seller/servicer is subject to compliance with its selling and servicing guides.

 

Any discontinuation of, or significant reduction or material change in, the operation of the FHLMC or any significant adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of the FHLMC would likely prevent RB&T from originating and selling most, if not all, of its mortgage loan originations.

 

The mortgage warehouse lending business is subject to numerous risks which could result in losses. Risks associated with mortgage warehouse loans include, without limitation, (i) credit risks relating to the mortgage bankers that borrow from RB&T, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers and their third party service providers, (iii) changes in the market value of mortgage loans originated by the mortgage banker during the time in warehouse, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker. Failure to mitigate these risks could have a material adverse impact on the Bank’s financial statements and results of operations.

 

Loans originated through the Bank’s planned 2014 Correspondent Lending channel will subject the Bank to additional negative earnings sensitivity as the result of prepayments and additional credit risks that the Bank does not have through its historical origination channels. Loans generated through the Bank’s 2014 Correspondent Lending initiative will substantially be i) purchased at a premium and ii) represent out-of-market loans originated by a non-Republic person and/or non-Republic entity.  Loans purchased at a premium inherently subject the Bank’s earnings to additional sensitivity related to prepayments as increases in prepayment speeds will negatively affect the overall yield to maturity on such loans, potentially even causing the net loan yield to be negative for the period of time the loan is owned by the Bank.

 

Loans originated out of the Bank’s market area by non-Republic persons and/or entities will inherently carry additional credit risk from potential fraud due to the increased level of third party involvement on such loans.  In addition, the Bank will also experience an increase in complexity for customer service and the collection process, given the number of different state laws the Bank could be subject to from loans purchased throughout the U.S.

 

Failure to appropriately manage these additional risks could lead to reduced profitability and/or operating losses through this origination channel.

 

Loans originated through the Bank’s Internet Lending channel, which management anticipates increasing in 2014, will subject the Bank to credit and regulatory risks that the Bank does not have through its historical origination channels. The dollar amount of loans originated through the Bank’s Internet Lending channel is expected to be increasingly out-of-market.   Loans originated out of the Bank’s market area inherently carry additional credit risk as the Bank will experience an increase in the complexity of the customer authentication requirements for such loans.  Failure to appropriately identify the end-borrower for such loans could lead to fraud losses.  Failure to appropriately manage these additional risks could lead to reduced profitability and/or operating losses through this origination channel.  In addition, failure to appropriately identify the end-borrower could result in regulatory sanctions resulting from failure to comply with various customer identification regulations.

 

Loan production volume through mortgage warehouse lending is subject to various market conditions. RB&T’s mortgage warehouse lending business is significantly influenced by the volume and composition of residential mortgage purchase and refinance transactions among the Bank’s mortgage banking clients. During 2013 the Bank’s mortgage warehouse lending volume consisted of 63% purchase transactions, in which the mortgage company’s borrower was purchasing a new residence, and 37% refinance transactions, in which the mortgage company’s client was refinancing an existing mortgage loan. Purchase volume is driven by a number of factors, including but not limited to, the overall economy, the housing market and long-term residential mortgage interest rates; while refinance volume is primarily driven by long-term residential mortgage interest rates. RB&T’s mortgage warehouse lending business benefited during 2011, 2012 and the first five months of 2013 from low or declining long-term residential mortgage rates, which incentivized a high volume of borrowers to refinance their mortgages. Increases in long-term residential mortgage interest rates in the second quarter of 2013 decreased refinances significantly without an equivalent increase in purchase volume. Market movements of this nature without compensating growth in RB&T’s mortgage warehouse client base will have an adverse impact on the Bank’s net interest income.

 

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INVESTMENT SECURITIES, FHLB STOCK AND OTHER INVESTMENTS

 

Concerns regarding a downgrade of the U.S. government’s credit rating could have a material adverse effect on the Company’s business, financial condition, liquidity, and results of operations. In 2011, Standard & Poor’s lowered its long-term sovereign credit rating on the U.S. from AAA to AA+ and also lowered the credit rating of several related government agencies and institutions, including FHLMC, FNMA, and the Federal Home Loan Bank’s (“FHLB’s”), from AAA to AA+. In October 2013, Fitch placed the U.S. AAA long-term foreign and local currency Issuer Default Ratings on Rating Watch Negative. Further downgrades by Standard & Poor’s, Moody’s or Fitch, or defaults by the U.S. on any of its obligations could have material adverse impacts on financial and banking markets and economic conditions in the U.S. and throughout the world.  In turn, the market’s anticipation of these impacts could have a material adverse effect on the Company’s business, financial condition and liquidity. In particular, these events could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect the Company’s profitability. It may also negatively affect the value and liquidity of the government securities the Bank holds in its investment portfolio.

 

At December 31, 2013, the majority of the Bank’s investment securities were issued by FHLMC, FNMA, and the FHLB. It is uncertain as to what impact future downgrades or defaults, if any, will have on these securities as sources of liquidity and funding. Also, the adverse consequences as a result of downgrades could extend to the borrowers of the loans the Bank makes and, as a result, could adversely affect its borrowers’ ability to repay their loans.

 

The Bank’s investment in Federal Home Loan Bank stock may become impaired. At December 31, 2013, the Bank owned $28 million in FHLB stock. As a condition of membership at the FHLB, the Bank is required to purchase and hold a certain amount of FHLB stock. Its stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. The Bank’s FHLB stock has a par value of $100, is carried at cost, and it is subject to recoverability testing per applicable accounting standards. The Bank’s FHLB stock investments could become impaired. The Bank will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of its investment.

 

The Bank’s investment securities may incur other than temporary impairment charges. The Bank’s investment portfolio is periodically evaluated for other-than-temporary impairment loss (“OTTI”).  From 2008 through 2011 OTTI charges were recognized on the Bank’s private label mortgage backed securities. The Bank’s remaining private label mortgage backed security may still require an OTTI charge in the future should the financial condition of the underlying mortgages and/or the underlying third party insurance wrap (guarantee) deteriorate further.

 

The Bank holds a significant amount of bank-owned life insurance. At December 31, 2013, the Bank held bank-owned life insurance (“BOLI”) on certain employees with a cash surrender value of $25 million. The eventual repayment of the cash surrender value is subject to the ability of the various insurance companies to pay death benefits or to return the cash surrender value to the Bank if needed for liquidity purposes. The Bank continually monitors the financial strength of the various insurance companies that carry these policies. However, any one of these companies could experience a decline in financial strength, which could impair its ability to pay benefits or return the Bank’s cash surrender value. If the Bank needs to liquidate these policies for liquidity purposes, it would be subject to taxation on the increase in cash surrender value and penalties for early termination, both of which would adversely impact earnings.

 

ASSET LIABILITY MANAGEMENT AND LIQUIDITY

 

Fluctuations in interest rates could reduce profitability. The Bank’s primary source of income is from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. The Bank expects to periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either interest-bearing liabilities will be more sensitive to changes in market interest rates than interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to the Bank’s position, earnings may be negatively affected.

 

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The Bank’s asset-liability management strategy may not be able to prevent changes in interest rates from having a material adverse effect on results of operations and financial condition. Overall, from 2008 through the first four months of 2013, interest rates generally decreased. In order to combat contraction with its net interest income and net interest margin and improve its current earnings for the current year and near-term, the Bank elected to retain assets in the loan and investment portfolios with longer repricing durations. In addition, through its strategic pricing, the Bank also allowed its certificates of deposits, which are a longer-term source of funding, to decline. While the Bank has remained within its board approved interest rate risk policies, when interest rates begin to rise again, the Bank’s net interest income and net interest margin could be more negatively impacted as a result of these strategies. More specifically, the Bank’s interest income could rise at a slower pace than the Bank’s interest expense and the fair value of the Bank’s assets could likely decrease at a faster pace than the increase in the fair value of interest-bearing liabilities. These circumstances could cause a decline in the Bank’s net interest income and a reduction in the Bank’s economic value of equity.

 

A continued stable interest rate environment will reduce profitability. During most of 2013, the Bank experienced contraction in its net interest income and net interest margin as it could no longer lower the rate on many of its interest-bearing liabilities, while the Bank’s higher yielding interest-earning assets continued to pay down and reprice lower.  An on-going stable interest rate environment will cause the Bank’s interest-earning assets to continue to reprice into lower yielding assets without the ability for the Bank to offset the decline in interest income through a reduction in its cost of funds. The continued contraction in the Bank’s net interest margin will cause net interest income to decrease. The overall magnitude of the decrease in net interest income will depend on the period of time that the current interest rate environment remains.

 

Mortgage Banking activities could be adversely impacted by increasing or stagnant long-term interest rates. The Company is unable to predict changes in market interest rates. Changes in interest rates can impact the gain on sale of loans, loan origination fees and loan servicing fees, which account for a significant portion of Mortgage Banking income. A decline in market interest rates generally results in higher demand for mortgage products, while an increase in rates generally results in reduced demand. Generally, if demand increases, Mortgage Banking income will be positively impacted by more gains on sale; however, the valuation of existing mortgage servicing rights will decrease and may result in a significant impairment.  A decline in demand for Mortgage Banking products resulting from rising interest rates could also adversely impact other programs/products such as home equity lending, title insurance commissions and service charges on deposit accounts.

 

The Bank’s Mortgage Banking income has benefitted over the past three years from a relatively low rate environment, which has incentivized borrowers to refinance their mortgages.  During the second quarter of 2013, however, long-term interest rates rose significantly and drove a dramatic downturn in mortgage refinancings. The Bank’s loan sales consisted of 19% purchase transactions and 81% refinance transactions during 2012 versus 26% purchase and 74% during 2013. Of the 1,650 secondary market loans refinanced by the Bank during 2013, 74% took place prior to June 30, 2013, the month in which long term interest rates began to rise significantly. Stagnant or increasing long-term interest rates would likely continue to decrease demand for all Mortgage Banking products, and most significantly decrease refinance transaction volume. Any such decreases in demand would have a significant adverse impact on Mortgage Banking income.

 

The Company may need additional capital resources in the future and these capital resources may not be available when needed or at all. The Company may need to incur additional debt or equity financing in the future for growth, investment or strategic acquisitions. Such financing may not be available on acceptable terms or at all. If the Company is unable to obtain additional financing, it may not be able to grow or make strategic acquisitions or investments.

 

The Bank’s funding sources may prove insufficient to replace deposits and support future growth. The Bank relies on customer deposits, brokered deposits and advances from the FHLB to fund operations. Although the Bank has historically been able to replace maturing deposits and advances if desired, no assurance can be given that the Bank would be able to replace such funds in the future if the Bank’s financial condition or the financial condition of the FHLB or general market conditions were to change. The Bank’s financial flexibility will be severely constrained if it is unable to maintain its access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if the Bank is required to rely more heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected.

 

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Although the Bank considers such sources of funds adequate for its liquidity needs, the Bank may seek additional debt in the future to achieve long-term business objectives. There can be no assurance additional borrowings, if sought, would be available to the Bank or, if available, would be on favorable terms. The sale of equity or equity-related securities in the future may be dilutive to the Bank’s shareholders, and debt financing arrangements may require the Bank to pledge some of its assets and enter into various affirmative and negative covenants, including limitations on operational activities and financing alternatives. Future financing sources, if sought, might be unavailable to the Bank or, if available, could be on terms unfavorable to the Bank and may require regulatory approval. If additional financing sources are unavailable or are not available on reasonable terms, growth and future prospects could be adversely affected.

 

DEPOSITS, OVERDRAFTS, FDIC INSURANCE PREMIUMS AND SERVICE CHARGES ON DEPOSITS

 

Clients could pursue alternatives to bank deposits, causing the Bank to lose a relatively inexpensive source of funding. Checking and savings account balances and other forms of client deposits could decrease if clients perceive alternative investments, such as the stock market, as providing superior expected returns. If clients move money out of bank deposits in favor of alternative investments, the Bank could lose a relatively inexpensive source of funds, increasing its funding costs and negatively impacting its overall results of operations.

 

The loss of large deposit relationships could increase the Bank’s funding costs. The Bank has several large deposit realationships that do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances are moved from the Bank, the Bank would likely utilize overnight borrowing lines on a short-term basis to replace the balances. On a longer-term basis, the Bank would likely utilize brokered deposits and/or FHLB borrowings to replace withdrawn balances. The overall cost of gathering brokered deposits and/or FHLB borrowings, however, could be substantially higher than the Traditional Bank deposits they replace, increasing the Bank’s funding costs and reducing the Bank’s overall results of operations.

 

The Bank’s “Overdraft Honor” program represents a significant business risk, and if the Bank terminated the program it would materially impact the earnings of the Bank. There can be no assurance that Congress, the Bank’s regulators, or others, will not impose additional limitations on this program or prohibit the Bank from offering the program. The Bank’s “Overdraft Honor” program permits eligible customers to overdraft their checking accounts up to a predetermined dollar amount for the Bank’s customary overdraft fee(s). Generally, to be eligible for the Overdraft Honor program, customers must qualify for one of the Bank’s traditional checking products when the account is opened, remain in that product for 30 days and have recurring deposit activity within the account. Once the eligibility requirements have been met, the client is eligible to participate in the Overdraft Honor program. If an overdraft occurs, the Bank may pay the overdraft, at its discretion, up to the client’s individual overdraft limit. Under regulatory guidelines, customers utilizing the Overdraft Honor program may remain in overdraft status for no more than 60 days before it must be closed charged off.

 

Overdraft balances from deposit accounts, including those overdraft balances resulting from the Bank’s Overdraft Honor program, are recorded as a component of “loans” on the Bank’s balance sheet.

 

The Bank assesses two types of fees related to overdrawn accounts, a fixed per item fee and a fixed daily charge for being in overdraft status. The per item fee for this service is not considered an extension of credit, but rather is considered a fee for paying checks when sufficient funds are not otherwise available. As such, it is classified on the income statement in “service charges on deposits” as a component of non-interest income along with per item fees assessed to customers not in the Overdraft Honor program. A substantial majority of the per item fees in service charges on deposits relates to customers in the Overdraft Honor program. The daily fee assessed to the client for being in overdraft status is considered a loan fee and is thus included in interest income under the line item “loans, including fees.” The total net per item fees included in service charges on deposit for the years ended December 31, 2013 and 2012 were $8.0 million and $7.5 million. The total net daily overdraft charges included in interest income for the years ended December 31, 2013 and 2012 was $1.7 million in both periods. Additional limitations or elimination, or adverse modifications to this program, either voluntary or involuntary, would significantly reduce Bank earnings.

 

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In 2010, the FDIC issued its final guidance on Automated Overdraft payment programs which requires FDIC regulated banks to implement and maintain robust oversight of these programs. The new guidance has had a material adverse effect on the Bank’s net income. These guidelines have negatively impacted and will continue to negatively impact the Bank’s net income in 2014 and beyond. This guidance states, “the FDIC expects institutions to implement effective compliance and risk management systems, policies, and procedures to ensure that institutions manage any overdraft payment programs in accordance with the 2005 Joint Guidance on Overdraft Protection Programs (Joint Guidance)(Financial Institutions Letter (FIL)-11-2005) and the Federal Reserve Bank (“FRB”) November 2009 amendments to Regulation E, to avoid harming consumers or creating other compliance, operational, financial, reputational, legal or other risks.”

 

Additional limitations or adverse modifications to this program, either voluntary or involuntary, would further significantly reduce net income.

 

There can be no assurance that the FDIC will not impose special assessments or increase the deposit premiums applicable to the Company. Under the Dodd-Frank Act, the minimum statutory reserve ratio for the FDIC’s Deposit Insurance Fund will increase from 1.15% to 1.35% of insurable deposits by 2020. Company expenses would increase as a result of increases in FDIC insurance premiums.

 

COMPANY COMMON STOCK

 

The Company’s common stock generally has a low average daily trading volume, which limits a stockholder’s ability to quickly accumulate or quickly sell large numbers of shares of Republic’s stock without causing wide price fluctuations. Republic’s stock price can fluctuate widely in response to a variety of factors, such as actual or anticipated variations in the Company’s operating results, recommendations by securities analysts, operating and stock price performance of other companies, news reports, results of litigation, regulatory actions or changes in government regulations, among other factors. A low average daily stock trading volume can lead to significant price swings even when a relatively small number of shares are being traded.

 

The market price for the Company’s common stock may be volatile. The market price of the Company’s common stock could fluctuate substantially in the future in response to a number of factors, including those discussed below. The market price of the Company’s common stock has in the past fluctuated significantly and is likely to continue to fluctuate significantly. Some of the factors that may cause the price of the Company’s common stock to fluctuate include:

 

·             Variations in the Company’s and its competitors’ operating results;

·             Changes in earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to the Bank or other financial institutions;

·             Announcements by the Company or its competitors of mergers, acquisitions and strategic partnerships;

·             Additions or departure of key personnel;

·             Actual or anticipated quarterly or annual fluctuations in operating results, cash flows and financial condition;

·             The announced exiting of or significant reductions in material lines of business within the Company;

·             Changes or proposed changes in banking laws or regulations or enforcement of these laws and regulations;

·             Events affecting other companies that the market deems comparable to the Company;

·             Developments relating to regulatory examinations;

·             Speculation in the press or investment community generally or relating to the Company’s reputation or the financial services industry;

·             Future issuances or re-sales of equity or equity-related securities, or the perception that they may occur;

·             General conditions in the financial markets and real estate markets in particular, developments related to market conditions for the financial services industry;

·             Domestic and international economic factors unrelated to the Company’s performance;

·             Developments related to litigation or threatened litigation;

·             The presence or absence of short selling of the Company’s common stock; and,

·             Future sales of the Company’s common stock or debt securities.

 

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In addition, in recent years, the stock market, in general, has experienced extreme price and volume fluctuations. This is due, in part, to investors’ shifting perceptions of the effect of changes and potential changes in the economy on various industry sectors. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their performance or prospects. These broad market fluctuations may adversely affect the market price of the Company’s common stock, notwithstanding its actual or anticipated operating results, cash flows and financial condition. The Company expects that the market price of its common stock will continue to fluctuate due to many factors, including prevailing interest rates, other economic conditions, operating performance and investor perceptions of the outlook for the Company specifically and the banking industry in general. There can be no assurance about the level of the market price of the Company’s common stock in the future or that you will be able to resell your shares at times or at prices you find attractive.

 

An investment in the Company’s Common Stock is not an insured deposit. The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common stock, you could lose some or all of your investment.

 

The Company’s insiders hold voting rights that give them significant control over matters requiring stockholder approval. The Company’s Chairman/CEO and President hold substantial voting authority over the Company’s Class A Common Stock and Class B Common Stock. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes. This group generally votes together on matters presented to stockholders for approval. These actions may include, for example, the election of directors, the adoption of amendments to corporate documents, the approval of mergers and acquisitions, sales of assets and the continuation of the Company as a registered company with obligations to file periodic reports and other filings with the SEC. Consequently, other stockholders’ ability to influence Company actions through their vote may be limited and the non-insider stockholders may not have sufficient voting power to approve a change in control even if a significant premium is being offered for their shares. Majority stockholders may not vote their shares in accordance with minority stockholder interests.

 

GOVERNMENT REGULATION / ECONOMIC FACTORS

 

The Company is significantly impacted by the regulatory, fiscal and monetary policies of federal and state governments which could negatively impact the Company’s liquidity position and earnings. These policies can materially affect the value of the Company’s financial instruments and can also adversely affect the Company’s customers and their ability to repay their outstanding loans. Also, failure to comply with laws, regulations or policies, or adverse examination findings, could result in significant penalties, negatively impact operations, or result in other sanctions against the Company. The Board of Governors of the FRB regulates the supply of money and credit in the U.S. Its policies determine, in large part, the Company’s cost of funds for lending and investing and the return the Company earns on these loans and investments, all of which impact net interest margin.

 

The Company and the Bank are heavily regulated at both the federal and state levels and are subject to various routine and non-routine examinations by federal and state regulators. This regulatory oversight is primarily intended to protect depositors, the Deposit Insurance Fund and the banking system as a whole, not the stockholders of the Company. Changes in policies, regulations and statutes, or the interpretation thereof, could significantly impact the product offerings of Republic causing the Company to terminate or modify its product offerings in a manner that could materially adversely affect the earnings of the Company.

 

Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. Various federal and state regulatory agencies possess cease and desist powers, and other authority to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulations. The FRB possesses similar powers with respect to bank holding companies. These, and other restrictions, can limit in varying degrees, the manner in which Republic conducts its business.

 

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The Dodd-Frank Act may continue to adversely affect the Company’s business, financial conditions and results of operations. In July, 2010, the President of the U.S. signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”). The Dodd-Frank Act imposed various new restrictions and creates an expanded framework of regulatory oversight for financial institutions.

 

On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

 

The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and will refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Bank under the final rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

The final rules implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

 

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

 

The final rules set forth certain changes for the calculation of risk-weighted assets, which the Bank will be required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.

 

Also, included as provisions of the Dodd-Frank Act was the establishment of the Bureau of Consumer Financial Protection, which was granted authority to regulate companies that provide consumer financial services. The Company is regularly refining its consumer financial services and developing new products and services or operations to address recent or anticipated legislative and regulatory changes. Some of these anticipated legislative and regulatory changes may result in, among other things, RB&T reducing fees to consumers or implementing additional disclosure requirements. The Company could incur additional operating costs which could reduce overall product profitability and lead to the Company exiting certain consumer products.

 

The Company cannot currently predict what operational changes, if any, it will make in response to evolving legislative and regulatory requirements and what effect these changes may have on the Company’s financial results of operations.  The Company does believe that any operational changes it may be required to make in the future will have a negative impact on the Company’s overall profitability.

 

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Government responses to economic conditions may adversely affect the Company’s operations, financial condition and earnings. Enacted financial reform legislation will change the bank regulatory framework, create an independent consumer protection bureau that will assume the consumer protection responsibilities of the various federal banking agencies, and establish more stringent capital standards for banks and bank holding companies. The legislation will also result in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of new legislation and regulatory actions in response to these conditions, may adversely affect Company operations by restricting business activities, including the Company’s ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These measures are likely to increase the Company’s costs of doing business and may have a significant adverse effect on the Company’s lending activities, financial performance and operating flexibility. In addition, these risks could affect the performance and value of the Company’s loan and investment securities portfolios, which also would negatively affect financial performance.

 

Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the overall economy, has, among other things, kept interest rates low through its targeted federal funds rate and the purchase of mortgage-backed securities. If the Federal Reserve Board increases the federal funds rate or tapers its securities purchases, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering operating costs, could have a significant negative effect on the Company’s borrowers, especially business borrowers, and the values of underlying collateral securing loans, which could negatively affect the Company’s financial performance.

 

The Company may be subject to examinations by taxing authorities which could adversely affect results of operations. In the normal course of business, the Company may be subject to examinations from federal and state taxing authorities regarding the amount of taxes due in connection with investments it has made and the businesses in which the Company is engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. The challenges made by taxing authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in the Company’s favor, they could have an adverse effect on the Company’s financial condition and results of operations.

 

The Company may be adversely affected by the soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition and results of operations.

 

MANAGEMENT, INFORMATION SYSTEMS, ACQUISITIONS, ETC.

 

The Company is dependent upon the services of its management team and qualified personnel. The Company is dependent upon the ability and experience of a number of its key management personnel who have substantial experience with Company operations, the financial services industry and the markets in which the Company offers services. It is possible that the loss of the services of one or more of its senior executives or key managers would have an adverse effect on operations, moreover, the Company depends on its account executives and loan officers to attract bank customers by developing relationships with commercial and consumer clients, mortgage companies, real estate agents, brokers and others. The Company believes that these relationships lead to repeat and referral business. The market for skilled account executives and loan officers is highly competitive and historically has experienced a high rate of turnover. In addition, if a manager leaves the Company, other members of the manager’s team may follow. Competition for qualified account executives and loan officers may lead to increased hiring and retention costs. The Company’s success also depends on its ability to continue to attract, manage and retain other qualified personnel as the Company grows. The Company cannot assure you that it will continue to attract or retain such personnel.

 

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The Company’s operations could be impacted if its third-party service providers experience difficulty. The Company depends on a number of relationships with third-party service providers, including core systems processing and web hosting. These providers are well established vendors that provide these services to a significant number of financial institutions. If these third-party service providers experience difficulty or terminate their services and the Company is unable to replace them with other providers, its operations could be interrupted which would adversely impact its business.

 

The Company’s operations, including customer interactions, are increasingly done via electronic means, and this has increased the risks related to cyber security. The Company is exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. Management has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access. The objectives of cyber-attacks vary widely and can include theft of financial assets, intellectual property, or other sensitive information, including the information belonging to the Bank’s customers. Cyber-attacks may also be directed at disrupting operations. While the Company has not incurred any material losses related to cyber-attacks, nor is management aware of any specific or threatened cyber-incidents as of the date of this report, the Bank may incur substantial costs and suffer other negative consequences if the Bank falls victim to successful cyber-attacks. Such negative consequences could include: remediation costs for stolen assets or information; system repairs; consumer protection costs; increased cyber security protection costs that may include organizational changes; deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation and payment of damages; and reputational damage adversely affecting customer or investor confidence.

 

The Company’s information systems may experience an interruption that could adversely impact the Company’s business, financial condition and results of operations. The Company relies heavily on communications and information systems to conduct its business. Any failure or interruption of these systems could result in failures or disruptions in customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the impact of the failure or interruption of information systems, there can be no assurance that any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrences of any failures, or interruptions of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

 

New lines of business or new products and services may subject the Company to additional risks. From time to time, the Company may develop and grow new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition. All service offerings, including current offerings and those which may be provided in the future, may become more risky due to changes in economic, competitive and market conditions beyond the Company’s control.

 

Negative public opinion could damage the Company’s reputation and adversely affect earnings. Reputational risk is the risk to Company operations from negative public opinion. Negative public opinion can result from the actual or perceived manner in which the Company conducts its business activities, including sales practices, practices used in origination and servicing operations, the management of actual or potential conflicts of interest and ethical issues, and the Company’s protection of confidential customer information. Negative public opinion can adversely affect the Company’s ability to keep and attract customers and can expose the Company to litigation.

 

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The Company’s ability to successfully complete acquisitions will affect its ability to grow its franchise and compete effectively in its market areas. The Company has announced plans to pursue a policy of growth through acquisitions in the near-future to supplement internal growth. The Company’s efforts to acquire other financial institutions and financial service companies or branches may not be successful. Numerous potential acquirers exist for many acquisition candidates, creating intense competition, which affects the purchase price for which the institution can be acquired. In many cases, the Company’s competitors have significantly greater resources than the Company has, and greater flexibility to structure the consideration for the transaction. The Company may also not be the successful bidder in acquisition opportunities that it pursues due to the willingness or ability of other potential acquirers to propose a higher purchase price or more attractive terms and conditions than the Company is willing or able to propose. The Company intends to continue to pursue acquisition opportunities in each of its market areas, although the Company currently has no understandings or agreements to acquire other financial institutions. The risks presented by the acquisition of other financial institutions could adversely affect the Bank’s financial condition and results of operations.

 

If the Company is successful in conducting acquisitions, it will be presented with many risks that could adversely affect the Company’s financial condition and results of operations. An institution that the Company acquires may have unknown asset quality issues or unknown or contingent liabilities that the Company did not discover or fully recognize in the due diligence process, thereby resulting in unanticipated losses. The acquisition of other institutions also typically requires the integration of different corporate cultures, loan and deposit products, pricing strategies, data processing systems and other technologies, accounting, internal audit and financial reporting systems, operating systems and internal controls, marketing programs and personnel of the acquired institution, in order to make the transaction economically advantageous. The integration process is complicated and time consuming and could divert the Company’s attention from other business concerns and may be disruptive to its customers and the customers of the acquired institution. The Company’s failure to successfully integrate an acquired institution could result in the loss of key customers and employees, and prevent the Company from achieving expected synergies and cost savings. Acquisitions also result in professional fees and may result in creating goodwill that could become impaired, thereby requiring the Company to recognize further charges. The Company may finance acquisitions with borrowed funds, thereby increasing the Company’s leverage and reducing liquidity, or with potentially dilutive issuances of equity securities.

 

The Company may engage in additional FDIC-assisted transactions, which could present additional risks to its business. The Company may have additional opportunities to acquire the assets and liabilities of failed banks in FDIC-assisted transactions. Although these FDIC-assisted transactions typically provide for FDIC assistance to an acquirer to mitigate certain risks, such as sharing exposure to loan losses and providing indemnification against certain liabilities of the failed institution, the Company is (and would be in future transactions) subject to many of the same risks it would face in acquiring another bank in a negotiated transaction, including risks associated with maintaining customer relationships and failure to realize the anticipated acquisition benefits in the amounts and within the timeframes the Company expects. In addition, because these acquisitions are structured in a manner that would not allow the Company the time and access to information normally associated with preparing for and evaluating a negotiated acquisition, the Company may face additional risks in FDIC-assisted transactions, including additional strain on management resources, management of problem loans, problems related to integration of personnel and operating systems and impact to capital resources requiring the Company to raise additional capital. Moreover, if the Company seeks to participate in additional FDIC-assisted acquisitions, the Company can only participate in the bid process if it receives approval of bank regulators. The Company’s inability to overcome these risks could have a material adverse effect on its business, financial condition and results of operations.

 

The Company’s litigation related costs may continue to increase. The Bank is subject to a variety of legal proceedings that have arisen in the ordinary course of the Bank’s business. The Bank believes that it has meritorious defenses in legal actions where it has been named as a defendant and is vigorously defending these suits. There can be no assurance that a resolution of any such legal matters will not result in significant liability to the Bank nor have a material adverse impact on its financial condition and results of operations or the Bank’s ability to meet applicable regulatory requirements. Moreover, the expenses of pending legal proceedings could adversely affect the Bank’s results of operations until they are resolved.

 

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Item 1B.  Unresolved Staff Comments.

 

None

 

Item 2.  Properties.

 

The Company’s executive offices, principal support and operational functions are located at 601 West Market Street in Louisville, Kentucky. As of December 31, 2013, Republic had 34 banking centers located in Kentucky, four banking centers located in Florida, three banking centers in Indiana, two in Tennessee and one banking center in Ohio and Minnesota.

 

The location of Republic’s facilities, their respective approximate square footage and their form of occupancy are as follows:

 

 

 

Approximate

 

 

 

 

 

Square

 

Owned (O)/

 

Bank Offices

 

Footage

 

Leased (L)

 

 

 

 

 

 

 

 

Kentucky Banking Centers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Louisville Metropolitan Area

 

 

 

 

 

 

2801 Bardstown Road, Louisville

 

6,000

 

 

L (1)

 

601 West Market Street, Louisville

 

57,000

 

 

L (1)

 

661 South Hurstbourne Parkway, Louisville

 

42,000

 

 

L (1)

 

9600 Brownsboro Road, Louisville

 

15,000

 

 

L (1)

 

5250 Dixie Highway, Louisville

 

5,000

 

 

O/L (2)

 

10100 Brookridge Village Boulevard, Louisville

 

5,000

 

 

O/L (2)

 

9101 U.S. Highway 42, Prospect

 

3,000

 

 

O/L (2)

 

11330 Main Street, Middletown

 

6,000

 

 

O/L (2)

 

3902 Taylorsville Road, Louisville

 

4,000

 

 

O/L (2)

 

3811 Ruckriegel Parkway, Louisville

 

4,000

 

 

O/L (2)

 

5125 New Cut Road, Louisville

 

4,000

 

 

O/L (2)

 

4808 Outer Loop, Louisville

 

4,000

 

 

O/L (2)

 

438 Highway 44 East, Shepherdsville

 

4,000

 

 

O/L (2)

 

1420 Poplar Level Road, Louisville

 

3,000

 

 

O

 

4921 Brownsboro Road, Louisville

 

3,000

 

 

L

 

3950 Kresge Way, Suite 108, Louisville

 

1,000

 

 

L

 

3726 Lexington Road, Louisville

 

4,000

 

 

L

 

2028 West Broadway, Suite 105, Louisville

 

2,000

 

 

L

 

220 Abraham Flexner Way, Suite 100, Louisville

 

1,000

 

 

L

 

6401 Claymont Crossing, Crestwood

 

4,000

 

 

L

 

 

 

 

 

 

 

 

Lexington

 

 

 

 

 

 

3098 Helmsdale Place

 

5,000

 

 

O/L (2)

 

3608 Walden Drive

 

4,000

 

 

O/L (2)

 

651 Perimeter Drive

 

4,000

 

 

L (3)

 

2401 Harrodsburg Road

 

6,000

 

 

O

 

641 East Euclid Avenue

 

3,000

 

 

O

 

 

 

 

 

 

 

 

Northern Kentucky

 

 

 

 

 

 

535 Madison Avenue, Covington

 

4,000

 

 

L

 

8513 U.S. Highway 42, Florence

 

4,000

 

 

L

 

2051 Centennial Boulevard, Independence

 

2,000

 

 

L

 

 

 

 

 

 

 

 

Owensboro

 

 

 

 

 

 

3500 Frederica Street

 

5,000

 

 

O

 

3332 Villa Point Drive, Suite 101

 

2,000

 

 

L

 

 

(continued)

 

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Table of Contents

 

 

 

Approximate

 

 

 

 

 

Square

 

Owned (O)/

 

Bank Offices

 

Footage

 

Leased (L)

 

 

 

 

 

 

 

 

(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

Elizabethtown, 1690 Ring Road

 

6,000

 

 

O

 

 

 

 

 

 

 

 

Frankfort, 100 Highway 676

 

3,000

 

 

O/L (2)

 

 

 

 

 

 

 

 

Georgetown, 430 Connector Road

 

5,000

 

 

O/L (2)

 

 

 

 

 

 

 

 

Shelbyville, 1614 Midland Trail

 

4,000

 

 

O/L (2)

 

 

 

 

 

 

 

 

Southern Indiana Banking Centers:

 

 

 

 

 

 

4571 Duffy Road, Floyds Knobs

 

4,000

 

 

O/L (2)

 

3141 Highway 62, Jeffersonville

 

4,000

 

 

O

 

3001 Charlestown Crossing Way, New Albany

 

2,000

 

 

L

 

 

 

 

 

 

 

 

Florida Banking Centers:

 

 

 

 

 

 

9100 Hudson Avenue, Hudson

 

4,000

 

 

O

 

34650 U.S. Highway 19, Palm Harbor

 

3,000

 

 

L (3)

 

9037 U.S. Highway 19, Port Richey

 

11,000

 

 

O

 

11502 North 56th Street, Temple Terrace

 

3,000

 

 

L

 

 

 

 

 

 

 

 

Ohio Banking Center:

 

 

 

 

 

 

9683 Kenwood Road, Blue Ash

 

3,000

 

 

L

 

 

 

 

 

 

 

 

Tennessee Banking Centers:

 

 

 

 

 

 

2034 Richard Jones Road, Nashville

 

3,000

 

 

L

 

113 Seaboard Lane, Franklin

 

2,000

 

 

L

 

 

 

 

 

 

 

 

Minnesota Banking Center:

 

 

 

 

 

 

8500 Normandale Lake Blvd, Suite 110, Bloomington

 

4,000

 

 

L (4)

 

 

 

 

 

 

 

 

Support and Operations:

 

 

 

 

 

 

200 South Seventh Street, Louisville, KY

 

48,000

 

 

L (1)

 

125 South Sixth Street, Louisville, KY

 

1,000

 

 

L

 

401 East Chestnut, Suite 620, Louisville, KY

 

500

 

 

L

 

 


(1)         Locations are leased from partnerships in which Steven E. Trager, Chairman and Chief Executive Officer and A. Scott Trager, President, are partners. See additional discussion included under Part III Item 13 “Certain Relationships and Related Transactions, and Director Independence.” For additional discussion regarding Republic’s lease obligations, see Part II Item 8 “Financial Statements and Supplementary Data” Footnote 19 “Transactions with Related Parties and Their Affiliates”

 

(2)         The banking centers at these locations are owned by Republic; however, the banking center is located on land that is leased through long-term agreements with third parties.

 

(3)         Banking center lease was exited in the first quarter of 2014.

 

(4)         Banking center was converted to a non-branch support office during the first quarter of 2014.

 

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Item 3.  Legal Proceedings.

 

In the ordinary course of operations, Republic and the Bank are defendants in various legal proceedings. There is no proceeding pending or threatened litigation, to the knowledge of management, in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic or the Bank, except as set forth below.

 

Overdraft Litigation

 

On August 1, 2011, a lawsuit was filed in the U.S. District Court for the Western District of Kentucky styled Brenda Webb vs. Republic Bank & Trust Company d/b/a Republic Bank, Civil Action No. 3:11-CV-00423-TBR. The Complaint was brought as a putative class action and seeks monetary damages, restitution and declaratory relief allegedly arising from the manner in which Republic Bank & Trust assessed overdraft fees. In the Complaint, the Plaintiff pleads seven claims against RB&T alleging: breach of contract and breach of the covenant of good faith and fair dealing (Counts I), unconscionability (Count II), conversion (Count III), unjust enrichment (Count IV), violation of the Electronic Funds Transfer Act and Regulation E (Count V), and violations of the Kentucky Consumer Protection Act, (Count VI). RB&T filed a Motion to Dismiss the case on January 12, 2012. In response, Plaintiff filed her Motion to Amend the Complaint on February 23, 2012. In Plaintiff’s proposed Amended Complaint, Plaintiff acknowledged disclosure of the Overdraft Honor Policy and did not seek to add any claims to the Amended Complaint. However, Plaintiff divided the breach of contract and breach of the covenant of good faith and fair dealing claims into two counts (Counts One and Two). In the original Complaint, those claims were combined in Count One. RB&T filed its objection to Plaintiff’s Motion to Amend. On June 16, 2012, the District Court denied the Plaintiff’s Motion to Amend concluding that the Plaintiff lacked the ability to automatically amend the complaint as of right. However, the Court held that the Plaintiff could be permitted to amend if the Plaintiff could first demonstrate that her amendment would not be futile and that the Plaintiff had standing to sue despite RB&T’s offer of judgment. The Court declined to rule on that issue at that time and ordered the case stayed pending a decision by the U.S. Court of Appeals for the Sixth Circuit in a case on appeal with the same standing issue. The Sixth Circuit ruled on June 11, 2013 and concluded that the offer of judgment did not moot the matter before it only because the offer of judgment in question did not afford the Plaintiff complete relief. The District Court lifted the stay of this matter on June 14, 2013 and permitted Plaintiff to file her Amended Complaint.  Plaintiff filed her Amended Complaint on June 21, 2013 and brought seven claims: breach of contract and breach of the covenant of good faith and fair dealing (Counts I & II), unconscionability (Count III), conversion (Count IV), unjust enrichment (Count V), violation of the Electronic Funds Transfer Act, (Count VI) and violation of the Kentucky Consumer Protection Act (Count VII).  RB&T filed its Motion to Dismiss the Amended Complaint on July 15, 2013. On September 30, 2013 the Court issued its decision granting the Motion to Dismiss in part and denying it in part.  The Court initially concluded that the offer of judgment did not moot the case and deprive it of subject matter jurisdiction as it did not provide Plaintiff with all of the relief she sought.  The Court dismissed the conversion, unconscionability and Electronic Funds Transfer Act claims in their entirety for failure to state a claim. With respect to the remaining claims, the Court dismissed them to the extent they are premised upon any overdraft charges incurred by the Plaintiff on or after January 6, 2010, the date on which she received the Overdraft Honor Policy.  The Court concluded that Plaintiff could not state any claim for the time period after she received the Policy with respect to the manner in which RB&T assessed overdraft fees. The Answer to the remaining claims was filed on October 14, 2013 and the matter now proceeds into discovery.

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.

 

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Table of Contents

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market and Dividend Information

 

Republic’s Class A Common Stock is traded on The NASDAQ Global Select Market® (“NASDAQ”) under the symbol “RBCAA.” The following table sets forth the high and low market value of the Class A Common Stock and the respective dividends declared during 2013 and 2012.

 

 

 

2013

 

 

 

Sales Price (1)

 

Dividend

 

Quarter Ended

 

High

 

Low

 

Class A

 

Class B

 

 

 

 

 

 

 

 

 

 

 

March 31st

 

$

23.02

 

$

20.57

 

0.165

 

0.150

 

June 30th

 

24.44

 

20.71

 

0.176

 

0.160

 

September 30th

 

28.14

 

23.22

 

0.176

 

0.160

 

December 31st

 

27.65

 

22.77

 

0.176

 

0.160

 

 

 

 

2012

 

 

 

Sales Price (1)

 

Dividend

 

Quarter Ended

 

High

 

Low

 

Class A

 

Class B

 

 

 

 

 

 

 

 

 

 

 

March 31st

 

$

27.50

 

$

23.35

 

0.154

 

0.140

 

June 30th

 

24.31

 

20.23

 

0.165

 

0.150

 

September 30th

 

25.12

 

21.95

 

0.165

 

0.150

 

December 31st (2)

 

22.02

 

19.85

 

1.265

 

1.150

 

 


(1) — Sales price based on closing price.

(2) — A special cash dividend of $1.10 per share on Class A Common Stock and $1.00 per share on Class B Common Stock was declared on November 14, 2012 to shareholders of record as of November 30, 2012, payable on December 21, 2012.

 

At February 14, 2014, the Company’s Class A Common Stock was held by 636 shareholders of record and the Class B Common Stock was held by 123 shareholders of record. There is no established public trading market for the Company’s Class B Common Stock. The Company intends to continue its historical practice of paying quarterly cash dividends; however, there is no assurance by the Board of Directors that such dividends will continue to be paid in the future. The payment of dividends in the future is dependent upon future income, financial position, capital requirements, the discretion and judgment of the Board of Directors and numerous other considerations.

 

For additional discussion regarding regulatory restrictions on dividends, see the following section:

 

·                  Part II Item 8 “Financial Statements and Supplementary Data” Footnote 16 “Stockholders’ Equity and Regulatory Capital Matters”

 

Republic has made available to its employees participating in its 401(k) Plan the opportunity, at the employee’s sole discretion, to invest funds held in their accounts under the plan in shares of Class A Common Stock of Republic. Shares are purchased by the independent trustee administering the plan from time to time in the open market in the form of broker’s transactions. As of December 31, 2013, the trustee held 274,190 shares of Class A Common Stock and 2,648 shares of Class B Common Stock on behalf of the plan.

 

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Table of Contents

 

Details of Republic’s Class A Common Stock purchases during the fourth quarter of 2013 are included in the following table:

 

 

 

 

 

 

 

Total Number of

 

Maximum Number

 

 

 

 

 

 

 

Shares Purchased

 

of Shares that May

 

 

 

 

 

 

 

as Part of Publicly

 

Yet Be Purchased

 

 

 

Total Number of

 

Average Price

 

Announced Plans

 

Under the Plan

 

Period

 

Shares Purchased

 

Paid Per Share

 

or Programs

 

or Programs

 

 

 

 

 

 

 

 

 

 

 

October 1 - October 31

 

 

$

 

 

 

 

November 1 - November 30

 

 

 

 

 

 

December 1 - December 31

 

 

 

 

 

 

Total

 

 

$

 

 

330,640

 

 

During 2013, the Company repurchased 193,000 shares and there were 7,000 shares exchanged for stock option exercises. During November of 2011, the Company’s Board of Directors amended its existing share repurchase program by approving the repurchase of 300,000 additional shares from time to time, as market conditions are deemed attractive 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 December 31, 2013, the Company had 330,640 shares which could be repurchased under its current share repurchase programs.

 

During 2013, there were approximately 11,000 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.

 

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Table of Contents

 

STOCK PERFORMANCE GRAPH

 

The following stock performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates the performance graph by reference therein.

 

The following stock performance graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) on Republic’s Class A Common Stock as compared to the NASDAQ Bank Stocks Index and the Standard & Poor’s (“S&P”) 500 Index. The graph covers the period beginning December 31, 2008 and ending December 31, 2013. The calculation of cumulative total return assumes an initial investment of $100 in Republic’s Class A Common Stock, the NASDAQ Bank Index and the S&P 500 Index on December 31, 2008. The stock price performance shown on the graph below is not necessarily indicative of future stock price performance.

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2008

 

2009

 

2010

 

2011

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp Class A Common Stock

 

$

100.00

 

$

77.53

 

$

91.81

 

$

91.13

 

$

90.85

 

$

108.56

 

NASDAQ Bank Index

 

100.00

 

83.70

 

100.24

 

89.72

 

105.21

 

151.53

 

S&P 500 Index

 

100.00

 

126.45

 

150.63

 

153.81

 

175.43

 

235.22

 

 

 

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Table of Contents

 

Item 6.  Selected Financial Data.

 

The following table sets forth Republic Bancorp Inc.’s selected financial data from 2009 through 2013. This information should be read in conjunction with Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II Item 8 “Financial Statements and Supplementary Data.” Certain amounts presented in prior periods have been reclassified to conform to the current period presentation.

 

 

 

As of and for the Years Ended December 31,

 

(in thousands, except per share data, FTEs and # of banking centers)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

170,863

 

$

137,691

 

$

362,971

 

$

786,371

 

$

1,068,179

 

Investment securities

 

483,537

 

484,256

 

674,022

 

542,694

 

467,235

 

Mortgage loans held for sale, at fair value

 

3,506

 

10,614

 

4,392

 

15,228

 

5,445

 

Gross loans

 

2,589,792

 

2,650,197

 

2,285,295

 

2,175,240

 

2,268,232

 

Allowance for loan losses

 

(23,026

)

(23,729

)

(24,063

)

(23,079

)

(22,879

)

Goodwill

 

10,168

 

10,168

 

10,168

 

10,168

 

10,168

 

Bank owned life insurance

 

25,086

 

 

 

 

 

Total assets

 

3,371,904

 

3,394,399

 

3,419,991

 

3,622,703

 

3,918,768

 

Non interest-bearing deposits

 

488,642

 

479,046

 

408,483

 

325,375

 

318,275

 

Interest-bearing deposits

 

1,502,215

 

1,503,882

 

1,325,495

 

1,977,317

 

2,284,206

 

Total deposits

 

1,990,857

 

1,982,928

 

1,733,978

 

2,302,692

 

2,602,481

 

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

 

165,555

 

250,884

 

230,231

 

319,246

 

299,580

 

Federal Home Loan Bank advances

 

605,000

 

542,600

 

934,630

 

564,877

 

637,607

 

Subordinated note

 

41,240

 

41,240

 

41,240

 

41,240

 

41,240

 

Total liabilities

 

2,829,111

 

2,857,697

 

2,967,624

 

3,251,327

 

3,602,748

 

Total stockholders’ equity

 

542,793

 

536,702

 

452,367

 

371,376

 

316,020

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and other interest-earning deposits

 

$

145,970

 

$

187,790

 

$

315,530

 

$

473,137

 

$

341,126

 

Investment securities, including FHLB stock

 

527,681

 

640,830

 

678,804

 

561,273

 

536,996

 

Gross loans, including loans held for sale

 

2,575,146

 

2,504,150

 

2,246,259

 

2,338,990

 

2,372,008

 

Allowance for loan losses

 

(23,287

)

(25,226

)

(28,817

)

(27,755

)

(22,005

)

Total assets

 

3,385,345

 

3,560,739

 

3,416,921

 

3,503,886

 

3,415,725

 

Non interest-bearing deposits

 

513,891

 

624,053

 

509,457

 

421,162

 

381,665

 

Interest-bearing deposits

 

1,514,847

 

1,512,455

 

1,540,515

 

1,725,891

 

1,684,277

 

Total interest-bearing liabilities

 

2,305,106

 

2,351,768

 

2,418,865

 

2,671,466

 

2,679,499

 

Total stockholders’ equity

 

546,880

 

530,096

 

439,636

 

361,357

 

305,864

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

134,568

 

$

183,459

 

$

195,115

 

$

193,473

 

$

212,605

 

Total interest expense

 

21,393

 

22,804

 

30,255

 

36,661

 

48,742

 

Net interest income

 

113,175

 

160,655

 

164,860

 

156,812

 

163,863

 

Provision for loan losses

 

2,983

 

15,043

 

17,966

 

19,714

 

33,975

 

Total non interest income

 

47,969

 

165,078

 

119,624

 

87,658

 

57,621

 

Total non interest expenses

 

117,663

 

126,745

 

122,321

 

126,323

 

121,485

 

Income before income tax expense

 

40,498

 

183,945

 

144,197

 

98,433

 

66,024

 

Income tax expense

 

15,075

 

64,606

 

50,048

 

33,680

 

23,893

 

Net income

 

25,423

 

119,339

 

94,149

 

64,753

 

42,131

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data - Traditional Bank(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

133,948

 

$

137,486

 

$

135,121

 

$

140,784

 

$

154,138

 

Total interest expense

 

21,392

 

22,655

 

29,775

 

35,099

 

43,786

 

Net interest income

 

112,556

 

114,831

 

105,346

 

105,685

 

110,352

 

Provision for loan losses

 

3,828

 

8,167

 

6,406

 

11,571

 

15,885

 

Total non interest income

 

25,821

 

78,068

 

27,095

 

22,678

 

20,645

 

Total non interest expenses

 

98,064

 

100,380

 

87,389

 

90,968

 

92,513

 

Income before income tax expense

 

36,485

 

84,352

 

38,646

 

25,824

 

22,599

 

Income tax expense

 

12,557

 

29,178

 

12,183

 

7,929

 

7,237

 

Net income

 

23,928

 

55,174

 

26,463

 

17,895

 

15,362

 

 

(continued)

 

51



Table of Contents

 

Item 6.  Selected Financial Data. (continued)

 

 

 

As of and for the Years Ended December 31,

 

(in thousands, except per share data, FTEs and # of banking centers)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic average shares outstanding

 

20,807

 

20,959

 

20,945

 

20,877

 

20,749

 

Diluted average shares outstanding

 

20,904

 

21,028

 

20,993

 

20,960

 

20,884

 

End of period shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

18,541

 

18,694

 

18,652

 

18,628

 

18,499

 

Class B Common Stock

 

2,260

 

2,271

 

2,300

 

2,307

 

2,309

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.23

 

$

5.71

 

$

4.50

 

$

3.11

 

$

2.04

 

Class B Common Stock

 

1.17

 

5.55

 

4.45

 

3.06

 

1.99

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.22

 

$

5.69

 

$

4.49

 

$

3.10

 

$

2.02

 

Class B Common Stock

 

1.16

 

5.53

 

4.44

 

3.04

 

1.98

 

Cash dividends declared per share:

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.693

 

$

1.749

 

$

0.605

 

$

0.561

 

$

0.517

 

Class B Common Stock

 

0.630

 

1.590

 

0.550

 

0.510

 

0.470

 

 

 

 

 

 

 

 

 

 

 

 

 

Market value per share at December 31,

 

$

24.54

 

$

21.13

 

$

22.90

 

$

23.75

 

$

20.60

 

Book value per share at December 31,

 

26.09

 

25.60

 

21.59

 

17.74

 

15.19

 

Tangible book value per share at December 31,(2)

 

25.35

 

24.86

 

20.81

 

16.88

 

14.28

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (ROA)

 

0.75

%

3.35

%

2.76

%

1.85

%

1.23

%

Return on average equity (ROE)

 

4.65

%

22.51

%

21.42

%

17.92

%

13.77

%

Efficiency ratio(3)

 

73

%

39

%

43

%

52

%

53

%

Yield on average interest-earning assets

 

4.14

%

5.50

%

6.02

%

5.74

%

6.54

%

Cost of average interest-bearing liabilities

 

0.93

%

0.97

%

1.25

%

1.37

%

1.82

%

Net interest spread

 

3.21

%

4.53

%

4.77

%

4.37

%

4.72

%

Net interest margin - Total Company

 

3.48

%

4.82

%

5.09

%

4.65

%

5.04

%

Net interest margin - Traditional Banking Segment

 

3.51

%

3.64

%

3.55

%

3.57

%

3.79

%

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average stockholders’ equity to average total assets

 

16.15

%

14.89

%

12.87

%

10.31

%

8.95

%

Total risk based capital - Total Company

 

26.71

%

25.28

%

24.74

%

22.04

%

18.37

%

Tier 1 risk based capital - Total Company

 

25.67

%

24.31

%

23.59

%

20.89

%

17.25

%

Tier 1 leverage capital - Total Company

 

16.81

%

16.36

%

14.77

%

12.05

%

10.52

%

Dividend payout ratio

 

56

%

31

%

13

%

18

%

25

%

Dividend yield

 

2.82

 

8.28

 

2.64

 

2.36

 

2.51

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period end full time equivalent employees - Total Company

 

736

 

797

 

710

 

744

 

735

 

Number of banking centers

 

45

 

44

 

43

 

43

 

44

 

 

(continued)

 

52



Table of Contents

 

Item 6.  Selected Financial Data. (continued)

 

 

 

As of and for the Years Ended December 31,

 

(in thousands, except per share data, FTEs and # of banking centers)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Data - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans on non-accrual status

 

$

19,104

 

$

18,506

 

$

23,306

 

$

28,317

 

$

43,136

 

Loans past due 90-days-or-more and still on accrual

 

1,974

 

3,173

 

 

 

8

 

Total non-performing loans

 

21,078

 

21,679

 

23,306

 

28,317

 

43,144

 

Other real estate owned

 

17,102

 

26,203

 

10,956

 

11,969

 

4,772

 

Total non-performing assets

 

38,180

 

47,882

 

34,262

 

40,286

 

47,916

 

Total delinquent loans

 

16,223

 

20,844

 

24,433

 

26,927

 

44,854

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Data - Acquired Banks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans on non-accrual status

 

$

290

 

$

 

NA

 

NA

 

NA

 

Loans past due 90-days-or-more and still on accrual

 

1,974

 

3,173

 

NA

 

NA

 

NA

 

Total non-performing loans

 

2,264

 

3,173

 

NA

 

NA

 

NA

 

Other real estate owned

 

9,463

 

14,498

 

NA

 

NA

 

NA

 

Total non-performing assets

 

11,727

 

17,671

 

NA

 

NA

 

NA

 

Total delinquent loans

 

3,504

 

5,967

 

NA

 

NA

 

NA

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.81

%

0.82

%

1.02

%

1.30

%

1.90

%

Non-performing assets to total loans (including OREO)

 

1.46

%

1.79

%

1.49

%

1.84

%

2.11

%

Non-performing assets to total assets

 

1.13

%

1.41

%

1.00

%

1.11

%

1.22

%

Allowance for loan losses to total loans

 

0.89

%

0.90

%

1.05

%

1.06

%

1.01

%

Allowance and non-accretable yield to total GCLPR(4)

 

1.61

%

2.34

%

NA

 

NA

 

NA

 

Allowance for loan losses to non-performing loans

 

109

%

109

%

103

%

82

%

53

%

Delinquent loans to total loans(5)

 

0.63

%

0.79

%

1.07

%

1.24

%

1.98

%

Net loan charge offs to average loans

 

0.14

%

0.61

%

0.76

%

0.83

%

1.09

%

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Traditional Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.81

%

0.82

%

1.02

%

1.30

%

1.90

%

Non-performing assets to total loans (including OREO)

 

1.46

%

1.79

%

1.49

%

1.84

%

2.11

%

Non-performing assets to total assets

 

1.13

%

1.41

%

1.10

%

1.32

%

1.60

%

Allowance for loan losses to total loans

 

0.89

%

0.90

%

1.05

%

1.06

%

1.01

%

Allowance and non-accretable yield to total GCLPR(4)

 

1.61

%

2.34

%

NA

 

NA

 

NA

 

Allowance for loan losses to non-performing loans

 

109

%

109

%

103

%

82

%

53

%

Delinquent loans to total loans(5)

 

0.63

%

0.79

%

1.07

%

1.24

%

1.98

%

Net loan charge offs to average loans

 

0.18

%

0.34

%

0.24

%

0.51

%

0.34

%

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Traditional Bank Excluding Acquired Banks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.75

%

0.74

%

1.02

%

1.30

%

1.90

%

Non-performing assets to total loans (including OREO)

 

1.06

%

1.20

%

1.49

%

1.84

%

2.11

%

Non-performing assets to total assets

 

0.81

%

0.95

%

1.10

%

1.32

%

1.60

%

Allowance for loan losses to total loans

 

0.82

%

0.94

%

1.05

%

1.06

%

1.01

%

Allowance for loan losses to non-performing loans

 

109

%

127

%

103

%

82

%

53

%

Delinquent loans to total loans(5)

 

0.51

%

0.59

%

1.07

%

1.24

%

1.98

%

Net loan charge offs to average loans

 

0.20

%

0.35

%

0.24

%

0.51

%

0.34

%

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Acquired Banks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

2.35

%

2.29

%

NA

 

NA

 

NA

 

Non-performing assets to total loans (including OREO)

 

11.07

%

11.54

%

NA

 

NA

 

NA

 

Allowance for loan losses to total loans

 

2.59

%

0.15

%

NA

 

NA

 

NA

 

Allowance and non-accretable yield to total GCLPR(4)

 

18.04

%

21.77

%

NA

 

NA

 

NA

 

Allowance for loan losses to non-performing loans

 

110

%

7

%

NA

 

NA

 

NA

 

Delinquent loans to total loans(5)

 

3.63

%

4.30

%

NA

 

NA

 

NA

 

 

(continued)

 

53



Table of Contents

 

Item 6.  Selected Financial Data. (continued)

 


(1)         See Footnote 22 “Segment Information” under Part II Item 8 “Financial Statements and Supplemental Data” for additional information regarding the Company’s reporting segments.

 

(2)         The following table provides a reconciliation of total stockholders’ equity in accordance with U.S. generally accepted accounting principles (“GAAP”) to tangible stockholders’ equity in accordance with applicable regulatory requirements. The Company provides the tangible common equity ratio, in addition to those defined by banking regulators, because of its widespread use by investors as a means to evaluate capital adequacy.

 

(in thousands, except per share data)

 

Dec. 31, 2013

 

Dec. 31, 2012

 

Dec. 31, 2011

 

Dec. 31, 2010

 

Dec. 31, 2009

 

Total stockholders’ equity (a)

 

$

542,793

 

$

536,702

 

$

452,367

 

$

371,376

 

$

316,020

 

Less: Goodwill

 

10,168

 

10,168

 

10,168

 

10,168

 

10,168

 

Less: Core deposit intangible

 

 

510

 

58

 

117

 

196

 

Less: Mortgage servicing rights

 

5,409

 

4,777

 

6,087

 

7,800

 

8,430

 

Tangible stockholders’ equity (c)

 

$

527,216

 

$

521,247

 

$

436,054

 

$

353,291

 

$

297,226

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (b)

 

$

3,371,904

 

$

3,394,399

 

$

3,419,991

 

$

3,622,703

 

$

3,918,768

 

Less: Goodwill

 

10,168

 

10,168

 

10,168

 

10,168

 

10,168

 

Less: Core deposit intangible

 

 

510

 

58

 

117

 

196

 

Less: Mortgage servicing rights

 

5,409

 

4,777

 

6,087

 

7,800

 

8,430

 

Tangible assets (d)

 

$

3,356,327

 

$

3,378,944

 

$

3,403,678

 

$

3,604,618

 

$

3,899,974

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity to total assets (a/b)

 

16.10

%

15.81

%

13.23

%

10.25

%

8.06

%

Tangible stockholders’ equity to tangible assets (c/d)

 

15.71

%

15.43

%

12.81

%

9.80

%

7.62

%

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares outstanding (e)

 

20,801

 

20,965

 

20,952

 

20,935

 

20,808

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share (a/e)

 

$

26.09

 

$

25.60

 

$

21.59

 

$

17.74

 

$

15.19

 

Tangible book value per share (c/e)

 

25.35

 

24.86

 

20.81

 

16.88

 

14.28

 

 

(3)         The efficiency ratio equals total non-interest expense divided by the sum of net interest income and non-interest income. The ratio excludes net gain (loss) on sales, calls and impairment of investment securities.

 

(4)         The following tables reflect the calculation of the Allowance plus non-accretable yield on purchased, credit impaired loans as a percentage of total gross contractual loan principal receivable (“GCLPR”) for the applicable periods. While this ratio is not considered in accordance with GAAP, it provides additional insight regarding the Bank’s ability to absorb impairment of contractual loan principal receivable.

 

 

 

Total Company

 

Acquired Banks

 

(dollars n thousands)

 

Dec. 31, 2013

 

Dec. 31, 2012

 

Dec. 31, 2013

 

Dec. 31, 2012

 

Allowance

 

$

23,026

 

$

23,729

 

$

2,497

 

$

214

 

Non-accretable yield

 

19,078

 

39,264

 

19,078

 

39,264

 

Total (f)

 

$

42,104

 

$

62,993

 

$

21,575

 

$

39,478

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

2,589,792

 

$

2,650,197

 

$

96,462

 

$

138,616

 

Non-accretable yield

 

19,078

 

39,264

 

19,078

 

39,264

 

Accretable yield

 

4,050

 

3,465

 

4,050

 

3,465

 

Total GCLPR (g)

 

$

2,612,920

 

$

2,692,926

 

$

119,590

 

$

181,345

 

 

 

 

 

 

 

 

 

 

 

Allowance and non-accretable yield to total GCLPR (f/g)

 

1.61

%

2.34

%

18.04

%

21.77

%

 

(5)         The delinquent loans to total loans ratio equals total loans exceeding 30-days-or-more past due divided by total loans.

 

NA — Not Applicable

 

54



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Item 7.  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”) and Republic Bank (“RB”), (collectively referred together as the “Bank”). Republic Invest Co., a former subsidiary of RB&T, and its subsidiary, Republic Capital LLC, were dissolved in April 2013 in connection with the full repayment by RB&T of intragroup subordinated debentures issued by Republic Capital LLC in a 2004 intragroup trust preferred transaction. 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 II Item 8 “Financial Statements and Supplementary Data.”

 

On January 27, 2014, RB&T filed an application with the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”) to merge RB&T and RB, with RB&T, a Kentucky-based, state chartered non-member institution, being the resulting institution and continuing to operate under the name Republic Bank & Trust Company.

 

As used in this filing, 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: RB&T and RB.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, recession, acquisitions and integrations of acquired businesses, technological changes, changes in law and regulations or the interpretation and enforcement thereof, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required, as well as other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”) included under Part 1 Item 1A “Risk Factors.”

 

Broadly speaking, forward-looking statements include:

 

·                  projections of revenue, income, expenses, 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:

 

·                  loan delinquencies; non-performing, classified, or impaired loans; and troubled debt restructurings (“TDR”s);

·                  further developments in the Bank’s ongoing review of and efforts to resolve possible problem credit relationships, which could result in, among other things, additional provisions for loan losses;

·                  future credit quality, credit losses and the overall adequacy of the Allowance for Loan Losses (“Allowance”);

·                  potential write-downs of other real estate owned (“OREO”);

·                  future short-term and long-term interest rates and the respective impact on net interest income, net interest spread, net income, liquidity and capital;

·                  the future impact of Company strategies to mitigate interest rate risk;

·                  future long-term interest rates and their impact on the demand for Mortgage Banking products and warehouse lines of credit;

·                  the future value of mortgage servicing rights (“MSR”s);

·                  the future financial performance of the Tax Refund Solutions (“TRS”) division of Republic Processing Group (“RPG);

·                  future Refund Transfer (“RT”) volume for TRS;

·                  the future net revenues associated with RTs at TRS;

·                  the future financial performance of the Republic Payment Solutions (“RPS”) division of RPG;

·                  the future financial performance of the Republic Credit Solutions (“RCS”) division of RPG;

·                  the potential impairment of investment securities;

 

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·                  the extent to which regulations written and implemented by the Federal Bureau of Consumer Financial Protection (“CFPB”), and other federal, state and local governmental regulation of consumer lending and related financial products and services, may limit or prohibit the operation of the Company’s business;

·                  financial services reform and other current, pending or future legislation or regulation that could have a negative effect on the Company’s revenue and businesses: including but not limited to Basel III capital reforms; the Dodd-Frank Act; and legislation and regulation relating to overdraft fees (and changes to the Bank’s overdraft practices as a result thereof), debit card interchange fees, credit cards, and other bank services;

·                  the impact of new accounting pronouncements;

·                  legal and regulatory matters including results and consequences of regulatory guidance, litigation, administrative proceedings, rule-making, interpretations, actions and examinations;

·                  future capital expenditures;

·                  the strength of the U.S. economy in general and the strength of the local economies in which the Company conducts operations;

·                  the Bank’s ability to maintain current deposit and loan levels at current interest rates; and

·                  the Company’s ability to successfully implement strategic plans, including, but not limited to, those related to future business acquisitions, in general, and the two FDIC-assisted acquisitions in 2012.

 

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 1 “Business” and Part I Item 1A “Risk Factors.”

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

 

Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, accounting and regulatory guidance and independent third party professionals and on various assumptions that are believed to be reasonable. Actual results may differ from those estimates made by management.

 

Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.

 

Republic believes its critical accounting policies and estimates relate to:

 

·                  Allowance and Provision for Loan Losses

·                  Acquisition Accounting

·                  Goodwill and Other Intangible Assets

·                  Mortgage Servicing Rights

·                  Income Tax Accounting

·                  Investment Securities

·                  OREO

 

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Allowance and Provision for Loan Losses — The Bank maintains an allowance for probable incurred credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit Committee and the Board of Directors on a quarterly basis.

 

The Allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component is based on historical loss experience adjusted for qualitative factors.

 

A Bank-originated loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. A Purchased Credit Impaired (“PCI”) loan is considered impaired when, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial estimate.  Loans that meet the following classifications are considered impaired:

 

·                        All loans internally rated as “Substandard,” “Doubtful” or “Loss;”

·                        All loans internally rated in a PCI category with cash flows that have deteriorated from management’s initial estimate;

·                        All loans on non-accrual status and non-PCI loans past due 90 days-or-more still on accrual;

·                        All retail and commercial TDRs; and

·                        Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the definition of impaired.

 

The Bank’s classified and special mention loans are generally commercial and industrial (“C&I”) and commercial real estate (“CRE”) loans but also include large single family residential and home equity loans, as well as TDRs, whether retail or commercial in nature. The Bank reviews and monitors these loans on a regular basis. Generally, loans are designated as classified or special mention to ensure more frequent monitoring. These loans 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 or modified contractual terms, then the loan is generally downgraded and often placed on non-accrual status.

 

GAAP recognizes three methods to measure specific loan impairment, including:

 

·                  Cash Flow Method — The recorded investment in the loan is measured against the present value of expected future cash flows discounted at the loan’s effective interest rate. The Bank employs this method for a significant portion of its impaired TDRs. Impairment amounts under this method are reflected in the Bank’s Allowance as specific reserves on the respective impaired loan. These specific reserves are adjusted quarterly based upon reevaluation of the loan’s expected future cash flows and changes in the recorded investment in such loans.

 

·                  Collateral Method — The recorded investment in the loan is measured against the fair value of the loan’s collateral value less applicable selling costs. The Bank employs the fair value of collateral method for its impaired loans when the loan’s repayment is based solely on the sale of or the operations of the underlying collateral. Collateral fair value is typically based on the most recent real estate appraisal on file.  Measured impairment under this method is classified loss and charged off. The Bank’s selling costs for its collateral dependent loans typically range from 10-13% of the fair value of the underlying collateral, depending on the loan class. Selling costs are not applicable for collateral dependent loans whose repayment is based solely on the operations of the underlying collateral.

 

·                  Market Value Method — The recorded investment in the loan is measured against the loan’s obtainable market value. The Bank does not currently employ this technique, as it is typically found impractical.

 

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In addition to obtaining appraisals at the time of loan origination, the Bank typically updates appraisals and/or broker price opinions for loans with potential impairment. Updated valuations for commercial related loans exhibiting an increased risk of loss are typically obtained within one year of the last appraisal. Collateral values for past due residential mortgage loans and home equity loans are generally updated prior to a loan becoming 90 days delinquent, but no more than 180 days past due. When determining the amount of reserve, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons, the Bank discounts the valuation of the collateral primarily based on the age of the appraisal and the real estate market conditions of the location of the underlying collateral.

 

The general component of the Allowance covers loans collectively evaluated for impairment and is based on historical loss experience with potential adjustments for current relevant qualitative factors. The historical loss experience is determined by loan performance and class and is based on the actual loss history experienced by the Bank. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are included in the general component unless the loans are classified as TDRs.

 

In determining the historical loss rates for each respective loan class, management evaluates the following historical loss rate scenarios:

 

·                  Rolling four quarter average

·                  Rolling eight quarter average

·                  Rolling twelve quarter average

·                  Rolling sixteen quarter average

·                  Rolling twenty quarter average

·                  Current year to date historical loss factor average

·                  Peer group loss factors

 

For the Bank’s current Allowance methodology, management uses the higher of the rolling eight, twelve, or sixteen quarter averages for each loan class when determining its historical loss factors for its “Pass” rated and nonrated loans.

 

Loan classes are also evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those classes. Management assigns risk multiples to certain classes to account for qualitative factors such as:

 

·                  Changes in nature, volume and seasoning of the loan portfolio;

·                  Changes in experience, ability, and depth of lending management and other relevant staff;

·                  Changes in the quality of the Bank’s loan review program;

·      Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

·                  Changes in the volume and severity of past due, nonaccrual and classified loans;

·                  Changes in the value of underlying collateral for collateral-dependent loans;

·      Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the loan portfolio, including the condition of various market segments;

·                  The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

·      The effect of other external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the Bank’s existing portfolio.

 

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.

 

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Prior to January 1, 2012, the Bank’s Allowance calculation was supported with qualitative factors which included a nominal “unallocated” Allowance component totaling $2.0 million as of December 31, 2011. The Bank believed that historically the “unallocated” allowance properly reflected estimated credit losses determined in accordance with GAAP. The unallocated allowance was primarily related to RB&T’s loan portfolio, which is highly concentrated in the Kentucky and Southern Indiana real estate markets. These markets have remained relatively stable during the recent economic downturn, as compared to other parts of the U.S. With the Bank’s 2012 expansion, its plans to pursue future acquisitions into potentially new markets through FDIC-assisted transactions, and its offering of new loan products, such as mortgage warehouse lines of credit, the Bank revised its methodology to provide a more detailed calculation when estimating the impact of qualitative factors over the Bank’s various loan categories. This methodology change did not have a material impact on the Bank’s provision for loan losses for the year ended December 31, 2012.

 

In executing this methodology change, the Bank primarily focused on large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and are generally not included in the scope of Accounting Standards Codification (“ASC”) Topic 310-10-35, Accounting by Creditors for Impairment of a Loan.

 

The Bank performs two calculations at year end in order to confirm the reasonableness of its Allowance. In the first calculation, the Bank compares its beginning Allowance to the net charge offs for the most recent calendar year. The ratio of net charge offs to the beginning allowance indicates how adequately the allowance accommodated subsequent charge offs. Higher ratios suggest the beginning of year allowance may not have been large enough to absorb impending charge offs, while inordinately low ratios might indicate a bank was accumulating excessive allowances. The Bank’s net charge off ratio to the beginning Allowance was 19% at December 31, 2013, compared to 35% for December 31, 2012. The Bank’s five year annual average for this ratio was 36% as of December 31, 2013.

 

For the second calculation, the Bank assesses the Allowance exhaustion rate. Exhaustion rates indicate the time (expressed in years) taken to use the beginning of year Allowance in the form of actual charge offs. The Bank believes an exhaustion rate that indicates a reasonable Allowance is between two and four years. The Bank’s allowance exhaustion rate at December 31, 2013 and 2012 was 3.0 years and 2.8 years compared to the five year annual average of 2.5 years.

 

Based on management’s calculation, an Allowance of $23 million, or 0.89%, of total loans was an adequate estimate of probable incurred losses within the loan portfolio as of December 31, 2013 compared to $24 million, or 0.90%, at December 31, 2012. This estimate resulted in Traditional Bank provision for loan losses of $3.8 million during 2013 compared to $8.2 million in 2012. If the mix and amount of future charge off percentages differ significantly from those assumptions used by management in making its determination, an adjustment to the Allowance and the resulting effect on the income statement could be material.

 

The Bank did not carryover any Allowance for loans acquired in its 2012 FDIC-assisted acquisitions. Such loans were recorded at fair value as of the acquisition date, and subsequent to the acquisition date receive allowance allocations based on circumstances and events that occur after the date of acquisition as further discussed below under “Acquisition Accounting” in this section of the filing.

 

Acquisition Accounting — The Bank accounts for its acquisitions in accordance with the acquisition method as outlined in ASC Topic 805, Business Combinations. The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any noncontrolling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.

 

Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in acquirees are generally recognized at their acquisition date (“day-one”) fair values based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, these recast adjustments for loans and other real estate owned may be made, as market value data, such as appraisals, are received by the bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.

 

Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.

 

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Loans purchased in an acquisition are accounted for using one of the following accounting standards:

 

·                  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 loan’s day-one fair value and amortized cost would be amortized or accreted into income using the interest method.

 

·                  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, or 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.

 

Purchased Loans (ASC Topic 310-20) — Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are considered in the determination of the Allowance once day-one fair values are final.

 

Purchased Credit Impaired Loans (ASC Topic 310-30) — In determining the day-one fair values of PCI loans, management considers a number of factors including, among other things, the estimated 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. For the Company’s 2012 FDIC-assisted acquisitions, RB&T elected to account for PCI loans individually, as opposed to aggregating the loans into pools based on common risk characteristics such as loan type.

 

Management separately monitors the PCI portfolio and on a quarterly basis 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, estimated life, the status of the borrower, or the quality or value of the underlying collateral.

 

To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified in the Purchased Credit Impaired - Group 1 (“PCI-1”) category; whose credit risk is considered equivalent to a non-PCI “Special Mention” loan within the Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial estimate. Provisions for loan losses are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified PCI-Substandard (“PCI-Sub”) within the Bank’s credit risk matrix.  Management deems the risk of default and overall credit risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI “Substandard” loan. PCI-Sub loans are considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

PCI loans may be contractually past due 80 days-or-more and continue to accrue interest if future cash flows can be reasonably projected to allow continuation of discount accretion.

 

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If a troubled debt restructuring is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting standards and transferred out of the PCI population. The loan may require an additional provision for loan losses if its restructured cash flows are less than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity date are generally not considered TDRs and remain in the PCI population.

 

See additional discussion regarding the Company’s 2012 FDIC-assisted acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Goodwill and Other Intangible Assets — Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.

 

The Company has selected September 30th as the date to perform its annual goodwill impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.

 

Based on its assessment, the Company believes its goodwill of $10 million was not impaired and is properly recorded in the consolidated financial statements as of December 31, 2013 and 2012.

 

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from bank acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which can range from two to ten years. During 2013, the Company amortized all $510,000 in other intangible assets held as of December 31, 2012.

 

Mortgage Servicing Rights — MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs that the Bank expects to receive on loans sold with servicing retained by the Bank. 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 on 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 Bank. 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 MSR asset, net of amortization, recorded at both December 31, 2013 and 2012 was $5 million.

 

The carrying value of the MSRs asset is reviewed at least quarterly 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, which is significantly influenced by market interest rates.  During a period of declining interest rates, the fair value of the MSRs would generally be expected to decline due to anticipated prepayments within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs would generally be 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. Based on the estimated fair value at December 31, 2013, management believes there was no impairment in the MSR portfolio as of year-end 2013.

 

Income Tax Accounting — Income tax liabilities or assets are established for the amount of taxes payable or refundable for the current year. Deferred tax liabilities and assets are also established for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and deductions that can be carried forward (used) in future years. The valuation of current and deferred tax liabilities and assets is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax liabilities and assets involves the use of estimates, assumptions, interpretations and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. The Company believes its tax assets and liabilities are adequate and are properly recorded in the consolidated financial statements at December 31, 2013 and 2012.

 

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The Company’s RPG segment recorded additional income tax expense of $1.1 million for the fourth quarter of 2013 primarily related to additional ASC 740-10, Accounting for Uncertainty in Income Taxes, accruals recorded for possible state income tax payments beyond the Company’s original estimates related to the tax years 2010 through 2013.  The Company attributed the increased state income taxes to the RPG segment, as RPG generated the substantial majority of the Company’s state income tax exposure outside of its geographic footprint during the tax years noted.

 

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

 

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

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

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

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

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

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

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

·                  Any rating changes by a rating agency; and

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

 

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

 

See additional discussion regarding impairment charges that the Bank recorded during 2011 under Footnote 3 “Investment Securities” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Other Real Estate Owned — Assets acquired through loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. The Bank’s selling costs for OREO typically range from 10-13% of each property’s fair value, depending on property class. Fair value is commonly based on recent real estate appraisals or broker price opinions. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

 

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Once the appraisal is received, a member of the Bank’s Credit Administration Department (“CAD”) reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On an annual basis, the Bank compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment, if any, should be made to the appraisal value to arrive at an estimated fair value.

 

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OVERVIEW

 

Net income for 2013 was $25.4 million, representing a decrease of $93.9 million compared to the same period in 2012. Diluted earnings per Class A Common Share decreased to $1.22 for 2013 compared to $5.69 for the same period in 2012.

 

Traditional Banking

 

FDIC-Assisted Acquisitions

 

Within the Company’s Traditional Banking segment, comparability of net income for 2013 to the same period in 2012 was significantly impacted by $55.4 million in prior year pre-tax bargain purchase gains recorded from the acquisitions of Tennessee Commerce Bank (“TCB”) and First Commercial Bank (“FCB”) in FDIC-assisted transactions. The Company made no FDIC-assisted acquisitions during 2013.

 

Opportunities for FDIC-assisted transactions that fit within the Company’s strategic plan declined in 2013 and are expected to decline further in the future. As a result of the decline in FDIC-assisted acquisition opportunities, management believes that the pricing for the transactions that do become available will be less favorable, as competition increases for these limited opportunities.

 

Minnesota Banking Center

 

In October 2013, Republic gave the required 90-day regulatory notice of its intentions to close its sole banking center location in Minneapolis, Minnesota, which it acquired as part of the FCB acquisition in September 2012. The Bank is currently under a lease for this location which is set to expire in April 2015. The location will remain a support office until the expiration of the Bank’s lease of the facility or until such time the Bank is able to negotiate with the landlord a buy-out of its future lease obligations. The banking center stopped transacting business at the Minnesota location with deposit customers on January 10, 2014.

 

Florida Banking Center

 

In October 2013, Republic gave the required 90-day regulatory notice of its intentions to close its sole banking center in Palm Harbor, Florida. This location closed on January 17, 2014, while the lease for the premises expired in February 2014.

 

Lexington Banking Center

 

In November 2013, Republic gave the required 90-day regulatory notice of its intentions to close its Perimeter banking center in Lexington, KY. This location closed on February 28, 2014 with the lease for the premises expiring in June 2014.

 

Reduction in Force (“RIF”)

 

With sharp increases in long-term interest rates during 2013 leading to an industry-wide decline in consumer demand for retail mortgages coupled with a demographic trend towards less “brick and mortar” banking, the Traditional Bank implemented a modest RIF during the fourth quarter of 2013 to lower its overhead cost structure.  As a result of the RIF, the Traditional Bank incurred severance expense during the fourth quarter of 2013 of approximately $150,000.  Primarily as a result of the RIF, the Traditional Bank’s total full time equivalent employees (“FTE’s”) decreased from 742 at September 30, 2013 to 675 at December 31, 2013.  The Traditional Bank’s FTEs were 729 at December 31, 2012.

 

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Consumer Mortgage Regulation

 

On January 10, 2013, the CFPB issued a final rule implementing the ability to repay (“ATR”) requirement in the Dodd-Frank Act. The rule, among other things, requires lenders to consider a consumer’s ability to repay a mortgage loan before extending credit to the consumer and limits prepayment penalties. The rule also establishes certain protections from liability for mortgage lenders with regard to qualified mortgages (“QM”s) they originate. For this purpose, the rule defines QMs to include loans with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) while they operate under Federal conservatorship or receivership, and loans eligible for insurance or guarantee by the Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture. QMs may not: (i) contain excess up-front points and fees; (ii) have a term greater than 30 years; or (iii) include interest-only or negative amortization payments. The rule was effective January 10, 2014. While the Company does not anticipate the rule will have a material impact on mortgage operations, management will not fully know the result of this regulation on the mortgage operations or the banking industry as a whole until later in 2014.

 

On January 17, 2013, the CFPB issued a series of final rules as part of an ongoing effort to address mortgage servicing reforms and create uniform standards for the mortgage servicing industry. The rules increase requirements for communications with borrowers, address requirements around the maintenance of customer account records, govern procedural requirements for responding to written borrower requests and complaints of errors, and provide guidance around servicing of delinquent loans, foreclosure proceedings and loss mitigation efforts, among other measures. These rules were also effective January 10, 2014 and will likely lead to increased costs to service loans across the mortgage industry. The Company does not believe these new rules will have a significant impact on its ability to originate new loans.

 

Republic Processing Group

 

The Company’s Republic Processing Group (“RPG”) segment recorded a net loss of $1.4 million for 2013, a decline of $62.3 million from the same period in 2012. RPG net income was significantly impacted by the previously disclosed elimination of the RAL product and the termination of RB&T’s contracts with JTH Tax Inc. d/b/a Liberty Tax Service (“Liberty”) and Jackson Hewitt Inc. (“JHI”) during the third quarter of 2012.  The RAL product, eliminated effective April 30, 2012, generated $45.2 million in interest income during 2012.  The Company’s ability to offer RALs gave it a competitive advantage in attracting relationships with tax preparation companies that also generated significant RT product volume. With the elimination of RALs and the termination of the Liberty and JHI contracts during the third quarter of 2012, both the volume and the Company’s share of the revenue for the RT product were significantly reduced in 2013. Net RT fees for 2013 were $13.9 million, a decrease of $64.4 million, or 82%, from the same period in 2012.

 

RPG’s profitability during 2013 was also negatively impacted by higher than normal legal related expenses, which were primarily associated with the Company’s unsuccessful attempt to acquire H&R Block Bank (“HRBB”) and its contract disputes with JHI and Liberty.  In total, RPG incurred approximately $3.0 million in expenses during 2013 associated with these three matters.

 

The TRS division of RPG derives substantially all of its revenues during the first and second quarters of the year and historically operates at a net loss during the second half of the year, as the Company prepares for the upcoming tax season.

 

H&R Block and H&R Block Bank

 

RB&T entered into a Purchase and Assumption Agreement (the “P&A Agreement”) July 11, 2013, with HRBB and its sole shareholder Block Financial LLC (collectively, “H&R Block”). Pursuant to the P&A Agreement, RB&T was to acquire certain assets and assume certain liabilities, including all of the deposits of HRBB (the “P&A Transaction”).

 

On July 15, 2013, RB&T submitted an application for approval of the P&A Transaction to the Office of the Comptroller of the Currency (“OCC”) for consideration in conjunction with RB&T’s pending application from May 2013 for approval of an internal merger of RB&T and its affiliate, RB, which would include RB&T’s conversion to a national bank.

 

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On October 8, 2013, RB&T notified HRBB that RB&T was withdrawing its pending applications with the OCC to merge and consolidate its RB&T and RB charters into one national bank charter and to consummate the P&A Transaction. As a result, H&R Block terminated the P&A Agreement with RB&T and the parties terminated discussions regarding the Joint Marketing Master Services Agreement and related Receivables Participation Agreement.  In total, RPG incurred $717,000 in legal expenses associated with the P&A Agreement.  The Company does not anticipate there will be any additional costs associated with the P&A Agreement going forward.

 

Jackson Hewitt Inc.

 

RB&T’s third party arbitration with JHI was concluded during the fourth quarter of 2013. Legal related expenses associated with the arbitration totaled $2.2 million for 2013, with $1.4 million of those expenses being incurred during the fourth quarter of 2013. The Company does not anticipate any additional future legal expense associated with this matter. With the matter resolved, RB&T entered into a new two-year agreement with JHI pursuant to which it began processing refunds for JHI clients in January 2014.  The contract is expected to increase RPG’s annual net revenue by approximately 12% per year above its 2013 net revenue level.  Additional overhead expenses with the new contract are expected to be minimal.

 

Liberty Tax Services

 

RB&T’s contract dispute with Liberty was resolved during January 2014 with a nominal amount of related legal expense during 2013. The Company does not anticipate any additional future legal expense associated with this matter. With the matter resolved, RB&T entered into a new two-year agreement with Liberty in which it will begin processing refunds for Liberty clients in January 2015.  Beginning with the first quarter 2015 tax season, the contract is expected to increase RPG’s annual net revenues for the two year term of the contract by an average of approximately 16% over its 2013 net revenue level.  Additional overhead expenses with the new contract are expected to be immaterial.

 

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The following table summarizes Republic’s financial performance for the years ended December 31, 2013, 2012 and 2011.

 

Table 1 — Summary

 

Year Ended December 31, (in thousands, except per share data)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net income

 

$

25,423

 

$

119,339

 

$

94,149

 

Diluted earnings per Class A Common Stock

 

1.22

 

5.69

 

4.49

 

Return on average assets (ROA)

 

0.75

%

3.35

%

2.76

%

Return on average equity (ROE)

 

4.65

%

22.51

%

21.42

%

 

Additional discussion follows in this section of the filing under “Results of Operations.”

 

General highlights by segment for the year ended December 31, 2013 consisted of the following:

 

Traditional Banking segment

 

·                  Net income decreased $31.2 million for 2013 compared to 2012. The decrease was driven by the previously mentioned pre-tax $55.4 million from pre-tax bargain purchase gains recorded in 2012 for two FDIC-assisted acquisitions.

 

·                  Net interest income decreased $2.3 million, or 2%, for 2013 to $112.6 million. The Traditional Banking segment net interest margin decreased 13 basis points for 2013 to 3.51%.

 

·                  Provision for loan losses was $3.8 million for 2013 compared to $8.2 million for 2012.

 

·                  Total non-interest income decreased $52.2 million for 2013 compared to 2012 primarily due to the pre-tax bargain purchase gains detailed above.

 

·                  Total non-interest expense decreased $2.3 million, or 2%, during 2013 compared to 2012.

 

·                  Total non-performing loans to total loans for the Traditional Banking segment was 0.81% at December 31, 2013, compared to 0.82% at December 31, 2012.

 

·                  Total delinquent loans to total loans for the Traditional Banking segment was 0.63% at December 31, 2013, compared to 0.79% at December 31, 2012.

 

·                  RB&T’s Mortgage Warehouse Lending portfolio had $150 million in loans outstanding at December 31, 2013 compared to $217 million at December 31, 2012.

 

·                  Gross Traditional Bank loans declined by $64 million, or 2% during 2013.

 

·                  Traditional Bank deposits grew by $7 million, or less than 1% during 2013.

 

Mortgage Banking segment

 

·                  Within the Mortgage Banking segment, mortgage banking income decreased $1.2 million, or 14%, during 2013 compared to the same period in 2012.

 

·                  While the Bank benefitted from a $0 closing cost promotion initiated at the beginning of 2013 and favorable long-term rates for the first five months of 2013, significant increases in these rates in late May 2013 negatively impacted new loan application volume. The rise in interest rates is expected to continue to negatively impact future loan application volume beyond 2013.

 

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Republic Processing Group segment

 

·                  The total dollar volume of tax refunds processed during 2013 decreased $7.0 billion, or 66%, from 2012.

 

·                  RPG incurred a net loss of $1.4 million in 2013 compared to $60.9 million in net income in 2012.

 

·                  With RB&T’s resolution of its differences with the FDIC through a Stipulation Agreement and Consent Order (collectively, the “Agreement”), RB&T discontinued RALs effective April 30, 2012. Total RAL dollar volume was $796 million during the 2012 tax season. Total interest income on the RAL product was $45.2 million during the 2012 tax season.

 

·                  RPG recorded a net recovery to its provision for loan losses of $845,000 for 2013, compared to a $6.9 million charge for the same period in 2012.

 

·                  RPG posted non-interest income of $14.8 million for 2013 compared to $78.5 million for the same period in 2012.

 

·                  Liberty and JHI unilaterally terminated their contracts with RPG’s TRS division during the third quarter of 2012 and as a result, Republic processed no business during 2013 from either of these tax service providers. On a combined basis, these contracts represented approximately 53% of the Company’s 2012 RT volume.

 

·                  The TRS division recorded $3.0 million in expenses during 2013 in connection with its contractual disputes with Liberty and JHI and its unsuccessful attempt to acquire H&R Block Bank.

 

General highlights by segment for the year ended December 31, 2012 consisted of the following:

 

Traditional Banking segment

 

·                  Net income increased $28.7 million for 2012 compared to 2011.

 

·                  On January 27, 2012, RB&T acquired loans and deposits of TCB from the FDIC with a fair value of $57 million and $947 million, resulting in a pre-tax bargain purchase gain of $27.6 million, primarily recorded during the first quarter of 2012.

 

·                  On September 7, 2012, RB&T acquired loans and deposits of FCB from the FDIC with a fair value of $128 million and $196 million, resulting in a pre-tax bargain purchase gain of $27.8 million, primarily recorded during the third quarter of 2012.

 

·                  As projected, approximately $905 million and $126 million of the deposit liabilities assumed in the TCB and FCB acquisitions exited RB&T by December 31, 2012 due to the strategic reduction in the interest rates paid on deposits.

 

·                  Net interest income increased $9.5 million, or 9%, for 2012 to $114.8 million. The Traditional Banking segment net interest margin increased nine basis points for 2012 to 3.64%.

 

·                  Provision for loan losses was $8.2 million for 2012 compared to $6.4 million for 2011.

 

·                  Total non-interest income increased $51.0 million for 2012 compared to 2011 primarily due to the pre-tax bargain purchase gains detailed above.

 

·                  Total non-interest expense increased $13.0 million, or 15%, during 2012 compared to 2011.

 

·                  Total non-performing loans to total loans for the Traditional Banking segment was 0.82% at December 31, 2012, compared to 1.02% at December 31, 2011.

 

·                  RB&T’s Warehouse Lending portfolio had $217 million in loans outstanding at December 31, 2012 compared to $41 million at December 31, 2011.

 

·                  Gross Traditional Bank loans grew by $365 million, or 16% during 2012, with $139 million attributable to the Company’s 2012 FDIC-assisted acquisitions.

 

·                  Traditional Bank deposits grew by $249 million, or 14% during 2012, with $112 million attributable to the Company’s 2012 FDIC-assisted acquisitions

 

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Mortgage Banking segment

 

·                  Within the Mortgage Banking segment, mortgage banking income increased $4.5 million, or 117%, during 2012 compared to 2011.

 

·                  Mortgage banking income was positively impacted by a significant increase in secondary market loan volume during 2012.

 

Republic Processing Group segment

 

·                  The total dollar volume of tax refunds processed during 2012 decreased $1.1 billion, or 9%, from 2011.

 

·                  Total RAL dollar volume decreased from $1.0 billion during 2011 to $796 million during 2012.

 

·                  Total RT dollar volume declined $814 million, or 8%, during 2012 compared to 2011.

 

·                  RPG net income decreased $6.5 million, or 10%, for 2012 compared to the same period in 2011.

 

·                  Net interest income decreased $13.7 million, or 23%, for 2012 compared to 2011.

 

·                  RPG recorded a provision for loan losses of $6.9 million for 2012, compared to $11.6 million for 2011.

 

·                  RPG posted non-interest income of $78.5 million for 2012 compared to $88.6 million for 2011.

 

·                  RB&T obtained $300 million of Federal Home Loan Bank (“FHLB”) advances during the fourth quarter of 2011 to fund projected RAL volume during the first quarter 2012 tax season. In addition, during the first quarter of 2012, RB&T obtained $252 million of brokered deposits to complete its required funding for the first quarter 2012 tax season.

 

·                  RPG posted non-interest expenses of $22.5 million for 2012 compared to $31.1 million for 2011.

 

·                  RB&T permanently discontinued the offering of its RAL product effective April 30, 2012.

 

·                  Liberty and JHI Service unilaterally terminated their contracts with TRS during the third quarter of 2012.

 

RESULTS OF OPERATIONS

 

Net Interest Income

 

Banking operations are significantly dependent upon 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, securities sold under agreements to repurchase and FHLB advances. 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.

 

Discussion of 2013 vs. 2012

 

Total Company net interest income decreased $47.5 million, or 30%, for 2013 compared to 2012. The total Company net interest margin decreased 134 basis points to 3.48% for 2013, with the decrease primarily attributable to the elimination of the RAL product, effective April 30, 2012. The significant components comprising the total Company decrease in net interest income were as follows:

 

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Traditional Banking segment

 

Net interest income within the Traditional Banking segment decreased $2.3 million, or 2%, for 2013 compared to 2012. The Traditional Banking net interest margin was 3.51% for 2013, a decrease of 13 basis points from 2012. The decrease in the Traditional Bank’s net interest income and net interest margin during 2013 was primarily attributable to the following factors:

 

·                  The Traditional Banking segment continued to experience downward repricing in its loan and investment portfolios during 2013 resulting from ongoing paydowns and early payoffs within its loan and investment portfolios. As a result, the yield in both the loan and investment portfolios of the Bank declined from 2012 to 2013.

 

·                  Traditional Bank loans experienced yield compression of 19 basis points from 2012 to 2013. Average loans outstanding were $2.47 billion with a weighted average yield of 5.06% during 2012 compared to $2.55 billion with a weighted average yield of 4.88% during 2013.

 

·                  Traditional Bank taxable investment securities experienced yield compression of 18 basis points from 2012 to 2013. Average taxable investment securities outstanding were $641 million with a weighted average yield of 1.94% during 2012 compared to $528 million with a weighted average yield of 1.76% during 2013.

 

·                  Partially offsetting the margin compression resulting from the declining yields within the interest-earning asset categories were the following factors:

 

·                  Average loans outstanding for the Mortgage Warehouse Loan portfolio increased by $32 million from 2012 to 2013. Average loans outstanding were $100 million during 2012 with a weighted-average yield of 4.43% as compared to average loans outstanding of $132 million during 2013 with a weighted-average yield of 4.50%.  As a result, interest income on Warehouse lines of credit increased $1.5 million during 2013 compared to the same period in 2012. These loans are revolving lines of credit with a term of 364 days, contain interest rate floors and adjust monthly with one-month LIBOR.

 

·                  The Traditional Bank’s percentage of average loans to average interest-earning assets increased from 78% in 2012 to 79% in 2013.

 

·                  The Bank accreted $2.3 million into interest income on loans during 2013 from discounts related to its acquired TCB loan portfolio compared to $836,000 in 2012.

 

·                  The Bank accreted $4.0 million into interest income on loans during 2013 from discounts related to its FCB loan portfolio compared to $329,000 for the same period in 2012, as the acquisition occurred near the end of the third quarter of 2012.

 

The total discount accretion of $6.3 million during 2013 that resulted from the TCB and FCB acquisitions positively impacted the Company’s net interest margin by 20 basis points, while the overall operations of the acquisitions contributed $12.3 million in net interest income and added 25 basis points to the net interest margin.  Management projects accretion of loan discounts related to the 2012 FDIC-assisted acquisitions to be approximately $1.6 million for 2014. The accretion estimate for 2014 could be positively impacted by positive workout arrangements in which RB&T receives loan payoffs for amounts greater than the loans’ respective carrying values.

 

The downward repricing of interest-earning assets is expected to continue to cause compression in Republic’s net interest income and net interest margin in the future. Because the Federal Funds Target Rate (“FFTR”), the index which many of the Bank’s short-term deposit rates track, has remained at a target range between 0.00% and 0.25%, no future FFTR decreases from the Federal Open Market Committee of the Federal Reserve Bank (“FRB”) are possible, exacerbating the compression to the Bank’s net interest income and net interest-bearing margin caused by its repricing loans and investments.  In addition, the Bank’s period end balances of loans outstanding at December 31, 2013 were only $18 million higher than its average loan balances for 2013,  presenting a significant challenge for the Bank to increase its average 2014 loan balances significantly above its 2013 average loan balances.  A likely decrease in average loan balances during 2014, in combination with the additional anticipated downward repricing of the Bank’s interest-earning assets, will likely lead to a further decline in the Bank’s net interest income and net interest margin for 2014.

 

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In addition to the margin compression challenges noted above, the Bank also faces margin compression challenges associated with the on-going management of its interest rate risk position. To combat the continued downward repricing in the Bank’s loan and investment portfolios during 2013, a primary strategy for the Bank included the origination of loans with longer repricing durations than the Bank has traditionally originated and retained within its portfolio. Overall, the Bank originated and retained within its loan portfolio $230 million of fixed rate loans during 2013 with maturities of 10 to 15 years and hedged a portion of these long-term assets with $70 million in FHLB advances at a weighted-average rate of 1.61% and a weighted average life of approximately seven years.

 

This strategy of extending the repricing duration of the Bank’s loans to mitigate the negative repricing trends within its interest-earning assets negatively affected the Bank’s ability to maintain its interest rate risk position within its board-approved policy limits for its economic value of equity (“EVE”) calculation. The EVE represents the difference between the net present value of the Bank’s interest-earning assets and interest bearing liabilities at a point in time. While the Bank’s primary interest rate risk management tool is its earnings simulation model, as presented in the section titled “Asset/Liability Management and Market Risk”, the board has also established policy limits for acceptable changes in the Bank’s EVE based on certain projected changes in market interest rates.

 

The Bank exceeded the Board’s approved policy limits during the fourth quarter of 2013 related to changes in its EVE for certain assumed changes in market interest rates. To bring its EVE calculation within board-approved policy limits, the Bank borrowed $20 million of long-term FHLB advances with a weighted average life of five years and a weighted average cost of 1.76%.  Also, during the fourth quarter of 2013, the Bank executed two long-term interest rate swaps with notional amounts of $20 million to hedge its cash flows associated with certain immediately repricing liabilities.  While these transactions did help improve the Bank’s EVE interest rate risk position in a rising interest rate environment, they did negatively impact the Bank’s current earnings.

 

The Bank is unable to determine the ultimate negative impact to the Bank’s net interest spread and margin in the future from all of the matters discussed above because several factors remain unknown, including, but not limited to, the future demand for the Bank’s financial products and its overall future liquidity needs, among many other factors.

 

See additional discussion regarding the Bank’s interest rate swaps under Footnote 7 “Interest Rate Swaps” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Republic Processing Group segment

 

Net interest income within the RPG segment decreased $45.3 million for 2013 compared to the same period in 2012. As previously discussed in this document, the decrease in net interest income at RPG was the result of the Company’s discontinuation of the RAL product effective April 30, 2012.

 

For additional information on the potential future effect of changes in short-term interest rates on Republic’s net interest income, see the table titled “Interest Rate Sensitivity for 2013” under “Financial Condition.”

 

Discussion of 2012 vs. 2011

 

Total Company net interest income decreased $4.2 million, or 3%, for 2012 compared to 2011. The total Company net interest margin decreased 27 basis points to 4.82% for 2012. The significant components comprising the total Company decrease in net interest income were as follows:

 

Traditional Banking segment

 

Net interest income within the Traditional Banking segment increased $9.5 million, or 9%, for 2012 compared to 2011. The Traditional Banking net interest margin increased nine basis points for the same period to 3.64%. The increase in net interest income during 2012 was directly attributable to an increase in the average balance of loans outstanding. Five distinguishable drivers occurred in 2012 that positively impacted the size of the loan portfolio and correspondingly provided a positive impact to net interest income.

 

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The first of these drivers occurred in June 2011 when the Bank purchased approximately $37 million of performing CRE loans at a 13% discount. The Bank made this purchase as one of its strategies to reverse an on-going contraction in its net interest margin. At the time of purchase, these loans had a weighted average life of approximately seven years with an expected yield of 8.28%.

 

Secondly, the Bank began offering its Mortgage Warehouse Lending product during June of 2011. During 2012, the Mortgage Warehouse Lending portfolio had average loans outstanding of $100 million achieving an average yield of 4.43%.

 

The third driver occurred in 2012 when RB&T acquired TCB. As part of the acquisition, RB&T acquired loans, net of loans put back to the FDIC, with a fair value of approximately $57 million and an initial projected effective yield of 7.94%.

 

The fourth driver related to the average balance of the Bank’s residential real estate loans, which increased $171 million in 2012 compared to 2011 due primarily to growth in the Bank’s Home Equity Amortizing Loan (“HEAL”) product.

 

Lastly, the fifth driver occurred in September 2012 when RB&T acquired FCB. As part of the FCB acquisition, the Bank acquired loans with a fair value of approximately $128 million and an initial projected effective yield of 7.36%.

 

Within the liabilities section of the balance sheet, the Bank continued to reprice its interest-bearing deposits lower to partially offset declining asset yields in 2012. In addition, due to the steepness of the yield curve and the FRB’s pledge to keep the FFTR low for an extended period of time, the Bank prepaid $81 million in FHLB advances during the first quarter of 2012 that were originally scheduled to mature between October 2012 and May 2013. These advances had a weighted average cost of 3.56%. The Bank incurred a $2.4 million early termination penalty in connection with these prepayments, which will save the Bank approximately $2.6 million in interest expense during the period from April 2012 through the first five months of 2013.

 

In addition, the Bank took advantage of declining interest rates during 2012 to borrow $195 million of long-term advances with a weighted average life of five years and a weighted average cost of 1.37%. The Bank borrowed these funds on a long-term basis to mitigate its interest rate risk position in the event of an increasing rate environment.

 

Republic Processing Group segment

 

Net interest income for RPG decreased $13.7 million, or 23%, for 2012 compared to 2011. The decrease in net interest income was primarily due to a $13.9 million, or 23%, decline in RAL fee income resulting from a corresponding 23% decrease in RAL volume. The overall decline in the volume of RALs originated during 2012 resulted from a general decrease in consumer demand for the product. Management believes the decrease in RAL volume, which is generated through retail locations, was the result of a shift in consumer demand toward lower priced on-line tax preparation services and increased competition within the retail market based on free products and services from competitors.

 

RPG’s net interest income continued to benefit from low funding costs during 2012. Average interest-bearing liabilities utilized to fund RALs during 2012 and 2011 were $107 million and $141 million with a weighted average cost of 0.19% and 0.43%. As a result, interest expense was $149,000 for 2012, compared to $480,000 for 2011.

 

Table 2 provides detailed Total Company average balances, interest income/expense and rates by each major balance sheet category for the years ended December 31, 2013, 2012 and 2011. Table 3 provides an analysis of total Company changes in net interest income attributable to changes in rates and changes in volume of interest-earning assets and interest-bearing liabilities for the same periods.

 

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Table 2 — Total Company Average Balance Sheets and Interest Rates for Years Ended December 31,

 

 

 

2013

 

2012

 

2011

 

(dollars in thousands)

 

Average
Balance

 

Interest

 

Average
Rate

 

Average
Balance

 

Interest

 

Average Rate

 

Average
Balance

 

Interest

 

Average Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities, including FHLB stock(1)

 

$

527,681

 

$

9,312

 

1.76

%

$

640,830

 

$

12,446

 

1.94

%

$

678,804

 

$

16,486

 

2.43

%

Federal funds sold and other interest-earning deposits

 

145,970

 

413

 

0.28

%

187,790

 

471

 

0.25

%

315,530

 

914

 

0.29

%

Refund Anticipation Loan fees(2)(3)

 

 

 

0.00

%

24,182

 

45,227

 

187.03

%

29,572

 

59,117

 

199.91

%

All other Bank loans and fees(2)(4)

 

2,575,146

 

124,843

 

4.85

%

2,479,968

 

125,315

 

5.05

%

2,216,687

 

118,598

 

5.35

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

3,248,797

 

134,568

 

4.14

%

3,332,770

 

183,459

 

5.50

%

3,240,593

 

195,115

 

6.02

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(23,287

)

 

 

 

 

(25,226

)

 

 

 

 

(28,817

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning cash and cash equivalents

 

77,322

 

 

 

 

 

164,071

 

 

 

 

 

112,513

 

 

 

 

 

Premises and equipment, net

 

33,165

 

 

 

 

 

33,672

 

 

 

 

 

36,020

 

 

 

 

 

Other assets(1)

 

49,348

 

 

 

 

 

55,452

 

 

 

 

 

56,612

 

 

 

 

 

Total assets

 

$

3,385,345

 

 

 

 

 

$

3,560,739

 

 

 

 

 

$

3,416,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCK-HOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

696,295

 

$

484

 

0.07

%

$

614,118

 

$

397

 

0.06

%

$

422,222

 

$

540

 

0.13

%

Money market accounts

 

508,288

 

631

 

0.12

%

478,682

 

737

 

0.15

%

628,178

 

1,939

 

0.31

%

Time deposits

 

187,076

 

1,365

 

0.73

%

253,567

 

2,190

 

0.86

%

254,064

 

4,055

 

1.60

%

Brokered money market and brokered certificates of deposit

 

123,188

 

1,613

 

1.31

%

166,088

 

1,750

 

1.05

%

236,051

 

2,380

 

1.01

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

1,514,847

 

4,093

 

0.27

%

1,512,455

 

5,074

 

0.34

%

1,540,515

 

8,914

 

0.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

170,386

 

70

 

0.04

%

237,414

 

375

 

0.16

%

278,861

 

646

 

0.23

%

Federal Home Loan Bank advances

 

578,633

 

14,715

 

2.54

%

560,659

 

14,833

 

2.65

%

558,249

 

18,180

 

3.26

%

Subordinated note

 

41,240

 

2,515

 

6.10

%

41,240

 

2,522

 

6.12

%

41,240

 

2,515

 

6.10

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

2,305,106

 

21,393

 

0.93

%

2,351,768

 

22,804

 

0.97

%

2,418,865

 

30,255

 

1.25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-bearing liabilities and Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-bearing deposits

 

513,891

 

 

 

 

 

624,053

 

 

 

 

 

509,457

 

 

 

 

 

Other liabilities

 

19,468

 

 

 

 

 

54,822

 

 

 

 

 

48,963

 

 

 

 

 

Stockholders’ equity

 

546,880

 

 

 

 

 

530,096

 

 

 

 

 

439,636

 

 

 

 

 

Total liabilities and stock-holders’ equity

 

$

3,385,345

 

 

 

 

 

$

3,560,739

 

 

 

 

 

$

3,416,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

113,175

 

 

 

 

 

$

160,655

 

 

 

 

 

$

164,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

3.21

%

 

 

 

 

4.53

%

 

 

 

 

4.77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

3.48

%

 

 

 

 

4.82

%

 

 

 

 

5.09

%

 

(continued)

 

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Table 2 — Total Company Average Balance Sheets and Interest Rates for Years Ended December 31, (continued)

 


(1)             For purpose of this calculation, the fair market value adjustment on investment securities resulting from ASC Topic 320, Investments — 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 $10.9 million, $50.8 million and $62.3 million for 2013, 2012 and 2011.

(3)             The Refund Anticipation Loan product was discontinued effective April 30, 2012.

(4)             Average balances for loans include the principal balance of non-accrual loans and loans held for sale.

 

Table 3 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 3 — Total Company Volume/Rate Variance Analysis

 

 

 

 

 

Year Ended December 31, 2013

 

 

 

Year Ended December 31, 2012

 

 

 

 

 

Compared to

 

 

 

Compared to

 

 

 

 

 

Year Ended December 31, 2012

 

 

 

Year Ended December 31, 2011

 

 

 

Total Net

 

Increase / (Decrease) Due to

 

Total Net

 

Increase / (Decrease) Due to

 

(in thousands)

 

Change

 

Volume

 

Rate

 

Change

 

Volume

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities, including FHLB stock

 

$

(3,134

)

$

(2,066

)

$

(1,068

)

$

(4,040

)

$

(882

)

$

(3,158

)

Federal funds sold and other interest-earning deposits

 

(58

)

(113

)

55

 

(443

)

(333

)

(110

)

Refund Anticipation Loan fees

 

(45,227

)

(45,227

)

 

(13,890

)

(10,262

)

(3,628

)

All other Bank loans and fees

 

(472

)

4,714

 

(5,186

)

6,717

 

13,553

 

(6,836

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in interest income

 

(48,891

)

(42,692

)

(6,199

)

(11,656

)

2,076

 

(13,732

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

87

 

56

 

31

 

(143

)

187

 

(330

)

Money market accounts

 

(106

)

44

 

(150

)

(1,202

)

(387

)

(815

)

Time deposits

 

(825

)

(518

)

(307

)

(1,865

)

(8

)

(1,857

)

Brokered money market and brokered certificates of deposit

 

(137

)

(509

)

372

 

(630

)

(733

)

103

 

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

 

(305

)

(84

)

(221

)

(271

)

(86

)

(185

)

Federal Home Loan Bank advances

 

(118

)

468

 

(586

)

(3,347

)

78

 

(3,425

)

Subordinated note

 

(7

)

 

(7

)

7

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in interest expense

 

(1,411

)

(543

)

(868

)

(7,451

)

(949

)

(6,502

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net interest income

 

$

(47,480

)

$

(42,149

)

$

(5,331

)

$

(4,205

)

$

3,025

 

$

(7,230

)

 

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Table of Contents

 

Provision for Loan Losses

 

Discussion of 2013 vs. 2012

 

The Company recorded total provision for loan losses of $3.0 million for 2013 compared to $15.0 million during 2012. The significant components comprising the Company’s provision for loan losses were as follows:

 

Traditional Banking segment

 

The Traditional Banking provision for loan losses during 2013 was $3.8 million, a $4.3 million, or 53%, decline from the $8.2 million recorded during 2012. The significant components comprising the Traditional Bank’s decreased provision for loan losses were as follows:

 

·                  The Bank recorded provision for loan losses related to its purchased credit impaired loans of $1.3 million during 2013. These provisions reflected probable shortfalls in cash flows below initial day-one estimates for these loans. Analogous provisions during 2012 were significantly lower, as the FCB acquisition was still within its initial day-one measurement period at December 31, 2012, and the TCB acquisition was only three months out of its initial day-one measurement period.

 

·                  The Bank recorded a net increase to the provision of $930,000 in 2013 associated with residential mortgage TDRs compared to $2.0 million for the same period in 2012, as the Company successfully refinanced retail borrowers displaying weaknesses in their ability to make payments under their previous contractual loan terms. Provisions were primarily calculated utilizing discounted cash flow analyses.

 

·                  Approximately $4.7 million of the provision for loan losses for 2012 was attributable to the Bank’s substandard classified loan portfolios. The Bank significantly increased allocations for relationships that were either downgraded to substandard or displayed further signs of credit deterioration during the year. A net recovery to the provision of $94,000 was made for substandard classified loans in 2013 due to favorable reevaluations and workouts of substandard classified loans.

 

·                  The Bank recorded provision expense of approximately $2.0 million during 2013 compared to $1.2 million for the same period in 2012 attributable to increases in the Bank’s general loan loss reserves for its pass-rated credits, excluding its 2012 acquired loans. These provisions were generally due to growth in the loan portfolios combined with movements in historical loss percentages and qualitative factors.

 

See the sections titled “Allowance for Loan Losses and Provision for Loan Losses” and “Asset Quality” in this section of the filing under “Financial Condition” for additional discussion regarding the provision for loan losses and the Bank’s delinquent, non-performing, impaired and TDR loans.

 

Republic Processing Group segment

 

The Company ceased offering the RAL product effective April 30, 2012. As a result, RPG experienced no RAL losses during 2013. During 2013, the Company recorded a credit of $845,000 to provision expense for recoveries of prior period RAL losses. During the 2012, the Company recorded a net provision of $6.9 million for probable RAL losses.

 

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Table of Contents

 

Provision for Loan Losses

 

Discussion of 2012 vs. 2011

 

The Company recorded total provision for loan losses of $15.0 million for 2012 compared to $18.0 million during 2011. The significant components comprising the Company’s provision for loan losses were as follows:

 

Traditional Banking segment

 

The Traditional Banking provision for loan losses during 2012 was $8.2 million, a $1.8 million, or 27%, increase from 2011. The net increase in the provision for loan losses related to the following:

 

·                  The Bank experienced a $792,000 net provision for loan loss increase in the Bank’s general loan loss reserves for its pass-rated credits. Approximately $437,000 of the increase was due to qualitative factors allocated to the warehouse lending portfolio. While the Company’s warehouse lending portfolio has experienced no charge-offs in its brief history, the portfolio’s rapid growth and concentration during 2012 was judged a qualitative risk.

 

·                  The Bank experienced a net provision for loan loss decrease of $651,000 in 2012 associated with required reserves for its large classified loan portfolio.

 

·                  The Bank recorded a net provision for loan loss decrease of $440,000 in 2012 related to improvement in the past due 90-days and non-accrual retail loan portfolios.

 

·                  The Bank recorded $2.0 million in provision for loan losses in 2012 associated with residential mortgage TDRs as the Company successfully refinanced retail borrowers displaying weaknesses in their ability to make payments under their previous contractual loan terms. The provision was primarily calculated utilizing discounted cash flow analyses.

 

·                  During 2012, the Bank recorded $500,000 less in credits to its provision for loan losses for recoveries of previously charged off loans than it did during 2011.

 

Republic Processing Group segment

 

As of December 31, 2012 and 2011, $10.5 million and $14.3 million of total RALs originated remained uncollected, representing 1.31% and 1.38% of total gross RALs originated during the respective tax years by RB&T. All of these loans were charged off as of June 30, 2012 and 2011.  Management’s estimate of current year losses combined with recoveries of previous years’ RALs during the period, resulted in a net provision for loan loss expense of $6.9 million and $11.6 million for the TRS division during the years ended December 31, 2012 and 2011.

 

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Table of Contents

 

Non-Interest Income

 

Table 4 — Analysis of Non-interest income

 

 

 

 

 

 

 

 

 

Percent Increase/(Decrease)

 

Year Ended December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

2013/2012

 

2012/2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

13,953

 

$

13,496

 

$

14,105

 

3

%

-4

%

Net refund transfer fees

 

13,884

 

78,304

 

88,195

 

-82

%

-11

%

Mortgage banking income

 

7,258

 

8,447

 

3,899

 

-14

%

117

%

Debit card interchange fee income

 

6,512

 

5,817

 

5,791

 

12

%

0

%

Bargain purchase gain - Tennessee Commerce Bank

 

 

27,614

 

 

-100

%

100

%

Bargain purchase gain - First Commercial Bank

 

1,324

 

27,824

 

 

-95

%

100

%

Gain on sale of banking center

 

 

 

2,856

 

0

%

-100

%

Gain on sale of securities available for sale

 

 

56

 

2,285

 

-100

%

0

%

Net gain on sale of other real estate owned

 

2,170

 

416

 

444

 

422

%

0

%

Increase in cash surrender value of BOLI

 

86

 

 

 

100

%

0

%

Net impairment loss on investment securities

 

 

 

(279

)

0

%

-100

%

Other

 

2,782

 

3,104

 

2,328

 

-10

%

33

%

 

 

 

 

 

 

 

 

 

 

 

 

Total non interest income

 

$

47,969

 

$

165,078

 

$

119,624

 

-71

%

38

%

 

Discussion of 2013 vs. 2012

 

Total Company non-interest income decreased $117.1 million, or 71%, for 2013 compared to 2012. The most significant components comprising the total Company increase in non-interest income were as follows:

 

Traditional Banking segment

 

Traditional Banking segment non-interest income decreased $52.2 million, or 67%, for 2013 compared to 2012.

 

During 2012, the Company recorded bargain purchase gains of $55.4 million as a result of its FDIC-assisted acquisitions of TCB and FCB. The bargain purchase gains were realized because the overall price paid by RB&T was substantially less than the fair value of the TCB and FCB assets acquired and liabilities assumed in the transactions.

 

Service charges on deposit accounts were $14.0 million during 2013 compared to $13.5 million for the same period in 2012. The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. The total net per item fees included in service charges on deposits for 2013 and 2012 were $8.0 million and $7.5 million. The total daily overdraft charges, net of refunds, included in interest income for 2013 and 2012 was $1.7 million in both periods.

 

Net gain on the sale of OREO was $2.2 million for the sale of 117 properties during 2013, as compared to a net gain of $416,000 from the sale of 137 properties during 2012.  Approximately $1.0 million of the 2013 net gain related to assets acquired in the 2012 FDIC-assisted acquisitions.

 

See additional discussion regarding the 2012 FDIC-assisted acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

During November 2013, the Bank purchased $25 million of Bank Owned Life Insurance (“BOLI”).  The BOLI offers tax advantaged non-interest income to help the Bank cover employee-related benefits expenses.  The $25 million of BOLI is expected to add approximately $750,000 of tax-exempt non-interest income to the Bank’s earnings in 2014.

 

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Table of Contents

 

Mortgage Banking segment

 

Within the Mortgage Banking segment, mortgage banking income decreased $1.2 million, or 14%, during 2013 compared to the same period in 2012.

 

Mortgage banking income for 2013 was negatively impacted by a sharp increase in long-term interest rates beginning in May 2013, which led to a significant decrease in secondary market loan volume as compared to the same time period in the prior year. Overall, Republic’s proceeds from the sale of secondary market loans totaled $305 million during 2013 compared to $256 million during the same period in 2012, with the majority of the 2013 application volume occurring during the first half of 2013.

 

While long-term interest rates at December 31, 2013 were relatively low as compared to longer-term historical levels, they were at their highest level in almost two years.  The rise in interest rates is expected to continue to negatively impact future loan application volume during 2014.

 

The Bank maintained an MSR impairment reserve of $345,000 at December 31, 2012. Due to the increase in long-term interest rates during 2013, the fair value of the Bank’s MSRs increased, as prepayment speed assumptions were adjusted lower. As a result of the increase in the fair value of the Bank’s MSRs, all $345,000 of MSR impairment reserve was reversed back into income during 2013.

 

See additional discussion regarding Mortgage Banking under Footnote 6 “Mortgage Banking Activities” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Republic Processing Group segment

 

RPG non-interest income decreased $63.8 million, or 81%, during 2013 compared to the same period in 2012. The decrease was the result of pricing pressures via revenue sharing driven by increased competition resulting from the elimination of the RAL product and the previously disclosed termination of RB&T’s contracts with Liberty and JHI.

 

With regard to the TRS division of the RPG segment, TRS faces direct competition for RT market share from independently-owned processing groups partnered with banks. Independent processing groups that were unable to offer RAL products were, historically, at a competitive disadvantage to banks who could offer RALs. With RB&T’s resolution of its differences with the FDIC through the Agreement, RB&T discontinued RALs effective April 30, 2012. Without the ability to originate RALs, RB&T continues to face increased competition in the RT marketplace. In addition to the loss of volume resulting from additional competitors, RB&T has incurred substantial pressure on its profit margin for RT products via revenue sharing arrangements with its various partners.

 

Furthermore, management believes that the Agreement with the FDIC also negatively impacts RB&T’s ability to originate RT products. As previously disclosed, the Agreement contains a provision for an Electronic Return Originator (“ERO”) Plan to be administered by RB&T. The ERO Plan places additional oversight and training requirements on RB&T and its tax preparation partners that may not currently be required by regulators for RB&T’s competitors in the tax business. These additional requirements make attracting new relationships, retaining existing relationships, and maintaining profit margin for RTs more difficult for RB&T. Management estimates net RT revenues could continue to be reduced beyond 2013 if these competitive disadvantages remain in place.

 

In addition to the reduced profit margin the Company experienced with its RT volume during 2013 as noted above, the Company also experienced a significant decrease in RT volume resulting from the termination of the Company’s contracts with JHI and Liberty. As previously disclosed in a Form 8-K filed on August 29, 2012, JHI unilaterally terminated its contract with RB&T on August 27, 2012. In addition, as previously disclosed in a Form 8-K filed on September 19, 2012, Liberty unilaterally terminated its contract with RB&T on September 18, 2012. On a combined basis, these contracts represented approximately 53% of RB&T’s 2012 RT volume.

 

As previously disclosed in this document, RB&T’s third party arbitration with JHI was concluded during the fourth quarter of 2013.  With the matter resolved, RB&T entered into a new two-year agreement with JHI pursuant to which it began processing refunds for JHI clients in January 2014.  The contract is expected to increase RPG’s annual net revenue by approximately 12% per year above its 2013 net revenue level.  Additional overhead expenses with the new contract are expected to be minimal.

 

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Table of Contents

 

RB&T’s contract dispute with Liberty was resolved during January 2014 with a nominal amount of related legal expense during 2013. The Company does not anticipate any additional future legal expense associated with this matter. With the matter resolved, RB&T entered into a new two-year agreement with Liberty in which it will begin processing refunds for Liberty clients in January 2015.  Beginning with the first quarter 2015 tax season, the contract is expected to increase RPG’s annual net revenues for the two year term of the contract by an average of approximately 16% over its 2013 net revenue level.  Additional overhead expenses with the new contract are expected to be immaterial.

 

Discussion of 2012 vs. 2011

 

Total Company non-interest income increased $45.5 million, or 38%, for 2012 compared to 2011. The most significant components comprising the total Company increase in non-interest income were as follows:

 

Traditional Banking segment

 

Traditional Banking segment non-interest income increased $51.0 million during 2012 compared to 2011.

 

Service charges on deposit accounts decreased $609,000, or 4%, during 2012 compared to the same period in 2011. The total net per item fees included in service charges on deposits for 2012 and 2011 were $7.5 million and $8.9 million. The total net daily overdraft charges included in interest income for 2012 and 2011 were $1.7 million and $1.8 million. The decrease was primarily the result of the continued general decline in consumer overdraft activity that the Bank and the banking industry as a whole have experienced the past several years. In addition, further contributing to this general decline in consumer overdraft activity was a decline in the number of the Bank’s retail checking accounts and the amended FDIC guidelines, which took effect in July 2011. These guidelines have continued to have a negative impact on the Bank’s net income since their implementation and will continue to do so in the future.

 

On August 1, 2011, the Bank converted the substantial majority of its existing retail checking accounts into new product types with new fee structures. The goal of the new fee structure, in the short-term, was to reverse the trend of declining service charges on deposits. In the long-term, the Bank’s goal is that the new fee structure, combined with growth in the Bank’s retail checking account base, will allow the service charges on deposits category to increase once again. Revenue generated during 2012 as a result of these new fees was approximately $1.3 million compared to $820,000 in 2011 for the five month period, partially offsetting the decrease in overdraft-related fees for the same period.

 

As a result of the new fee structure, the Bank’s retail checking account base declined substantially from July 1, 2011 through January 31, 2012, further contributing to the decline in overdraft related revenue. The Bank experienced nominal growth in its retail checking account base from January 31, 2012 through December 31, 2013.

 

Related to the TCB acquisition, the Bank recorded a bargain purchase gain of $27.6 million, substantially all of which was recorded during the first quarter of 2012. The bargain purchase gain was realized because the overall price paid by RB&T for TCB was substantially less than the fair value of the TCB assets acquired and liabilities assumed in the acquisition.

 

Related to the FCB acquisition, the Bank recorded an initial bargain purchase gain of $27.8 million, substantially all of which was recorded during the third quarter of 2012. As with the TCB acquisition, the bargain purchase gain was realized because the overall price paid by RB&T for FCB was substantially less than the fair value of the FCB assets acquired and liabilities assumed in the acquisition.

 

During 2012, the Bank recognized net securities gains in earnings for TCB acquired securities available of $56,000. Subsequent to the acquisition of TCB, management concluded that these securities did not fit the profile of securities traditionally purchased by the Bank and thus sold them during the first quarter 2012. The Bank recognized net gains on sales, calls and impairment of investment securities of $2.0 million during 2011. The substantial majority of the 2011 gain occurred during the second quarter of 2011, as the Bank sold available for sale securities with an amortized cost of $132 million. The decision to sell these securities was based, in large part, on positive growth developments within the loan portfolio.

 

The Bank recognized a $2.9 million gain related to the sale of a banking center in 2011.

 

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Table of Contents

 

Mortgage Banking segment

 

Within the Mortgage Banking segment, mortgage banking income increased $4.5 million, or 117%, during 2012 compared to the same period in 2011. Mortgage banking income was positively impacted by an increase in secondary market loan volume during 2012, which resulted from the continued low long-term interest rate environment. The Bank’s loan sales during 2012 consisted of 19% purchase transactions and 81% refinance transactions, as refinances in particular were fueled by the low long-term rate environment. During 2012, the Bank recorded proceeds from the sale of mortgage loans of $256 million compared to $153 million during the same period in 2011. Secondary market pricing also generally improved across the industry during 2012 compared to the prior year.

 

In addition to the factors noted in the previous paragraph, due to the reduction in long-term interest rates during 2012, the fair value of the Bank’s MSRs declined as prepayment speed assumptions were adjusted higher. As a result of the decline in the fair value of the Bank’s MSRs, an additional impairment charge of $142,000 was recorded during 2012.

 

Republic Processing Group segment

 

RPG non-interest income decreased $10.0 million, or 11%, during 2012 compared to the same period in 2011. Net RT fees decreased $9.9 million for 2012 primarily attributable to the overall decrease in volume during the tax season. More specifically within the RT category, RT check fees decreased 12% consistent with a 12% decrease in volume. The decline in RT checks fees was partially offset by a 10% increase in direct deposit on-line RT fees driven by a 10% increase in this lower-margin RT product. As with the decrease RPG experienced in RAL volume, management believes the decrease in RT volume, which is generated through store-front locations, was a direct result of a shift in consumer demand toward lower-priced on-line tax preparation services and increased competition within the retail market based on free products and services from competitors.

 

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Table of Contents

 

Non-Interest Expenses

 

Table 5 — Analysis of Non-Interest Expenses

 

 

 

 

 

 

 

 

 

Percent Increase/(Decrease)

 

Year Ended December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

2013/2012

 

2012/2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

57,778

 

$

60,633

 

$

54,966

 

-5

%

10

%

Occupancy and equipment, net

 

21,918

 

22,474

 

21,713

 

-2

%

4

%

Communication and transportation

 

4,128

 

5,806

 

5,695

 

-29

%

2

%

Marketing and development

 

3,353

 

3,429

 

3,237

 

-2

%

6

%

FDIC insurance expense

 

1,682

 

1,403

 

4,425

 

20

%

-68

%

Bank franchise tax expense

 

4,115

 

3,916

 

3,645

 

5

%

7

%

Data processing

 

3,333

 

4,309

 

3,207

 

-23

%

34

%

Debit card interchange expense

 

2,850

 

2,462

 

2,239

 

16

%

10

%

Supplies

 

1,157

 

2,114

 

2,353

 

-45

%

-10

%

Other real estate owned expense

 

3,446

 

3,537

 

2,356

 

-3

%

50

%

Charitable contributions

 

1,004

 

3,341

 

5,933

 

-70

%

-44

%

Legal expense

 

4,627

 

1,866

 

3,969

 

148

%

-53

%

FDIC civil money penalty

 

 

 

900

 

0

%

-100

%

FHLB advance prepayment penalty

 

 

2,436

 

 

-100

%

100

%

Other

 

8,272

 

9,019

 

7,683

 

-8

%

17

%

 

 

 

 

 

 

 

 

 

 

 

 

Total non interest expenses

 

$

117,663

 

$

126,745

 

$

122,321

 

-7

%

4

%

 

Discussion of 2013 vs. 2012

 

Total Company non-interest expenses in 2013 decreased $9.1 million, or 7%, from 2012. The most significant components comprising the change in non-interest expense were as follows:

 

Traditional Banking segment

 

Total Traditional Bank non-interest expenses in 2013 decreased $2.3 million, or 2%, from 2012.

 

Salaries and benefits in 2013 increased $402,000 over 2012 due primarily to a rise in salaries and benefits resulting from an increase in the Traditional Banking segment’s full time equivalent employees (“FTEs”) for the first three quarters of 2013. The increase in the Traditional Bank’s FTEs was the result of retaining employees its FDIC-assisted acquired banks and the hiring of additional employees to support the FDIC-assisted acquired banks’ operations and the Bank’s long-term growth plans.  The increase in salaries and benefits during 2013 was partially offset by a $2.6 million reduction in incentive compensation accruals as anticipated bonus payouts for 2013 were expected to be approximately $763,000 as compared to $2.7 million for 2012 payouts.

 

Also marginally impacting salaries and benefits during the fourth quarter of 2013 was $150,000 in expenses for anticipated severance payouts related to a Bank-related reduction in force (“RIF”).  Primarily as a result of the Bank’s RIF, its total FTE’s decreased from 742 at September 30, 2013 to 675 at December 31, 2013.  The Bank’s FTEs were 729 at December 31, 2012.  In addition to the RIF, the Bank substantially eliminated all merit increases for its year-end 2013 employee evaluations.  The RIF in combination with the substantial elimination of annual merit increases is expected to save the Company approximately $2.3 million in salaries and benefits for the 2014 calendar year.

 

Contributions expense in 2013 decreased $486,000 from 2012 due to the first quarter 2012 contribution to the Republic Bank Foundation.

 

During the first quarter of 2012, the Bank prepaid $81 million in FHLB advances that were originally scheduled to mature between October 2012 and May 2013. These advances had a weighted average cost of 3.56%. The Bank incurred a $2.4 million early termination penalty in connection with this prepayment during 2012.

 

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Data processing expense in 2013 decreased $973,000 from 2012 primarily due to $912,000 in data processing costs incurred during 2012 related to the TCB and FCB acquisitions.

 

Audit and professional fees in 2013 decreased $340,000 from 2012 due primarily to additional audit and third party consulting fees in 2012 related to the 2012 FDIC-assisted acquisitions.

 

Amortization expense of the Traditional Bank’s core deposit intangible asset in 2013 increased $339,000 over 2012, as the Bank accelerated the amortization of this asset consistent with the Company’s decision to close its sole banking center in the Minnesota market.

 

See additional discussion regarding the 2012 FDIC-assisted acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Republic Processing Group segment

 

Total RPG non-interest expenses in 2013 decreased $6.3 million, or 28%, from 2012.

 

Salaries and employee benefits during 2013 decreased $2.9 million, or 29%, from 2012 as RPG reflected lower contract labor staffing costs, reduced bonus payouts tied to TRS’ operating performance as compared to goal, and a reduction in staff at TRS consistent with a decline in overall segment revenues.

 

Legal expense at RPG during 2013 was $3.0 million compared to $283,000 for 2012.  The increase in legal expenses during 2013 was directly associated with the Company’s contract termination disputes with JHI and Liberty. In addition, the Company also incurred legal expenses during 2013 related to a now terminated Purchase and Assumption Agreement (the “P&A Agreement”) and the negotiations of a Master Services Agreement (“MSA”)  and Receivables Participation Agreement (“RPA”) with H&R Block.

 

In total, RPG incurred $717,000 in legal expenses during 2013 associated with the P&A Agreement and the negotiation of the MSA.  The Company does not anticipate there will be any additional costs associated with this transaction going forward.

 

See the Company’s Form 8-K filed with the SEC on July 11, 2013 for additional information on the Company’s entry into the now terminated P&A Agreement.

 

See the Company’s Form 8-K filed with the SEC on October 8, 2013 disclosing the termination of the P&A Agreement.

 

RB&T’s third party arbitration with JHI was concluded during the fourth quarter of 2013.  Legal related expenses associated with the arbitration totaled $2.2 million for 2013, with $1.4 million of those expenses being incurred during the fourth quarter of 2013.  The Company does not anticipate any additional future legal expenses associated with this matter.  With the matter resolved, RB&T entered into a new two-year agreement with JHI pursuant to which it began processing refunds for JHI clients in January 2014. Additional overhead expenses with the new contract are expected to be minimal.

 

RB&T’s contract dispute with Liberty was resolved during January 2014 with a nominal amount of related legal expense during 2013. The Company does not anticipate any additional future legal expense associated with this matter. With the matter resolved, RB&T entered into a new two-year agreement with Liberty in which it will begin processing refunds for Liberty clients in January 2015.  Additional overhead expenses with the new contract are expected to be immaterial.

 

Charitable contributions in 2013 decreased $1.9 million from 2012.  The decrease was the result of the $2.5 million total company contribution made to the Republic Bank Foundation in 2012 with no contribution being made during 2013.  The contribution to the Republic Bank Foundation was allocated to the Company’s business segments using a formula based on the segments’ overall profits.

 

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The following expenses and their related decreases were a function of the elimination of the RAL product and the decline in RT volume from 2012 to 2013 leading to a reduced demand for resources to facilitate the business:

 

·                  Occupancy and equipment expense decreased $935,000, or 27%;

·                  Communication and transportation expenses decreased $1.6 million, or 77%;

·                  Audit and professional fees decreased $579,000, or 77%; and

·                  Supplies expense decreased $930,000, or 78%.

 

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Discussion of 2012 vs. 2011

 

Total Company non-interest expenses increased $4.4 million, or 4%, for 2012 compared to 2011. The most significant components comprising the change in non-interest expense were as follows:

 

Traditional Banking segment

 

Non-interest expense within the Traditional Banking segment was $100 million during 2012, an increase of $13 million over 2011. Approximately $9.5 million of the increase in non-interest expenses during 2012 related to the Company’s 2012 FDIC-assisted acquisitions, with $6.2 million related to the TCB acquisition and $3.3 million related to the FCB acquisition. Expenses related to the TCB acquisition declined during the third quarter of 2012 as a result of the branch consolidation and core system conversion in July 2012. The FCB branch consolidation and core system conversion occurred in February 2013. Overall, traditional banking expenses not associated with the 2012 acquisitions, increased $3.5 million, or 4% from 2011. The most notable changes in the Traditional Banking’s non-interest expenses are discussed in the following paragraphs.

 

Salaries and benefits in 2012 increased $6.2 million over 2011. The Bank incurred $4.0 million in salaries and benefit expense directly associated with the Company’s 2012 FDIC-assisted acquisitions; including approximately $2.0 million related to incentive compensation accruals. Approximately $272,000 of incentive compensation related to retention bonuses payable to the acquired bank employees to encourage them to remain with the Bank through various dates up through system conversion. Approximately $1.1 million of incentive compensation was for short-term bonuses for Bank employees related to a successful system conversion, with another $670,000 for Bank associates related to a two-year profitability goal tied to the acquisitions.

 

Further contributing to the Traditional Bank’s rise in salaries and benefits was an increase in the Traditional Banking segment’s FTEs, which rose from 641 at December 31, 2011 to 729 at December 31, 2012. The increase in the Traditional Bank’s FTEs was the result of retaining employees at the acquired banks and the hiring of additional employees to support the acquired operations and the Bank’s long-term growth plans. In addition, the Bank recorded a $2.3 million increase in incentive compensation payouts during 2012 as compared to 2011 as the Bank generally achieved a more favorable performance compared to its budgeted goals in 2012 compared to 2011.

 

Occupancy and equipment expense in 2012 increased $1.2 million over 2011. Substantially all of the fluctuation was attributable to the Company’s 2012 FDIC-assisted acquisitions for expense items such as rent, leased and rented equipment and equipment service.

 

Data processing expense in 2012 increased $1.1 million over 2011, with $912,000 of the increase attributable to the data processing costs and internet banking enhancements for the Company’s 2012 FDIC-assisted acquisitions.

 

FDIC insurance expense in 2012 decreased $1.1 from 2011. The decrease primarily occurred due to more favorable insurance premium calculations for the Company and its risk profile resulting from the implementation of the Dodd-Frank Act. As a result of the Dodd-Frank Act, the FDIC approved a rule that changed the FDIC insurance assessment base from adjusted domestic deposits to a bank’s average consolidated total assets minus average tangible equity, defined as Tier 1 capital. The change was effective for the second quarter of 2011. The decrease in expense resulting from the more favorable premium calculations was partially offset with a $93,000 increase resulting from the Company’s 2012 FDIC-assisted acquisitions.

 

Other real estate owned expense in 2012 increased $1.2 million over 2011, with $818,000 of the increase attributable to the Company’s 2012 FDIC-assisted acquisitions.

 

Contributions expense in 2012 increased $473,000 over 2011, primarily due to the first quarter contribution to the Republic Bank Foundation. See additional discussion below under “Republic Processing Group segment.”

 

During the first quarter of 2012, the Bank prepaid $81 million in FHLB advances that were originally scheduled to mature between October 2012 and May 2013. These advances had a weighted average cost of 3.56%. The Bank recognized a $2.4 million early termination penalty during the first quarter of 2012 in connection with this prepayment.

 

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Traditional banking other expense in 2012 increased $1.6 million over 2011. Approximately $2.0 million of this increase related to the Company’s 2012 FDIC-assisted acquisitions, for expenses such as audit and professional fees and legal expenses. Offsetting the increase due to the acquisitions, banking center and ATM service promotional expense decreased by $419,000 during 2012. The decline was the direct result of the Bank’s new fee structure for retail checking accounts implemented during 2011. The new fee structure significantly reduced the number of client foreign ATM reimbursements paid by the Bank.

 

Republic Processing Group segment

 

RPG non-interest expenses in 2012 decreased $8.6 million, or 28%, from 2011.

 

Salaries and employee benefits in 2012 decreased $553,000, or 5%, from 2011. The 2012 year reflected lower contract labor staffing costs and reduced bonus payouts tied to the achievement of gross operating profit goals.

 

FDIC insurance expense in 2012 decreased $1.9 million, or 92% from 2011.  The decrease was primarily related to the new insurance calculation noted in the “Traditional Banking” discussion above and to the elimination of a higher assessment rate levied against the Bank for its deposit insurance during 2011 resulting from facts and circumstances specific to the Bank and the TRS division.

 

Bank Franchise expense in 2012 related to the RPG segment increased $350,000 over 2011 primarily due to an increase in capital associated with continued strong earnings and the higher capital base. Bank franchise tax expense represents taxes paid to different state taxing authorities based on capital. The substantial majority of the Company’s Bank Franchise tax is paid to the Commonwealth of Kentucky.

 

Legal expense at the RPG segment was $283,000 for 2012 compared to $2.3 million for 2011. The decrease in legal expense was directly related to the December 2011 resolution of RB&T’s on-going regulatory actions with the FDIC as described in the Agreement.

 

Charitable contribution expense in 2012 totaled $1.9 million at the TRS, as RB&T made a $2.5 million contribution to the Republic Bank Foundation, which was allocated between the Company’s business operating segments using a formula based on pre-tax profits for the quarter. Charitable contribution expense totaled $4.9 million at the TRS division for 2011, as RB&T made a $5 million contribution to the Republic Bank Foundation. The Republic Bank Foundation was formed in 2010 to support charitable, educational, scientific and religious organizations throughout communities in Kentucky, Indiana, Ohio, Tennessee and Florida.

 

During the second quarter of 2011, the FDIC assessed a Civil Money Penalty against RB&T at a $2.0 million level as part of the Amended Notice. The actual penalty paid during the fourth quarter of 2011 in connection with the settlement was $900,000, resulting in a $1.1 million credit to pre-tax income during the fourth quarter of 2011.

 

Income Tax Expenses

 

Republic Processing Group segment

 

The Company’s RPG segment recorded additional income tax expense of $1.1 million for the fourth quarter of 2013 primarily related to additional ASC 740-10, Accounting for Uncertainty in Income Taxes, accruals recorded for possible state income tax payments beyond the Company’s original estimates related to the tax years 2010 through 2013.  The Company attributed the increased state income taxes to the RPG segment, as RPG generated the substantial majority of the Company’s state income tax exposure outside of its geographic footprint during the tax years noted.

 

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FINANCIAL CONDITION

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days and federal funds sold. Republic had $171 million in cash and cash equivalents at December 31, 2013 compared to $138 million at December 31, 2012. The Bank’s restricted cash includes $2 million in a money market account as collateral to secure settlement obligations related to the RPG segment’s prepaid card program as of December 31, 2013. No similar collateral was maintained as of December 31, 2012.

 

For cash held at the FRB, the Bank earns a yield of 0.25% on amounts in excess of required reserves. For all other cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest. Due to ongoing contraction within the Bank’s net interest margin, management is anticipating that it will maintain a general near-term strategy to keep minimal amounts of cash on its balance sheet; however, this strategy will likely be significantly influenced by the Company’s on-going interest rate risk management practices and strategies, which could limit the Company’s ability to invest its cash into higher yielding earning assets.

 

Investment Securities

 

Table 6 — Investment Securities Portfolio

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Securities available for sale (fair value):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

97,465

 

$

39,472

 

$

152,674

 

Private label mortgage backed security

 

5,485

 

5,687

 

4,542

 

Mortgage backed securities - residential

 

150,087

 

197,210

 

293,329

 

Collateralized mortgage obligations

 

163,946

 

195,877

 

195,403

 

Mutual fund

 

995

 

 

 

Corporate bonds

 

14,915

 

 

 

Total securities available for sale

 

432,893

 

438,246

 

645,948

 

 

 

 

 

 

 

 

 

Securities held to maturity (carrying value):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2,311

 

4,388

 

4,233

 

Mortgage backed securities - residential

 

420

 

827

 

1,376

 

Collateralized mortgage obligations

 

42,913

 

40,795

 

22,465

 

Corporate bonds

 

5,000

 

 

 

Total securities held to maturity

 

50,644

 

46,010

 

28,074

 

 

 

 

 

 

 

 

 

Total investment securities

 

$

483,537

 

$

484,256

 

$

674,022

 

 

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Securities available for sale primarily consists of U.S. Treasury securities and U.S. Government agency obligations, including agency mortgage backed securities (“MBSs”) and agency collateralized mortgage obligations (“CMOs”). 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 securities that adjust monthly. The Bank uses a portion of the investment securities portfolio as collateral to Bank clients for securities sold under agreements to repurchase (“repurchase agreements”). The remaining eligible securities that are not pledged to secure client repurchase agreements may be pledged to the Federal Home Loan Bank as collateral for the Bank’s borrowing line. Strategies for the investment securities portfolio are influenced by economic and market conditions, loan demand, deposit mix and liquidity needs.

 

During 2013, part of the Bank’s strategy to mitigate contraction within its net interest income was to grow its investment securities portfolio. As a result, the Bank purchased $113 million in U.S. Government agencies, $76 million in MBSs, and $20 million in floating rate corporate bonds. The corporate bonds purchased during 2013 have a weighted average yield of 1.36% and an expected weighted-average life of seven years.  All other securities purchased during 2013 have a weighted average yield of 1.44% and an expected weighted-average life of less than five years.  The majority of the funds employed to purchase the aforementioned securities were previously invested in cash equivalents earning approximately twenty-five basis points.

 

The $20 million of floating rate corporate bonds purchased during the second quarter of 2013 were rated “investment grade” by accredited ratings agencies as of their respective purchase dates, and represented approximately 4% of the Bank’s investment portfolio as of December 31, 2013. While management does not consider these bonds to be material relative to the Bank’s overall balance sheet structure, these purchases do represent a strategic deviation from the Bank’s historical purchase patterns of primarily U.S. Government or U.S. Government Agency backed securities.

 

Management does not anticipate material future purchases of corporate bonds in the future.  The Company will likely continue to grow its U.S. Government and U.S. Government Agency investment securities portfolio during 2014 in order to combat its anticipated net interest income contraction.  The amounts and types of securities it purchases in 2014, however, will also likely be heavily dependent upon the Company’s overall interest rate risk position, which could limit the Company’s ability to mitigate its anticipated contraction in its net interest income.

 

Detail of the fair value of the Bank’s mortgage backed investment securities follows:

 

Table 7 — Mortgage Backed Investment Securities

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Private label mortgage backed security

 

$

5,485

 

$

5,687

 

Mortgage backed securities - residential

 

150,550

 

198,100

 

Collateralized mortgage obligations

 

207,062

 

236,988

 

Total mortgage backed securities fair value

 

$

363,097

 

$

440,775

 

 

For discussion of the Bank’s private label mortgage backed security, see “Critical Accounting Policies and Estimates” in this section of the filing and Footnote 3 “Investment Securities” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

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In addition, the Bank holds agency structured notes in the investment portfolio, which consist of step up bonds. A step up bond pays an initial coupon rate for the first period, and then a higher coupon rate for the following periods. The Bank increased its investment in structured notes by $30 million during 2013 due to favorable market terms. These investments are predominantly classified as available for sale. The amortized cost and fair value of the structured note investment portfolio follows:

 

Table 8 — Structured Notes

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Amortized cost

 

$

30,492

 

$

509

 

Fair value

 

30,467

 

508

 

 

The amortized cost/carrying amount, fair value, weighted average yield and weighted average maturity of the investment portfolio at December 31, 2013 follows:

 

Table 9 — Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

Amortized

 

Fair

 

Average

 

Maturity in

 

December 31, 2013 (dollars in thousands)

 

Cost

 

Value

 

Yield

 

Years

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

24,395

 

$

24,760

 

1.78

%

1.22

 

Due from one year to five years

 

70,259

 

70,237

 

1.45

%

4.18

 

Due from five years to ten years

 

2,503

 

2,468

 

2.66

%

5.64

 

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

 

97,157

 

97,465

 

1.57

%

3.47

 

Corporate bonds:

 

 

 

 

 

 

 

 

 

Due from five years to ten years

 

15,015

 

14,915

 

1.26

%

7.60

 

Total Corporate bonds

 

15,015

 

14,915

 

1.26

%

7.60

 

Private label mortgage backed security

 

4,740

 

5,485

 

6.58

%

4.11

 

Total mortgage backed securities - residential

 

146,087

 

150,087

 

2.20

%

3.65

 

Total collateralized mortgage obligations

 

164,264

 

163,946

 

1.28

%

4.91

 

Mutual fund

 

1,000

 

995

 

0.07

%

NM

 

Total securities available for sale

 

$

428,263

 

$

432,893

 

1.71

%

4.24

 

 

NM = Not meaningful. Security does not have a finite maturity.

 

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Table 10 — Securities Held to Maturity

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

Carrying

 

Fair

 

Average

 

Maturity in

 

December 31, 2013 (dollars in thousands)

 

Value

 

Value

 

Yield

 

Years

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

508

 

$

512

 

1.43

%

3.12

 

Due from one year to five years

 

1,803

 

1,793

 

1.48

%

6.38

 

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

 

2,311

 

2,305

 

2.17

%

1.79

 

Corporate bonds:

 

 

 

 

 

 

 

 

 

Due from one year to five years

 

5,000

 

4,884

 

1.48

%

6.38

 

Total corporate bonds

 

5,000

 

4,884

 

1.48

%

6.38

 

Total mortgage backed securities - residential

 

420

 

463

 

5.66

%

3.73

 

Total collateralized mortgage obligations

 

42,913

 

43,116

 

0.89

%

6.34

 

Total securities held to maturity

 

$

50,644

 

$

50,768

 

1.02

%

6.16

 

 

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Loan Portfolio

 

Net loans, primarily consisting of secured real estate loans, decreased by $60 million, or 2%, during 2013 to $2.6 billion at December 31, 2013. Following are the more significant factors contributing to fluctuations in the Bank’s loan portfolio:

 

Loans Associated with the 2012 FDIC-Assisted Acquisitions

 

The contractual amount of the loans associated with the TCB transaction decreased from $42 million as of December 31, 2012 to $34 million as of December 31, 2013. The carrying value of these loans decreased from $31 million at December 31, 2012 to $29 million as of December 31, 2013, as the Bank has continued efforts to establish itself in this new market and work acquired problem loans out of the Bank.

 

The contractual amount of the loans associated with the FCB transaction decreased from $139 million as of December 31, 2012 to $85 million as of December 31, 2013. The carrying value of these loans decreased from $108 million as of December 31, 2012 to $68 million as of December 31, 2013, as the Bank has mainly focused its resources towards working the problem loans out of the Bank and servicing the performing loans from the transaction.

 

See additional discussion regarding the 2012 FDIC-assisted acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Mortgage Warehouse Lines of Credit

 

RB&T began offering mortgage warehouse lines of credit in June 2011. These lines of credit provide short-term, revolving credit facilities to mortgage bankers across the Nation. These credit facilities are secured by single family, first lien residential real estate loans. The credit facility enables mortgage banking customers to close single family, first lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by RB&T. The individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and are collected when the loan is sold to the secondary market investor. RB&T receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage banking customer.

 

As of December 31, 2013 RB&T had $150 million of outstanding loans from total committed credit lines of $358 million. As of December 31, 2012, RB&T had $217 million of outstanding loans from total committed credit lines of $331 million. The $67 million decrease in the outstanding balances of mortgage warehouse loans was primarily due to the rise in long-term interest rates during the latter part of the second quarter of 2013, which negatively impacted refinance volume among RB&T’s mortgage warehouse clients.

 

RB&T’s mortgage warehouse lending business is significantly influenced by the volume and composition of residential mortgage purchase and refinance transactions among RB&T’s mortgage banking clients. During 2013 and 2012, RB&T’s warehouse volume consisted of 63% and 47% purchase transactions in which the mortgage company’s borrower was purchasing a new residence, and 37% and 53% refinance transactions, in which the mortgage company’s client was refinancing an existing mortgage loan. Purchase volume is driven by a number of factors, including but not limited to, the overall economy, the housing market and long-term residential mortgage interest rates; while refinance volume is primarily driven by long-term residential mortgage interest rates.

 

RB&T’s warehouse lending business did benefit during 2012 and the first five months of 2013 from low or declining long-term residential mortgage rates which incentivized a high volume of borrowers to refinance their mortgages. Long-term interest rates, however, began rising rapidly in May of 2013. These increases in long-term residential mortgage interest rates have and will likely continue to decrease refinance activity and, without an equivalent increase in purchases and/or growth in RB&T’s warehouse client base, will likely have a negative impact on RB&T’s mortgage warehouse loans outstanding beyond 2013.

 

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Fixed Rate Commercial Real Estate Loan Initiatives

 

As an additional effort to grow its loan portfolio and further combat net interest income compression, the Bank began offering a promotional 15-year fixed-rate CRE loan during the first quarter of 2013. The initial offering rate on these loans was 3.50% when the program was started in January of 2013, but was later adjusted to 3.79% in February 2013 and 3.95% in June 2013, consistent with the market demand and the interest rate environment.  During 2013, the Bank closed approximately $83 million of these loans with a weighted average rate of approximately 3.65%. To partially mitigate the risk of rising interest rates related to these longer-term loans, the Bank borrowed $70 million from the FHLB with a weighted average rate of 1.61% and a weighted average life of approximately six years.

 

With market conditions changing in late second quarter 2013, the Bank ceased accepting new loan applications for the 15-year promotional CRE product and began promoting CRE products of shorter-term and therefore lower interest rate risk. The Bank continues to adjust its CRE product offerings to fit customer demand and stay within credit and interest rate risk tolerances.

 

The table below illustrates Republic’s loan portfolio composition for the past five years:

 

Table 11A — Loan Portfolio Composition

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,097,795

 

$

1,145,495

 

$

985,735

 

$

918,407

 

$

976,348

 

Non owner occupied

 

110,809

 

74,539

 

99,161

 

126,404

 

120,963

 

Commercial real estate

 

773,173

 

714,642

 

639,966

 

640,872

 

641,451

 

Commercial real estate - purchased whole loans

 

34,186

 

33,531

 

32,741

 

 

 

Construction & land development

 

44,351

 

68,214

 

67,406

 

68,701

 

83,090

 

Commercial & industrial

 

127,763

 

130,681

 

119,117

 

108,720

 

104,274

 

Warehouse lines of credit

 

149,576

 

216,576

 

41,496

 

 

 

Home equity

 

226,782

 

241,607

 

280,235

 

289,945

 

318,449

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

9,030

 

8,716

 

8,580

 

8,213

 

8,052

 

Overdrafts

 

944

 

955

 

950

 

901

 

2,006

 

Other consumer

 

15,383

 

15,241

 

9,908

 

13,077

 

13,599

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross loans

 

$

2,589,792

 

$

2,650,197

 

$

2,285,295

 

$

2,175,240

 

$

2,268,232

 

 

90



Table of Contents

 

2012 FDIC-Assisted Acquisitions:

 

The composition of TCB and FCB loans outstanding at December 31, 2013 and 2012 follows:

 

Table 11B — Loan Portfolio Composition

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2013 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

10,191

 

$

19,554

 

$

29,745

 

Commercial real estate

 

13,398

 

43,167

 

56,565

 

Construction & land development

 

295

 

1,614

 

1,909

 

Commercial & industrial

 

329

 

2,867

 

3,196

 

Home equity

 

4,270

 

366

 

4,636

 

Consumer:

 

 

 

 

 

 

 

Credit cards

 

205

 

 

205

 

Overdrafts

 

4

 

 

4

 

Other consumer

 

73

 

129

 

202

 

Total gross loans

 

$

28,765

 

$

67,697

 

$

96,462

 

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2012 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

12,270

 

$

32,459

 

$

44,729

 

Commercial real estate

 

8,015

 

61,758

 

69,773

 

Construction & land development

 

4,235

 

3,301

 

7,536

 

Commercial & industrial

 

1,284

 

9,405

 

10,689

 

Home equity

 

4,183

 

385

 

4,568

 

Consumer:

 

 

 

 

 

 

 

Credit cards

 

321

 

 

321

 

Overdrafts

 

1

 

11

 

12

 

Other consumer

 

655

 

333

 

988

 

Total loans

 

$

30,964

 

$

107,652

 

$

138,616

 

 

91



Table of Contents

 

The table below illustrates the Bank’s maturities and repricing frequency, including estimated prepayments for the loan portfolio:

 

Table 12 — Selected Loan Distribution

 

 

 

 

 

 

 

Over One

 

 

 

 

 

 

 

One Year

 

Through

 

Over

 

December 31, 2013 (in thousands)

 

Total

 

Or Less

 

Five Years

 

Five Years

 

 

 

 

 

 

 

 

 

 

 

Fixed rate loan maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

$

600,348

 

$

97,248

 

$

249,176

 

$

253,924

 

Commercial real estate

 

412,496

 

117,557

 

204,585

 

90,354

 

Construction & land development

 

10,859

 

3,018

 

5,224

 

2,617

 

Commercial & industrial

 

63,405

 

20,492

 

35,505

 

7,408

 

Warehouse lines of credit

 

 

 

 

 

Home equity

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

Overdrafts

 

944

 

944

 

 

 

Other consumer

 

13,067

 

5,252

 

5,658

 

2,157

 

Total fixed rate loans

 

$

1,101,119

 

$

244,511

 

$

500,148

 

$

356,460

 

 

 

 

 

 

 

 

 

 

 

Variable rate loan maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

$

608,256

 

$

215,735

 

$

301,392

 

$

91,129

 

Commercial real estate

 

394,863

 

188,123

 

175,547

 

31,193

 

Construction & land development

 

33,492

 

30,139

 

3,303

 

50

 

Commercial & industrial

 

64,358

 

45,687

 

10,515

 

8,156

 

Warehouse lines of credit

 

149,576

 

149,576

 

 

 

Home equity

 

226,782

 

226,477

 

301

 

4

 

Consumer:

 

 

 

 

 

 

 

 

 

Credit cards

 

9,030

 

9,030

 

 

 

Overdrafts

 

 

 

 

 

Other consumer

 

2,316

 

2,316

 

 

 

Total variable rate loans

 

$

1,488,673

 

$

867,083

 

$

491,058

 

$

130,532

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

$

1,208,604

 

$

312,983

 

$

550,568

 

$

345,053

 

Commercial real estate

 

807,359

 

305,680

 

380,132

 

121,547

 

Construction & land development

 

44,351

 

33,157

 

8,527

 

2,667

 

Commercial & industrial

 

127,763

 

66,179

 

46,020

 

15,564

 

Warehouse lines of credit

 

149,576

 

149,576

 

 

 

Home equity

 

226,782

 

226,477

 

301

 

4

 

Consumer:

 

 

 

 

 

 

 

 

 

Credit cards

 

9,030

 

9,030

 

 

 

Overdrafts

 

944

 

944

 

 

 

Other consumer

 

15,383

 

7,568

 

5,658

 

2,157

 

Total loans

 

$

2,589,792

 

$

1,111,594

 

$

991,206

 

$

486,992

 

 

92



Table of Contents

 

Allowance for Loan Losses and Provision for Loan Losses

 

The Bank maintains an allowance for probable incurred credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit Committee and the Board of Directors on a quarterly basis.

 

The Allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component is based on historical loss experience adjusted for qualitative factors.

 

A Bank-originated loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. A Purchased Credit Impaired (“PCI”) loan is considered impaired when, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial estimate. Loans that meet the following classifications are considered impaired:

 

·                        All loans internally rated as “Substandard,” “Doubtful” or “Loss;”

·                        All loans internally rated in a PCI category with cash flows that have deteriorated from management’s initial estimate;

·                        All loans on non-accrual status and non-PCI loans past due 90 days-or-more still on accrual;

·                        All retail and commercial TDRs; and

·                        Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the definition of impaired.

 

The Bank’s classified and special mention loans are generally C&I and CRE loans but also include large single family residential and home equity loans, as well as TDRs, whether retail or commercial in nature. The Bank reviews and monitors these loans on a regular basis. Generally, loans are designated as classified or special mention to ensure more frequent monitoring. These loans 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 or modified contractual terms, then the loan is generally downgraded and often placed on non-accrual status.

 

GAAP recognizes three methods to measure specific loan impairment, including:

 

·                  Cash Flow Method — The recorded investment in the loan is measured against the present value of expected future cash flows discounted at the loan’s effective interest rate. The Bank employs this method for a significant portion of its impaired TDRs. Impairment amounts under this method are reflected in the Bank’s Allowance as specific reserves on the respective impaired loan. These specific reserves are adjusted quarterly based upon reevaluation of the loan’s expected future cash flows and changes in the recorded investment in such loans.

 

·                  Collateral Method — The recorded investment in the loan is measured against the fair value of the loan’s collateral value less applicable selling costs. The Bank employs the fair value of collateral method for its impaired loans when the loan’s repayment is based solely on the sale of or the operations of the underlying collateral. Collateral fair value is typically based on the most recent real estate appraisal on file.  Measured impairment under this method is classified loss and charged off. The Bank’s selling costs for its collateral dependent loans typically range from 10-13% of the fair value of the underlying collateral, depending on the loan class. Selling costs are not applicable for collateral dependent loans whose repayment is based solely on the operations of the underlying collateral.

 

·                  Market Value Method — The recorded investment in the loan is measured against the loan’s obtainable market value. The Bank does not currently employ this technique as it is typically found impractical.

 

In addition to obtaining appraisals at the time of loan origination, the Bank typically updates appraisals and/or broker price opinions for loans with potential impairment. Updated valuations for commercial related loans exhibiting an increased risk of loss are typically obtained within one year of the last appraisal. Collateral values for past due residential mortgage loans and home equity loans are generally updated prior to a loan becoming 90 days delinquent, but no more than 180 days past due. When determining the amount of reserve, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons, the Bank discounts the valuation of the collateral primarily based on the age of the appraisal and the real estate market conditions of the location of the underlying collateral.

 

93



Table of Contents

 

The general component of the Allowance covers loans collectively evaluated for impairment and is based on historical loss experience with potential adjustments for current relevant qualitative factors. The historical loss experience is determined by loan performance and class and is based on the actual loss history experienced by the Bank. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are included in the general component unless the loans are classified as TDRs.

 

In determining the historical loss rates for each respective loan class, management evaluates the following historical loss rate scenarios:

 

·                  Rolling four quarter average

·                  Rolling eight quarter average

·                  Rolling twelve quarter average

·                  Rolling sixteen quarter average

·                  Rolling twenty quarter average

·                  Current year to date historical loss factor average

·                  Peer group loss factors

 

For the Bank’s current Allowance methodology, management uses the higher of the rolling eight, twelve, or sixteen quarter averages for each loan class when determining its historical loss factors for its “Pass” rated and nonrated loans.

 

Loan classes are also evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those classes. Management assigns risk multiples to certain classes to account for qualitative factors such as:

 

·                  Changes in nature, volume and seasoning of the loan portfolio;

·                  Changes in experience, ability, and depth of lending management and other relevant staff;

·                  Changes in the quality of the Bank’s loan review program;

·                  Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

·                  Changes in the volume and severity of past due, nonaccrual and classified loans;

·                  Changes in the value of underlying collateral for collateral-dependent loans;

·                  Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the loan portfolio, including the condition of various market segments;

·                  The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

·                  The effect of other external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the Bank’s existing portfolio.

 

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.

 

The Bank’s Allowance decreased $703,000, or 3%, during 2013 to $23 million at December 31, 2013. As a percent of total loans, the Allowance decreased slightly to 0.89% at December 31, 2013 compared to 0.90% at December 31, 2012.

 

Total Company net charge-offs exceeded loan loss provisions during 2013, as the Company’s credit quality ratios generally continued their positive trends from the prior year. Annualized Traditional Bank net loan charge-offs to average loans were 0.18% for 2013 compared to 0.34% for the same period in 2012.

 

94



Table of Contents

 

Notable fluctuations in the Allowance were as follows:

 

·                  The Bank increased its allowance by a net $1.9 million during 2013 related to loans acquired in its 2012 FDIC-assisted acquisitions. This increase was due to probable shortfalls in future estimated cash flows below initial day-one estimates for these loans.

 

·                  The Bank increased its allowance by a net $930,000 in 2013 associated with residential mortgage TDRs, as the Company successfully refinanced retail borrowers displaying weaknesses in their ability to make payments under their previous contractual loan terms. The allowance allocations were primarily calculated utilizing discounted cash flow analyses.

 

·                  The Bank charged off approximately $2.8 million in substandard allowance allocations in 2013, the majority of which was allocated in a previous period.

 

·                  The Bank posted a net $1.4 million increase to its allowance attributable to increases in the Bank’s general loan loss reserves for its pass-rated credits, excluding its 2012 FDIC-assisted acquired loans. These increases were generally due to growth in the loan portfolios combined with movements in historical loss percentages and qualitative factors.

 

·                  The Bank recorded a net decrease of $561,000 to its allowance related to improvements within the Bank’s small balance, homogeneous loan portfolios. These loans were predominantly retail oriented and were either past due 90-days-or-more or on non-accrual status and not past due at the respective periods ends.

 

95



Table of Contents

 

Table 13 — Summary of Loan Loss Experience

 

Year Ended December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses at beginning of year

 

$

23,729

 

$

24,063

 

$

23,079

 

$

22,879

 

$

14,832

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

(2,127

)

(3,648

)

(2,760

)

(3,012

)

(2,439

)

Commercial real estate

 

(1,190

)

(1,033

)

(1,125

)

(4,846

)

(956

)

Commercial real estate - purchased whole loans

 

 

 

 

 

 

Construction & land development

 

(619

)

(1,922

)

(845

)

(1,261

)

(1,196

)

Commercial & industrial

 

(466

)

(176

)

(100

)

(207

)

(372

)

Warehouse lines of credit

 

 

 

 

 

 

Home equity

 

(632

)

(2,252

)

(1,279

)

(1,811

)

(1,915

)

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

(142

)

(123

)

(241

)

(158

)

(389

)

Overdrafts

 

(601

)

(468

)

(678

)

(848

)

(832

)

Other consumer

 

(408

)

(266

)

(281

)

(362

)

(563

)

Refund Anticipation Loans

 

 

(11,097

)

(15,484

)

(14,584

)

(31,180

)

Total charge offs

 

(6,185

)

(20,985

)

(22,793

)

(27,089

)

(39,842

)

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

457

 

393

 

245

 

70

 

84

 

Commercial real estate

 

117

 

90

 

301

 

48

 

120

 

Commercial real estate - purchased whole loans

 

 

 

 

 

 

Construction & land development

 

48

 

104

 

237

 

248

 

102

 

Commercial & industrial

 

99

 

25

 

128

 

49

 

16

 

Warehouse lines of credit

 

 

 

 

 

 

Home equity

 

165

 

92

 

159

 

23

 

23

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

19

 

36

 

32

 

19

 

16

 

Overdrafts

 

411

 

422

 

506

 

385

 

257

 

Other consumer

 

338

 

225

 

279

 

292

 

206

 

Refund Anticipation Loans

 

845

 

4,221

 

3,924

 

6,441

 

13,090

 

Total recoveries

 

2,499

 

5,608

 

5,811

 

7,575

 

13,914

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loan charge offs

 

(3,686

)

(15,377

)

(16,982

)

(19,514

)

(25,928

)

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses - Traditional Banking

 

3,828

 

8,167

 

6,406

 

11,571

 

15,885

 

Provision for loan losses - Refund Anticipation Loans

 

(845

)

6,876

 

11,560

 

8,143

 

18,090

 

Total provision for loan losses

 

2,983

 

15,043

 

17,966

 

19,714

 

33,975

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses at end of year

 

$

23,026

 

$

23,729

 

$

24,063

 

$

23,079

 

$

22,879

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to total loans

 

0.89

%

0.90

%

1.05

%

1.06

%

1.01

%

Allowance for loan losses to non-performing loans

 

109

%

109

%

103

%

82

%

53

%

Net loan charge offs to average loans

 

0.14

%

0.61

%

0.76

%

0.83

%

1.09

%

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to total loans

 

0.89

%

0.90

%

1.05

%

1.06

%

1.01

%

Allowance for loan losses to non-performing loans

 

109

%

109

%

103

%

82

%

53

%

Net loan charge offs to average loans

 

0.18

%

0.34

%

0.24

%

0.51

%

0.34

%

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Acquired Banks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to total loans

 

2.59

%

0.15

%

NA

 

NA

 

NA

 

Allowance for loan losses to non-performing loans

 

110

%

7

%

NA

 

NA

 

NA

 

 

 

 

 

 

 

 

 

 

 

 

 

NA - not applicable

 

96



Table of Contents

 

The table below sets forth management’s allocation of the Allowance by loan class. The Allowance allocation is based on management’s assessment of economic conditions, historical loss experience, loan volume, past due and non-accrual loans and various other qualitative factors. Since these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance or future allowance allocation.

 

Table 14 — Management’s Allocation of the Allowance for Loan Losses

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

December 31,
(dollars in thousands)

 

Allowance

 

Percent
of Loans
to Total
Loans

 

Allowance

 

Percent of
Loans to
Total
Loans

 

Allowance

 

Percent of
Loans to
Total
Loans

 

Allowance

 

Percent of
Loans to
Total
Loans

 

Allowance

 

Percent of
Loans to
Total
Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

8,839

 

47%

 

$

8,055

 

47%

 

$

6,354

 

48%

 

$

5,281

 

49%

 

$

4,936

 

48%

 

Commercial real estate

 

8,309

 

30%

 

8,843

 

26%

 

7,724

 

28%

 

7,214

 

29%

 

9,180

 

28%

 

Commercial real estate - purchased whole loans

 

34

 

1%

 

34

 

1%

 

 

1%

 

NA

 

NA

 

NA

 

NA

 

Construction & land dev.

 

1,296

 

2%

 

2,769

 

3%

 

3,042

 

3%

 

2,612

 

3%

 

2,434

 

4%

 

Commercial & industrial

 

1,089

 

5%

 

580

 

5%

 

1,025

 

5%

 

1,347

 

5%

 

1,473

 

5%

 

Warehouse lines of credit

 

449

 

6%

 

541

 

8%

 

104

 

2%

 

NA

 

NA

 

NA

 

NA

 

Home equity

 

2,396

 

9%

 

2,348

 

9%

 

2,984

 

12%

 

3,581

 

13%

 

1,823

 

14%

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

289

 

0%

 

210

 

0%

 

503

 

0%

 

492

 

0%

 

438

 

0%

 

Overdrafts

 

199

 

0%

 

198

 

0%

 

135

 

0%

 

126

 

0%

 

179

 

0%

 

Other consumer

 

126

 

0%

 

151

 

1%

 

227

 

1%

 

461

 

1%

 

451

 

1%

 

Unallocated

 

 

 

 

 

1,965

 

 

1,965

 

 

1,965

 

 

Total

 

$

23,026

 

100%

 

$

23,729

 

100%

 

$

24,063

 

100%

 

$

23,079

 

100%

 

$

22,879

 

100%

 

 

NA - Not Applicable

 

Prior to January 1, 2012, the Bank’s Allowance calculation was supported with qualitative factors which included a nominal “unallocated” Allowance component totaling $2.0 million as of December 31, 2011. The Bank believed that historically the “unallocated” allowance properly reflected estimated credit losses determined in accordance with GAAP. The unallocated allowance was primarily related to RB&T’s loan portfolio, which is highly concentrated in the Kentucky and Southern Indiana real estate markets. These markets have remained relatively stable during the recent economic downturn, as compared to other parts of the U.S. With the Bank’s 2012 expansion, its plans to pursue future acquisitions into potentially new markets through FDIC-assisted transactions, and its offering of new loan products, such as mortgage warehouse lines of credit, the Bank revised its methodology to provide a more detailed calculation when estimating the impact of qualitative factors over the Bank’s various loan categories. This methodology change did not have a material impact on the Bank’s provision for loan losses for the year ended December 31, 2012.

 

In executing this methodology change, the Bank  adjusted its qualitative factors for its groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and are generally not included in the scope of ASC Topic 310-10-35 Accounting by Creditors for Impairment of a Loan. These portfolios are typically not graded and not subject to annual review.

 

Management believes, based on information presently available, that it has adequately provided for loan losses at December 31, 2013 and December 31, 2012. For additional discussion regarding Republic’s methodology for determining the adequacy of the Allowance, see the section titled “Critical Accounting Policies and Estimates” in this section of the filing.

 

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The composition of loans classified within the Allowance follows:

 

Table 15 — Classified and Special Mention Assets

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss

 

$

 

$

 

$

 

$

 

$

 

Doubtful

 

 

 

 

 

 

Substandard

 

44,083

 

49,352

 

43,088

 

38,245

 

46,335

 

Purchased Credit Impaired - Substandard

 

222

 

 

 

 

 

Total Classified Loans

 

44,305

 

49,352

 

43,088

 

38,245

 

46,335

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

40,167

 

50,625

 

35,455

 

54,254

 

57,036

 

Purchased Credit Impaired - Group 1

 

40,731

 

72,978

 

 

 

 

Total Special Mention Loans

 

80,898

 

123,603

 

35,455

 

54,254

 

57,036

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Classified and Special Mention Loans

 

$

125,203

 

$

172,955

 

$

78,543

 

$

92,499

 

$

103,371

 

 

Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are considered in the determination of the Allowance once day-one fair values are final.

 

In determining the day-one fair values of PCI 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.  For the Company’s 2012 FDIC-assisted 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.

 

Management separately monitors the PCI portfolio and on a quarterly basis 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, estimated life, the status of the borrower, or the quality or value of the underlying collateral.

 

To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified in the Purchased Credit Impaired - Group 1 (“PCI-1”) category; whose credit risk is considered equivalent to a non-PCI “Special Mention” loan within the Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial estimate. Provisions for loan losses are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified PCI-Substandard (“PCI-Sub”) within the Bank’s credit risk matrix.  Management deems the risk of default and overall credit risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI “Substandard” loan. PCI-Sub loans are considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

PCI loans may be contractually past due 80 days-or-more and continue to accrue interest if future cash flows can be reasonably projected to allow continuation of discount accretion.

 

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If a troubled debt restructuring is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting standards and transferred out of the PCI population. The loan may require an additional provision for loan losses if its restructured cash flows are less than management’s initial day-one expectations. Special Mention and Substandard loans include $1 million and $6 million at December 31, 2013 and $4 million and $11 million at December 31, 2012, respectively, which were removed from the PCI population due to a troubled debt restructuring of the loan. PCI loans for which the Bank simply chooses to extend the maturity date are generally not considered TDRs and remain in the PCI population.

 

See additional discussion regarding the 2012 FDIC-assisted acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Asset Quality

 

Non-performing Loans

 

Non-performing loans include loans on non-accrual status and loans past due 90-days-or-more and still accruing. Impaired loans that are not placed on non-accrual status are not included as non-performing loans. The non-performing loan category includes impaired loans totaling approximately $21 million at December 31, 2013, with approximately $13 million of these loans also reported as TDRs. The non-performing loan category includes impaired loans totaling approximately $22 million at December 31, 2012, with approximately $14 million of these loans also reported as TDRs.

 

The following table details the Bank’s non-performing loans and non-performing assets and select credit quality ratios:

 

Table 16 — Non-performing Loans and Non-performing Assets Summary

 

December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans on non-accrual status (1)

 

$

19,104

 

$

18,506

 

$

23,306

 

$

28,317

 

$

43,136

 

Loans past due 90 days or more and still on accrual (2)

 

1,974

 

3,173

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

21,078

 

21,679

 

23,306

 

28,317

 

43,144

 

Other real estate owned

 

17,102

 

26,203

 

10,956

 

11,969

 

4,772

 

Total non-performing assets

 

$

38,180

 

$

47,882

 

$

34,262

 

$

40,286

 

$

47,916

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.81%

 

0.82%

 

1.02%

 

1.30%

 

1.90%

 

Non-performing assets to total loans (including OREO)

 

1.46%

 

1.79%

 

1.49%

 

1.84%

 

2.11%

 

Non-performing assets to total assets

 

1.13%

 

1.41%

 

1.00%

 

1.11%

 

1.22%

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Traditional Banking

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.81%

 

0.82%

 

1.02%

 

1.30%

 

1.90%

 

Non-performing assets to total loans (including OREO)

 

1.46%

 

1.79%

 

1.49%

 

1.84%

 

2.11%

 

Non-performing assets to total assets

 

1.13%

 

1.41%

 

1.10%

 

1.32%

 

1.60%

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Acquired Banks

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

2.35%

 

2.29%

 

NA

 

NA

 

NA

 

Non-performing assets to total loans (including OREO)

 

11.07%

 

11.54%

 

NA

 

NA

 

NA

 

 


(1)         Loans on non-accrual status include impaired loans. See Footnote 4 “Loans and Allowance for Loan Losses” of Part II Item 8 “Financial Statements and Supplementary Data” for additional discussion regarding impaired loans.

(2)         All loans past due 90 days-or-more and still accruing are PCI loans accounted for under ASC 310-30.

 

Approximately $10 million, or 50%, of the Bank’s total non-performing loans at December 31, 2013 are in the residential real estate category with the underlying collateral predominantly located in the Bank’s primary market area of Kentucky. The Bank does not consider any of these loans to be “sub-prime.” The Bank’s non-performing residential real estate concentration was $11 million, or 53%, as of December 31, 2012.

 

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Approximately $8 million, or 37%, of the Bank’s total non-performing loans are in the CRE and construction and land development loan portfolios as of December 31, 2013. These loans are secured primarily by commercial properties. In addition to the primary collateral, the Bank also obtained in many cases, at the time of origination, personal guarantees from the principal borrowers and secured liens on the guarantors’ primary residences. The Bank’s non-performing commercial and construction and land development concentration was $7 million, or 31%, as of December 31, 2012.

 

The composition of the Bank’s non-performing loans follows:

 

Table 17 — Non-performing Loan Composition

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

10,490

 

$

11,404

 

$

13,748

 

$

15,236

 

$

14,832

 

Commercial real estate

 

7,643

 

4,468

 

3,032

 

6,265

 

16,850

 

Commercial real estate - purchased whole loans

 

 

 

 

NA

 

NA

 

Construction & land development

 

167

 

2,308

 

2,521

 

3,682

 

9,500

 

Commercial & industrial

 

1,558

 

1,534

 

373

 

323

 

647

 

Warehouse lines of credit

 

 

 

 

NA

 

NA

 

Home equity

 

1,128

 

1,868

 

3,603

 

2,734

 

1,244

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

Other consumer

 

92

 

97

 

29

 

77

 

71

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

$

21,078

 

$

21,679

 

$

23,306

 

$

28,317

 

$

43,144

 

 


NA — Not applicable

 

Table 18 — Non-performing Loans to Total Loans by Loan Type

 

December 31, 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

0.87

%

0.93

%

1.27

%

1.46

%

1.35

%

Commercial real estate

 

0.99

%

0.63

%

0.47

%

0.98

%

2.63

%

Commercial real estate - purchased whole loans

 

0.00

%

0.00

%

0.00

%

NA

 

NA

 

Construction & land development

 

0.38

%

3.38

%

3.74

%

5.36

%

11.43

%

Commercial & industrial

 

1.22

%

1.17

%

0.31

%

0.30

%

0.62

%

Warehouse lines of credit

 

0.00

%

0.00

%

0.00

%

NA

 

NA

 

Home equity

 

0.50

%

0.77

%

1.29

%

0.94

%

0.39

%

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

0.00

%

0.00

%

0.00

%

0.00

%

0.00

%

Overdrafts

 

0.00

%

0.00

%

0.00

%

0.00

%

0.00

%

Other consumer

 

0.60

%

0.64

%

0.29

%

0.59

%

0.52

%

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans to total loans

 

0.81

%

0.82

%

1.02

%

1.30

%

1.90

%

 


NA — Not applicable

 

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The composition of the Bank’s non-performing loans stratified by the number of loans within a specified value range follows:

 

Table 19 — Stratification of Non-performing Loans

 

 

 

Number of Loans and Unpaid Principal Balance

 

December 31, 2013 

 

 

 

 

 

 

 

Balance

 

 

 

 

 

 

 

Total

 

(dollars in thousands)

 

No.

 

Balance <= $100

 

No.

 

> $100 <= $500

 

No.

 

Balance > $500

 

No.

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

87

 

$

4,127

 

23

 

$

3,838

 

2

 

$

1,246

 

112

 

$

9,211

 

Non-owner occupied

 

8

 

312

 

 

 

1

 

967

 

9

 

1,279

 

Commercial real estate

 

3

 

139

 

12

 

3,410

 

3

 

4,094

 

18

 

7,643

 

Commercial real estate - purchased whole loans

 

 

 

 

 

 

 

 

 

Construction & land dev.

 

2

 

167

 

 

 

 

 

2

 

167

 

Commercial & industrial

 

 

 

2

 

327

 

1

 

1,231

 

3

 

1,558

 

Warehouse lines of credit

 

 

 

 

 

 

 

 

 

Home equity

 

24

 

529

 

3

 

599

 

 

 

27

 

1,128

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

 

 

Other consumer

 

16

 

92

 

 

 

 

 

16

 

92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

140

 

$

5,366

 

40

 

$

8,174

 

7

 

$

7,538

 

187

 

$

21,078

 

 

 

 

Number of Loans and Unpaid Principal Balance

 

December 31, 2012 

 

 

 

 

 

 

 

Balance

 

 

 

 

 

 

 

Total

 

(dollars in thousands)

 

No.

 

Balance <= $100

 

No.

 

> $100 <= $500

 

No.

 

Balance > $500

 

No.

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

82

 

$

3,993

 

31

 

$

5,411

 

1

 

$

624

 

114

 

$

10,028

 

Non-owner occupied

 

15

 

798

 

2

 

578

 

 

 

17

 

1,376

 

Commercial real estate

 

5

 

137

 

7

 

1,805

 

3

 

2,526

 

15

 

4,468

 

Commercial real estate - purchased whole loans

 

 

 

 

 

 

 

 

 

Construction & land dev.

 

1

 

76

 

4

 

1,205

 

1

 

1,027

 

6

 

2,308

 

Commercial & industrial

 

2

 

97

 

1

 

237

 

1

 

1,200

 

4

 

1,534

 

Warehouse lines of credit

 

 

 

 

 

 

 

 

 

Home equity

 

33

 

826

 

6

 

1,042

 

 

 

39

 

1,868

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

 

 

Other consumer

 

19

 

97

 

 

 

 

 

19

 

97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

157

 

$

6,024

 

51

 

$

10,278

 

6

 

$

5,377

 

214

 

$

21,679

 

 

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Approximately $15 million in non-performing loans at December 31, 2012, were removed from the non-performing loan classification during 2013.  Approximately $1 million, or 9%, of these loans were removed from the non-performing category because they were charged-off.  Approximately $3 million, or 22%, in loan balances were transferred to OREO with $6 million, or 37%, refinanced at other financial institutions.  The remaining $5 million, or 32%, was returned to accrual status for performance reasons, such as six consecutive months of performance.  Of the $5 million returned to accrual status, one relationship of approximately $2 million accounted for 37% of the total amount returned to accrual status.

 

Interest income that would have been recorded if non-accrual loans were on a current basis in accordance with their original terms was $641,000, $805,000 and $1.1 million in 2013, 2012 and 2011.

 

Based on the Bank’s review of the large individual non-performing commercial credits, as well as its migration analysis for its residential real estate and home equity non-performing portfolio, management believes that its reserves as of December 31, 2013 and 2012, are adequate to absorb probable losses on all non-performing loans.

 

The following tables detail the activity of the Bank’s non-performing loans:

 

Table 20 — Rollforward of Non-performing Loan Activity

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Non-performing loans at beginning of year

 

$

21,679

 

$

23,306

 

$

28,317

 

Acquired bank loans added to non-performing status

 

1,033

 

3,173

 

 

All other bank loans added to non-performing status

 

14,370

 

11,454

 

13,490

 

Loans removed from non-performing status (see table below)

 

(15,374

)

(15,391

)

(16,699

)

Principal paydowns

 

(630

)

(863

)

(1,802

)

 

 

 

 

 

 

 

 

Non-performing loans at end of year

 

$

21,078

 

$

21,679

 

$

23,306

 

 

Table 21 — Detail of Loans Removed from Non-Performing Status

 

Year Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Loans charged off

 

$

(1,520

)

$

(2,421

)

$

(2,220

)

Loans transferred to OREO

 

(3,340

)

(5,871

)

(7,070

)

Loans refinanced at other institutions

 

(5,626

)

(3,664

)

(5,677

)

Loans returned to accrual status

 

(4,888

)

(3,435

)

(1,732

)

 

 

 

 

 

 

 

 

Total non-performing loans removed from non-performing status

 

$

(15,374

)

$

(15,391

)

$

(16,699

)

 

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Delinquent Loans

 

Delinquent loans to total loans decreased to 0.63% at December 31, 2013, from 0.79% at December 31, 2012, as the total balance of delinquent loans decreased by nearly $5 million for the same period. All Bank loans, with the exception of PCI loans, greater than 90 days past due or more as of December 31, 2013 and December 31, 2012 were on non-accrual status.

 

The composition of the Bank’s delinquent loans follows:

 

Table 22 — Delinquent Loan Composition

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

7,650

 

$

11,799

 

$

14,299

 

$

16,031

 

$

22,601

 

Commercial real estate

 

5,198

 

2,640

 

5,126

 

5,700

 

14,111

 

Commercial real estate - purchased whole loans

 

 

 

 

NA

 

NA

 

Construction & land development

 

499

 

2,124

 

541

 

2,322

 

4,111

 

Commercial & industrial

 

1,415

 

2,262

 

105

 

67

 

434

 

Warehouse lines of credit

 

 

 

 

NA

 

NA

 

Home equity

 

1,110

 

1,654

 

4,041

 

2,444

 

3,142

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

98

 

65

 

53

 

61

 

54

 

Overdrafts

 

159

 

168

 

129

 

158

 

155

 

Other consumer

 

94

 

132

 

139

 

144

 

246

 

 

 

 

 

 

 

 

 

 

 

 

 

Total past due loans

 

$

16,223

 

$

20,844

 

$

24,433

 

$

26,927

 

$

44,854

 

 


NA — Not applicable.

 

Table 23 — Delinquent Loans to Total Loans by Loan Type (1)

 

December 31,

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

0.63

%

0.97

%

1.32

%

1.53

%

2.06

%

Commercial real estate

 

0.67

%

0.37

%

0.80

%

0.89

%

2.20

%

Commercial real estate - purchased whole loans

 

0.00

%

0.00

%

0.00

%

0.00

%

0.00

%

Construction & land development

 

1.13

%

3.11

%

0.80

%

3.38

%

4.95

%

Commercial & industrial

 

1.11

%

1.73

%

0.09

%

0.06

%

0.42

%

Warehouse lines of credit

 

0.00

%

0.00

%

0.00

%

NA

 

NA

 

Home equity

 

0.49

%

0.68

%

1.44

%

0.84

%

0.99

%

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

1.09

%

0.75

%

0.62

%

0.74

%

0.67

%

Overdrafts

 

16.84

%

17.59

%

13.58

%

17.54

%

7.73

%

Other consumer

 

0.61

%

0.87

%

1.40

%

1.10

%

1.81

%

 

 

 

 

 

 

 

 

 

 

 

 

Total past due loans to total loans

 

0.63

%

0.78

%

1.07

%

1.24

%

1.98

%

 


(1) — Represents total loans over 30 days past due divided by total loans.

NA — Not applicable.

 

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Table of Contents

 

As detailed in the preceding tables, past due loans within the residential real estate, construction and land development, C&I and home equity categories improved significantly, or $7 million, from December 31, 2012 to December 31, 2013, while CRE delinquencies increased $3 million for the same period.

 

Approximately $17 million in delinquent loans at December 31, 2012, were removed from delinquent status as of December 31, 2013.  Approximately $1 million, or 8%, of these loans were removed from the delinquent category because they were charged-off.  Approximately $6 million, or 37%, in loan balances were transferred to OREO with $6 million, or 35%, refinanced at other financial institutions.  The remaining $4 million, or 20%, in delinquent loans paid current in 2013.

 

The Bank had $96 million in loans outstanding at December 31, 2013 related to its 2012 FDIC-assisted acquisitions, with approximately $4 million of the purchased loans (accounted for under both ASC Topic 310-20 and ASC Topic 310-30) past due 30-or-more days. See additional discussion regarding the Company’s 2012 FDIC-assisted acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

The following tables reflect activity of the Bank’s delinquent loans:

 

Table 24 — Rollforward of Delinquent Loan Activity

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Delinquent loans at beginning of year

 

$

20,844

 

$

24,433

 

$

26,927

 

Acquired bank loans that became delinquent

 

2,094

 

5,967

 

 

All other bank loans that became delinquent

 

10,894

 

11,592

 

17,467

 

Net change in delinquent credit cards and demand deposit accounts

 

28

 

45

 

(32

)

Delinquent loans removed from delinquent status (see table below)

 

(17,328

)

(20,965

)

(18,872

)

Principal paydowns of loans delinquent in both periods

 

(309

)

(228

)

(1,057

)

 

 

 

 

 

 

 

 

Delinquent loans at end of year

 

$

16,223

 

$

20,844

 

$

24,433

 

 

Table 25 — Detail of Loans Removed From Delinquent Status

 

Year Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Loans charged-off

 

$

(1,380

)

$

(2,120

)

$

(2,090

)

Loans transferred to OREO

 

(6,331

)

(6,358

)

(6,140

)

Loans refinanced at other institutions

 

(6,115

)

(7,741

)

(7,147

)

Loans paid current

 

(3,502

)

(4,746

)

(3,495

)

 

 

 

 

 

 

 

 

Total delinquent loans removed from delinquent status

 

$

(17,328

)

$

(20,965

)

$

(18,872

)

 

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Table of Contents

 

Impaired Loans and Troubled Debt Restructurings

 

The Bank defines impaired loans as follows:

 

·                        All loans internally rated as “Substandard,” “Doubtful” or “Loss;”

·                        All loans internally rated in a PCI category with cash flows that have deteriorated from management’s initial estimate;

·                        All loans on non-accrual status and non-PCI loans past due 90 days-or-more still on accrual;

·                        All retail and commercial TDRs; and

·                        Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the definition of impaired.

 

The Bank’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 $108 million at December 31, 2013 compared to $106 million at December 31, 2012. Impaired loans from the Company’s 2012 FDIC-assisted acquisitions totaled $32 million and $18 million at December 31, 2013 and 2012.

 

A TDR is the situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank’s TDRs involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required) and/or extending the maturity date of the loan. Non-accrual loans modified as TDRs remain on non-accrual status and continue to be reported as non-performing loans. Accruing loans modified as TDRs are evaluated for non-accrual status based on a current evaluation of the borrower’s financial condition, and ability and willingness to service the modified debt. As of December 31, 2013, the Bank had $74 million in TDRs, of which $13 million were also on non-accrual status. As of December 31, 2012, the Bank had $83 million in TDRs, of which $14 million were also on non-accrual status.

 

The composition of the Bank’s impaired loans follows:

 

Table 26 — Impaired Loan Composition

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings

 

$

73,972

 

$

83,307

 

$

67,022

 

$

32,231

 

$

36,615

 

Impaired loans (which are not TDRs)

 

34,022

 

22,400

 

10,171

 

12,855

 

12,231

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$

107,994

 

$

105,707

 

$

77,193

 

$

45,086

 

$

48,846

 

 

See Footnote 4 “Loans and Allowance for Loan Losses” of Part II Item 8 “Financial Statements and Supplementary Data” for additional discussion regarding impaired loans and TDRs.

 

105



Table of Contents

 

Other Real Estate Owned

 

The composition of the Bank’s other real estate owned follows:

 

Table 27 — Other Real Estate Owned Composition

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

3,574

 

$

6,281

 

$

4,754

 

$

5,171

 

$

2,749

 

Commercial real estate

 

5,824

 

7,693

 

2,030

 

3,259

 

1,178

 

Construction & land development

 

7,704

 

12,229

 

4,172

 

3,543

 

845

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other real estate owned

 

$

17,102

 

$

26,203

 

$

10,956

 

$

11,973

 

$

4,772

 

 

Table 28 — Stratification of Other Real Estate Owned

 

 

 

Number of Properties and Carrying Value Range

 

December 31, 2013

 

 

 

Carrying Value

 

 

 

Carrying Value

 

 

 

Carrying Value

 

 

 

Total

 

(dollars in thousands)

 

No.

 

<= $100

 

No.

 

> $100 <= $500

 

No.

 

> $500

 

No.

 

Carrying Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

17

 

$

828

 

6

 

$

1,256

 

2

 

$

1,490

 

25

 

$

3,574

 

Commercial real estate

 

 

 

5

 

1,344

 

2

 

4,480

 

7

 

5,824

 

Construction & land development

 

6

 

164

 

12

 

2,689

 

4

 

4,851

 

22

 

7,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

23

 

$

992

 

23

 

$

5,289

 

8

 

$

10,821

 

54

 

$

17,102

 

 

 

 

Number of Properties and Carrying Value Range

 

December 31, 2012 

 

 

 

Carrying Value

 

 

 

Carrying Value

 

 

 

Carrying Value

 

 

 

Total

 

(dollars in thousands)

 

No.

 

<= $100

 

No.

 

> $100 <= $500

 

No.

 

> $500

 

No.

 

Carrying Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

30

 

$

1,665

 

12

 

$

2,735

 

3

 

$

1,881

 

45

 

$

6,281

 

Commercial real estate

 

 

 

7

 

1,826

 

6

 

5,867

 

13

 

7,693

 

Construction & land development

 

5

 

105

 

14

 

2,897

 

6

 

9,227

 

25

 

12,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

35

 

$

1,770

 

33

 

$

7,458

 

15

 

$

16,975

 

83

 

$

26,203

 

 

106



Table of Contents

 

The table below presents a rollforward of the Bank’s OREO for the periods presented:

 

Table 29 — Rollforward of OREO Activity

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

OREO at beginning of year

 

$

26,203

 

$

10,956

 

$

11,973

 

$

4,772

 

$

5,737

 

OREO acquired from failed banks at fair value

 

 

21,266

 

 

 

 

Recast adjustment to acquired properties

 

(1,074

)

 

 

 

 

Transfer from loans to OREO

 

15,271

 

20,610

 

11,300

 

17,798

 

7,332

 

Proceeds from sale*

 

(23,644

)

(25,326

)

(11,844

)

(9,673

)

(6,306

)

Net gain on sale

 

2,170

 

416

 

444

 

203

 

20

 

Writedowns

 

(1,824

)

(1,719

)

(917

)

(1,127

)

(2,011

)

 

 

 

 

 

 

 

 

 

 

 

 

OREO at end of year

 

$

17,102

 

$

26,203

 

$

10,956

 

$

11,973

 

$

4,772

 

 


* — Inclusive of non-cash proceeds where the Bank financed the sale of the property.

 

The fair value of OREO represents the estimated value that management expects to receive when the property is sold, net of related costs to sell. These estimates are based on the most recently available real estate appraisals, with certain adjustments made based on the type of property, age of appraisal, current status of the property and other related factors to estimate the current value of the property. Approximately 82%, or $5 million, of the CRE balance related to two properties added during 2013 located in the Bank’s Minnesota market. Approximately 50%, or $4 million, of the construction and land development balance related to one land development property added during 2012 located in the Bank’s greater Louisville, Kentucky market.

 

Approximately $9 million and $15 million of the OREO balance at December 31, 2013 and 2012 related to the 2012 FDIC-assisted acquisitions and relates predominantly to CRE and construction and land development loans. See additional discussion regarding the 2012 FDIC-assisted acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Approximately $8 million of the OREO balance at December 31, 2013 related to loans transferred to OREO in connection with the Bank’s traditional lending markets. Approximately $3 million of this balance was tied to retail residential real estate properties, $342,000 to construction and  land development property, with the remaining $4 million tied to CRE.

 

Bank Owned Life Insurance (“BOLI”)

 

During November 2013, the Bank purchased $25 million of Bank Owned Life Insurance (“BOLI”).  The BOLI offers tax advantaged non-interest income to help the Bank cover employee-related benefits expenses.  The $25 million of BOLI is expected to add approximately $750,000 of tax-exempt non-interest income to the Bank’s earnings in 2014.  The Company intends to evaluate the BOLI performance during the second quarter of 2014 and could purchase an additional $25 million of BOLI, if circumstances are deemed to be favorable, to help cover employee-benefit related costs.

 

Deposits

 

Total Company deposits increased $8 million, or less than 1%, from December 31, 2012 to $2 billion at December 31, 2013. Total Company interest-bearing deposits decreased $2 million, or less than 1%, and total Company non-interest bearing deposits increased $10 million, or 2%.

 

Deposits related to the Company’s 2012 FDIC-assisted acquisitions totaled $38 million at December 31, 2013 compared to $112 million at December 31, 2012. Former TCB deposits consisted of $17 million in interest-bearing deposits and almost $4 million in non-interest bearing deposits at December 31, 2013, a decrease of $20 million and $1 million since December 31, 2012. Former FCB deposits consisted of $15 million in interest-bearing deposits and $2 million in non-interest bearing deposits at December 31, 2013, a decrease of $48 million and $5 million since December 31, 2012. In general, the run-off of deposits balances for both TCB-related customers and FCB-related customers is within management’s expectations and the result of lower offering rates by RB&T as compared to those offered by TCB and FCB as of their respective acquisition dates.

 

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Table of Contents

 

Excluding non-interest bearing deposits associated with the Company’s 2012 FDIC-assisted acquisitions, non-interest bearing deposits increased $15 million, or 3%, during 2013.  During most of 2012, non-interest bearing accounts, in general, remained an attractive product offering to clients due to the unlimited FDIC insurance feature. This unlimited guaranty by the FDIC expired on December 31, 2012. Management does not believe that the expiration of the unlimited FDIC insurance guaranty has had a material negative impact to the Bank’s non-interest bearing deposit balances.

 

Excluding interest-bearing deposits associated with the Company’s 2012 FDIC-assisted acquisitions, interest-bearing deposits increased $67 million, or 5%, during 2013. Approximately $32 million of this increase represented a transfer by one account out of a repurchase agreement into the NOW category of deposits. At this time, management remains uncertain as to the long-term nature of this large deposit.

 

See additional discussion regarding the 2012 FDIC-assisted acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Ending balances of all deposit categories follows:

 

Table 30A — Deposits

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

651,134

 

$

580,900

 

$

523,708

 

$

298,452

 

$

245,502

 

Money market accounts

 

479,569

 

514,698

 

433,508

 

637,557

 

596,370

 

Brokered money market accounts

 

35,533

 

35,596

 

18,121

 

513

 

64,608

 

Savings

 

78,020

 

62,145

 

44,472

 

38,661

 

33,691

 

Individual retirement accounts*

 

28,767

 

32,491

 

31,201

 

34,129

 

34,651

 

Time deposits, $100,000 and over*

 

67,255

 

80,906

 

82,970

 

152,891

 

169,548

 

Other certificates of deposit*

 

75,516

 

100,036

 

103,230

 

127,156

 

135,171

 

Brokered certificates of deposit*(1)

 

86,421

 

97,110

 

88,285

 

687,958

 

1,004,665

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

1,502,215

 

1,503,882

 

1,325,495

 

1,977,317

 

2,284,206

 

Total non interest-bearing deposits

 

488,642

 

479,046

 

408,483

 

325,375

 

318,275

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

1,990,857

 

$

1,982,928

 

$

1,733,978

 

$

2,302,692

 

$

2,602,481

 

 


(*) - Represents a time deposit.

(1) — Incudes brokered deposits less than, equal to and greater than $100,000.

 

108



Table of Contents

 

The composition of deposits outstanding at December 31, 2013 and 2012 related to the Company’s 2012 FDIC-assisted acquisitions follows:

 

Table 30B —Deposits — 2012 FDIC-assisted Acquired Banks

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2013 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Demand

 

$

1,072

 

$

2,674

 

$

3,746

 

Money market accounts

 

2,325

 

4,677

 

7,002

 

Savings

 

4,069

 

 

4,069

 

Individual retirement accounts*

 

643

 

729

 

1,372

 

Time deposits, $100,000 and over*

 

3,947

 

1,475

 

5,422

 

Other certificates of deposit*

 

2,293

 

3,168

 

5,461

 

Brokered certificates of deposit*(1)

 

2,758

 

2,581

 

5,339

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

17,107

 

15,304

 

32,411

 

Total non interest-bearing deposits

 

3,335

 

2,192

 

5,527

 

 

 

 

 

 

 

 

 

Total deposits

 

$

20,442

 

$

17,496

 

$

37,938

 

 


(*) - Represents a time deposit.

(1) — Incudes brokered deposits less than, equal to and greater than $100,000.

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2012 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Demand

 

$

1,401

 

$

5,871

 

$

7,272

 

Money market accounts

 

1,727

 

25,762

 

27,489

 

Savings

 

8,623

 

 

8,623

 

Individual retirement accounts*

 

1,166

 

3,269

 

4,435

 

Time deposits, $100,000 and over*

 

10,822

 

3,267

 

14,089

 

Other certificates of deposit*

 

7,196

 

12,574

 

19,770

 

Brokered certificates of deposit*(1)

 

6,729

 

12,247

 

18,976

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

37,664

 

62,990

 

100,654

 

Total non interest-bearing deposits

 

4,240

 

6,812

 

11,052

 

 

 

 

 

 

 

 

 

Total deposits

 

$

41,904

 

$

69,802

 

$

111,706

 

 


(*) — Represents a time deposit.

(1) — Incudes brokered deposits less than, equal to and greater than $100,000.

 

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Table of Contents

 

Average balances of all deposits and the average rates paid on such deposits for the years indicated follows:

 

Table 31 — Average Deposits

 

 

 

2013

 

2012

 

2011

 

 

 

Average

 

Average

 

Average

 

Average

 

Average

 

Average

 

December 31, (dollars in thousands)

 

Balance

 

Rate

 

Balance

 

Rate

 

Balance

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

696,295

 

0.07%

 

$

614,118

 

0.06%

 

$

422,222

 

0.13%

 

Money market accounts

 

508,288

 

0.12%

 

478,682

 

0.15%

 

628,178

 

0.31%

 

Time deposits

 

187,076

 

0.73%

 

253,567

 

0.86%

 

254,064

 

1.60%

 

Brokered money market

 

34,691

 

0.20%

 

22,469

 

0.22%

 

6,563

 

0.31%

 

Brokered certificates of deposit

 

88,497

 

1.75%

 

143,619

 

1.19%

 

229,488

 

1.03%

 

Total average interest-bearing deposits

 

1,514,847

 

0.27%

 

1,512,455

 

0.34%

 

1,540,515

 

0.58%

 

Total average non interest-bearing deposits

 

513,891

 

 

624,053

 

 

509,457

 

 

Total average deposits

 

$

2,028,738

 

0.20%

 

$

2,136,508

 

0.24%

 

$

2,049,972

 

0.43%

 

 

Maturities of time deposits of $100,000 or more outstanding, including brokered deposits, at December 31, 2013 follows:

 

Table 32 — Maturities of Time Deposits Greater than $100,000

 

Maturity

 

(in thousands)

 

 

 

 

 

Three months or less

 

$

28,084

 

Over three months through six months

 

24,043

 

Over six months through 12 months

 

29,525

 

Over 12 months

 

65,257

 

 

 

 

 

Total time deposits greater than $100,000

 

$

146,909

 

 

110



Table of Contents

 

Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings

 

Securities sold under agreements to repurchase and other short-term borrowings decreased $85 million, or 34%, during 2013. Approximately $32 million of this decline was related to the previously discussed transfer into deposits by one customer relationship. The remaining decrease was related to customary account fluctuations, as these balances are subject to large fluctuations on a daily basis.  The substantial majority of these accounts are indexed to immediately repricing indices such as the FFTR.

 

Information regarding Securities sold under agreements to repurchase follows:

 

Table 33 — Securities sold under agreements to repurchase

 

December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding balance at end of year

 

$

165,555

 

$

250,884

 

$

230,231

 

$

319,246

 

$

299,580

 

Weighted average interest rate at year end

 

0.04

%

0.06

%

0.17

%

0.31

%

0.30

%

Average outstanding balance during the year

 

$

170,386

 

$

237,414

 

$

278,861

 

$

330,154

 

$

323,688

 

Average interest rate during the year

 

0.04

%

0.16

%

0.23

%

0.31

%

0.33

%

Maximum outstanding at any month end

 

$

242,721

 

$

272,057

 

$

297,571

 

$

329,383

 

$

318,769

 

 

Federal Home Loan Bank Advances

 

FHLB advances increased $62 million, or 12%, from December 31, 2012 to $605 million at December 31, 2013. In addition to using FHLB advances as a funding source, the Bank also utilizes longer-term FHLB advances as an interest rate risk management tool. During 2013, the Bank borrowed $70 million in FHLB advances primarily to fund and partially mitigate the Bank’s interest rate risk for its fixed rate CRE loan initiative. These advances had a weighted average rate of 1.61% and a weighted average life of seven years. To assist in bringing the Bank’s EVE calculation within board-approved policy limits during the fourth quarter of 2013, the Bank borrowed an additional $20 million of long-term FHLB advances with a weighted-average life of five years and a weighted-average cost of 1.76%.

 

Overall use of these advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. With many of the Bank’s expected loan originations during 2014 having repricing terms longer than five years, management will likely elect to borrow additional funds in 2014 and beyond to mitigate its risk of future increases in market interest rates. Whether the Bank ultimately does so, and how much in advances it extends out, will be dependent upon circumstances at that time. If the Bank does obtain longer-term FHLB advances for interest rate risk mitigation, it will have a negative impact on then current earnings. The amount of the negative impact will be dependent upon the dollar amount, coupon and final maturity of the advances obtained.

 

Information regarding Federal Home Loan Bank advances follows:

 

Table 34 — Federal Home Loan Bank advances

 

December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding balance at end of year

 

$

605,000

 

$

542,600

 

$

934,630

 

$

564,877

 

$

637,607

 

Weighted average interest rate at year end

 

2.42

%

2.64

%

1.83

%

3.49

%

3.53

%

Average outstanding balance during the year

 

$

578,633

 

$

560,659

 

$

558,249

 

$

574,181

 

$

630,294

 

Average interest rate during the year

 

2.54

%

2.65

%

3.26

%

3.48

%

3.69

%

Maximum outstanding at any month end

 

$

605,000

 

$

789,618

 

$

934,630

 

$

662,593

 

$

675,117

 

 

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Interest Rate Swaps

 

During the fourth quarter of 2013, the Bank entered into two interest rate swap agreements as part of its interest rate risk management strategy. The Bank designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to the three-month LIBOR or the overall changes in cash flows on certain money market deposit accounts.  The counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the swap contracts is not significant. At December 31, 2013, the Bank had no cash pledged as collateral for these swaps.

 

Table 35 — Interest Rate Swaps

 

Information regarding the Bank’s interest rate swaps follows:

 

December 31, (dollars in thousands)

 

2013

 

 

 

 

 

Notional amount

 

$

20,000

 

Weighted average pay rate

 

2.25

%

Weighted average receive rate

 

0.21

%

Weighted average maturity in years

 

7

 

Unrealized gain

 

$

170

 

 

Liquidity

 

The Bank had a loan to deposit ratio (excluding brokered deposits) of 139% at December 31, 2013 and 143% at December 31, 2012. At December 31, 2013 and December 31, 2012, the Bank had cash and cash equivalents on-hand of $171 million and $138 million. In addition, the Bank had available collateral to borrow an additional $282 million and $472 million from the FHLB at December 31, 2013 and December 31, 2012. In addition to its borrowing line with the FHLB, RB&T also had unsecured lines of credit totaling $166 million available through various other financial institutions as of December, 31 2013.

 

The Bank 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 Bank’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, FHLB borrowings, and for other purposes, as required by law.

 

At December 31, 2013 and December 31, 2012, pledged investment securities had a fair value of $225 million and $335 million. 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. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were cancelled, or if the Bank cannot obtain brokered deposits, the Bank would be forced to offer market leading deposit interest rates to meet its funding and liquidity needs.

 

At December 31, 2013, the Bank had approximately $391 million from 58 large deposit relationships where the individual relationship individually exceeded $2 million. These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. The 20 largest deposit relationships represented approximately $282 million of the total balance. If any of these balances are moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize brokered deposits to replace withdrawn balances. Based on past experience utilizing brokered deposits, the Bank believes it can quickly obtain brokered deposits if needed. The overall cost of gathering brokered deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.

 

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Capital

 

Table 36 — Capital

 

Information pertaining to the Company’s capital balances and ratios follows:

 

December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

$

542,793

 

$

536,702

 

$

452,367

 

$

371,376

 

$

316,020

 

Book value per share at December 31,

 

26.09

 

25.60

 

21.59

 

17.74

 

15.19

 

Tangible book value per share at December 31, (1)

 

25.35

 

24.86

 

20.81

 

16.87

 

14.28

 

Dividends declared per share - Class A Common Stock

 

0.693

 

1.749

 

0.605

 

0.561

 

0.517

 

Dividends declared per share - Class B Common Stock

 

0.630

 

1.590

 

0.550

 

0.510

 

0.470

 

Average stockholders’ equity to average total assets

 

16.15

%

14.89

%

12.87

%

10.31

%

8.95

%

Total risk based capital - Total Company

 

26.71

%

25.28

%

24.74

%

22.04

%

18.37

%

Tier 1 risk based capital - Total Company

 

25.67

%

24.31

%

23.59

%

20.89

%

17.25

%

Tier 1 leverage capital - Total Company

 

16.81

%

16.36

%

14.77

%

12.05

%

10.52

%

Dividend payout ratio

 

56

%

31

%

13

%

18

%

25

%

 


(1) See footnote 4 of Part II, Item 6 “Selected Financial Data”

 

Total stockholders’ equity increased from $537 million at December 31, 2012 to $543 million at December 31, 2013. The increase in stockholders’ equity was primarily attributable to net income earned during 2013 reduced by cash dividends declared and common stock repurchases.

 

New Capital Rules — Beginning January 1, 2015 the Company and the Bank will be subject to the new capital regulations of Basel III. The new regulations establish higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based capital ratio and a new capital conservation buffer. The new regulations also include revisions to the definition of capital and changes in the risk-weighting of certain assets. The new regulations establish definitions of “well capitalized” including the capital conservation buffer as a 7.0%  common equity Tier 1 risk-based capital ratio, an 8.5% Tier 1 risk-based capital ratio and a 10.5% total risk-based capital ratio. The Tier 1 leverage ratio is unchanged from current regulations. Management has completed a preliminary analysis of the impact of these new regulations to the capital ratios of both the Company and the Bank and estimates that the ratios for both the Company and the Bank will comfortably exceed the new minimum capital ratio requirements for “well-capitalized” including the capital conservation buffer under Basel III when effective.

 

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.

 

Dividend Restrictions — 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 December 31, 2013, RB&T could, without prior approval, declare dividends of approximately $75 million. The Company does not plan to pay dividends from its Florida subsidiary, RB, in the foreseeable future.

 

Regulatory Capital Requirements — The Parent Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

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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 FRB, FDIC and the OCC. Republic’s average stockholders’ equity to average assets ratio was 16.15% at December 31, 2013 compared to 14.89% at December 31, 2012. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.

 

In 2004, the Bank executed an intragroup trust preferred transaction with the purpose of providing RB&T access to additional capital markets, if needed in the future. The subordinated debentures held by RB&T were treated as Tier 2 Capital based on requirements administered by the Bank’s federal banking agency. In April 2013, the Bank received approval from its regulators and unwound the intragroup trust preferred transaction. The cash utilized to pay off the transaction remained at the Parent Company, Republic Bancorp. Unwinding of the transaction had no impact on RB&T’s two Tier 1 related capital ratios and only a minimal impact on its Total Risk Based Capital ratio.

 

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 December 31, 2035 and are redeemable at the Bank’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 utilized to fund loan growth (in prior years), support an existing stock repurchase program and for other general business purposes such as the acquisition of GulfStream Community Bank in 2006.

 

Off Balance Sheet Items

 

Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit follows:

 

Table 37 — Off Balance Sheet Items

 

 

 

Maturity by Period

 

 

 

 

 

Greater

 

Greater

 

 

 

 

 

 

 

 

 

than one

 

than three

 

Greater

 

 

 

 

 

Less than

 

year to

 

years to

 

than five

 

 

 

December 31, 2013 (in thousands)

 

one year

 

three years

 

five years

 

years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused warehouse lines of credit

 

$

208,424

 

$

 

$

 

$

 

$

208,424

 

Unused home equity lines of credit

 

542

 

25,156

 

63,940

 

140,723

 

230,361

 

Unused loan commitments - other

 

122,440

 

52,230

 

1,735

 

2,371

 

178,776

 

Standby letters of credit

 

2,145

 

100

 

63

 

 

2,308

 

FHLB letters of credit

 

3,200

 

 

 

 

3,200

 

Total off balance sheet items

 

$

336,751

 

$

77,486

 

$

65,738

 

$

143,094

 

$

623,069

 

 

A portion of the unused commitments above are expected to expire or may not be fully used, therefore the total amount of commitments above does not necessarily indicate future cash requirements.

 

Standby letters of credit are conditional commitments issued by the Bank 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 $2 million and $17 million at December 31, 2013 and December 31, 2012. In addition to credit risk, the Bank also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Bank does not deem this risk to be material.

 

At December 31, 2013, the Bank had a $3 million letter of credit from the FHLB issued on behalf of a RB&T client. This letter of credit was used as credit enhancements for client bond offerings and reduced RB&T’s available borrowing line at the FHLB. The Bank uses a blanket pledge of eligible real estate loans to secure these letters of credit.

 

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Commitments to extend credit generally consist of unfunded lines of credit. These commitments generally have variable rates of interest.

 

Aggregate Contractual Obligations

 

In addition to owned banking facilities, the Bank has entered into long-term leasing arrangements to support the ongoing activities of the Company. The Bank also has required future payments for long-term and short-term debt as well as the maturity of time deposits. The required payments under such commitments follows:

 

Table 38 — Aggregate Contractual Obligations

 

 

 

Maturity by Period

 

 

 

 

 

Greater

 

Greater

 

 

 

 

 

 

 

 

 

than one

 

than three

 

Greater

 

 

 

 

 

Less than

 

year to

 

years to

 

than five

 

 

 

December 31, 2013 (in thousands)

 

one year

 

three years

 

five years

 

years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits (including brokered certificates of deposit)

 

$

151,189

 

$

79,287

 

$

27,012

 

$

471

 

$

257,959

 

Federal Home Loan Bank advances

 

188,000

 

92,000

 

235,000

 

90,000

 

605,000

 

Subordinated note (*)

 

 

 

 

41,240

 

41,240

 

Securities sold under agreements to repurchase

 

165,555

 

 

 

 

165,555

 

Interest rate swaps (**)

 

400

 

332

 

141

 

 

873

 

Lease commitments

 

6,846

 

10,345

 

5,672

 

5,507

 

28,370

 

Total contractual obligations

 

$

511,990

 

$

181,964

 

$

267,825

 

$

137,218

 

$

1,098,997

 

 


(*) — While this instrument matures in September 2035, the Bank has the right to prepay at the end of the fixed period, August 2015, without penalty.

(**) — Obligation is estimated using the LIBOR forward yield curve through 2020. Amounts are subject to change based on actual movements in LIBOR.

 

See Footnote 10 “Deposits” of Part II Item 8 “Financial Statements and Supplementary Data” for further information regarding the Bank’s time deposits.

 

FHLB advances represent the amounts that are due to the FHLB. Approximately $100 million of the advances, although fixed, are subject to conversion provisions at the option of the FHLB and can be prepaid without a penalty. Management believes these advances will not likely be converted in the short-term, and therefore has included the advances in their original maturity categories for purposes of this table.

 

See Footnote 13 “Subordinated Note” of Part II Item 8 “Financial Statements and Supplementary Data” for further information regarding the Bank’s subordinated note.

 

Securities sold under agreements to repurchase generally have indeterminate maturity periods and are predominantly included in the less than one year category above.

 

Lease commitments represent the total minimum lease payments under non-cancelable operating leases.

 

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Table of Contents

 

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. Management considers interest rate risk to be the Company’s most significant market risk.

 

The interest sensitivity profile of the Company at any point in time will be impacted 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.

 

The Company utilizes an earnings simulation model as its primary tool to measure interest rate sensitivity. Potential changes in market interest rates and their subsequent effects on net interest income were evaluated with the model. The model projects the effect of instantaneous movements in interest rates between 100 and 400 basis point increments equally across all points on the yield curve. These projections are computed based on many various assumptions, which are used to determine the range between 100 and 400 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 the Bank’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.

 

The Company did not present a model simulation for declining interest rates as of December 31, 2013 because the Federal Open Market Committee effectively lowered the Fed Funds Target Rate between 0.00% to 0.25% in December 2008; therefore, no further short-term rate reductions can occur.  Overall, the Company’s interest rate risk position from rising rates has generally remained within a relatively narrow range since December 31, 2012, showing improvements in the “Up 100” and “Up 200” basis points scenarios with deterioration in the “Up 300” scenario.  The Company’s “Base” net interest income projection as of December 31, 2013, however, was substantially lower than the previous 12 months and the “Base” projection as of December 31, 2012.  The “Base” projection represents the Company’s projected net interest income, excluding loan fees, for the next 12-month period.  The deterioration in the Company’s “Base” net interest income projection is primarily due to the expected continued downward repricing of the Bank’s interest-earning assets.

 

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The following tables illustrate the Company’s projected net interest income sensitivity profile based on the asset/liability model as of December 31, 2013 and 2012. The Company’s interest rate sensitivity model does not include loan fees within interest income. During 2013 and 2012, loan fees (excluding RAL fees) included in interest income were $10.9 million and $5.6 million.

 

Table 39 — Interest Rate Sensitivity for 2013

 

 

 

Previous

 

 

 

Increase in Rates

 

 

 

Twelve

 

 

 

100

 

200

 

300

 

400

 

(dollars in thousands)

 

Months

 

Base

 

Basis Points

 

Basis Points

 

Basis Points

 

Basis Points*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

413

 

$

24

 

$

279

 

$

528

 

$

771

 

$

936

 

Investment securities

 

9,311

 

9,006

 

10,727

 

12,499

 

14,130

 

15,662

 

Loans, excluding loan fees

 

113,933

 

112,746

 

119,881

 

128,069

 

136,706

 

145,458

 

Total interest income, excluding loan fees

 

123,657

 

121,776

 

130,887

 

141,096

 

151,607

 

162,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,093

 

3,957

 

9,460

 

17,540

 

26,011

 

35,242

 

Securities sold under agreements to repurchase

 

70

 

29

 

835

 

2,048

 

3,673

 

5,297

 

Federal Home Loan Bank advances and other long-term borrowings

 

17,230

 

16,494

 

17,717

 

18,949

 

20,190

 

22,729

 

Total interest expense

 

21,393

 

20,480

 

28,012

 

38,537

 

49,874

 

63,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income, excluding loan fees

 

$

102,264

 

$

101,296

 

$

102,875

 

$

102,559

 

$

101,733

 

$

98,788

 

Change from base

 

 

 

 

 

$

1,579

 

$

1,263

 

$

437

 

$

(2,508

)

% Change from base

 

 

 

 

 

1.56

%

1.25

%

0.43

%

-2.48

%

 


* — The Company increased its interest rate shock range to +400 basis points during the year ending December 31, 2013; therefore, no comparable measure was available at December 31, 2012.

 

Table 40 — Interest Rate Sensitivity for 2012

 

 

 

Previous

 

 

 

Increase in Rates

 

 

 

Twelve

 

 

 

100

 

200

 

300

 

(dollars in thousands)

 

Months

 

Base

 

Basis Points

 

Basis Points

 

Basis Points

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected interest income:

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

588

 

$

88

 

$

209

 

$

329

 

$

298

 

Investment securities

 

12,329

 

9,719

 

12,162

 

14,485

 

16,606

 

Loans, excluding loan fees

 

119,762

 

119,529

 

126,038

 

135,022

 

144,842

 

Total interest income, excluding loan fees

 

132,679

 

129,336

 

138,409

 

149,836

 

161,746

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected interest expense:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

5,074

 

4,717

 

13,735

 

22,327

 

31,059

 

Securities sold under agreements to repurchase

 

375

 

42

 

1,770

 

3,503

 

5,235

 

Federal Home Loan Bank advances and other long-term borrowings

 

17,355

 

16,583

 

16,827

 

17,076

 

16,231

 

Total interest expense

 

22,804

 

21,342

 

32,332

 

42,906

 

52,525

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income, excluding loan fees

 

$

109,875

 

$

107,994

 

$

106,077

 

$

106,930

 

$

109,221

 

Change from base

 

 

 

 

 

$

(1,917

)

$

(1,064

)

$

1,227

 

% Change from base

 

 

 

 

 

-1.78

%

-0.99

%

1.14

%

 

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While the RB&T’s primary interest rate risk management tool is its earnings simulation model, the Board has also established policy limits for RB&T for acceptable changes in the economic value of the RB&T’s equity (“EVE”) for given changes in market interest rates.  The EVE represents the difference between the net present value of RB&T’s interest-earning assets and interest bearing liabilities at a point in time.

 

To combat the continued downward repricing in RB&T’s loan and investment portfolios during 2013, a primary strategy for RB&T during the year included the origination of loans with longer repricing durations than what RB&T has traditionally originated and retained within its portfolio.  This strategy of extending the repricing duration of RB&T’s loans to mitigate the negative repricing trends within its interest-earning assets has created challenges for RB&T to maintain its interest rate risk position within its board-approved policy limits for its economic value of equity calculation.

 

RB&T exceeded the Board’s approved policy limits during the fourth quarter of 2013 related to changes in its EVE for certain assumed changes in market interest rates. To bring its EVE calculation within board-approved policy limits, RB&T borrowed $20 million of long-term FHLB advances with a weighted average life of 5 years and a weighted average cost of 1.76%.  In addition, RB&T executed two long-term interest rate swaps with a total notional amount of $20 million during the fourth quarter of 2013 to hedge its cash flows associated with certain immediately repricing liabilities.  The chart below illustrates RB&T’s EVE calculation as of December 31, 2013 as compared to the EVE calculation as of December 31, 2012.

 

Table 41 — Economic Value of Equity Sensitivity for 2013 (RB&T only)

 

 

 

 

 

Increase in Rates

 

 

 

 

 

100

 

200

 

300

 

400

 

(dollars in thousands)

 

Base

 

Basis Points

 

Basis Points

 

Basis Points

 

Basis Points

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Economic Value of Equity

 

$

436,190

 

$

394,056

 

$

350,972

 

$

308,819

 

$

260,398

 

Change from base

 

 

 

$

(42,134

)

$

(85,218

)

$

(127,371

)

$

(175,792

)

% Change from base

 

 

 

-9.66

%

-19.54

%

-29.20

%

-40.30

%

Board policy limit on % change from base

 

 

 

-10.00

%

-20.00

%

-35.00

%

-45.00

%

 


* — RB&T increased its interest rate shock range to +400 basis points during the year ending December 31, 2013; therefore, no comparable measure was available at December 31, 2012.

 

Table 42 — Economic Value of Equity Sensitivity for 2012 (RB&T only)

 

 

 

 

 

Increase in Rates

 

 

 

 

 

100

 

200

 

300

 

(dollars in thousands)

 

Base

 

Basis Points

 

Basis Points

 

Basis Points

 

 

 

 

 

 

 

 

 

 

 

Estimated Economic Value of Equity

 

$

407,158

 

$

388,636

 

$

360,793

 

$

336,204

 

Change from base

 

 

 

$

(18,522

)

$

(46,365

)

$

(70,954

)

% Change from base

 

 

 

-4.55

%

-11.39

%

-17.43

%

Board policy limit on % change from base

 

 

 

-10.00

%

-20.00

%

-35.00

%

 

118



Table of Contents

 

Adoption of New Accounting Pronouncements

 

Accounting Standards Update (“ASU”) 2013-02 — Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

 

This ASU requires an entity report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in this ASU were effective prospectively for reporting periods beginning after December 15, 2012. This amendment did not have a material impact on the Company’s financial statements.

 

ASU 2013-10 — Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes

 

This ASU permits the Fed Funds Effective Swap Rate or as it is also called, the Overnight Index Swap Rate (“OIS”), to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to U.S. Treasury rates and the London Interbank Offered Rate (“LIBOR”). The ASU also removes the restriction on using different benchmark rates for similar hedges. The amendments in this ASU are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.This ASU did not have a material impact on the Company’s financial statements.

 

ASU 2013-11 — Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

 

This ASU clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this ASU do not require new recurring disclosures and are effective for fiscal years and interim periods within those years, beginning after December 15, 2013. This ASU is not expected to have a material impact on the Company’s financial statements.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

 

See the section titled “Asset/Liability Management and Market Risk” included under Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Item 8.  Financial Statements and Supplementary Data.

 

The following are included in this section:

 

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated balance sheets — December 31, 2013 and 2012

Consolidated statements of income and comprehensive income — years ended December 31, 2013, 2012 and 2011

Consolidated statements of stockholders’ equity — years ended December 31, 2013, 2012 and 2011

Consolidated statements of cash flows — years ended December 31, 2013, 2012 and 2011

Footnotes to consolidated financial statements

 

119



Table of Contents

 

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The Management of Republic Bancorp, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the Company’s annual consolidated financial statements. All information has been prepared in accordance with U.S. generally accepted accounting principles and, as such, includes certain amounts that are based on Management’s best estimates and judgments.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting presented in conformity with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Two of the objectives of internal control are to provide reasonable assurance to Management and the Board of Directors that transactions are properly authorized and recorded in the Company’s financial records, and that the preparation of the Company’s financial statements and other financial reporting is done in accordance with U.S. generally accepted accounting principles. There are inherent limitations in the effectiveness of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to reliability of financial statements. Furthermore, internal control can vary with changes in circumstances.

 

Management has made its own assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, in relation to the criteria described in the report, The 1992 Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Based on its assessment, Management believes that as of December 31, 2013, the Company’s internal control was effective in achieving the objectives stated above. Crowe Horwath LLP has provided its report on the effectiveness of internal control in their report dated March 13, 2014.

 

GRAPHIC

Steven E. Trager

Chairman and Chief Executive Officer

 

GRAPHIC

Kevin Sipes

Chief Financial Officer and Chief Accounting Officer

 

 

March 13, 2014

 

120



Table of Contents

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

of Republic Bancorp, Inc.

 

We have audited the accompanying consolidated balance sheets of Republic Bancorp, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited Republic Bancorp, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in The 1992 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Republic Bancorp, Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Republic Bancorp, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the U.S. of America. Also in our opinion, Republic Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in The 1992 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

GRAPHIC

 

Louisville, Kentucky

March 13, 2014

 

121



Table of Contents

 

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, (in thousands, except share data)

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

170,863

 

$

137,691

 

Securities available for sale

 

432,893

 

438,246

 

Securities held to maturity (fair value of $50,768 in 2013 and $46,416 in 2012)

 

50,644

 

46,010

 

Mortgage loans held for sale, at fair value

 

3,506

 

10,614

 

Loans

 

2,589,792

 

2,650,197

 

Allowance for loan losses

 

(23,026

)

(23,729

)

Loans, net

 

2,566,766

 

2,626,468

 

Federal Home Loan Bank stock, at cost

 

28,342

 

28,377

 

Premises and equipment, net

 

32,908

 

33,197

 

Goodwill

 

10,168

 

10,168

 

Other real estate owned

 

17,102

 

26,203

 

Bank owned life insurance

 

25,086

 

 

Other assets and accrued interest receivable

 

33,626

 

37,425

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

3,371,904

 

$

3,394,399

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

Non interest-bearing

 

$

488,642

 

$

479,046

 

Interest-bearing

 

1,502,215

 

1,503,882

 

Total deposits

 

1,990,857

 

1,982,928

 

 

 

 

 

 

 

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

 

165,555

 

250,884

 

Federal Home Loan Bank advances

 

605,000

 

542,600

 

Subordinated note

 

41,240

 

41,240

 

Other liabilities and accrued interest payable

 

26,459

 

40,045

 

 

 

 

 

 

 

Total liabilities

 

2,829,111

 

2,857,697

 

 

 

 

 

 

 

Commitments and contingent liabilities (Footnote 20)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, no par value, 100,000 shares authorized Series A 8.5% non cumulative convertible, none issued

 

 

 

Class A Common Stock, no par value, 30,000,000 shares authorized, 18,541,284 shares (2013) and 18,694,315 shares (2012) issued and outstanding; Class B Common Stock, no par value, 5,000,000 shares authorized, 2,259,926 shares (2013) and 2,270,952 (2012) issued and outstanding

 

4,894

 

4,932

 

Additional paid in capital

 

133,012

 

132,686

 

Retained earnings

 

401,766

 

393,472

 

Accumulated other comprehensive income

 

3,121

 

5,612

 

 

 

 

 

 

 

Total stockholders’ equity

 

542,793

 

536,702

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

3,371,904

 

$

3,394,399

 

 

See accompanying footnotes to consolidated financial statements.

 

122



Table of Contents

 

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, (in thousands, except per share data)

 

 

 

2013

 

2012

 

2011

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

124,843

 

$

170,542

 

$

177,715

 

Taxable investment securities

 

8,067

 

10,729

 

15,309

 

Federal Home Loan Bank stock and other

 

1,658

 

2,188

 

2,091

 

Total interest income

 

134,568

 

183,459

 

195,115

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,093

 

5,074

 

8,914

 

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

 

70

 

375

 

646

 

Federal Home Loan Bank advances

 

14,715

 

14,833

 

18,180

 

Subordinated note

 

2,515

 

2,522

 

2,515

 

Total interest expense

 

21,393

 

22,804

 

30,255

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

113,175

 

160,655

 

164,860

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

2,983

 

15,043

 

17,966

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

110,192

 

145,612

 

146,894

 

 

 

 

 

 

 

 

 

NON INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

13,953

 

13,496

 

14,105

 

Net refund transfer fees

 

13,884

 

78,304

 

88,195

 

Mortgage banking income

 

7,258

 

8,447

 

3,899

 

Debit card interchange fee income

 

6,512

 

5,817

 

5,791

 

Bargain purchase gain - Tennessee Commerce Bank

 

 

27,614

 

 

Bargain purchase gain - First Commercial Bank

 

1,324

 

27,824

 

 

Gain on sale of banking center

 

 

 

2,856

 

Gain on sale of securities available for sale

 

 

56

 

2,285

 

Net gain on sale of other real estate owned

 

2,170

 

416

 

444

 

Increase in cash surrender value of bank owned life insurance

 

86

 

 

 

 

 

 

 

 

 

 

 

Total impairment losses on investment securities

 

 

 

(279

)

Net impairment loss recognized in earnings

 

 

 

(279

)

 

 

 

 

 

 

 

 

Other

 

2,782

 

3,104

 

2,328

 

Total non interest income

 

47,969

 

165,078

 

119,624

 

 

 

 

 

 

 

 

 

NON INTEREST EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

57,778

 

60,633

 

54,966

 

Occupancy and equipment, net

 

21,918

 

22,474

 

21,713

 

Communication and transportation

 

4,128

 

5,806

 

5,695

 

Marketing and development

 

3,353

 

3,429

 

3,237

 

FDIC insurance expense

 

1,682

 

1,403

 

4,425

 

Bank franchise tax expense

 

4,115

 

3,916

 

3,645

 

Data processing

 

3,333

 

4,309

 

3,207

 

Debit card interchange expense

 

2,850

 

2,462

 

2,239

 

Supplies

 

1,157

 

2,114

 

2,353

 

Other real estate owned expense

 

3,446

 

3,537

 

2,356

 

Charitable contributions

 

1,004

 

3,341

 

5,933

 

Legal expense

 

4,627

 

1,866

 

3,969

 

FDIC civil money penalty

 

 

 

900

 

FHLB advance prepayment penalty

 

 

2,436

 

 

Other

 

8,272

 

9,019

 

7,683

 

Total non interest expenses

 

117,663

 

126,745

 

122,321

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

 

40,498

 

183,945

 

144,197

 

INCOME TAX EXPENSE

 

15,075

 

64,606

 

50,048

 

NET INCOME

 

$

25,423

 

$

119,339

 

$

94,149

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.23

 

$

5.71

 

$

4.50

 

Class B Common Stock

 

$

1.17

 

$

5.55

 

$

4.45

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.22

 

$

5.69

 

$

4.49

 

Class B Common Stock

 

$

1.16

 

$

5.53

 

$

4.44

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.693

 

$

1.749

 

$

0.605

 

Class B Common Stock

 

$

0.630

 

$

1.590

 

$

0.550

 

 

See accompanying footnotes to consolidated financial statements.

 

123



Table of Contents

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, (in thousands)

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net income

 

$

25,423

 

$

119,339

 

$

94,149

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

170

 

 

 

Unrealized gains (losses) on securities available for sale

 

(4,747

)

1,043

 

(893

)

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

 

742

 

1,279

 

(145

)

Reclassification adjustment for gains recognized in earnings

 

 

(56

)

(2,285

)

Reclassification adjustment for other-than-temporary impairment recognized in earnings

 

 

 

279

 

Net unrealized gains (losses)

 

(3,835

)

2,266

 

(3,044

)

Tax effect

 

1,344

 

(793

)

1,065

 

Net of tax

 

(2,491

)

1,473

 

(1,979

)

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

22,932

 

$

120,812

 

$

92,170

 

 

See accompanying footnotes to consolidated financial statements.

 

124



Table of Contents

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2013, 2012 and 2011

 

 

 

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, 2011

 

18,628

 

2,307

 

$

4,944

 

$

129,327

 

$

230,987

 

$

6,118

 

$

371,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

94,149

 

 

94,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in accumulated other comprehensive income

 

 

 

 

 

 

(1,979

)

(1,979

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A ($0.605 per share)

 

 

 

 

 

(11,280

)

 

(11,280

)

Class B ($0.550 per share)

 

 

 

 

 

(1,266

)

 

(1,266

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised, net of shares redeemed

 

38

 

 

7

 

881

 

(450

)

 

438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Class A Common Stock

 

(23

)

 

(4

)

(147

)

(341

)

 

(492

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class B Common Stock to Class A Common Stock

 

7

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Common Stock

 

 

 

 

973

 

 

 

973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred director compensation expense - Company Stock

 

2

 

 

 

171

 

 

 

171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - options

 

 

 

 

277

 

 

 

277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

18,652

 

2,300

 

$

4,947

 

$

131,482

 

$

311,799

 

$

4,139

 

$

452,367

 

 

(continued)

 

125



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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

 

 

 

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, 2012

 

18,652

 

2,300

 

$

4,947

 

$

131,482

 

$

311,799

 

$

4,139

 

$

452,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

119,339

 

 

119,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in accumulated other comprehensive income

 

 

 

 

 

 

1,473

 

1,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A ($1.749 per share)

 

 

 

 

 

(32,832

)

 

(32,832

)

Class B ($1.590 per share)

 

 

 

 

 

(3,619

)

 

(3,619

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised, net of shares redeemed

 

8

 

 

2

 

213

 

(68

)

 

147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Class A Common Stock

 

(80

)

 

(17

)

(504

)

(1,147

)

 

(1,668

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class B Common Stock to Class A Common Stock

 

29

 

(29

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Common Stock

 

 

 

 

426

 

 

 

426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred director compensation expense - Company Stock

 

3

 

 

 

227

 

 

 

227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - restricted stock

 

82

 

 

 

50

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - options

 

 

 

 

792

 

 

 

792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

18,694

 

2,271

 

$

4,932

 

$

132,686

 

$

393,472

 

$

5,612

 

$

536,702

 

 

(continued)

 

126



Table of Contents

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

 

 

 

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, 2013

 

18,694

 

2,271

 

$

4,932

 

$

132,686

 

$

393,472

 

$

5,612

 

$

536,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

25,423

 

 

25,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in accumulated other comprehensive income

 

 

 

 

 

 

(2,491

)

(2,491

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A ($0.693 per share)

 

 

 

 

 

(12,707

)

 

(12,707

)

Class B ($0.630 per share)

 

 

 

 

 

(1,424

)

 

(1,424

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised, net of shares redeemed

 

24

 

 

5

 

610

 

(176

)

 

439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Class A Common Stock

 

(193

)

 

(43

)

(1,230

)

(2,822

)

 

(4,095

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class B Common Stock to Class A Common Stock

 

11

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Common Stock

 

 

 

 

250

 

 

 

250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred director compensation expense - Company Stock

 

5

 

 

 

193

 

 

 

193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - restricted stock

 

 

 

 

298

 

 

 

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - options

 

 

 

 

205

 

 

 

205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

18,541

 

2,260

 

$

4,894

 

$

133,012

 

$

401,766

 

$

3,121

 

$

542,793

 

 

See accompanying footnotes to consolidated financial statements.

 

127



Table of Contents

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, (in thousands)

 

 

 

2013

 

2012

 

2011

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

25,423

 

$

119,339

 

$

94,149

 

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

 

 

 

 

 

 

 

Depreciation, amortization and accretion, net

 

2,060

 

9,875

 

4,406

 

Provision for loan losses

 

2,983

 

15,043

 

17,966

 

Net gain on sale of mortgage loans held for sale

 

(6,979

)

(9,698

)

(4,091

)

Origination of mortgage loans held for sale

 

(291,155

)

(252,194

)

(137,843

)

Proceeds from sale of mortgage loans held for sale

 

305,242

 

255,670

 

152,770

 

Net realized (recovery) impairment of mortgage servicing rights

 

(345

)

142

 

203

 

Net realized gain on sales, calls and impairment of securities

 

 

(56

)

(2,006

)

Net gain on sale of other real estate owned

 

(2,170

)

(416

)

(444

)

Writedowns of other real estate owned

 

1,824

 

1,719

 

917

 

Deferred director compensation expense - Company Stock

 

193

 

227

 

171

 

Stock based compensation expense

 

503

 

842

 

277

 

Bargain purchase gains on acquisitions

 

(1,324

)

(55,438

)

 

Gain on sale of banking center

 

 

 

(2,856

)

Increase in cash surrender value of bank owned life insurance

 

(86

)

 

 

Net change in other assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

973

 

434

 

(262

)

Accrued interest payable

 

56

 

(321

)

(646

)

Other assets

 

488

 

6,289

 

1,665

 

Other liabilities

 

(12,250

)

(1,543

)

(772

)

Net cash provided by operating activities

 

25,436

 

89,914

 

123,604

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Net cash received in FDIC-assisted transactions

 

 

921,247

 

 

Purchases of securities available for sale

 

(194,527

)

(61,717

)

(598,495

)

Purchases of securities to be held to maturity

 

(15,000

)

(23,114

)

(500

)

Purchases of Federal Home Loan Bank stock

 

 

 

(46

)

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

 

195,553

 

287,773

 

310,331

 

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

 

10,294

 

5,341

 

5,402

 

Proceeds from sales of securities available for sale

 

 

38,724

 

161,652

 

Proceeds from sales of Federal Home Loan Bank stock

 

35

 

469

 

278

 

Proceeds from sales of other real estate owned

 

21,267

 

25,326

 

11,844

 

Purchase of commercial real estate loans

 

 

 

(32,650

)

Net change in loans

 

52,801

 

(198,520

)

(117,864

)

Net purchases of premises and equipment

 

(5,022

)

(3,888

)

(3,727

)

Purchase of bank owned life insurance

 

(25,000

)

 

 

Sale of banking center

 

 

 

(15,388

)

Net cash provided by/(used in) investing activities

 

40,401

 

991,641

 

(279,163

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net change in deposits

 

7,929

 

(894,756

)

(536,792

)

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

 

(85,329

)

20,653

 

(88,433

)

Payments of Federal Home Loan Bank advances

 

(37,600

)

(590,095

)

(75,247

)

Proceeds from Federal Home Loan Bank advances

 

100,000

 

195,000

 

445,000

 

Repurchase of Common Stock

 

(4,095

)

(1,668

)

(492

)

Net proceeds from Common Stock options exercised

 

439

 

147

 

438

 

Cash dividends paid

 

(14,009

)

(36,116

)

(12,315

)

Net cash used in financing activities

 

(32,665

)

(1,306,835

)

(267,841

)

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

33,172

 

(225,280

)

(423,400

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

137,691

 

362,971

 

786,371

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

170,863

 

$

137,691

 

$

362,971

 

 

(continued)

 

128



Table of Contents

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

YEARS ENDED DECEMBER 31, (in thousands)

 

 

 

2013

 

2012

 

2011

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

21,337

 

$

23,125

 

$

30,908

 

Income taxes

 

31,875

 

53,763

 

48,947

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL NONCASH DISCLOSURES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers from loans to real estate acquired in settlement of loans

 

$

15,271

 

$

20,610

 

$

11,300

 

Loans provided for sales of other real estate owned

 

2,377

 

1,554

 

3,119

 

Changes in fair value of derivatives used for cash flow hedges

 

170

 

 

 

 

See accompanying footnotes to consolidated financial statements.

 

129



Table of Contents

 

FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Principles of Consolidation 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 Invest Co., a former subsidiary of RB&T, and its subsidiary, Republic Capital LLC, were dissolved in April 2013 in connection with the full repayment by RB&T of intragroup subordinated debentures issued by Republic Capital LLC in a 2004 intragroup trust preferred transaction. All companies are collectively referred to as “Republic” or the “Company.” All significant intercompany balances and transactions are eliminated in consolidation.

 

As of December 31, 2013, the Company was divided into three distinct business operating segments: Traditional Banking, Mortgage Banking and Republic Processing Group (“RPG”). During the second quarter of 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 RPG segment.

 

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

 

As of December 31, 2013, in addition to an Internet delivery channel, Republic had 45 full-service banking centers with locations as follows:

 

·                  Kentucky – 34

·                  Metropolitan Louisville – 20

·                  Central Kentucky – 9

·                  Elizabethtown – 1

·                  Frankfort – 1

·                  Georgetown – 1

·                  Lexington – 5*

·                  Shelbyville – 1

·                  Western Kentucky – 2

·                  Owensboro – 2

·                  Northern Kentucky – 3

·                  Covington – 1

·                  Florence – 1

·                  Independence – 1

·                  Southern Indiana – 3

·                  Floyds Knobs – 1

·                  Jeffersonville – 1

·                  New Albany – 1

·                  Metropolitan Tampa, Florida – 4*

·                  Metropolitan Cincinnati, Ohio – 1

·                  Metropolitan Nashville, Tennessee – 2

·                  Metropolitan Minneapolis, Minnesota – 1*

 


* - One banking center in Palm Harbor, Florida, one in Lexington, Kentucky and Republic’s sole banking center in Minneapolis, Minnesota were closed in the first quarter of 2014, thereby reducing total banking centers to 42.

 

130



Table of Contents

 

1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

In October 2013, RB gave the required 90-day regulatory notice of its intentions to close its sole banking center in Palm Harbor, Florida. This location was closed in January 2014 with the lease for the premises expiring in February 2014.

 

In October 2013, RB&T gave the required 90-day regulatory notice of its intentions to close its sole banking center in Minneapolis, Minnesota, which it acquired in connection with the First Commercial Bank (“FCB”) acquisition in September 2012. The Bank is currently under a lease for this location which is set to expire in April 2015. The Bank repurposed the location as a support office in January 2014 and intends to use the office until the expiration of its lease or until such time that it is able to negotiate with the landlord a buy-out of its future lease obligations. The banking center stopped transacting business at the Minnesota location with deposit customers in January 2014.

 

In November 2013, RB&T gave the required 90-day regulatory notice of its intentions to close its “Perimeter” banking center in Lexington, Kentucky. This location was closed in February 2014 with the lease for the premises expiring in June 2014.

 

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

 

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, primarily the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”).

 

Core Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, data processing, debit card interchange expenses, marketing and development expenses, FDIC insurance expense, and various general and administrative costs. Core Banking results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory agencies.

 

Republic Processing Group

 

Nationally, through RB&T, RPG facilitates the receipt and payment of federal and state tax refunds under the TRS division, primarily through refund transfers (“RT”s). RTs are products whereby a tax refund is issued to the taxpayer after RB&T has received the refund from the federal or state government. There is no credit risk or borrowing costs associated with these products, because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority.  Fees earned on RTs, net of rebates, are the primary source of revenue for the TRS division and the RPG segment, and are reported as non-interest income under the line item “Net refund transfer fees.”

 

The TRS division historically originated and obtained a significant source of revenue from Refund Anticipation Loans (“RAL”s), but terminated this product effective April 30, 2012. RALs were short-term consumer loans offered to taxpayers that were secured by the customer’s anticipated tax refund, which represented the sole source of repayment. The fees earned on RALs for the applicable reporting period in 2012 were reported as interest income under the line item “Loans, including fees.”

 

Through RB, the RPS division is an issuing bank offering general purpose reloadable prepaid debit cards through third party program managers. Through RB&T, the RCS division is piloting short-term consumer credit products.

 

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Table of Contents

 

1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Use of Estimates — Financial statements prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) require management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting estimates relate to:

 

·                  Allowance for loan losses (“Allowance”) and Provision for Loan Losses

·                  Acquisition Accounting

·                  Goodwill and Other Intangible Assets

·                  Mortgage Servicing Rights

·                  Income Tax Accounting

·                  Investment Securities

·                  Other real estate owned (“OREO”)

 

These estimates are particularly subject to change and actual results could differ from these estimates.

 

Concentration of Credit Risk — Most of the Company’s Traditional Banking business activity is with customers located in Kentucky, Southern Indiana, Florida, Tennessee and Minnesota. The Company’s Traditional Banking exposure to credit risk is significantly affected by changes in the economy in these specific areas. Furthermore, the Company’s warehouse lines are secured by single family, first lien residential real estate loans originated by the Bank’s mortgage clients across the nation. As of December 31, 2013, 44% of collateral securing warehouse lines were located in California.

 

Earnings Concentration — For 2013, 2012 and 2011, approximately 9%, 38% and 52% of total Company net revenues (interest income plus non-interest income) were derived from RPG’s TRS division.

 

Cash Flows — Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions, repurchase agreements and income taxes.

 

Interest-Bearing Deposits in Other Financial Institutions — Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

 

Trust Assets — Property held for customers in fiduciary or agency capacities, other than trust cash on deposit at RB&T, is not included in the consolidated financial statements since such items are not assets of RB&T.

 

Securities — Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

 

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

 

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Table of Contents

 

1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. OTTI related to credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

 

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Bank compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

 

Acquisition Accounting — The Bank accounts for its 2012 FDIC-assisted acquisitions in accordance with the acquisition method as outlined in Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any noncontrolling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.

 

Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in acquirees are generally recognized at their acquisition date (“day-one”) fair values based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, these recast adjustments for loans and other real estate owned may be made, as market value data, such as appraisals, are received by the bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.

 

Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.

 

Mortgage Banking Activities — Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Net gains and losses are recorded as a component of mortgage banking income. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Substantially all of the gain or loss on the sale of loans are reported in earnings when loans are locked.

 

Commitments to fund mortgage loans (“interest rate lock commitments”) to be sold into the secondary market and non-exchange traded mandatory forward sales contracts (“forward contracts”) for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the Bank enters into the derivative. Generally, the Bank enters into forward contracts for the future delivery of mortgage loans when interest rate lock commitments are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these mortgage derivatives are included in net gains on sales of loans, which is a component of Mortgage Banking income on the income statement.

 

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Table of Contents

 

1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Mortgage loans held for sale are generally sold with the mortgage servicing rights (“MSR”) retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in net gains on sales of loans, which is a component of Mortgage Banking income on the income statement. Fair value is based on market prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and subsequently adjusted on a quarterly basis based on the weighted average remaining life of the underlying loans.

 

MSRs are evaluated for impairment quarterly based upon the fair value of the MSRs as compared to carrying amount. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Bank later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance may be recorded as an increase to income. Changes in valuation allowances are reported within Mortgage Banking income on the income statement. The fair values of MSRs are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates.

 

A primary factor influencing the fair value is the estimated life of the underlying serviced loans. The estimated life of the serviced loans is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs generally will decline due to higher expected prepayments within the portfolio. Alternatively, during a period of rising interest rates the fair value of MSRs generally will increase as prepayments on the underlying loans would be expected to decline. Based on the estimated fair value at December 31, 2013 and 2012, management determined there was $0 and $345,000 impairment within the MSR portfolio.

 

Loan servicing income is reported on the income statement as a component of Mortgage Banking income. Loan servicing income is recorded as loan payments are collected and includes servicing fees from investors and certain charges collected from borrowers. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of MSRs is netted against loan servicing fee income. Loan servicing income totaled $2.1 million, $2.2 million and $2.8 million for the years ended December 31, 2013, 2012 and 2011. Late fees and ancillary fees related to loan servicing are not material.

 

LoansLoans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums or discounts, deferred loan fees and costs and the Allowance. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.

 

Interest income on mortgage and commercial loans is typically discontinued at the time the loan is 80 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In most cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Non-accrual loans and loans past due 80 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

All interest accrued but not received for all classes of loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, typically a minimum of six months of performance. Consumer and credit card loans, are not placed on non-accrual status, but are reviewed periodically and charged off when the loans reach 90 days past due or at any point the loan is deemed uncollectible.

 

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1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Loans purchased in the Company’s 2012 FDIC-assisted acquisitions are accounted for using one of the following accounting standards:

 

·                  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 loan’s day-one fair value and amortized cost would be amortized or accreted into income using the interest method.

 

·                  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.

 

Purchased Loans (ASC Topic 310-20) — Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are considered in the determination of the Allowance once day-one fair values are final.

 

Purchased Credit Impaired (“PCI”) Loans (ASC Topic 310-30) — In determining the day-one fair values of PCI loans, management considers a number of factors including, among other things, the estimated 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. For the Company’s 2012 FDIC-assisted acquisitions, RB&T elected to account for PCI loans individually, as opposed to aggregating the loans into pools based on common risk characteristics such as loan type.

 

Management separately monitors the PCI portfolio and on a quarterly basis 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, estimated life, the status of the borrower, or the quality or value of the underlying collateral.

 

To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified in the Purchased Credit Impaired - Group 1 (“PCI-1”) category; whose credit risk is considered equivalent to a non-PCI “Special Mention” loan within the Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial estimate. Provisions for loan losses are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified PCI-Substandard (“PCI-Sub”) within the Bank’s credit risk matrix.  Management deems the risk of default and overall credit risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI “Substandard” loan. PCI-Sub loans are considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

PCI loans may be contractually past due 80 days-or-more and continue to accrue interest if future cash flows can be reasonably projected to allow continuation of discount accretion.

 

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1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

PCI loans would be placed on non-accrual when management determines that based on estimated cash flow, the Bank will be unable to accrete any yield on such loan. PCI loans may also be placed on non-accrual if management cannot reasonably estimate future cash flows on such loans

 

Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. If a troubled debt restructuring is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting standards and transferred out of the PCI population. The loan may require an additional provision for loan losses if its restructured cash flows are less than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity date are generally not considered TDRs and remain in the PCI population.

 

Allowance for Loan Losses The Allowance is a valuation allowance for probable incurred credit losses and includes overdrawn deposit accounts. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using historical loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific classes, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit Committee and the Board of Directors on a quarterly basis.

 

The Allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component is based on historical loss experience adjusted for qualitative factors.

 

A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans that meet the following classifications are considered impaired:

 

·                        All loans internally rated as “Substandard,” “Doubtful” or “Loss;”

·                        All loans internally rated in a PCI category with cash flows that have deteriorated from management’s initial estimate;

·                        All loans on non-accrual status and non-PCI loans past due 90 days-or-more still on accrual;

·                        All retail and commercial TDRs; and

·                        Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the definition of impaired.

 

The Bank’s classified and special mention loans are generally commercial and industrial (“C&I”) and commercial real estate (“CRE”) loans but also include large single family residential and home equity loans, as well as TDRs, whether retail or commercial in nature. The Bank reviews and monitors these loans on a regular basis. Generally, loans are designated as classified or special mention to ensure more frequent monitoring. These loans 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 or modified contractual terms, then the loan is generally downgraded and often placed on non-accrual status.

 

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1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Generally accepted accounting principles recognizes three methods to measure specific loan impairment, including:

 

·                  Cash Flow Method — The recorded investment in the loan is measured against the present value of expected future cash flows discounted at the loan’s effective interest rate. The Bank employs this method for a significant portion of its impaired TDRs. Impairment amounts under this method are reflected in the Bank’s Allowance as specific reserves on the respective impaired loan. These specific reserves are adjusted quarterly based upon reevaluation of the loan’s expected future cash flows and changes in the recorded investment in such loans.

 

·                  Collateral Method — The recorded investment in the loan is measured against the fair value of the loan’s collateral value less applicable selling costs. The Bank employs the fair value of collateral method for its impaired loans when the loan’s repayment is based solely on the sale of or the operations of the underlying collateral. Collateral fair value is typically based on the most recent real estate appraisal on file.  Measured impairment under this method is classified loss and charged off. The Bank’s selling costs for its collateral dependent loans typically range from 10-13% of the fair value of the underlying collateral, depending on the loan class. Selling costs are not applicable for collateral dependent loans whose repayment is based solely on the operations of the underlying collateral.

 

·                  Market Value Method — The recorded investment in the loan is measured against the loan’s obtainable market value. The Bank does not currently employ this technique as it is typically impractical.

 

In addition to obtaining appraisals at the time of loan origination, the Bank typically updates appraisals and/or broker price opinions for loans with potential impairment. Updated valuations for commercial related loans exhibiting an increased risk of loss are typically obtained within one year of the last appraisal. Collateral values for past due residential mortgage loans and home equity loans are generally updated prior to a loan becoming 80 days delinquent, but no more than 180 days past due. When determining the amount of reserve, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons, the Bank discounts the valuation of the collateral primarily based on the age of the appraisal and the real estate market conditions of the location of the underlying collateral.

 

The general component of the Allowance covers loans collectively evaluated for impairment and is based on historical loss experience with potential adjustments for current relevant qualitative factors. The historical loss experience is determined by loan performance and class and is based on the actual loss history experienced by the Bank. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are included in the general component unless the loans are classified as TDRs.

 

For loans not considered impaired, management evaluates the loan portfolio by reviewing the historical loss rate for each respective loan class. Management evaluates the following historical loss rate scenarios:

 

·                  Rolling four quarter average

·                  Rolling eight quarter average

·                  Rolling twelve quarter average

·                  Rolling sixteen quarter average

·                  Rolling twenty quarter average

·                  Current year to date historical loss factor average

·                  Peer group loss factors

 

For the Bank’s current Allowance methodology, management uses the higher of the rolling eight, twelve, or sixteen quarter averages for each loan class when determining its historical loss factors for its “Pass” rated and nonrated loans.

 

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1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Loan classes are also evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those classes. Management assigns risk multiples to certain classes to account for qualitative factors such as:

 

·                  Changes in nature, volume and seasoning of the loan portfolio;

·                  Changes in experience, ability, and depth of lending management and other relevant staff;

·                  Changes in the quality of the Bank’s loan review program;

·                  Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

·                  Changes in the volume and severity of past due, nonaccrual and classified loans;

·                  Changes in the value of underlying collateral for collateral-dependent loans;

·                  Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the loan portfolio, including the condition of various market segments;

·                  The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

·                  The effect of other external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the Bank’s existing portfolio.

 

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.

 

A “portfolio segment” is defined as the level at which an entity develops and documents a systematic methodology to determine its Allowance. A “class” of loans represents further disaggregation of a portfolio segment based on risk characteristics and the entity’s method for monitoring and assessing credit risk. In developing its allowance methodology, the Company has identified the following Traditional Banking portfolio segments:

 

Portfolio Segment 1 — Loans where the allowance methodology is determined based on a loan grading system (primarily commercial related loans).

 

For this portfolio, the Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, public information, and current economic trends. The Bank also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). The Bank analyzes loans individually, and based on this analysis, establishes a credit risk rating consistent with its credit risk matrix.

 

Portfolio Segment 2 — Loans where the allowance methodology is driven by delinquency and non-accrual data (primarily retail mortgage or consumer related).

 

For this portfolio, the Bank analyzes risk classes based on delinquency and/or non-accrual status.

 

See Footnote 4 “Loans and Allowance for Loan Losses” in this section of the filing for additional discussion regarding the Company’s Allowance.

 

Transfers of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

Other Real Estate Owned — Assets acquired through loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. The Bank’s selling costs for OREO typically range from 10-13% of each property’s fair value, depending on property class. Fair value is commonly based on recent real estate appraisals or broker price opinions. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

 

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1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Once the appraisal is received, a member of the Bank’s Credit Administration Department (“CAD”) reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On an annual basis, the Bank compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment, if any, should be made to the appraisal value to arrive at an estimated fair value.

 

Fair value is commonly based on recent real estate appraisals or broker price opinions. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

 

Premises and Equipment, NetLand is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the related assets on the straight-line method. Estimated lives typically range from 25 to 39 years for buildings and improvements, three to ten years for furniture, fixtures and equipment and three to five years for leasehold improvements.

 

Federal Home Loan Bank Stock — The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security and periodically evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are recorded as interest income.

 

Bank Owned Life Insurance (“BOLI”) — During the fourth quarter of 2013, the Bank purchased $25 million in BOLI policies on certain employees. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. The Bank recognizes tax-free income from the periodic increases in cash surrender value of these policies and from death benefits in non-interest income.

 

Goodwill and Other Intangible Assets — Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.

 

The Company has selected September 30th as the date to perform its annual goodwill impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.

 

Based on its assessment, the Company believes its goodwill of $10 million was not impaired and is properly recorded in the consolidated financial statements as of December 31, 2013 and 2012.

 

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from bank acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which can range from two to ten years. During 2013, the Company amortized all $510,000 in other intangible assets held as of December 31, 2012.

 

Off Balance Sheet Financial Instruments — Financial instruments include off balance sheet credit instruments, such as commitments to fund loans and standby letters of credit. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded upon funding. Instruments such as standby letters of credit are considered financial guarantees and are recorded at fair value.

 

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1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Derivatives — Derivatives are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value. The Company’s derivatives include interest rate swap agreements. For asset/liability management purposes, the Bank uses interest rate swap agreements to hedge the exposure or to modify the interest rate characteristic of certain immediately repricing liabilities. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss is recorded as a component of other comprehensive income. Offsetting fair values are recorded in other assets and other liabilities with no net effect on other operating income.

 

Net cash settlements on interest rate swaps are recorded in interest expense and cash flows related to the swaps are classified in the cash flow statement the same as the interest expense and cash flows from the liabilities being hedged. The Bank formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet. The Bank also formally assesses, both at the hedge’s inception and on an ongoing basis, whether a swap is highly effective in offsetting changes in cash flows of the hedged items. The Bank discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended.

 

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income.  When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

 

Stock Based Compensation — For stock options and restricted stock awards issued to employees, compensation cost is recognized based on the fair value of these awards at the date of grant. The Company utilizes a Black-Scholes model to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Income Taxes — Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized

 

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

Retirement Plans — 401(k) plan expense is recorded as a component of salaries and employee benefits and represents the amount of Company matching contributions.

 

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1.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Earnings Per Common Share — Basic earnings per share is based on net income (in the case of Class B Common Stock, less the dividend preference on Class A Common Stock), divided by the weighted average number of shares outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential Class A common shares issuable under stock options. Earnings and dividends per share are restated for all stock dividends through the date of issuance of the financial statements.

 

Comprehensive Income — Comprehensive income consists of net income and other comprehensive income (“OCI”). OCI includes unrealized gains and losses on securities available for sale, net of tax, and unrealized gains and losses on cash flow hedges, which are also recognized as a separate component of equity.

 

Loss Contingencies — Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any outstanding matters that would have a material effect on the financial statements.

 

Restrictions on Cash and Cash Equivalents — Republic is required by the Federal Reserve Bank (“FRB”) to maintain average reserve balances. Cash and due from banks on the consolidated balance sheet includes $168,000 and $744,000 of required reserve balances at December 31, 2013 and 2012. The Bank earns a nominal interest rate for balances held at the FRB in excess of required reserves. The Bank does not earn interest on cash balances at its branches and within its Automated Teller Machine (“ATM”) network.

 

Equity — Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid in capital. Fractional share amounts are paid in cash with a reduction in retained earnings.

 

Dividend Restrictions — Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Republic or by Republic to shareholders.

 

Fair Value of Financial Instruments — Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Footnote 5 “Fair Value” in this section of the filing. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

 

Segment Information — Segments represent parts of the Company evaluated by management with separate financial information. Republic’s internal information is primarily reported and evaluated in three lines of business — Traditional Banking, Mortgage Banking and RPG.

 

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 previously reported prior periods’ net income. Additionally, as discussed in Footnote 2 “2012 FDIC-Assisted Acquisitions,” during the first quarter of 2013 the Bank posted adjustments to the FCB acquired assets in the determination of acquisition day (“day-one”) fair values, which resulted in a $1.3 million increase to the bargain purchase gain presented.

 

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2.                                      2012 FDIC-ASSISTED ACQUISITIONS

 

OVERVIEW

 

During 2012, the Bank acquired two failed institutions in FDIC-assisted transactions. The Bank did not raise capital to complete either of these acquisitions.

 

The Bank determined that its 2012 FDIC-assisted acquisitions constituted “business acquisitions” as defined by ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed were presented at their estimated fair values, as required. Fair values were determined over a measurement period based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of these day-one fair values requires management to make material estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, recast adjustments for loans and other real estate owned were made as market value data, such as appraisals, were received by the Bank. Increases or decreases to day-one fair values have been reflected with a corresponding increase or decrease to bargain purchase gain.

 

Tennessee Commerce Bank (“TCB”)

 

On January 27, 2012, the Bank acquired specific assets and assumed substantially all of the deposits and specific other liabilities of TCB, which was headquartered in Franklin, Tennessee from the FDIC, as receiver for TCB, pursuant to the terms of a Purchase and Assumption Agreement (“P&A”) — 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.

 

The Bank acquired approximately $221 million in notional assets from the FDIC as receiver for TCB. In addition, the Bank 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 the Bank 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.

 

During the first quarter of 2012, the Bank recorded an initial bargain purchase gain of $27.9 million as a result of the TCB acquisition. The bargain purchase gain was realized because the overall price paid by the Bank was substantially less than the fair value of the TCB assets acquired and liabilities assumed in the acquisition. In the second and third quarters of 2012, the Bank posted adjustments to the acquired assets for its FDIC-assisted acquisition in the determination of day-one fair values and recorded a net decrease to the bargain purchase gain of $285,000, as additional information relative to the day-one fair values became available.

 

Information obtained subsequent to January 27, 2012 and through September 30, 2012 was considered in forming TCB estimates of cash flows and collateral values as of the January 27, 2012 acquisition date, i.e., TCB’s day-one fair values. Day-one fair values for TCB were considered final as of September 30, 2012, which was the date the Bank believed it had received all the information necessary to determine TCB’s day-one fair values.

 

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2.                                      2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

A summary of the assets acquired and liabilities assumed in the TCB acquisition follows:

 

Tennessee Commerce Bank

 

 

 

January 27, 2012

 

 

 

As Previously Reported

 

As Recasted

 

 

 

Contractual

 

Fair Value

 

2012 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 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

 

Other assets and accrued interest receivable

 

945

 

(60

)

 

885

 

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

 

 

 

 

 

 

 

 

 

 

 

Total liabilities assumed and equity

 

$

948,701

 

$

28,063

 

$

(285

)

$

976,479

 

 

143



Table of Contents

 

2.                                      2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

A summary of the net assets acquired from the FDIC and the estimated fair value adjustments as of the TCB acquisition date follows:

 

Tennessee Commerce Bank

 

 

 

January 27, 2012

 

 

 

 

 

Second Quarter

 

Third Quarter

 

 

 

 

 

As Previously

 

2012 Recast

 

2012 Recast

 

As

 

(in thousands)

 

Reported

 

Adjustments

 

Adjustments

 

Recasted

 

 

 

 

 

 

 

 

 

 

 

Assets acquired, at contractual amount

 

$

221,126

 

$

 

$

 

$

221,126

 

Liabilities assumed, at contractual amount

 

(948,701

)

 

 

(948,701

)

Net liabilities assumed per the P&A Agreement

 

(727,575

)

 

 

(727,575

)

 

 

 

 

 

 

 

 

 

 

Contractual discount

 

(56,970

)

 

 

(56,970

)

Net receivable from the FDIC

 

$

(784,545

)

$

 

$

 

$

(784,545

)

 

 

 

 

 

 

 

 

 

 

Fair value adjustments:

 

 

 

 

 

 

 

 

 

Loans

 

$

(22,666

)

$

919

 

$

(89

)

$

(21,836

)

Discount for loans to be repurchased by the FDIC

 

(2,797

)

 

 

(2,797

)

Other real estate owned

 

(3,359

)

(1,000

)

(113

)

(4,472

)

Core deposit intangible

 

64

 

 

 

64

 

Deposits

 

(54

)

 

 

(54

)

Other assets and accrued interest receivable

 

(60

)

 

 

(60

)

All other

 

(199

)

(15

)

13

 

(201

)

Total fair value adjustments

 

(29,071

)

(96

)

(189

)

(29,356

)

 

 

 

 

 

 

 

 

 

 

Discount

 

56,970

 

 

 

56,970

 

Bargain purchase gain, pre-tax

 

$

27,899

 

$

(96

)

$

(189

)

$

27,614

 

 

On January 27, 2012, the Bank did not immediately acquire the TCB banking facility, including outstanding lease agreements and furniture, fixtures and equipment. During the third quarter of 2012, the Bank renegotiated a new lease with the landlord related to the sole banking facility and acquired all related data processing equipment and fixed assets totaling approximately $573,000.

 

RB&T incurred TCB acquisition and integration costs of approximately $1.8 million in 2012. Included in the total integration costs was $724,000 for estimated short-term retention bonuses for certain former TCB employees and short-term incentive bonuses for existing RB&T employees related to the successful branch consolidation and core system conversion. In addition, total integration costs included $642,000 for estimated professional and consulting fees, as well as $471,000 for a long-term incentive program for RB&T employees based upon a two-year profitability target for the overall TCB operation.

 

First Commercial Bank (“FCB”)

 

On September 7, 2012, the Bank 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 P&A 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.

 

The Bank acquired approximately $215 million in notional assets from the FDIC as receiver for FCB. In addition, the Bank 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 the Bank received for the acquisition. The FDIC paid substantially all of this receivable to the Bank on September 10, 2012.

 

144



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2.             2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

During the third quarter of 2012, the Bank recorded an initial bargain purchase gain of $27.1 million as a result of the FCB acquisition. The bargain purchase gain was realized because the overall price paid by the Bank was substantially less than the fair value of the FCB assets acquired and liabilities assumed in the acquisition. During the fourth quarter of 2012, the Bank posted adjustments to the acquired assets for its FDIC-assisted acquisition in the determination of day-one fair values and recorded a net increase to the bargain purchase gain of $712,000, as additional information relative to the day-one fair values became available. During the first quarter of 2013, the Bank posted its final recast adjustment which resulted in an increase of $1.3 million to the bargain purchase gain.

 

Information obtained subsequent to September 7, 2012 and through March 31, 2013 was considered in forming FCB estimates of cash flows and collateral values as of the September 7, 2012 acquisition date, i.e., FCB’s day-one fair values. Day-one fair values for FCB were considered final as of March 31, 2013, which was the date the Bank believed it had received all the information necessary to determine FCB’s day-one fair values.

 

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

 

First Commercial Bank

 

 

 

September 7, 2012

 

 

 

As Previously Reported

 

As Recasted

 

 

 

 

 

 

 

2012 & 2013

 

 

 

 

 

Contractual

 

Fair Value

 

Recast

 

Fair

 

(in thousands)

 

Amount

 

Adjustments

 

Adjustments

 

Value

 

Assets acquired :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,524

 

$

 

$

 

$

10,524

 

Securities available for sale

 

12,002

 

 

 

12,002

 

Loans

 

171,744

 

(44,214

)

2,821

 

130,351

 

Federal Home Loan Bank stock, at cost

 

407

 

 

 

407

 

Other real estate owned

 

19,360

 

(8,389

)

(785

)

10,186

 

Core deposit intangible

 

 

559

 

 

559

 

Discount

 

(79,412

)

79,412

 

 

 

FDIC settlement receivable

 

64,326

 

 

 

64,326

 

Other assets and accrued interest receivable

 

829

 

(95

)

 

734

 

Total assets acquired

 

$

199,780

 

$

27,273

 

$

2,036

 

$

229,089

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Non interest-bearing

 

$

7,197

 

$

 

$

 

$

7,197

 

Interest-bearing

 

189,057

 

(3

)

 

189,054

 

Total deposits

 

196,254

 

(3

)

 

196,251

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

3,002

 

63

 

 

3,065

 

Accrued income taxes payable

 

 

9,706

 

712

 

10,418

 

Other liabilities and accrued interest payable

 

524

 

101

 

 

625

 

 

 

 

 

 

 

 

 

 

 

Total liabilities assumed

 

$

199,780

 

$

9,867

 

$

712

 

$

210,359

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bargain purchase gain, net of taxes

 

 

17,406

 

1,324

 

18,730

 

 

 

 

 

 

 

 

 

 

 

Total liabilities assumed and equity

 

$

199,780

 

$

27,273

 

$

2,036

 

$

229,089

 

 

145



Table of Contents

 

2.             2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

A summary of the net assets acquired from the FDIC and the estimated fair value adjustments as of the FCB acquisition date follows:

 

First Commercial Bank

 

 

 

September 7, 2012

 

 

 

 

 

Fourth Quarter

 

First Quarter

 

 

 

 

 

As Previously

 

2012 Recast

 

2013 Recast

 

As

 

(in thousands)

 

Reported

 

Adjustments

 

Adjustments

 

Recasted

 

 

 

 

 

 

 

 

 

 

 

Assets acquired, at contractual amount

 

$

214,866

 

$

 

$

 

$

214,866

 

Liabilities assumed, at contractual amount

 

(199,780

)

 

 

(199,780

)

Net liabilities assumed per the P&A Agreement

 

15,086

 

 

 

15,086

 

 

 

 

 

 

 

 

 

 

 

Contractual discount

 

(79,412

)

 

 

(79,412

)

Net receivable from the FDIC

 

$

(64,326

)

$

 

$

 

$

(64,326

)

 

 

 

 

 

 

 

 

 

 

Fair value adjustments:

 

 

 

 

 

 

 

 

 

Loans

 

$

(44,214

)

$

423

 

$

2,398

 

$

(41,393

)

Other real estate owned

 

(8,389

)

289

 

(1,074

)

(9,174

)

Core deposit intangible

 

559

 

 

 

559

 

Deposits

 

3

 

 

 

3

 

Federal Home Loan Bank advances

 

(63

)

 

 

(63

)

Other assets and accrued interest receivable

 

(95

)

 

 

(95

)

All other

 

(101

)

 

 

(101

)

Total fair value adjustments

 

(52,300

)

712

 

1,324

 

(50,264

)

 

 

 

 

 

 

 

 

 

 

Discount

 

79,412

 

 

 

79,412

 

Bargain purchase gain, pre-tax

 

$

27,112

 

$

712

 

$

1,324

 

$

29,148

 

 

On September 7, 2012, the Bank did not immediately acquire the FCB banking facility, including outstanding lease agreements and furniture, fixtures and equipment. The Bank acquired all data processing equipment and fixed assets totaling approximately $328,000 during the fourth quarter of 2012. During the first quarter of 2013, the Bank renegotiated a new lease with the landlord related to the sole banking facility and acquired all related data processing equipment and fixed assets totaling approximately $233,000.

 

In October 2013, Republic gave the required 90-day regulatory notice of its intentions to close its sole banking center in Minneapolis, Minnesota.  The Bank is currently under a lease for this location which is set to expire in April 2015. The Bank repurposed the location as a support office in January 2014 and intends to use the office until the expiration of its lease or until such time that it is able to negotiate with the landlord a buy-out of its future lease obligations. The banking center stopped transacting business at the Minnesota location with deposit customers in January 2014.

 

The core deposit intangible asset associated with the FCB acquisition was accelerated, effective October 2013, in connection with the Bank’s notice of its intent to repurpose the Minnesota banking center.

 

146



Table of Contents

 

2.             2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

FAIR VALUE METHODS ASSOCIATED WITH THE COMPANY’S 2012 FDIC-ASSISTED ACQUISITIONS

 

The following is a description of the methods used to determine the fair values of significant assets and liabilities at the respective acquisition dates as presented throughout:

 

Cash and Due from Banks and Interest-bearing Deposits in Banks — The carrying amount of these assets, adjusted for any cash items deemed uncollectible by management, was determined to be a reasonable estimate of fair value based on their short-term nature.

 

Investment Securities — Investment securities were acquired at fair value from the FDIC. The fair values provided by the FDIC were reviewed and considered reasonable based on management’s understanding of the marketplace. FHLB stock was acquired at cost, as it is not practicable to determine its fair value given restrictions on its marketability.

 

With the TCB acquisition, the Bank acquired $43 million in securities at fair value. The majority of the securities acquired were subsequently sold or called during the first quarter of 2012, with the Bank realizing a net gain on the corresponding transactions of approximately $56,000. The Bank sold these securities because management determined that the acquired securities did not fit within the Bank’s traditional investment strategies.

 

With the FCB acquisition, the Bank acquired $12 million in securities at fair value. The nature of these securities acquired was consistent with the Bank’s existing investment portfolio and the Bank elected to retain these securities.

 

Loans — Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting current market rates for new originations of comparable loans adjusted for the risk inherent in the cash flow estimates.

 

Certain loans that were deemed to be collateral dependent were valued based on the fair value of the underlying collateral. These estimates were based on the most recently available real estate appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property and other related factors to estimate the current value of the collateral.

 

With the TCB acquisition, the Bank purchased approximately $99 million in loans with a recasted fair value of approximately $74 million. During 2012, the FDIC repurchased approximately $20 million of TCB loans at a price of par less the original discount of $3 million that the Bank received when it purchased the loans. Loans repurchased by the FDIC were valued at the contractual amount reduced by the applicable discount.

 

With the FCB acquisition, the Bank purchased approximately $172 million in loans with a recasted fair value of approximately $130 million.

 

147



Table of Contents

 

2.             2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

The composition of acquired loans as of the respective acquisition dates follows:

 

Tennessee Commerce Bank

 

 

 

January 27, 2012

 

 

 

As Previously Reported

 

As Recasted

 

 

 

Contractual

 

Fair Value

 

2012 Recast

 

Fair

 

(in thousands)

 

Amount

 

Adjustments

 

Adjustments

 

Value

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

22,693

 

$

(4,076

)

$

243

 

$

18,860

 

Commercial real estate

 

18,646

 

(6,971

)

1,988

 

13,663

 

Construction & land development

 

14,877

 

(2,681

)

(1,972

)

10,224

 

Commercial & industrial

 

13,224

 

(6,939

)

496

 

6,781

 

Home equity

 

6,220

 

(606

)

24

 

5,638

 

Consumer:

 

 

 

 

 

 

 

 

 

Credit cards

 

608

 

(22

)

 

586

 

Overdrafts

 

672

 

(621

)

 

51

 

Other consumer

 

2,172

 

(750

)

51

 

1,473

 

Total loans

 

$

79,112

 

$

(22,666

)

$

830

 

$

57,276

 

 

First Commercial Bank

 

 

 

September 7, 2012

 

 

 

As Previously Reported

 

As Recasted

 

 

 

 

 

 

 

2012 & 2013

 

 

 

 

 

Contractual

 

Fair Value

 

Recast

 

Fair

 

(in thousands)

 

Amount

 

Adjustments

 

Adjustments

 

Value

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

48,409

 

$

(9,634

)

$

180

 

$

38,955

 

Commercial real estate

 

82,161

 

(12,330

)

(1,746

)

68,085

 

Construction & land development

 

14,918

 

(6,182

)

316

 

9,052

 

Commercial & industrial

 

25,475

 

(16,060

)

4,120

 

13,535

 

Home equity

 

404

 

(3

)

 

401

 

Consumer:

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

Overdrafts

 

6

 

 

 

6

 

Other consumer

 

371

 

(5

)

(49

)

317

 

Total loans

 

$

171,744

 

$

(44,214

)

$

2,821

 

$

130,351

 

 

The following tables present the purchased loans that are included within the scope of ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, at the respective acquisition dates:

 

Tennessee Commerce Bank

 

 

 

January 27, 2012

 

 

 

As Previously

 

2012 Recast

 

As

 

(in thousands)

 

Reported

 

Adjustments

 

Recasted

 

 

 

 

 

 

 

 

 

Contractually-required principal and interest payments

 

$

52,278

 

$

 

$

52,278

 

Non-accretable difference

 

(21,308

)

903

 

(20,405

)

Cash flows expected to be collected

 

30,970

 

903

 

31,873

 

Accretable difference

 

(425

)

(73

)

(498

)

Fair value of loans

 

$

30,545

 

$

830

 

$

31,375

 

 

148



Table of Contents

 

2.             2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

First Commercial Bank

 

 

 

September 7, 2012

 

 

 

 

 

2012 & 2013

 

 

 

 

 

As Previously

 

Recast

 

As

 

(in thousands)

 

Reported

 

Adjustments

 

Recasted

 

 

 

 

 

 

 

 

 

Contractually-required principal and interest payments

 

$

116,940

 

$

4,213

 

$

121,153

 

Non-accretable difference

 

(33,523

)

4,640

 

(28,883

)

Cash flows expected to be collected

 

83,417

 

8,853

 

92,270

 

Accretable difference

 

(2,827

)

(1,819

)

(4,646

)

Fair value of loans

 

$

80,590

 

$

7,034

 

$

87,624

 

 

The following table presents a rollforward of the accretable discount on PCI loans over the two years ended December 31, 2013:

 

 

 

Tennessee

 

First

 

 

 

 

 

Commerce

 

Commercial

 

 

 

(in thousands)

 

Bank

 

Bank

 

Total

 

 

 

 

 

 

 

 

 

Day-one 2012 beginning balances, as recasted

 

$

(498

)

$

(2,912

)

$

(3,410

)

Transfers between non-accretable and accretable

 

 

 

 

Accreted/(Amortized) into interest income on loans, including loan fees

 

179

 

136

 

315

 

Other changes

 

 

 

 

Balance December 31, 2012

 

$

(319

)

$

(2,776

)

$

(3,095

)

Transfers between non-accretable and accretable

 

(2,771

)

(3,684

)

(6,455

)

Accreted/(Amortized) into interest income on loans, including loan fees

 

1,926

 

4,167

 

6,093

 

Other changes

 

 

 

 

Balance December 31, 2013

 

$

(1,164

)

$

(2,293

)

$

(3,457

)

 

Changes between the accretable and non-accretable components within the day-one measurement periods were deemed to be the result of facts and circumstances that existed the day of the acquisition and became known to the Bank after the fact. Thus, any adjustments between the two categories within the measurement period were deemed to be recast adjustments to the bargain purchase gain.

 

Core Deposit Intangible — In its assumption of the deposit liabilities for the 2012 FDIC-assisted acquisitions, the Bank believed that the customer relationships associated with these deposits had intangible value, although this value was anticipated to be modest given the nature of the deposit accounts and the anticipated rapid account run-off since acquired. The Bank recorded core deposit intangible assets of $64,000 and $559,000 related to the TCB and FCB acquisitions in 2012. The fair value of these intangible assets were estimated based on a discounted cash flow methodology that gave appropriate consideration to type of deposit, deposit retention, cost of the deposit base and net maintenance cost attributable to customer deposits. The core deposit intangible asset associated with the FCB acquisition was accelerated, effective October 2013, in connection with the Bank’s notice of its intent to repurpose the Minnesota banking center.

 

Other Real Estate Owned (“OREO”) — OREO is presented at fair value, which is the estimated value that management expects to receive when the property is sold, net of related costs to sell. These estimates were based on the most recently available real estate appraisals, with certain adjustments made based on the type of property, age of appraisal, current status of the property and other related factors to estimate the current value of the property.

 

The Bank acquired $14 million in OREO related to the TCB acquisition, which was initially reduced by a $3 million fair value adjustment as of January 27, 2012. Subsequent to the first quarter, the Bank posted a net negative recast adjustment of $1 million to OREO to mark several properties to market based on appraisals received.

 

149



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2.             2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

The Bank acquired $19 million in OREO related to the FCB acquisition, which was initially reduced by an $8 million fair value adjustment as of September 7, 2012. During the fourth quarter of 2012 and the first quarter of 2013, the Bank posted a net negative recast adjustment of $785,000 to OREO to mark several properties to market based on appraisals received.

 

FHLB Advances — The Bank acquired $3 million in FHLB advances related to the FCB acquisition. The advances were marked to market as of the acquisition date based on early prepayment payoffs (including penalties) received from the FHLB. The Bank paid off the advances during the third quarter of 2012 at no additional loss beyond the fair value adjustment as of the date of acquisition.

 

Deposits — The fair values used for the demand and savings deposits that comprise the acquisition accounts acquired, by definition, equal the amount payable on demand at the acquisition date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the interest rates embedded on such time deposits.

 

The Bank assumed $947 million in deposits at estimated fair value in connection with the TCB acquisition. As permitted by the FDIC, within seven days of the acquisition date, RB&T had the option to disclose to TCB’s deposit customers that it was repricing the acquired deposit portfolios. In addition, depositors had the option to withdraw funds without penalty. The Bank chose to reprice all of the acquired TCB interest-bearing deposits, including transaction, time and brokered deposits with an effective date of January 28, 2012. This re-pricing triggered significant time “run-off” consistent with management’s expectations.

 

The Bank assumed $196 million in deposits at estimated fair value in connection with the FCB acquisition. The Bank chose to re-price all of the acquired FCB time deposits with an effective date of October 1, 2012. This re-pricing triggered time deposit “run-off” consistent with management’s expectations.

 

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Table of Contents

 

2.             2012 FDIC-ASSISTED ACQUISITIONS (continued)

 

The composition of deposits assumed at fair value as of the respective acquisition dates follows:

 

Tennessee Commerce Bank

 

 

 

January 27, 2012

 

 

 

Contractual

 

Fair Value

 

Recast

 

Fair

 

(in thousands)

 

Amount

 

Adjustments

 

Adjustments

 

Value

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

3,190

 

$

 

$

 

$

3,190

 

Money market accounts

 

11,338

 

 

 

11,338

 

Savings

 

91,859

 

 

 

91,859

 

Individual retirement accounts*

 

15,486

 

 

 

15,486

 

Time deposits, $100,000 and over*

 

278,825

 

 

 

278,825

 

Other certificates of deposit*

 

108,003

 

14

 

 

108,017

 

Brokered certificates of deposit*

 

418,940

 

40

 

 

418,980

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

927,641

 

54

 

 

927,695

 

Total non interest-bearing deposits

 

19,754

 

 

 

19,754

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

947,395

 

$

54

 

$

 

$

947,449

 

 

First Commercial Bank

 

 

 

September 7, 2012

 

 

 

Contractual

 

Fair Value

 

Recast

 

Fair

 

(in thousands)

 

Amount

 

Adjustments

 

Adjustments

 

Value

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

4,003

 

$

 

$

 

$

4,003

 

Money market accounts

 

38,187

 

 

 

38,187

 

Savings

 

 

 

 

 

Individual retirement accounts*

 

16,780

 

 

 

16,780

 

Time deposits, $100,000 and over*

 

14,740

 

 

 

14,740

 

Other certificates of deposit*

 

62,033

 

 

 

62,033

 

Brokered certificates of deposit*

 

53,314

 

(3

)

 

53,311

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

189,057

 

(3

)

 

189,054

 

Total non interest-bearing deposits

 

7,197

 

 

 

7,197

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

196,254

 

$

(3

)

$

 

$

196,251

 

 


* - denotes a time deposit

 

The Bank accrued FCB acquisition and integration costs of approximately $1.3 million in 2012. Included in the total integration costs was $380,000 for estimated short-term retention bonuses for certain former FCB employees and short-term incentive bonuses for existing RB&T employees related to a successful branch consolidation and core system conversion. In addition, total 2012 integration costs included $710,000 for estimated professional and consulting fees, as well as $199,000 for a long-term incentive program for RB&T employees based upon a two-year profitability target for the overall FCB operation.

 

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3.             INVESTMENT SECURITIES

 

Securities available for sale:

 

The gross amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

 

 

Gross

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2013 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

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

 

$

97,157

 

$

409

 

$

(101

)

$

97,465

 

Private label mortgage backed security

 

4,740

 

745

 

 

5,485

 

Mortgage backed securities - residential

 

146,087

 

4,288

 

(288

)

150,087

 

Collateralized mortgage obligations

 

164,264

 

1,228

 

(1,546

)

163,946

 

Mutual fund

 

1,000

 

 

(5

)

995

 

Corporate bonds

 

15,015

 

50

 

(150

)

14,915

 

Total securities available for sale

 

$

428,263

 

$

6,720

 

$

(2,090

)

$

432,893

 

 

 

 

Gross

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2012 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

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

 

$

38,931

 

$

547

 

$

(6

)

$

39,472

 

Private label mortgage backed security

 

5,684

 

3

 

 

5,687

 

Mortgage backed securities - residential

 

190,569

 

6,641

 

 

197,210

 

Collateralized mortgage obligations

 

194,427

 

1,580

 

(130

)

195,877

 

Total securities available for sale

 

$

429,611

 

$

8,771

 

$

(136

)

$

438,246

 

 

Securities held to maturity:

 

The carrying value, gross unrecognized gains and losses, and fair value of securities held to maturity were as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Carrying

 

Unrecognized

 

Unrecognized

 

Fair

 

December 31, 2013 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

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

 

$

2,311

 

$

7

 

$

(13

)

$

2,305

 

Mortgage backed securities - residential

 

420

 

43

 

 

463

 

Collateralized mortgage obligations

 

42,913

 

387

 

(184

)

43,116

 

Corporate bonds

 

5,000

 

 

(116

)

4,884

 

Total securities held to maturity

 

$

50,644

 

$

437

 

$

(313

)

$

50,768

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Carrying

 

Unrecognized

 

Unrecognized

 

Fair

 

December 31, 2012 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

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

 

$

4,388

 

$

27

 

$

 

$

4,415

 

Mortgage backed securities - residential

 

827

 

63

 

 

890

 

Collateralized mortgage obligations

 

40,795

 

316

 

 

41,111

 

Total securities to be held to maturity

 

$

46,010

 

$

406

 

$

 

$

46,416

 

 

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3.                                INVESTMENT SECURITIES (continued)

 

At December 31, 2013 and December 31, 2012, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

Sales of Securities Available for Sale

 

During 2013, there were no sales of securities available for sale.

 

During 2012, the Bank recognized gross gains of $56,000 and gross losses of $0 in earnings for sales of securities available for sale. Gross gains were recognized as follows in 2012:

 

·                  The Bank sold six available for sale securities acquired in the TCB acquisition with an amortized cost of $35 million, resulting in a pre-tax gain of $53,000 during the first quarter of 2012.

·                  The Bank realized $3,000 in pre-tax gains related to unamortized discount accretion on $10 million of callable U.S. Government agencies that were called during the first quarter of 2012 before their maturity.

·                  There were no sales of securities available for sale during the second, third and fourth quarters of 2012.

 

See additional discussion regarding securities acquired in connection with the TCB acquisition in this section of the filing under Footnote 2 “2012 FDIC-Assisted Acquisitions.”

 

During 2011, the Bank recognized gross gains of $2.3 million and gross losses of $0 in earnings for sales of securities available for sale. Gross gains were recognized as follows in 2011:

 

·                  There were no sales of securities available for sale during the first quarter of 2011.

·                  During the second quarter of 2011, the Bank sold available for sale mortgage backed securities with an amortized cost of $132 million, resulting in a pre-tax gain of $1.9 million.

·                  During the third quarter of 2011, the Bank realized $188,000 in pre-tax gains related to unamortized discount accretion on $24 million of callable U.S. Government agencies that were called during the third quarter of 2011 before their maturity.

·                  Also, during the third quarter of 2011, the Bank sold available for sale mortgage backed securities with an amortized cost of $2 million, resulting in a pre-tax gain of $112,000.

·                  Finally, during the fourth quarter of 2011, the Bank sold available for sale mortgage backed securities with an amortized cost of $1.5 million, resulting in a pre-tax gain of $77,000.

 

The tax provision related to the Bank’s realized gains totaled $0, $20,000 and $800,000 for the years ended December 31, 2013, 2012 and 2011.

 

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3.         INVESTMENT SECURITIES (continued)

 

The amortized cost and fair value of the investment securities portfolio by contractual maturity at December 31, 2013 follows. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.

 

 

 

Securities

 

Securities

 

 

 

available for sale

 

held to maturity

 

 

 

Amortized

 

Fair

 

Carrying

 

Fair

 

December 31, 2013 (in thousands)

 

Cost

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

24,395

 

$

24,760

 

$

508

 

$

512

 

Due from one year to five years

 

70,259

 

70,237

 

1,803

 

1,793

 

Due from five years to ten years

 

17,518

 

17,383

 

5,000

 

4,884

 

Due beyond ten years

 

 

 

 

 

Private label mortgage backed security

 

4,740

 

5,485

 

 

 

Mortgage backed securities - residential

 

146,087

 

150,087

 

420

 

463

 

Collateralized mortgage obligations

 

164,264

 

163,946

 

42,913

 

43,116

 

Mutual fund

 

1,000

 

995

 

 

 

Total securities

 

$

428,263

 

$

432,893

 

$

50,644

 

$

50,768

 

 

Corporate Bonds

 

During 2013, the Bank purchased $20 million in floating rate corporate bonds with an initial weighted average yield of 1.36%. The bonds, which have a weighted average life of seven years, were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 4% of the Bank’s investment portfolio as of December 31, 2013.

 

Mortgage backed Securities

 

At December 31, 2013, with the exception of the $5.5 million private label mortgage backed security, all other mortgage backed securities held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac and Fannie Mae (“FNMA”), institutions that the government has affirmed its commitment to support. At December 31, 2013 and December 31, 2012, there were gross unrealized/unrecognized losses of $1.8 million and $130,000 related to available for sale mortgage backed securities. Because the decline in fair value of these mortgage backed securities is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these mortgage backed securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired.

 

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Market Loss Analysis

 

Securities with unrealized losses at December 31, 2013 and 2012, 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

 

December 31, 2013 (in thousands)

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

44,041

 

$

(101

)

$

 

$

 

$

44,041

 

$

(101

)

Mortgage backed securities - residential

 

19,494

 

(288

)

 

 

19,494

 

(288

)

Collateralized mortgage obligations

 

55,927

 

(1,546

)

 

 

55,927

 

(1,546

)

Mutual fund

 

995

 

(5

)

 

 

995

 

(5

)

Corporate bonds

 

9,850

 

(150

)

 

 

9,850

 

(150

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

130,307

 

$

(2,090

)

$

 

$

 

$

130,307

 

$

(2,090

)

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

521

 

$

(13

)

$

 

$

 

$

521

 

$

(13

)

Collateralized mortgage obligations

 

18,686

 

(184

)

 

 

18,686

 

(184

)

Corporate bonds

 

4,884

 

(116

)

 

 

4,884

 

(116

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

 

$

24,091

 

$

(313

)

$

 

$

 

$

24,091

 

$

(313

)

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

December 31, 2012 (in thousands)

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

3,588

 

$

(6

)

$

 

$

 

$

3,588

 

$

(6

)

Collateralized mortgage obligations

 

20,508

 

(130

)

 

 

20,508

 

(130

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

24,096

 

$

(136

)

$

 

$

 

$

24,096

 

$

(136

)

 

At December 31, 2013, the Bank’s security portfolio consisted of 147 securities, 27 of which were in an unrealized loss position.

 

At December 31, 2012, the Bank’s security portfolio consisted of 153 securities, seven of which were in an unrealized loss position.

 

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3.             INVESTMENT SECURITIES (continued)

 

Other-than-temporary impairment (“OTTI”)

 

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

 

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

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

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

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

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

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

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

·  Any rating changes by a rating agency; and

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

 

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

 

The Bank owns one private label mortgage backed security with a total carrying value of $5.5 million at December 31, 2013. This security, with an average remaining life currently estimated at four years, is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

 

See additional discussion regarding the Bank’s private label mortgage backed security in this section of the filing under Footnote 5 “Fair Value.”

 

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3.         INVESTMENT SECURITIES (continued)

 

The following table presents a rollforward of the Bank’s private label mortgage backed security credit losses recognized in earnings:

 

Year ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Balance, beginning of year

 

$

2,142

 

$

3,455

 

$

9,757

 

Reversal of interest reserve

 

 

 

(169

)

Recovery of losses previously recorded

 

(201

)

 

 

Realized pass through of actual losses

 

 

(1,313

)

(6,412

)

Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized

 

 

 

279

 

Balance, end of year

 

$

1,941

 

$

2,142

 

$

3,455

 

 

Further deterioration in economic conditions could cause the Bank to record an additional impairment charge related to credit losses of up to $4.7 million, which is the current gross amortized cost of the Bank’s remaining private label mortgage backed security.

 

Pledged Investment Securities

 

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

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Carrying amount

 

$

224,693

 

$

334,560

 

Fair value

 

224,989

 

334,843

 

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The composition of the loan portfolio at period end follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

Owner occupied

 

$

1,097,795

 

$

1,145,495

 

Non owner occupied

 

110,809

 

74,539

 

Commercial real estate

 

773,173

 

714,642

 

Commercial real estate - purchased whole loans

 

34,186

 

33,531

 

Construction & land development

 

44,351

 

68,214

 

Commercial & industrial

 

127,763

 

130,681

 

Warehouse lines of credit

 

149,576

 

216,576

 

Home equity

 

226,782

 

241,607

 

Consumer:

 

 

 

 

 

Credit cards

 

9,030

 

8,716

 

Overdrafts

 

944

 

955

 

Other consumer

 

15,383

 

15,241

 

 

 

 

 

 

 

Total loans

 

2,589,792

 

2,650,197

 

Less: Allowance for loan losses

 

23,026

 

23,729

 

 

 

 

 

 

 

Total loans, net

 

$

2,566,766

 

$

2,626,468

 

 

2012 FDIC-Assisted Acquisitions

 

The contractual amount of the loans associated with the TCB transaction decreased from $79 million as of the acquisition date to $34 million and $42 million as of December 31, 2013 and 2012. The carrying value of these loans was $57 million as of the acquisition date compared to $29 and $31 million as of December 31, 2013 and 2012.

 

The contractual amount of the loans associated with the FCB transaction decreased from $172 million as of the acquisition date to $85 million and $139 million as of December 31, 2013 and 2012. The carrying value of these loans was $130 million as of the acquisition date compared to $68 million and $108 million as of December 31, 2013 and 2012.

 

The composition of TCB and FCB loans outstanding at December 31, 2013 and December 31, 2012 follows:

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2013 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

10,191

 

$

19,554

 

$

29,745

 

Commercial real estate

 

13,398

 

43,167

 

56,565

 

Construction & land development

 

295

 

1,614

 

1,909

 

Commercial & industrial

 

329

 

2,867

 

3,196

 

Home equity

 

4,270

 

366

 

4,636

 

Consumer:

 

 

 

 

 

 

 

Credit cards

 

205

 

 

205

 

Overdrafts

 

4

 

 

4

 

Other consumer

 

73

 

129

 

202

 

Total loans

 

$

28,765

 

$

67,697

 

$

96,462

 

 

The above table is inclusive of loans originated subsequent to the respective acquisition dates.

 

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Table of Contents

 

4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2012 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

12,270

 

$

32,459

 

$

44,729

 

Commercial real estate

 

8,015

 

61,758

 

69,773

 

Construction & land development

 

4,235

 

3,301

 

7,536

 

Commercial & industrial

 

1,284

 

9,405

 

10,689

 

Home equity

 

4,183

 

385

 

4,568

 

Consumer:

 

 

 

 

 

 

 

Credit cards

 

321

 

 

321

 

Overdrafts

 

1

 

11

 

12

 

Other consumer

 

655

 

333

 

988

 

Total loans

 

$

30,964

 

$

107,652

 

$

138,616

 

 

The tables below reconcile the contractually-required and carrying amounts of acquired TCB and FCB loans at December 31, 2013 and December 31, 2012:

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2013 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Contractually-required principal

 

$

34,406

 

$

85,184

 

$

119,590

 

Non-accretable difference

 

(3,884

)

(15,194

)

(19,078

)

Accretable difference

 

(1,757

)

(2,293

)

(4,050

)

Total carrying value of loans

 

$

28,765

 

$

67,697

 

$

96,462

 

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2012 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Contractually-required principal

 

$

42,188

 

$

139,156

 

$

181,344

 

Non-accretable difference

 

(10,393

)

(28,870

)

(39,263

)

Accretable difference

 

(831

)

(2,634

)

(3,465

)

Total carrying value of loans

 

$

30,964

 

$

107,652

 

$

138,616

 

 

See additional discussion regarding the TCB and FCB acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions.”

 

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Table of Contents

 

4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Credit Quality Indicators

 

Bank procedures for assessing and maintaining credit gradings differs slightly depending on whether a new or renewed loan is being underwritten, or whether an existing loan is being re-evaluated for potential credit quality concerns. The latter usually occurs upon receipt of updated financial information, or other pertinent data, that would potentially cause a change in the loan grade. Specific Bank procedures follow:

 

·                  For new and renewed C&I, CRE and construction and land development loans, the Bank’s Credit Administration Department (“CAD”) assigns the credit quality grade to the loan. Loan grades for new C&I, CRE and construction and land development loans with an aggregate credit exposure of $2.0 million or greater are validated by the Senior Loan Committee (“SLC”).

 

·                  The SLC is chaired by the Chief Operating Officer of Commercial Banking (“COO”) and includes the Bank’s Chief Credit Officer (“CCO”) and is attended by the Bank’s Chief Risk Management Officer (“CRMO”), among other executives.

 

·                  Commercial loan officers are responsible for monitoring their respective loan portfolios and reporting any adverse material changes to the CCO. When circumstances warrant a review and possible change in the credit quality grade, loan officers are required to notify the Bank’s CAD.

 

·                  The COO meets monthly with commercial loan officers to discuss the status of past due loans and possible classified loans. These meetings are designed to give loan officers an opportunity to identify an existing loan that should be downgraded.

 

·                  Monthly, members of senior management along with managers of Commercial Lending, CAD, Accounting, Special Assets and Retail Collections attend a Special Asset Committee (“SAC”) meeting. The SAC reviews all C&I and CRE, classified, and impaired loans in excess of $100,000 and discusses the relative trends and current status of these assets. In addition, the SAC reviews all retail residential real estate loans exceeding $750,000 and all home equity loans exceeding $100,000 that are 80-days or more past due or that are on non-accrual status. SAC also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures and collateral repossessions. Based on the information reviewed in this meeting, the SAC approves all specific loan loss allocations to be recognized by the Bank within the Allowance analysis.

 

·                  All new and renewed warehouse lending loans are approved by the SLC and Executive Loan Committee. The CAD assigns the initial credit quality grade to warehouse lending loans. Monthly, members of senior management along with the SLC, review warehouse lending activity and monitor key performance indicators such as average days outstanding, average FICO credit report score, average LTV and other important factors.

 

On at least an annual basis, the Bank’s internal loan review department analyzes all aggregate lending relationships with outstanding balances greater than $1 million that are internally classified as “Special Mention,” “Substandard,” “Doubtful” or “Loss.” In addition, for all “Pass” rated loans, the Bank analyzes, on at least an annual basis, all aggregate lending relationships with outstanding balances exceeding $4 million.

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, public information, and current economic trends. The Bank also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). The Bank analyzes loans individually, and based on this analysis, establishes a credit risk rating. The Bank uses the following definitions for risk ratings:

 

Risk Grade 1 — Excellent (Pass): Loans fully secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans fully secured by publicly traded marketable securities where there is no impediment to liquidation; or loans to any publicly held company with a current long-term debt rating of A or better.

 

Risk Grade 2 — Good (Pass): Loans to businesses that have strong financial statements containing an unqualified opinion from a Certified Public Accounting firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans that are guaranteed or otherwise backed by the full faith and credit of the U.S. government or an agency thereof, such as the Small Business Administration; or loans to publicly held companies with current long-term debt ratings of Baa or better.

 

Risk Grade 3 — Satisfactory (Pass): Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.

 

Risk Grade 4 — Satisfactory/Monitored (Pass): Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

 

Risk Grade 5 — Special Mention: Loans that possess some credit deficiency or potential weakness that deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) credit weaknesses are considered potential and are not defined impairments to the primary source of repayment.

 

Purchased Credit Impaired Loans Group 1 (“PCI-1”): To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified in the Purchased Credit Impaired - Group 1 (“PCI-1”) category; whose credit risk is considered equivalent to a non-PCI “Special Mention” loan within the Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial estimate.  Provisions for loan losses are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

Purchased Credit Impaired Loans — Substandard (“PCI-Sub”): If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified PCI-Substandard (“PCI-Sub”) within the Bank’s credit risk matrix.  Management deems the risk of default and overall credit risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI “Substandard” loan within the Bank’s credit rating matrix. PCI-Sub loans are considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

See additional discussion regarding purchased credit impaired loans in this section of the filing under Footnote 2 “2012 FDIC-Assisted Acquisitions.”

 

Risk Grade 6 — Substandard: One or more of the following characteristics may be exhibited in loans classified as Substandard:

 

·                  Loans that possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

·                  Loans are inadequately protected by the current net worth and paying capacity of the obligor.

·                  The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

·                  Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

·                  Unusual courses of action are needed to maintain a high probability of repayment.

·                  The borrower is not generating enough cash flow to repay loan principal, however, it continues to make interest payments.

·                  The Bank is forced into a subordinated or unsecured position due to flaws in documentation.

·                  The Bank is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

·                  There is significant deterioration in market conditions to which the borrower is highly vulnerable.

 

Risk Grade 7 — Doubtful: One or more of the following characteristics may be present in loans classified as Doubtful:

 

·                  Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

·                  The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

·                  The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

 

Risk Grade 8 — Loss: Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified “Loss” when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

For all real estate and consumer loans that do not meet the scope above, the Bank uses a grading system based on delinquency. Loans that are 80 days or more past due, on non-accrual, or are troubled debt restructurings are graded “Substandard.” Occasionally, a real estate loan below scope may be graded as “Special Mention” or “Substandard” if the loan is cross-collateralized with a classified C&I or CRE loan.

 

Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are considered in the determination of the Allowance once day-one fair values are final.

 

Management separately monitors PCI loans, and on at least a quarterly basis, reviews them against the factors and assumptions used in determining their day-one fair values. In addition to its quarterly evaluation, a PCI 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.

 

If a troubled debt restructuring is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting standards and transferred out of the PCI population. The loan may require an additional provision for loan losses if its restructured cash flows are less than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity date are generally not considered TDRs and remain in the PCI population.

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Credit Quality Indicators

 

Based on the Bank’s internal analysis performed, the risk category of loans by class follows:

 

 

 

 

 

 

 

 

 

 

 

Purchased

 

Purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired

 

Impaired

 

Total

 

December 31, 2013

 

 

 

Special

 

 

 

Doubtful /

 

Loans -

 

Loans -

 

Rated

 

(in thousands)

 

Pass

 

Mention *

 

Substandard *

 

Loss

 

Group 1

 

Substandard

 

Loans**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

27,431

 

$

10,994

 

$

 

$

2,810

 

$

 

$

41,235

 

Non owner occupied

 

 

919

 

1,292

 

 

7,936

 

 

10,147

 

Commercial real estate

 

709,610

 

11,125

 

25,296

 

 

27,142

 

 

773,173

 

Commercial real estate - Purchased whole loans

 

34,186

 

 

 

 

 

 

34,186

 

Construction & land development

 

40,591

 

128

 

2,386

 

 

1,246

 

 

44,351

 

Commercial & industrial

 

123,646

 

296

 

2,035

 

 

1,564

 

222

 

127,763

 

Warehouse lines of credit

 

149,576

 

 

 

 

 

 

149,576

 

Home equity

 

 

250

 

2,014

 

 

 

 

2,264

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

 

Other consumer

 

 

18

 

66

 

 

33

 

 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rated loans

 

$

1,057,609

 

$

40,167

 

$

44,083

 

$

 

$

40,731

 

$

222

 

$

1,182,812

 

 

 

 

 

 

 

 

 

 

 

 

Purchased

 

Purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired

 

Impaired

 

Total

 

December 31, 2012

 

 

 

Special

 

 

 

Doubtful /

 

Loans -

 

Loans -

 

Rated

 

(in thousands)

 

Pass

 

Mention*

 

Substandard*

 

Loss

 

Group 1

 

Substandard

 

Loans**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

26,031

 

$

8,700

 

$

 

$

2,413

 

$

 

$

37,144

 

Non owner occupied

 

 

2,616

 

3,350

 

 

20,190

 

 

26,156

 

Commercial real estate

 

624,631

 

17,216

 

28,433

 

 

44,362

 

 

714,642

 

Commercial real estate - Purchased whole loans

 

33,531

 

 

 

 

 

 

33,531

 

Construction & land development

 

61,556

 

1,088

 

3,878

 

 

1,692

 

 

68,214

 

Commercial & industrial

 

121,170

 

2,639

 

2,592

 

 

4,280

 

 

130,681

 

Warehouse lines of credit

 

216,576

 

 

 

 

 

 

216,576

 

Home equity

 

 

648

 

2,346

 

 

 

 

2,994

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

 

Other consumer

 

 

387

 

53

 

 

41

 

 

481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rated loans

 

$

1,057,464

 

$

50,625

 

$

49,352

 

$

 

$

72,978

 

$

 

$

1,230,419

 

 


* - Special Mention and Substandard loans include $1 million and $6 million at December 31, 2013 and $4 million and $11 million at December 31, 2012, respectively, which were removed from the Purchased Credit Impaired population due to a post-acquisition troubled debt restructuring of the loan.

 

** - The above tables exclude all non-classified residential real estate and consumer loans at the respective period ends. The tables also exclude most non classified small C&I and CRE relationships totaling $100,000 or less. These loans are not rated since they are accruing interest and are not past due 80-days-or-more.

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Allowance for Loan Losses

 

Activity in the Allowance follows:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Allowance for loan losses at beginning year

 

$

23,729

 

$

24,063

 

$

23,079

 

 

 

 

 

 

 

 

 

Charge offs - Traditional Banking

 

(6,185

)

(9,888

)

(7,309

)

Charge offs - Refund Anticipation Loans

 

 

(11,097

)

(15,484

)

Total charge offs

 

(6,185

)

(20,985

)

(22,793

)

 

 

 

 

 

 

 

 

Recoveries - Traditional Banking

 

1,654

 

1,387

 

1,887

 

Recoveries - Refund Anticipation Loans

 

845

 

4,221

 

3,924

 

Total recoveries

 

2,499

 

5,608

 

5,811

 

 

 

 

 

 

 

 

 

Net loan charge offs - Traditional Banking

 

(4,531

)

(8,501

)

(5,422

)

Net loan charge offs - Refund Anticipation Loans

 

845

 

(6,876

)

(11,560

)

Net loan charge offs

 

(3,686

)

(15,377

)

(16,982

)

 

 

 

 

 

 

 

 

Provision for loan losses - Traditional Banking

 

3,828

 

8,167

 

6,406

 

Provision for loan losses - Refund Anticipation Loans

 

(845

)

6,876

 

11,560

 

Total provision for loan losses

 

2,983

 

15,043

 

17,966

 

 

 

 

 

 

 

 

 

Allowance for loan losses at end of year

 

$

23,026

 

$

23,729

 

$

24,063

 

 

The Allowance calculation includes the following qualitative factors, which are considered in combination with the Bank’s historical loss rates in determining the general loss reserve within the Allowance:

 

·                  Changes in nature, volume and seasoning of the loan portfolio;

·                  Changes in experience, ability and depth of lending management and other relevant staff;

·                  Changes in the quality of the Bank’s loan review system;

·                  Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

·                  Changes in the volume and severity of past due, non-accrual and classified loans;

·                  Changes in the value of underlying collateral for collateral-dependent loans;

·                  Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the loan portfolio, including the condition of various market segments;

·                  The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

·                  The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

 

Prior to January 1, 2012, the Bank’s Allowance calculation was supported with qualitative factors which included a nominal “unallocated” Allowance component totaling $2.0 million as of December 31, 2011. The Bank believed that historically the “unallocated” allowance properly reflected estimated credit losses determined in accordance with GAAP. The unallocated allowance was primarily related to RB&T’s loan portfolio, which is highly concentrated in the Kentucky and Southern Indiana real estate markets. These markets have remained relatively stable during the recent economic downturn, as compared to other parts of the U.S. With the Bank’s 2012 expansion, its plans to pursue future acquisitions into potentially new markets through FDIC-assisted transactions, and its offering of new loan products, such as mortgage warehouse lines of credit, the Bank revised its methodology to provide a more detailed calculation when estimating the impact of qualitative factors over the Bank’s various loan categories. This methodology change did not have a material impact on the Bank’s provision for loan losses for the year ended December 31, 2012.

 

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4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

In executing this methodology change, the Bank primarily focused on large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and are generally not included in the scope of ASC Topic 310-10-35, Accounting by Creditors for Impairment of a Loan.

 

The following tables present the activity in the Allowance by portfolio class for the years ended December 31, 2013 and 2012:

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

Real Estate -

 

 

 

 

 

Warehouse

 

Year Ended

 

Owner

 

Non Owner

 

Commercial

 

Purchased

 

Construction &

 

Commercial &

 

Lines of

 

December 31, 2013 (in thousands)

 

Occupied

 

Occupied

 

Real Estate

 

Whole Loans

 

Land Development

 

Industrial

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

7,006

 

$

1,049

 

$

8,843

 

$

34

 

$

2,769

 

$

580

 

$

541

 

Provision for loan losses

 

2,411

 

43

 

539

 

 

(902

)

876

 

(92

)

Loans charged off

 

(1,886

)

(241

)

(1,190

)

 

(619

)

(466

)

 

Recoveries

 

285

 

172

 

117

 

 

48

 

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

7,816

 

$

1,023

 

$

8,309

 

$

34

 

$

1,296

 

$

1,089

 

$

449

 

 

(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refund

 

Consumer

 

 

 

Home

 

Anticipation

 

Credit

 

 

 

Other

 

 

 

 

 

Equity

 

Loans

 

Cards

 

Overdrafts

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,348

 

$

 

$

210

 

$

198

 

$

151

 

$

23,729

 

Provision for loan losses

 

515

 

(845

)

202

 

191

 

45

 

2,983

 

Loans charged off

 

(632

)

 

(142

)

(601

)

(408

)

(6,185

)

Recoveries

 

165

 

845

 

19

 

411

 

338

 

2,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

2,396

 

$

 

$

289

 

$

199

 

$

126

 

$

23,026

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

Real Estate -

 

 

 

 

 

Warehouse

 

Year Ended

 

Owner

 

Non Owner

 

Commercial

 

Purchased

 

Construction &

 

Commercial &

 

Lines of

 

December 31, 2012 (in thousands)

 

Occupied

 

Occupied

 

Real Estate

 

Whole Loans

 

Land Development

 

Industrial

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,212

 

$

1,142

 

$

7,724

 

$

 

$

3,042

 

$

1,025

 

$

104

 

Allocation of previously unallocated allowance

 

1,117

 

146

 

47

 

 

 

 

 

Provision for loan losses

 

3,549

 

144

 

2,015

 

34

 

1,545

 

(294

)

437

 

Loans charged off

 

(3,128

)

(520

)

(1,033

)

 

(1,922

)

(176

)

 

Recoveries

 

256

 

137

 

90

 

 

104

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

7,006

 

$

1,049

 

$

8,843

 

$

34

 

$

2,769

 

$

580

 

$

541

 

 

(continued)

 

 

 

 

 

Refund

 

Consumer

 

 

 

 

 

 

 

Home

 

Anticipation

 

Credit

 

 

 

Other

 

 

 

 

 

 

 

Equity

 

Loans

 

Cards

 

Overdrafts

 

Consumer

 

Unallocated*

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,984

 

$

 

$

503

 

$

135

 

$

227

 

$

1,965

 

$

24,063

 

Allocation of previously unallocated allowance*

 

536

 

 

47

 

17

 

55

 

(1,965

)

 

Provision for loan losses

 

988

 

6,876

 

(253

)

92

 

(90

)

 

15,043

 

Loans charged off

 

(2,252

)

(11,097

)

(123

)

(468

)

(266

)

 

(20,985

)

Recoveries

 

92

 

4,221

 

36

 

422

 

225

 

 

5,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

2,348

 

$

 

$

210

 

$

198

 

$

151

 

$

 

$

23,729

 

 


* Allocation was made January 1, 2012 based on a methodology change to the Company’s Allowance .

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Subprime Lending

 

The Bank has certain classes of loans that are considered to be “subprime” strictly due to the credit score of the borrower at the time of origination. These loans totaled approximately $58 million and $66 million at December 31, 2013 and 2012. Approximately $17 million and $19 million of the outstanding subprime loans at December 31 2013 and 2012 were originated for CRA purposes. Management does not consider these loans to possess significantly higher credit risk due to other stringent underwriting qualifications such as higher debt to income and loan-to-value requirements.

 

Non-performing Loans and Non-performing Assets

 

Detail of non-performing loans and non-performing assets and select credit quality ratios follows:

 

December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Loans on non-accrual status(1)

 

$

19,104

 

$

18,506

 

$

23,306

 

Loans past due 90-days-or-more and still on accrual(2)

 

1,974

 

3,173

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

21,078

 

21,679

 

23,306

 

Other real estate owned

 

17,102

 

26,203

 

10,956

 

Total non-performing assets

 

$

38,180

 

$

47,882

 

$

34,262

 

Credit Quality Ratios

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.81

%

0.82

%

1.02

%

Non-performing assets to total loans (including OREO)

 

1.46

%

1.79

%

1.49

%

Non-performing assets to total assets

 

1.13

%

1.41

%

1.00

%

 


(1)         Loans on non-accrual status include impaired loans.

(2)         All loans past due 90-days-or-more and still accruing were PCI loans accounted for under ASC 310-30.

 

Non-performing loans and non-performing asset balances related to the 2012 FDIC-assisted acquisitions, and included in the tables above at December 31, 2013 and December 31, 2012, are presented in the tables below:

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2013 (dollars in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Loans on non-accrual status(1)

 

$

290

 

$

 

$

290

 

Loans past due 90 days-or-more and still on accrual(2)

 

334

 

1,640

 

1,974

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

624

 

1,640

 

2,264

 

Other real estate owned

 

371

 

9,092

 

9,463

 

Total non-performing assets

 

$

995

 

$

10,732

 

$

11,727

 

Credit Quality Ratios - Acquired Banks:

 

 

 

 

 

 

 

Non-performing loans to total loans

 

2.35

%

 

 

 

 

Non-performing assets to total loans (including OREO)

 

11.07

%

 

 

 

 

 


(1)         Loans on non-accrual status include impaired loans.

(2)         All loans past due 90 days-or-more and still accruing were PCI loans accounted for under ASC 310-30.

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2012 (dollars in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Loans on non-accrual status (1)

 

$

 

$

 

$

 

Loans past due 90-days-or-more and still on accrual (2)

 

801

 

2,372

 

3,173

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

801

 

2,372

 

3,173

 

Other real estate owned

 

2,100

 

12,398

 

14,498

 

Total non-performing assets

 

$

2,901

 

$

14,770

 

$

17,671

 

 

Credit Quality Ratios - Acquired Banks:

 

 

 

 

 

 

 

Non-performing loans to total loans

 

2.29

%

 

 

 

 

Non-performing assets to total loans (including OREO)

 

11.54

%

 

 

 

 

 


(1)         Loans on non-accrual status include impaired loans.

(2)         All loans past due 90 days-or-more and still accruing were PCI loans accounted for under ASC 310-30.

 

See additional discussion regarding the TCB and FCB acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” in this section of the filing.

 

The following table presents the recorded investment in non-accrual loans and loans past due 90-days-or-more and still on accrual by class of loans:

 

 

 

 

 

 

 

 

 

Loans Past Due 90-Days-or-More

 

 

 

Non-Accrual Loans

 

and Still Accruing Interest

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

8,538

 

$

9,298

 

$

12,183

 

$

673

 

$

730

 

$

 

Non owner occupied

 

1,279

 

1,376

 

1,565

 

 

 

 

Commercial real estate

 

7,643

 

3,756

 

3,032

 

 

712

 

 

Commercial real estate - purchased whole loans

 

 

 

 

 

 

 

Construction & land dev.

 

97

 

1,777

 

2,521

 

70

 

531

 

 

Commercial & industrial

 

327

 

334

 

373

 

1,231

 

1,200

 

 

Warehouse lines of credit

 

 

 

 

 

 

 

Home equity

 

1,128

 

1,868

 

3,603

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

Other consumer

 

92

 

97

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

19,104

 

$

18,506

 

$

23,306

 

$

1,974

 

$

3,173

 

$

 

 

Non-accrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Non-accrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months and future payments are reasonably assured. TDRs on non-accrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms. Loans past due 90-days-or-more and still on accrual currently only represent PCI loans accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

 

167



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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Delinquent Loans

 

The following tables present the aging of the recorded investment in loans by class of loans:

 

 

 

30 - 59

 

60 - 89

 

Greater than

 

Total

 

Total

 

 

 

December 31, 2013

 

Days

 

Days

 

90 Days

 

Loans

 

Loans Not

 

Total

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent*

 

Delinquent

 

Delinquent

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,956

 

$

733

 

$

3,668

 

$

6,357

 

$

1,091,438

 

$

1,097,795

 

Non owner occupied

 

195

 

967

 

131

 

1,293

 

109,516

 

110,809

 

Commercial real estate

 

874

 

384

 

3,940

 

5,198

 

767,975

 

773,173

 

Commercial real estate - purchased whole loans

 

 

 

 

 

34,186

 

34,186

 

Construction & land development

 

332

 

 

167

 

499

 

43,852

 

44,351

 

Commercial & industrial

 

 

 

1,415

 

1,415

 

126,348

 

127,763

 

Warehouse lines of credit

 

 

 

 

 

149,576

 

149,576

 

Home equity

 

665

 

48

 

397

 

1,110

 

225,672

 

226,782

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

87

 

6

 

5

 

98

 

8,932

 

9,030

 

Overdrafts

 

159

 

 

 

159

 

785

 

944

 

Other consumer

 

67

 

27

 

 

94

 

15,289

 

15,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,335

 

$

2,165

 

$

9,723

 

$

16,223

 

$

2,573,569

 

$

2,589,792

 

Delinquent loans to total loans

 

0.17

%

0.08

%

0.38

%

0.63

%

 

 

 

 

 

 

 

30 - 59

 

60 - 89

 

Greater than

 

Total

 

Total

 

 

 

December 31, 2012

 

Days

 

Days

 

90 Days

 

Loans

 

Loans Not

 

Total

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent *

 

Delinquent

 

Delinquent

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

2,210

 

$

1,978

 

$

4,712

 

$

8,900

 

$

1,136,595

 

$

1,145,495

 

Non owner occupied

 

907

 

1,128

 

864

 

2,899

 

71,640

 

74,539

 

Commercial real estate

 

103

 

486

 

2,051

 

2,640

 

712,002

 

714,642

 

Commercial real estate - purchased whole loans

 

 

 

 

 

33,531

 

33,531

 

Construction & land development

 

 

194

 

1,930

 

2,124

 

66,090

 

68,214

 

Commercial & industrial

 

222

 

733

 

1,307

 

2,262

 

128,419

 

130,681

 

Warehouse lines of credit

 

 

 

 

 

216,576

 

216,576

 

Home equity

 

521

 

251

 

882

 

1,654

 

239,953

 

241,607

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

60

 

5

 

 

65

 

8,651

 

8,716

 

Overdrafts

 

167

 

1

 

 

168

 

787

 

955

 

Other consumer

 

102

 

28

 

2

 

132

 

15,109

 

15,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,292

 

$

4,804

 

$

11,748

 

$

20,844

 

$

2,629,353

 

$

2,650,197

 

Delinquent loans to total loans

 

0.16

%

0.18

%

0.44

%

0.78

%

 

 

 

 

 


* - All loans past due 90 days-or-more, excluding PCI loans, as of December 31, 2013 and 2012 were on non-accrual status.

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

An aging of the recorded investment in past due loans related to the 2012 FDIC-assisted acquisitions and included in the preceding tables at December 31, 2013 and December 31, 2012, are presented below:

 

 

 

30 - 59

 

60 - 89

 

Greater than

 

Total

 

Total

 

Total

 

December 31, 2013

 

Days

 

Days

 

90 Days

 

Loans

 

Loans Not

 

Acquired Bank

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent *

 

Delinquent

 

Delinquent

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

213

 

$

178

 

$

673

 

$

1,064

 

$

28,681

 

$

29,745

 

Commercial real estate

 

241

 

384

 

 

625

 

55,940

 

56,565

 

Construction & land development

 

334

 

 

70

 

404

 

1,505

 

1,909

 

Commercial & industrial

 

 

 

1,231

 

1,231

 

1,965

 

3,196

 

Home equity

 

178

 

 

 

178

 

4,458

 

4,636

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

205

 

205

 

Overdrafts

 

1

 

 

 

1

 

3

 

4

 

Other consumer

 

1

 

 

 

1

 

201

 

202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

968

 

$

562

 

$

1,974

 

$

3,504

 

$

92,958

 

$

96,462

 

Delinquent acquired bank loans to total acquired bank loans

 

1.00

%

0.58

%

2.05

%

3.63

%

 

 

 

 

 

 

 

30 - 59

 

60 - 89

 

Greater than

 

Total

 

Total

 

Total

 

December 31, 2012

 

Days

 

Days

 

90 Days

 

Loans

 

Loans Not

 

Acquired Bank

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent *

 

Delinquent

 

Delinquent

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

159

 

$

1,430

 

$

729

 

$

2,318

 

$

42,411

 

$

44,729

 

Commercial real estate

 

 

165

 

698

 

863

 

68,910

 

69,773

 

Construction & land development

 

 

194

 

531

 

725

 

6,811

 

7,536

 

Commercial & industrial

 

 

732

 

1,215

 

1,947

 

8,742

 

10,689

 

Home equity

 

83

 

 

 

83

 

4,485

 

4,568

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

321

 

321

 

Overdrafts

 

 

 

 

 

12

 

12

 

Other consumer

 

4

 

27

 

 

31

 

957

 

988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

246

 

$

2,548

 

$

3,173

 

$

5,967

 

$

132,649

 

$

138,616

 

Delinquent acquired bank loans to total acquired bank loans

 

0.18

%

1.84

%

2.29

%

4.31

%

 

 

 

 

 


* - All loans past due 90 days-or-more, excluding PCI loans, as of December 31, 2013 and 2012 were on non-accrual status.

 

See additional discussion regarding the TCB and FCB acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” in this section of the filing.

 

169



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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The Bank considers the performance of the loan portfolio and its impact on the Allowance. For residential and consumer loan classes, the Bank also evaluates credit quality based on the aging status of the loan (which was previously presented) and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of December 31, 2013 and 2012:

 

 

 

Residential Real Estate

 

 

 

Consumer

 

 

 

Owner

 

Non Owner

 

Home

 

Credit

 

 

 

Other

 

December 31, 2013 (in thousands)

 

Occupied

 

Occupied

 

Equity

 

Cards

 

Overdrafts

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

1,088,584

 

$

109,530

 

$

225,654

 

$

9,030

 

$

944

 

$

15,291

 

Non performing

 

9,211

 

1,279

 

1,128

 

 

 

92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,097,795

 

$

110,809

 

$

226,782

 

$

9,030

 

$

944

 

$

15,383

 

 

 

 

Residential Real Estate

 

 

 

Consumer

 

 

 

Owner

 

Non Owner

 

Home

 

Credit

 

 

 

Other

 

December 31, 2012 (in thousands)

 

Occupied

 

Occupied

 

Equity

 

Cards

 

Overdrafts

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

1,138,326

 

$

73,163

 

$

239,985

 

$

8,716

 

$

955

 

$

16,104

 

Non performing

 

10,028

 

1,376

 

1,868

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,148,354

 

$

74,539

 

$

241,853

 

$

8,716

 

$

955

 

$

16,201

 

 

170



Table of Contents

 

4.             LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Impaired Loans

 

The Bank defines impaired loans as follows:

 

·                        All loans internally rated as “Substandard,” “PCI-Sub,” “Doubtful” or “Loss;”

·                        All loans on non-accrual status and non-PCI loans past due 90 days-or-more still on accrual;

·                        All retail and commercial TDRs; and

·                        Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the definition of impaired.

 

See the section titled “Credit Quality Indicators” in this section of the filing for additional discussion regarding the Bank’s loan classification structure.

 

Information regarding the Bank’s impaired loans follows:

 

As of and for the years ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Loans with no allocated allowance for loan losses

 

$

36,721

 

$

36,325

 

$

32,171

 

Loans with allocated allowance for loan losses

 

71,273

 

69,382

 

45,022

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$

107,994

 

$

105,707

 

$

77,193

 

 

 

 

 

 

 

 

 

Amount of the allowance for loan losses allocated

 

$

6,674

 

$

8,531

 

$

7,086

 

Average of individually impaired loans during the year

 

110,272

 

93,487

 

59,711

 

Interest income recognized during impairment

 

3,489

 

2,682

 

1,464

 

Cash basis interest income recognized

 

 

 

 

 

Approximately $32 million and $18 million of impaired loans at December 31, 2013 and December 31, 2012 were loans acquired in the Bank’s 2012 FDIC-assisted acquisitions. Approximately $7 million of the loans acquired during 2012 became classified during 2013 as “impaired” through a troubled debt restructuring. See additional discussion regarding the TCB and FCB acquisitions under Footnote 2 “2012 FDIC-Assisted Acquisitions” in this section of the filing.

 

171



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4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The following tables present the balance in the Allowance and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

Real Estate -

 

 

 

 

 

Warehouse

 

 

 

Owner

 

Non Owner

 

Commercial

 

Purchased

 

Construction &

 

Commercial &

 

Lines of

 

December 31, 2013 (in thousands)

 

Occupied

 

Occupied

 

Real Estate

 

Whole Loans

 

Land Development

 

Industrial

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment, excluding PCI loans

 

$

3,606

 

$

61

 

$

1,232

 

$

 

$

146

 

$

111

 

$

 

Collectively evaluated for impairment

 

4,159

 

672

 

6,474

 

34

 

1,140

 

661

 

449

 

PCI loans with post acquisition impairment

 

51

 

290

 

603

 

 

10

 

317

 

 

PCI loans without post acquisition impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending allowance for loan losses

 

$

7,816

 

$

1,023

 

$

8,309

 

$

34

 

$

1,296

 

$

1,089

 

$

449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated, excluding PCI loans

 

$

39,211

 

$

2,061

 

$

33,519

 

$

 

$

2,494

 

$

4,521

 

$

 

Loans collectively evaluated for impairment

 

1,055,774

 

100,812

 

712,512

 

34,186

 

40,611

 

121,456

 

149,576

 

PCI loans with post acquisition impairment

 

1,455

 

5,984

 

14,512

 

 

267

 

1,609

 

 

PCI loans without post acquisition impairment

 

1,355

 

1,952

 

12,630

 

 

979

 

177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending loan balance

 

$

1,097,795

 

$

110,809

 

$

773,173

 

$

34,186

 

$

44,351

 

$

127,763

 

$

149,576

 

 

(continued)

 

 

 

 

 

Consumer

 

 

 

 

 

 

Home

 

Credit

 

 

 

Other

 

 

 

 

 

 

Equity

 

Cards

 

Overdrafts

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment, excluding PCI loans

 

$

203

 

$

 

$

 

$

43

 

 $

5,402

 

 

Collectively evaluated for impairment

 

2,193

 

289

 

199

 

82

 

16,352

 

 

PCI loans with post acquisition impairment

 

 

 

 

1

 

1,272

 

 

PCI loans without post acquisition impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending allowance for loan losses

 

$

2,396

 

$

289

 

$

199

 

$

126

 

 $

23,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated, excluding PCI loans

 

$

2,264

 

$

 

$

 

$

85

 

 $

84,155

 

 

Loans collectively evaluated for impairment

 

224,518

 

9,030

 

944

 

15,265

 

2,464,684

 

 

PCI loans with post acquisition impairment

 

 

 

 

12

 

23,839

 

 

PCI loans without post acquisition impairment

 

 

 

 

21

 

17,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending loan balance

 

$

226,782

 

$

9,030

 

$

944

 

$

15,383

 

 $

2,589,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

172



Table of Contents

 

4.              LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

Real Estate -

 

 

 

 

 

Warehouse

 

 

 

Owner

 

Non Owner

 

Commercial

 

Purchased

 

Construction &

 

Commercial &

 

Lines of

 

December 31, 2012 (in thousands)

 

Occupied

 

Occupied

 

Real Estate

 

Whole Loans

 

Land Development

 

Industrial

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment, excluding PCI loans

 

$

3,032

 

$

521

 

$

2,919

 

$

 

$

1,157

 

$

348

 

$

 

Collectively evaluated for impairment

 

3,972

 

527

 

5,924

 

34

 

1,612

 

232

 

541

 

PCI loans with post acquisition impairment

 

2

 

1

 

 

 

 

 

 

PCI loans without post acquisition impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending allowance for loan losses

 

$

7,006

 

$

1,049

 

$

8,843

 

$

34

 

$

2,769

 

$

580

 

$

541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated, excluding PCI loans

 

$

44,429

 

$

4,235

 

$

40,593

 

$

 

$

5,268

 

$

6,972

 

$

 

Loans collectively evaluated for impairment

 

1,080,792

 

67,974

 

629,687

 

33,531

 

61,254

 

119,429

 

216,576

 

PCI loans with post acquisition impairment

 

136

 

184

 

 

 

 

 

 

PCI loans without post acquisition impairment

 

20,138

 

2,146

 

44,362

 

 

1,692

 

4,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending loan balance

 

$

1,145,495

 

$

74,539

 

$

714,642

 

$

33,531

 

$

68,214

 

$

130,681

 

$

216,576

 

 

(continued)

 

 

 

 

 

Consumer

 

 

 

 

 

 

Home

 

Credit

 

 

 

Other

 

 

 

 

 

 

Equity

 

Cards

 

Overdrafts

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment, excluding PCI loans

 

$

496

 

$

 

$

 

$

55

 

 $

8,528

 

 

Collectively evaluated for impairment

 

1,852

 

210

 

198

 

96

 

15,198

 

 

PCI loans with post acquisition impairment

 

 

 

 

 

3

 

 

PCI loans without post acquisition impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending allowance for loan losses

 

$

2,348

 

$

210

 

$

198

 

$

151

 

 $

23,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated, excluding PCI loans

 

$

3,420

 

$

 

$

 

$

470

 

 $

105,387

 

 

Loans collectively evaluated for impairment

 

238,187

 

8,716

 

955

 

14,731

 

2,471,832

 

 

PCI loans with post acquisition impairment

 

 

 

 

 

320

 

 

PCI loans without post acquisition impairment

 

 

 

 

40

 

72,658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending loan balance

 

$

241,607

 

$

8,716

 

$

955

 

$

15,241

 

 $

2,650,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

173



Table of Contents

 

4.              LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2013 and 2012. The difference between the “Unpaid Principal Balance” and “Recorded Investment” columns represents life-to-date partial write downs/charge offs taken on individual impaired credits.

 

 

 

 

 

 

 

 

 

Twelve Months Ended

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

Unpaid

 

 

 

Allowance for

 

Average

 

Interest

 

Cash Basis

 

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

Interest Income

 

December 31, 2013 (in thousands)

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

7,136

 

$

6,569

 

$

 

$

8,977

 

$

120

 

$

 

Non owner occupied

 

1,498

 

1,256

 

 

1,520

 

13

 

 

Commercial real estate

 

21,886

 

20,953

 

 

21,218

 

693

 

 

Commercial real estate - purchased whole loans

 

 

 

 

 

 

 

Construction & land development

 

2,087

 

2,087

 

 

2,150

 

103

 

 

Commercial & industrial

 

4,367

 

4,258

 

 

3,577

 

258

 

 

Warehouse lines of credit

 

 

 

 

 

 

 

Home equity

 

1,695

 

1,577

 

 

1,982

 

43

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

Other consumer

 

18

 

18

 

 

138

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

34,393

 

34,097

 

3,657

 

34,154

 

939

 

 

Non owner occupied

 

6,789

 

6,789

 

351

 

5,104

 

248

 

 

Commercial real estate

 

27,080

 

27,078

 

1,835

 

25,724

 

1,017

 

 

Commercial real estate - purchased whole loans

 

 

 

 

 

 

 

Construction & land development

 

674

 

674

 

156

 

2,048

 

38

 

 

Commercial & industrial

 

1,872

 

1,872

 

428

 

2,593

 

11

 

 

Warehouse lines of credit

 

 

 

 

 

 

 

Home equity

 

688

 

687

 

203

 

999

 

5

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

Other consumer

 

79

 

79

 

44

 

88

 

 

 

Total impaired loans

 

$

110,262

 

$

107,994

 

$

6,674

 

$

110,272

 

$

3,489

 

$

 

 

 

174



Table of Contents

 

4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

 

 

 

 

 

 

 

 

Twelve Months Ended

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

Unpaid

 

 

 

Allowance for

 

Average

 

Interest

 

Cash Basis

 

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

Interest Income

 

December 31, 2012 (in thousands)

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

13,299

 

$

13,107

 

$

 

$

23,397

 

$

224

 

$

 

Non owner occupied

 

955

 

794

 

 

1,656

 

6

 

 

Commercial real estate

 

14,293

 

14,293

 

 

11,130

 

707

 

 

Commercial real estate - purchased whole loans

 

 

 

 

 

 

 

Construction & land development

 

3,090

 

2,085

 

 

2,883

 

29

 

 

Commercial & industrial

 

4,206

 

4,114

 

 

2,653

 

99

 

 

Warehouse lines of credit

 

 

 

 

 

 

 

Home equity

 

1,753

 

1,546

 

 

858

 

23

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

Other consumer

 

386

 

386

 

 

219

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

31,709

 

31,458

 

3,034

 

12,558

 

258

 

 

Non owner occupied

 

3,695

 

3,625

 

522

 

2,543

 

100

 

 

Commercial real estate

 

26,710

 

26,300

 

2,919

 

27,094

 

909

 

 

Commercial real estate - purchased whole loans

 

 

 

 

 

 

 

Construction & land development

 

3,416

 

3,183

 

1,157

 

4,318

 

106

 

 

Commercial & industrial

 

2,858

 

2,858

 

348

 

2,614

 

173

 

 

Warehouse lines of credit

 

 

 

 

 

 

 

Home equity

 

1,874

 

1,874

 

496

 

1,543

 

38

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

Other consumer

 

84

 

84

 

55

 

21

 

2

 

 

Total impaired loans

 

$

108,328

 

$

105,707

 

$

8,531

 

$

93,487

 

$

2,682

 

$

 

 

175



Table of Contents

 

4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Troubled Debt Restructurings

 

A TDR is the situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy.

 

All TDRs are considered “Impaired” loans, including loans acquired in the Company’s 2012 FDIC-assisted acquisitions and subsequently restructured. The majority of the Bank’s commercial related and construction TDRs involve a restructuring of loan terms such as a reduction in the payment amount to require only interest and escrow (if required) and/or extending the maturity date of the loan. The substantial majority of the Bank’s residential real estate TDRs involve reducing the client’s loan payment through a rate reduction for a set period of time based on the borrower’s ability to service the modified loan payment.

 

Management determines whether to classify a TDR as non-performing based on its accrual status prior to modification. Non-accrual loans modified as TDRs remain on non-accrual status and continue to be reported as non-performing loans for a minimum of six months. Accruing loans modified as TDRs are evaluated for non-accrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. At December 31, 2013 and December 31, 2012, $13 million and $14 million of TDRs were also non-accrual loans.

 

Detail of TDRs differentiated by loan type and accrual status follows:

 

 

 

Troubled Debt

 

Troubled Debt

 

Total

 

 

 

Restructurings on

 

Restructurings on

 

Troubled Debt

 

December 31, 2013 (in thousands)

 

Non-Accrual Status

 

Accrual Status

 

Restructurings

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

5,514

 

$

31,705

 

$

37,219

 

Commercial real estate

 

7,486

 

22,041

 

29,527

 

Construction & land development

 

97

 

2,608

 

2,705

 

Commercial & industrial

 

143

 

4,378

 

4,521

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

$

13,240

 

$

60,732

 

$

73,972

 

 

 

 

Troubled Debt

 

Troubled Debt

 

Total

 

 

 

Restructurings on

 

Restructurings on

 

Troubled Debt

 

December 31, 2012 (in thousands)

 

Non-Accrual Status

 

Accrual Status

 

Restructurings

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

6,951

 

$

36,758

 

$

43,709

 

Commercial real estate

 

5,149

 

26,174

 

31,323

 

Construction & land development

 

1,595

 

2,167

 

3,762

 

Commercial & industrial

 

269

 

4,244

 

4,513

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

$

13,964

 

$

69,343

 

$

83,307

 

 

176



Table of Contents

 

4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The Bank considers a TDR to be performing to its modified terms if the loan is in accrual status and not past due 30 days or more as of the reporting date. A summary of the categories of TDR loan modifications outstanding and respective performance under modified terms at December 31, 2013 and December 31, 2012 follows:

 

 

 

Troubled Debt

 

Troubled Debt

 

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

 

 

Performing to

 

Not Performing to

 

Troubled Debt

 

December 31, 2013 (in thousands)

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

 

 

 

 

 

 

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

Interest only payments

 

$

430

 

$

671

 

$

1,101

 

Rate reduction

 

26,004

 

4,993

 

30,997

 

Principal deferral

 

1,840

 

632

 

2,472

 

Bankruptcies

 

1,247

 

1,402

 

2,649

 

Total residential TDRs

 

29,521

 

7,698

 

37,219

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

Interest only payments

 

6,086

 

1,321

 

7,407

 

Rate reduction

 

13,958

 

663

 

14,621

 

Principal deferral

 

8,983

 

5,351

 

14,334

 

Bankruptcies

 

 

391

 

391

 

Total commercial TDRs

 

29,027

 

7,726

 

36,753

 

Total troubled debt restructurings

 

$

58,548

 

$

15,424

 

$

73,972

 

 

 

 

Troubled Debt

 

Troubled Debt

 

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

 

 

Performing to

 

Not Performing to

 

Troubled Debt

 

December 31, 2012 (in thousands)

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

 

 

 

 

 

 

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

Interest only payments

 

$

813

 

$

624

 

$

1,437

 

Rate reduction

 

23,789

 

3,919

 

27,708

 

Principal deferral

 

9,186

 

2,092

 

11,278

 

Bankruptcies

 

2,224

 

1,093

 

3,317

 

Total residential TDRs

 

36,012

 

7,728

 

43,740

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

Interest only payments

 

5,096

 

342

 

5,438

 

Rate reduction

 

15,747

 

895

 

16,642

 

Principal deferral

 

15,640

 

1,595

 

17,235

 

Bankruptcies

 

 

252

 

252

 

Total commercial TDRs

 

36,483

 

3,084

 

39,567

 

Total troubled debt restructurings

 

$

72,495

 

$

10,812

 

$

83,307

 

 

As of December 31, 2013 and December 31, 2012, 79% and 87% of the Bank’s TDRs were performing according to their modified terms. The Bank had provided $5 million and $7 million of specific reserve allocations to customers whose loan terms have been modified in TDRs as of December 31, 2013 and December 31, 2012. Specific reserve allocations are generally assessed prior to loans being modified as a TDR, as most of these loans migrate from the Bank’s internal watch list and have been specifically provided for or reserved for as part of the Bank’s normal loan loss provisioning methodology. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships at December 31, 2013 and December 31, 2012.

 

177



Table of Contents

 

4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

A summary of the categories of TDR loan modifications that occurred during the years ended December 31, 2013 and 2012 follows:

 

 

 

Troubled Debt

 

Troubled Debt

 

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

Year Ended

 

Performing to

 

Not Performing to

 

Troubled Debt

 

December 31, 2013 (in thousands)

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

 

 

 

 

 

 

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

Interest only

 

$

 

$

164

 

$

164

 

Rate reduction

 

6,605

 

935

 

7,540

 

Principal deferral

 

95

 

157

 

252

 

Bankruptcies

 

793

 

950

 

1,743

 

Total residential TDRs

 

7,493

 

2,206

 

9,699

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

Interest only

 

3,095

 

143

 

3,238

 

Rate reduction

 

437

 

184

 

621

 

Principal deferral

 

3,315

 

 

3,315

 

Bankruptcies

 

 

168

 

168

 

Total commercial TDRs

 

6,847

 

495

 

7,342

 

Total troubled debt restructurings

 

$

14,340

 

$

2,701

 

$

17,041

 

 


The table above is inclusive of loans which were TDRs at the end of previous periods and were re-modified, e.g. a maturity date extension, during the current year.

 

 

 

Troubled Debt

 

Troubled Debt

 

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

Year Ended

 

Performing to

 

Not Performing to

 

Troubled Debt

 

December 31, 2012 (in thousands)

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

 

 

 

 

 

 

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

Interest only

 

$

 

$

624

 

$

624

 

Rate reduction

 

14,011

 

849

 

14,860

 

Principal deferral

 

6,016

 

1,452

 

7,468

 

Bankruptcies

 

2,354

 

962

 

3,316

 

Total residential TDRs

 

22,381

 

3,887

 

26,268

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

Interest only

 

3,080

 

342

 

3,422

 

Rate reduction

 

9,638

 

895

 

10,533

 

Principal deferral

 

1,582

 

194

 

1,776

 

Total commercial TDRs

 

14,300

 

1,431

 

15,731

 

Total troubled debt restructurings

 

$

36,681

 

$

5,318

 

$

41,999

 

 


The table above is inclusive of loans which were TDRs at the end of previous periods and were re-modified, e.g. a maturity date extension, during the current year.

 

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4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

As of December 31, 2013 and 2012, 84% and 87% of the Bank’s TDRs that occurred during the years ended December 31, 2013 and 2012 were performing according to their modified terms. The Bank provided $1 million and $5 million in specific reserve allocations to customers whose loan terms were modified in TDRs during 2013 and 2012. As stated above, specific reserves are generally assessed prior to loans being modified as a TDR, as most of these loans migrate from the Bank’s internal watch list and have been specifically reserved for as part of the Bank’s normal reserving methodology.

 

There was no significant change between the pre and post modification loan balances at December 31, 2013 and December 31, 2012.

 

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4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The following tables present loans by class modified as troubled debt restructurings within the previous twelve months of December 31, 2013 and 2012 and for which there was a payment default during 2013 and 2012:

 

Year Ended

 

Number of

 

Recorded

 

December 31, 2013 (dollars in thousands)

 

Loans

 

Investment

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

Owner occupied

 

29

 

$

2,252

 

Non owner occupied

 

 

 

Commercial real estate

 

2

 

352

 

Commercial real estate - purchased whole loans

 

 

 

Construction & land development

 

 

 

Commercial & industrial

 

1

 

143

 

Warehouse lines of credit

 

 

 

Home equity

 

1

 

10

 

Consumer:

 

 

 

 

 

Credit cards

 

 

 

Overdrafts

 

 

 

Other consumer

 

 

 

 

 

 

 

 

 

Total

 

33

 

$

2,757

 

 

Year Ended

 

Number of

 

Recorded

 

December 31, 2012 (dollars in thousands)

 

Loans

 

Investment

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

Owner occupied

 

31

 

$

2,355

 

Non owner occupied

 

5

 

1,671

 

Commercial real estate

 

4

 

1,310

 

Commercial real estate - purchased whole loans

 

 

 

Construction & land development

 

2

 

1,154

 

Commercial & industrial

 

 

 

Warehouse lines of credit

 

 

 

Home equity

 

 

 

Consumer:

 

 

 

 

 

Credit cards

 

 

 

Overdrafts

 

 

 

Other consumer

 

 

 

 

 

 

 

 

 

Total

 

42

 

$

6,490

 

 

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4.                                      LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Refund Anticipation Loans

 

Discontinuance of the RAL Product:

 

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 offering the RAL product effective April 30, 2012, subsequent to the first quarter 2012 tax season.

 

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.

 

The following table details RAL originations and RAL losses for the years ended December 31, 2012 and 2011:

 

Year Ended December 31, (in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

RAL Originations:

 

 

 

 

 

 

 

 

 

 

 

RALs originated and retained on balance sheet

 

$

796,015

 

$

1,038,862

 

 

 

 

 

 

 

RAL Losses:

 

 

 

 

 

 

 

 

 

 

 

Losses for RALs retained, net

 

$

6,876

 

$

11,560

 

 

RAL Loss Reserves and Provision for Loan Losses:

 

Substantially all RALs issued by RB&T in 2012 and 2011 were made during the first quarter. RALs were generally repaid by the IRS or applicable taxing authority within two weeks of origination. Losses associated with RALs resulted from the IRS not remitting taxpayer refunds to RB&T associated with a particular tax return. This occurred for a number of reasons, including errors in the tax return and tax return fraud which are identified through IRS audits resulting from revenue protection strategies. In addition, RB&T also incurred losses as a result of tax debts not previously disclosed during its underwriting process.

 

At March 31st of each applicable year, RB&T reserved for its estimated RAL losses for the year based on funding patterns, information received from the IRS on current year payment processing, projections using RB&T’s internal RAL underwriting criteria applied against prior years’ customer data, and the subjective experience of RB&T management. RALs outstanding 30 days or longer were charged off at the end of each quarter with subsequent collections recorded as recoveries. Since the RAL season was over by the end of April of each year, substantially all uncollected RALs were charged off by June 30th of each year, except for those RALs management deems certain of collection.

 

As of December 31, 2012 and 2011, $10.5 million and $14.3 million of total RALs originated remained uncollected (outstanding past their expected funding date from the IRS), representing 1.31% and 1.38% of total gross RALs originated during the respective tax years. Substantially all of these RALs were charged off as of June 30, 2012 and 2011.

 

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5.                                      FAIR VALUE

 

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

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.

 

The Bank used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

 

Securities available for sale: Quoted market prices in an active market are available for the Bank’s mutual fund and fall within Level 1 of the fair value hierarchy. For all securities available for sale, excluding the Bank’s mutual fund and its private label mortgage backed security, fair value is typically determined by 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 the mutual fund and the private label mortgage backed security, all securities available for sale are classified as Level 2 in the fair value hierarchy.

 

The Bank’s private label mortgage backed security remains extremely illiquid, and as such, the Bank classifies this security as a Level 3 security in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures.” Based on this determination, the Bank utilized an income valuation model (present value model) approach, in determining the fair value of this security.

 

See in this section of the filing under Footnote 3 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage backed security.

 

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.

 

Derivative instruments: Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and rate lock loan commitments. The fair value of the Bank’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 Bank. Forward contracts and rate lock loan commitments are classified as Level 2 in the fair value hierarchy.

 

Interest rate swap agreements used for interest rate risk management: Interest rate swaps are recorded at fair value on a recurring basis. The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the Company’s interest-bearing liabilities. The Company values its interest rate swaps using Bloomberg Valuation Service’s derivative pricing functions and therefore classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant counterparty and validated against internal calculations. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

 

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5.                                                   FAIR VALUE (continued)

 

Impaired Loans: Collateral dependent impaired loans generally reflect partial charge-downs to their respective fair value, which is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Once the appraisal is received, a member of the Bank’s CAD reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On an annual basis, the Bank compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment, if any, should be made to the appraisal value to arrive at an estimated fair value.

 

Mortgage Servicing Rights: On a monthly basis, mortgage servicing rights are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual grouping exceeds fair value, impairment is recorded and the respective individual tranche is carried at fair value. If the carrying amount of an individual grouping does not exceed fair value, impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can generally be validated against available market data (Level 2).

 

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5.                                                   FAIR VALUE (continued)

 

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Bank has elected the fair value option, are summarized below:

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2013 Using:

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

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

 

$

 

$

97,465

 

$

 

$

97,465

 

Private label mortgage backed security

 

 

 

5,485

 

5,485

 

Mortgage backed securities - residential

 

 

150,087

 

 

150,087

 

Collateralized mortgage obligations

 

 

163,946

 

 

163,946

 

Mutual fund

 

995

 

 

 

995

 

Corporate bonds

 

 

14,915

 

 

14,915

 

Total securities available for sale

 

$

995

 

$

426,413

 

$

5,485

 

$

432,893

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

 

$

3,506

 

$

 

$

3,506

 

 

 

 

 

 

 

 

 

 

 

Rate lock commitments

 

 

77

 

 

77

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

 

12

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

170

 

 

170

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2012 Using:

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

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

 

$

 

$

39,472

 

$

 

$

39,472

 

Private label mortgage backed security

 

 

 

5,687

 

5,687

 

Mortgage backed securities - residential

 

 

197,210

 

 

197,210

 

Collateralized mortgage obligations

 

 

195,877

 

 

195,877

 

Total securities available for sale

 

$

 

$

432,559

 

$

5,687

 

$

438,246

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

 

$

10,614

 

$

 

$

10,614

 

Rate lock loan commitments

 

 

833

 

 

833

 

Mandatory forward contracts

 

 

47

 

 

47

 

 

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5.                                      FAIR VALUE (continued)

 

Private Label Mortgage Backed Security

 

The table below presents a reconciliation of the Bank’s private label mortgage backed security. This is the only asset that was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended December 31, 2013, 2012 and 2011:

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Balance, beginning of year

 

$

5,687

 

$

4,542

 

$

5,124

 

 

 

 

 

 

 

 

 

Total gains or losses included in earnings:

 

 

 

 

 

 

 

Net impairment loss recognized in earnings

 

 

 

(279

)

Net change in unrealized gain/(loss)

 

742

 

2,458

 

6,671

 

Realized pass through of actual losses

 

 

(1,313

)

(6,412

)

Recovery of actual losses previously recorded

 

201

 

 

 

Principal paydowns

 

(1,145

)

 

(562

)

Balance, end of year

 

$

5,485

 

$

5,687

 

$

4,542

 

 

The Bank’s single private label mortgage backed security is supported by analysis prepared by an independent third party. The third party’s approach to determining fair value involved several steps: 1) detailed collateral analysis of the underlying mortgages, including consideration of geographic location, original loan-to-value and the weighted average FICO credit score of the borrowers; 2) collateral performance projections for each pool of mortgages underlying the security (probability of default, severity of default, and prepayment probabilities) and 3) discounted cash flow modeling.

 

There were no transfers into or out of Level 3 assets during the years ended December 31, 2013, 2012 and 2011.

 

The following tables present quantitative information about recurring Level 3 fair value measurements at December 31, 2013 and 2012:

 

 

 

Fair

 

Valuation

 

 

 

 

 

December 31, 2013 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Range

 

 

 

 

 

 

 

 

 

 

 

Private label mortgage backed security

 

$

5,485

 

Discounted cash flow

 

(1) Constant prepayment rate

 

2.5% - 6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Probability of default

 

3.0% - 7.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Loss severity

 

55% - 75%

 

 

 

 

Fair

 

Valuation

 

 

 

 

 

December 31, 2012 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Range

 

 

 

 

 

 

 

 

 

 

 

Private label mortgage backed security

 

$

5,687

 

Discounted cash flow

 

Constant prepayment rate

 

1.0% - 6.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Probability of default

 

3.5% - 7.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss severity

 

60% - 70%

 

 

 

The significant unobservable inputs in the fair value measurement of the Bank’s single private label mortgage backed security are prepayment rates, probability of default and loss severity in the event of default. Significant fluctuations in any of those inputs in isolation would result in a significantly lower/higher fair value measurement.

 

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5.                                      FAIR VALUE (continued)

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

 

 

Fair Value Measurements at

 

 

 

 

December 31, 2013 Using:

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

 

$

2,020

 

$

2,020

 

Commercial real estate

 

 

 

5,488

 

5,488

 

Home equity

 

 

 

1,030

 

1,030

 

Total impaired loans *

 

$

 

$

 

$

8,538

 

$

8,538

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

 

$

 

$

1,716

 

$

1,716

 

Commercial real estate

 

 

 

507

 

507

 

Construction & land development

 

 

 

6,195

 

6,195

 

Total other real estate owned

 

$

 

$

 

$

8,418

 

$

8,418

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2012 Using:

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

 

$

782

 

$

782

 

Non owner occupied

 

 

 

1,788

 

1,788

 

Commercial real estate

 

 

 

15,618

 

15,618

 

Construction & land development

 

 

 

1,552

 

1,552

 

Commercial & industrial

 

 

 

182

 

182

 

Home equity

 

 

 

303

 

303

 

Total impaired loans *

 

$

 

$

 

$

20,225

 

$

20,225

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

 

$

 

$

1,195

 

$

1,195

 

Commercial real estate

 

 

 

1,219

 

1,219

 

Construction & land development

 

 

 

5,161

 

5,161

 

Total other real estate owned

 

$

 

$

 

$

7,575

 

$

7,575

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights**

 

$

 

$

3,484

 

$

 

$

3,484

 

 


* - The impaired loan balances in the preceding two tables excludes TDRs which are not collateral dependent. The difference between the carrying value and the fair value of impaired loans measured at fair value are reconciled in a subsequent table of this footnote and represents estimated selling costs and loss reserves on such loans.

** - Mortgage Servicing Rights at fair value only include those tranches which were considered impaired at the reported period end.

 

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5.                                      FAIR VALUE (continued)

 

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013 and 2012:

 

 

 

 

 

 

 

 

 

Range

 

 

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

 

December 31, 2013 (dollars in thousands)

 

Value

 

Technique

 

Inputs

 

Average)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

5,488

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

0% - 30% (19%)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate

 

$

2,020

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

2% - 22% (7%)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - home equity

 

$

1,030

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

0% - 10% (2%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned - residential

 

$

1,716

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

10% - 53% (30%)

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned - commercial real estate

 

$

507

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

23% - 33% (29%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned - construction & land development

 

$

2,236

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

17% - 58% (43%)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,959

 

Income approach

 

Adjustments for differences between net operating income expectations

 

21% (21%)

 

 

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Table of Contents

 

5.                                      FAIR VALUE (continued)

 

 

 

 

 

 

 

 

 

Range

 

 

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

 

December 31, 2012 (dollars in thousands)

 

Value

 

Technique

 

Inputs

 

Average)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

15,230

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

0% - 50% (18%)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,940

 

Income approach

 

Adjustments for differences between net operating income expectations

 

12% - 12% (12%)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate

 

$

2,873

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

2% - 60% (17%)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial & industrial

 

$

182

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

0% - 50% (44%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned - residential

 

$

1,195

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

4% - 71% (14%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned - commercial real estate

 

$

1,219

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

1% - 33% (16%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned - real estate construction

 

$

663

 

Sales comparison approach

 

Adjustments determined by Management for differences between the comparable sales

 

1% - 54% (35%)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,498

 

Income approach

 

Adjustments for differences between net operating income expectations

 

25% - 25% (25%)

 

 

188



Table of Contents

 

5.                                      FAIR VALUE (continued)

 

Private Label Mortgage Backed Security

 

The following section details impairment charges recognized during the period:

 

The Bank recorded realized impairment losses related to its single Level 3 private label mortgage backed security as follows:

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net impairment loss recognized in earnings

 

$

 

$

 

$

279

 

 

See in this section of the filing under Footnote 3 “Investment Securities” for additional detail regarding impairment losses.

 

Impaired Loans

 

Collateral dependent impaired loans are generally measured for impairment using the fair market value for reasonable disposition of the underlying collateral. The Bank’s practice is to obtain new or updated appraisals on the loans subject to the initial impairment review and then to evaluate the need for an update to this value on an as necessary or possibly annual basis thereafter (depending on the market conditions impacting the value of the collateral). The Bank may discount the appraisal amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal is not available at the time of a loan’s impairment review, the Bank may apply a discount to the existing value of an old appraisal to reflect the property’s current estimated value if it is believed to have deteriorated in either: (i) the physical or economic aspects of the subject property or (ii) material changes in market conditions. The results of the impairment review generally results in a partial charge-off of the loan if fair value less selling costs are less than the loan’s carrying value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

 

The following section details impairment charges recognized during the period:

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans are as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Carrying amount of loans measured at fair value

 

$

7,629

 

$

23,070

 

Estimated selling costs considered in carrying amount

 

909

 

1,839

 

Valuation allowance(1)

 

 

(4,684

)

Total fair value

 

$

8,538

 

$

20,225

 

 


(1) – Loans measured at fair value at December 31, 2013 carried no valuation allowance but were charged down to fair value less selling costs. Loans measured at fair value at December 31, 2012 included a valuation allowance for the difference between fair value less selling costs and carrying value.

 

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5.                                      FAIR VALUE (continued)

 

Other Real Estate Owned

 

Other real estate owned, which is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is determined from external appraisals using judgments and estimates of external professionals. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. The fair value of the Bank’s individual other real estate owned properties exceeded their carrying value at December 31, 2013 and 2012.

 

Details of other real estate owned carrying value and write downs follows:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Carrying value of other real estate owned

 

$

17,102

 

$

26,203

 

$

10,956

 

Other real estate owned writedowns

 

1,824

 

1,719

 

917

 

 

Mortgage Servicing Rights

 

MSRs are carried at lower of cost or fair value with fair value determined by MSR tranche. There were no tranches carried at fair value at December 31, 2013, while nine of 21 tranches were carried at fair value at December 31, 2012. Details of the tranches carried at fair value follow:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Outstanding balance

 

$

 

$

3,829

 

$

3,615

 

Valuation allowance

 

 

(345

)

(203

)

Fair value

 

$

 

$

3,484

 

$

3,412

 

 

 

 

 

 

 

 

 

Year to date charge (credit) to mortgage banking income due to evaluation of value

 

$

(345

)

$

142

 

$

203

 

 

190



Table of Contents

 

5.                                      FAIR VALUE (continued)

 

Mortgage Loans Held for Sale

 

The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more nor on nonaccrual as of December 31, 2013 and December 31, 2012.

 

As of December 31, 2013 and December 31, 2012, the aggregate fair value, contractual balance (including accrued interest), and gain was as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Aggregate fair value

 

$

3,506

 

$

10,614

 

Contractual balance

 

3,417

 

10,037

 

Gain

 

89

 

577

 

 

The total amount of gains and losses from changes in fair value included in earnings for 2013, 2012 and 2011 for mortgage loans held for sale are presented in the following table:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Interest income

 

$

471

 

$

400

 

$

401

 

Change in fair value

 

(488

)

421

 

201

 

Total change in fair value

 

$

(17

)

$

821

 

$

602

 

 

191



Table of Contents

 

5.                                      FAIR VALUE (continued)

 

The carrying amounts and estimated fair values of financial instruments, at December 31, 2013 and 2012 are as follows:

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Carrying

 

 

 

 

 

 

 

Fair

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

170,863

 

$

170,863

 

$

 

$

 

$

170,863

 

Securities available for sale

 

432,893

 

995

 

426,413

 

5,485

 

432,893

 

Securities to be held to maturity

 

50,644

 

 

50,768

 

 

50,768

 

Mortgage loans held for sale, at fair value

 

3,506

 

 

3,506

 

 

3,506

 

Loans, net

 

2,566,766

 

 

 

2,585,476

 

2,585,476

 

Federal Home Loan Bank stock

 

28,342

 

 

 

 

N/A

 

Mortgage servicing rights

 

5,409

 

 

7,337

 

 

7,337

 

Accrued interest receivable

 

8,272

 

 

8,272

 

 

8,272

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Non interest-bearing deposits

 

488,642

 

 

488,642

 

 

488,642

 

Transaction deposits

 

1,244,256

 

 

1,244,256

 

 

1,244,256

 

Time deposits

 

257,959

 

 

259,345

 

 

259,345

 

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

 

165,555

 

 

165,555

 

 

165,555

 

Federal Home Loan Bank advances

 

605,000

 

 

618,064

 

 

618,064

 

Subordinated note

 

41,240

 

 

38,020

 

 

38,020

 

Accrued interest payable

 

1,459

 

 

1,459

 

 

1,459

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Carrying

 

 

 

 

 

 

 

Fair

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

137,691

 

$

137,691

 

$

 

$

 

$

137,691

 

Securities available for sale

 

438,246

 

 

432,559

 

5,687

 

438,246

 

Securities to be held to maturity

 

46,010

 

 

46,416

 

 

46,416

 

Mortgage loans held for sale, at fair value

 

10,614

 

 

10,614

 

 

10,614

 

Loans, net

 

2,626,468

 

 

 

2,702,686

 

2,702,686

 

Federal Home Loan Bank stock

 

28,377

 

 

 

 

N/A

 

Mortgage servicing rights

 

4,777

 

 

5,446

 

 

5,446

 

Accrued interest receivable

 

9,245

 

 

9,245

 

 

9,245

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Non interest-bearing deposits

 

479,046

 

 

479,046

 

 

479,046

 

Transaction deposits

 

1,193,339

 

 

1,193,339

 

 

1,193,339

 

Time deposits

 

310,543

 

 

314,972

 

 

314,972

 

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

 

250,884

 

 

250,884

 

 

250,884

 

Federal Home Loan Bank advances

 

542,600

 

 

576,158

 

 

576,158

 

Subordinated note

 

41,240

 

 

37,917

 

 

37,917

 

Accrued interest payable

 

1,403

 

 

1,403

 

 

1,403

 

 

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5.                                      FAIR VALUE (continued)

 

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the Bank’s estimates.

 

The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by the Company.

 

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

 

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

 

Mortgage loans held for sale — The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

Loans, net of Allowance — The fair value of loans is calculated using discounted cash flows by loan type resulting in a Level 3 classification. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the credit and interest rate risk inherent in the loan portfolio without considering widening credit spreads due to market illiquidity. The estimated maturity is based on the Bank’s historical experience with repayments adjusted to estimate the effect of current market conditions. The Allowance is considered a reasonable discount for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

Federal Home Loan Bank stock — It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

Accrued interest receivable/payable — The carrying amounts of accrued interest, due to their short-term nature, approximates fair value resulting in a Level 2 classification.

 

Deposits — Fair values for certificates of deposit have been determined using discounted cash flows. The discount rate used is based on estimated market rates for deposits of similar remaining maturities and are classified as Level 2. The carrying amounts of all other deposits, due to their short-term nature, approximate their fair values and are also classified as Level 2.

 

Securities sold under agreements to repurchase — The carrying amount for securities sold under agreements to repurchase generally maturing within ninety days approximates its fair value resulting in a Level 2 classification.

 

Federal Home Loan Bank advances — The fair value of the FHLB advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the Company for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

 

Subordinated note — The fair value for subordinated debentures is calculated using discounted cash flows based upon current market spreads to London Interbank Borrowing Rate (“LIBOR”) for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

 

The fair value estimates presented herein are based on pertinent information available to management as of the respective period ends. Although management is not aware of any factors that would dramatically affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, estimates of fair value may differ significantly from the amounts presented.

 

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6.                                      MORTGAGE BANKING ACTIVITIES

 

Mortgage Banking activities primarily include residential mortgage originations and servicing.

 

Activity for mortgage loans held for sale was as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Balance, beginning of year

 

$

10,614

 

$

4,392

 

Origination of mortgage loans held for sale

 

291,155

 

252,194

 

Proceeds from the sale of mortgage loans held for sale

 

(305,242

)

(255,670

)

Net gain on sale of mortgage loans held for sale

 

6,979

 

9,698

 

 

 

 

 

 

 

Balance, end of year

 

$

3,506

 

$

10,614

 

 

Mortgage loans serviced for others are not reported as assets. The Bank serviced loans for others, primarily FHLMC, totaling $929 million and $893 million at December 31, 2013 and 2012. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Custodial escrow account balances maintained in connection with serviced loans were approximately $6 million and $12 million at December 31, 2013 and 2012.

 

The following table presents the components of Mortgage Banking income:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net gain realized on sale of mortgage loans held for sale

 

$

8,258

 

$

8,796

 

$

3,877

 

Net change in fair value of recognized on loans held for sale

 

(488

)

421

 

201

 

Net change in fair value recognized on rate lock commitments

 

(756

)

342

 

383

 

Net change in fair value recognized on forward contracts

 

(35

)

139

 

(370

)

Net gain recognized

 

6,979

 

9,698

 

4,091

 

 

 

 

 

 

 

 

 

Loan servicing income

 

2,107

 

$

2,181

 

$

2,828

 

Amortization of mortgage servicing rights

 

(2,173

)

(3,290

)

(2,817

)

Change in mortgage servicing rights valuation allowance

 

345

 

(142

)

(203

)

Net servicing income recognized

 

279

 

(1,251

)

(192

)

 

 

 

 

 

 

 

 

Total Mortgage Banking income

 

$

7,258

 

$

8,447

 

$

3,899

 

 

Activity for capitalized mortgage servicing rights was as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Balance, beginning of year

 

$

4,777

 

$

6,087

 

$

7,800

 

Additions

 

2,460

 

2,122

 

1,307

 

Amortized to expense

 

(2,173

)

(3,290

)

(2,817

)

Change in valuation allowance

 

345

 

(142

)

(203

)

 

 

 

 

 

 

 

 

Balance, end of year

 

$

5,409

 

$

4,777

 

$

6,087

 

 

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6.                                      MORTGAGE BANKING ACTIVITIES (continued)

 

Activity for the valuation allowance for capitalized mortgage servicing rights was as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Balance, beginning of year

 

$

(345

)

$

(203

)

$

 

Additions

 

 

(247

)

(203

)

Reductions credited to operations

 

345

 

105

 

 

 

 

 

 

 

 

 

 

Balance, end of year

 

$

 

$

(345

)

$

(203

)

 

Other information relating to mortgage servicing rights follows:

 

December 31, (dollars in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Fair value of mortgage servicing rights

 

$

7,337

 

$

5,446

 

Prepayment speed range

 

105% - 550%

 

112% - 550%

 

Discount rate

 

10%

 

9%

 

Weighted average default rate

 

1.50%

 

1.50%

 

Weighted average life in years

 

6.17

 

3.89

 

 

Estimated future amortization expense of the MSR portfolio (net of the impairment charge) follows; however, actual amortization expense will be impacted by loan payoffs and changes in estimated lives that occur during each respective year:

 

Year

 

(in thousands)

 

 

 

 

 

2014

 

$

1,008

 

2015

 

986

 

2016

 

967

 

2017

 

933

 

2018

 

710

 

2019

 

466

 

2020

 

339

 

 

 

 

 

Total

 

$

5,409

 

 

Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and rate lock loan commitments. Mandatory 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 loan commitments represent commitments to fund loans at specific rates. 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.

 

Mandatory 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 counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management and the Board of Directors. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.

 

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6.                                      MORTGAGE BANKING ACTIVITIES (continued)

 

The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will fluctuate. To offset this interest rate risk, the Bank enters into derivatives such as mandatory forward contracts to sell loans. The fair value of mandatory forward contracts will fluctuate as market interest rates fluctuate, 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 loan 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.

 

The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives as of the period ends presented:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

Notional
Amount

 

Fair Value

 

Notional
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Included in Mortgage loans held for sale:

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

3,417

 

$

3,506

 

$

10,037

 

$

10,614

 

 

 

 

 

 

 

 

 

 

 

Included in other assets:

 

 

 

 

 

 

 

 

 

Rate lock loan commitments

 

$

4,393

 

$

77

 

$

27,468

 

$

833

 

Mandatory forward contracts

 

5,571

 

12

 

36,675

 

47

 

 

 

 

 

 

 

 

 

 

 

Total included in other assets

 

$

9,964

 

$

89

 

$

64,143

 

$

880

 

 

7.                                      INTEREST RATE SWAPS

 

During the fourth quarter of 2013, the Bank entered into two interest rate swap agreements as part of its interest rate risk management strategy. The Bank designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to the three-month LIBOR or the overall changes in cash flows on certain money market deposit accounts.  The counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the swap contracts is not significant. At December 31, 2013, the Bank had no cash pledged as collateral for these swaps.

 

The swaps were determined to be fully effective during all periods presented; therefore, no amount of ineffectiveness was included in net income. The aggregate fair value of the swaps is recorded in other assets with changes in fair value recorded in OCI. The amount included in accumulated OCI would be reclassified to current earnings should the hedge no longer be considered effective. The Bank expects the hedges to remain fully effective during the remaining term of the swaps.

 

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Table of Contents

 

7.                                      INTEREST RATE SWAPS (continued)

 

Summary information about swaps designated as cash flow hedges as of December 31, 2013 follows:

 

December 31, 2013 (dollars in thousands)

 

 

 

 

 

 

 

Notional amount

 

$

20,000

 

Weighted average pay rate

 

2.25

%

Weighted average receive rate

 

0.21

%

Weighted average maturity in years

 

7

 

Unrealized gain

 

$

170

 

 

Interest expense recorded on these swap transactions totaled $23,000 during 2013, with $16,000 reported as a component of interest expense on deposits and $7,000 reported as interest expense on FHLB Advances.

 

The following table presents the net gains recorded in accumulated OCI and the consolidated statements of income relating to the swaps for the year ended December 31, 2013:

 

December 31, 2013 (in thousands)

 

Amount of Gain
Recognized in
Other
Comprehensive
Income on
Derivative
(Effective Portion)

 

Amount of Gain
Reclassified from
Accumulated Other
Comprehensive
Income on Derivative
(Effective Portion)

 

Amount of Gain
Recognized in
Income on
Derivative
(Ineffective Portion)

 

 

 

 

 

 

 

 

 

Cash flow hedges - interest rate swaps

 

$

111

 

$

 

$

 

 

The following table reflects the cash flow hedges included in the consolidated balance sheet as of December 31, 2013:

 

December 31, 2013 (in thousands)

 

Notional
Amount

 

Fair Value

 

 

 

 

 

 

 

Included in other assets:

 

 

 

 

 

Cash flow hedges - interest rate swaps

 

$

20,000

 

$

170

 

 

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Table of Contents

 

8.                                      PREMISES AND EQUIPMENT

 

A summary of the cost and accumulated depreciation of premises and equipment follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Land

 

$

3,967

 

$

3,967

 

Buildings and improvements

 

28,968

 

27,074

 

Furniture, fixtures and equipment

 

35,011

 

37,460

 

Leasehold improvements

 

15,475

 

12,118

 

Construction in progress

 

173

 

106

 

 

 

 

 

 

 

Total premises and equipment

 

83,594

 

80,725

 

Less: Accumulated depreciation and amortization

 

50,686

 

47,528

 

 

 

 

 

 

 

Premises and equipment, net

 

$

32,908

 

$

33,197

 

 

Depreciation expense related to premises and equipment follows:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

5,311

 

$

5,372

 

$

5,738

 

 

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9.                                      GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS

 

A progression of the balance for goodwill follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Beginning of year

 

$

10,168

 

$

10,168

 

Acquired goodwill

 

 

 

Impairment

 

 

 

 

 

 

 

 

 

End of year

 

$

10,168

 

$

10,168

 

 

The Bank did not record goodwill associated with its 2012 FDIC-assisted acquisitions. The goodwill balance relates entirely to the Traditional Banking segment.

 

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At September 30, 2013, the Company’s traditional bank reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the carrying value of the reporting unit did not exceed its fair value. Therefore, the Company did not complete the two-step impairment test as of September 30, 2013.

 

The Bank initially recorded $623,000 in core deposit intangibles (“CDI”) associated with its 2012 acquisitions. The CDI related to the FCB acquisition was initially recorded for $559,000 in September 2012 and amortized on an accelerated basis through December 31, 2013. FCB related CDI totaled $489,000 at December 31, 2012 and was fully amortized during 2013. Based on the nature of the TCB deposits acquired, the Bank amortized all $64,000 in CDI related to the TCB acquisition during 2012.

 

Detail of core deposit intangibles, which are included in other assets in the Company’s consolidated balance sheets, follows:

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31, (in thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

 

 

 

 

 

 

 

 

 

 

Core deposit intangibles

 

$

1,160

 

$

1,160

 

$

1,160

 

$

650

 

 

Aggregate core deposit intangible amortization expense follows:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Aggregate core deposit intangible amortization expense

 

$

510

 

$

171

 

$

59

 

 

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10.                               DEPOSITS

 

Ending deposit balances at December 31, 2013 and 2012 were as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Demand

 

$

651,134

 

$

580,900

 

Money market accounts

 

479,569

 

514,698

 

Brokered money market accounts

 

35,533

 

35,596

 

Savings

 

78,020

 

62,145

 

Individual retirement accounts*

 

28,767

 

32,491

 

Time deposits, $100,000 and over*

 

67,255

 

80,906

 

Other certificates of deposit*

 

75,516

 

100,036

 

Brokered certificates of deposit*(1)

 

86,421

 

97,110

 

 

 

 

 

 

 

Total interest-bearing deposits

 

1,502,215

 

1,503,882

 

Total non interest-bearing deposits

 

488,642

 

479,046

 

 

 

 

 

 

 

Total deposits

 

$

1,990,857

 

$

1,982,928

 

 


(*) — Represents a time deposit.

(1) — Includes brokered deposits less than, equal to and greater than $100,000.

 

The composition of deposits outstanding at December 31, 2013 and 2012 related to the Company’s 2012 FDIC-assisted acquisitions were as follows:

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2013 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Demand

 

$

1,072

 

$

2,674

 

$

3,746

 

Money market accounts

 

2,325

 

4,677

 

7,002

 

Savings

 

4,069

 

 

4,069

 

Individual retirement accounts*

 

643

 

729

 

1,372

 

Time deposits, $100,000 and over*

 

3,947

 

1,475

 

5,422

 

Other certificates of deposit*

 

2,293

 

3,168

 

5,461

 

Brokered certificates of deposit*(1)

 

2,758

 

2,581

 

5,339

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

17,107

 

15,304

 

32,411

 

Total non interest-bearing deposits

 

3,335

 

2,192

 

5,527

 

 

 

 

 

 

 

 

 

Total deposits

 

$

20,442

 

$

17,496

 

$

37,938

 

 


(*) — Represents a time deposit.

(1) — Includes brokered deposits less than, equal to and greater than $100,000.

 

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10.                               DEPOSITS (continued)

 

 

 

Tennessee

 

First

 

Total

 

 

 

Commerce

 

Commercial

 

Acquired

 

December 31, 2012 (in thousands)

 

Bank

 

Bank

 

Banks

 

 

 

 

 

 

 

 

 

Demand

 

$

1,401

 

$

5,871

 

$

7,272

 

Money market accounts

 

1,727

 

25,762

 

27,489

 

Savings

 

8,623

 

 

8,623

 

Individual retirement accounts*

 

1,166

 

3,269

 

4,435

 

Time deposits, $100,000 and over*

 

10,822

 

3,267

 

14,089

 

Other certificates of deposit*

 

7,196

 

12,574

 

19,770

 

Brokered certificates of deposit*(1)

 

6,729

 

12,247

 

18,976

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

37,664

 

62,990

 

100,654

 

Total non interest-bearing deposits

 

4,240

 

6,812

 

11,052

 

 

 

 

 

 

 

 

 

Total deposits

 

$

41,904

 

$

69,802

 

$

111,706

 

 


(*) - Represents a time deposit.

(1) — Includes brokered deposits less than, equal to and greater than $100,000.

 

See additional discussion regarding the Company’s 2012 FDIC-assisted acquisitions in this section of the filing under Footnote 2 “2012 FDIC-Assisted Acquisitions.”

 

Time deposits of $100,000 or more, including brokered certificates of deposit, are presented in the table below:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Time deposits of $100,000 or more

 

$

146,909

 

$

158,516

 

 

At December 31, 2013, the scheduled maturities of all time deposits, including brokered certificates of deposit, were as follows:

 

Year

 

(in thousands)

 

Weighted
Average
Rate

 

 

 

 

 

 

 

2014

 

$

151,189

 

0.55%

 

2015

 

58,711

 

1.58%

 

2016

 

20,576

 

1.64%

 

2017

 

6,956

 

1.09%

 

2018

 

20,056

 

1.47%

 

Thereafter

 

471

 

1.00%

 

 

 

 

 

 

 

Total

 

$

257,959

 

0.96%

 

 

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11.                                            SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

Securities sold under agreements to repurchase consist of short-term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit customers arising from the Bank’s treasury management program. While comparable to deposits in their transactional nature, these overnight liabilities to customers are in the form of repurchase agreements. Repurchase agreements collateralized by securities are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the Bank’s control. Information regarding securities sold under agreements to repurchase follows:

 

December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Outstanding balance at end of year

 

$

165,555

 

$

250,884

 

$

230,231

 

Weighted average interest rate at year end

 

0.04

%

0.06

%

0.17

%

Average outstanding balance during the year

 

$

170,386

 

$

237,414

 

$

278,861

 

Average interest rate during the year

 

0.04

%

0.16

%

0.23

%

Maximum outstanding at any month end

 

$

242,721

 

$

272,057

 

$

297,571

 

 

At December 31, 2013, all securities sold under agreements to repurchase had overnight maturities.

 

12.                                            FEDERAL HOME LOAN BANK ADVANCES

 

At December 31, 2013 and 2012, FHLB advances were as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Fixed interest rate advances with a weighted average interest rate of 2.03% due through 2023

 

$

505,000

 

$

442,600

 

 

 

 

 

 

 

Putable fixed interest rate advances with a weighted average interest rate of 4.39% due through 2017(1)

 

100,000

 

100,000

 

 

 

 

 

 

 

Total FHLB advances

 

$

605,000

 

$

542,600

 

 


(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 Bank 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 Bank at no penalty. Based on market conditions at this time, the Bank does not believe that any of its putable advances are likely to be “put back” to the Bank in the short-term by the FHLB.

 

Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than maturity. FHLB advances are collateralized by a blanket pledge of eligible real estate loans. At December 31, 2013, Republic had available collateral to borrow an additional $282 million from the FHLB. In addition to its borrowing line with the FHLB, Republic also had unsecured lines of credit totaling $166 million available through various other financial institutions.

 

As discussed under Footnote 2 “2012 FDIC-Assisted Acquisitions,” RB&T assumed $3 million in FHLB advances in connection with the FCB acquisition. During the third quarter of 2012, RB&T prepaid these advances and incurred an early termination penalty of $63,000, which was equivalent to the fair value adjustment recorded in connection with the initial day-one bargain purchase gain.

 

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12.                                            FHLB ADVANCES (continued)

 

During the first quarter of 2012, RB&T prepaid $81 million in FHLB advances. These advances had a weighted average cost of 3.56% and were all scheduled to mature between October 2012 and May 2013. The Bank incurred a $2.4 million early termination penalty in connection with this transaction.

 

Aggregate future principal payments on FHLB advances, based on contractual maturity dates are detailed below:

 

Year

 

(in thousands)

 

Weighted
Average
Rate

 

 

 

 

 

 

 

2014

 

$

188,000

 

2.69

%

2015

 

10,000

 

2.48

%

2016

 

82,000

 

1.74

%

2017

 

145,000

 

3.44

%

2018

 

90,000

 

1.51

%

Thereafter

 

90,000

 

1.75

%

 

 

 

 

 

 

Total

 

$

605,000

 

2.42

%

 

The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

First lien, single family residential real estate

 

$

1,082,624

 

$

1,053,946

 

Home equity lines of credit

 

105,957

 

116,043

 

Multi-family commercial real estate

 

13,124

 

7,017

 

 

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13.                               SUBORDINATED NOTE

 

In 2005, Republic Bancorp Capital Trust (“RBCT”), an unconsolidated trust subsidiary of Republic Bancorp, Inc., issued $40 million in Trust Preferred Securities (“TPS”). The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. The TPS mature in September, 2035 and are redeemable at the Company’s option after ten years. The TPS pay a fixed interest rate for ten years and adjust with LIBOR + 1.42% thereafter. The Company may defer the payment of interest on the TPS for up to five consecutive years. RBCT used the proceeds from the sale of the TPS to purchase $41.2 million of unsecured fixed/floating rate subordinated debentures. The subordinated debentures mature in whole in September, 2035 and are redeemable at the Company’s option after ten years. The subordinated debentures are currently treated as Tier 1 Capital for regulatory purposes and the related interest expense, currently payable quarterly at the annual rate of 6.015%, is included in the consolidated financial statements.

 

In 2004, the Bank executed an intragroup trust preferred transaction with the purpose of providing RB&T access to additional capital markets, if needed in the future. The subordinated debentures held by RB&T were treated as Tier 2 Capital based on requirements administered by the Bank’s federal banking agency. In April 2013, the Bank received approval from its regulators and unwound the intragroup trust preferred transaction. The cash utilized to pay off the transaction remained at the Parent Company. Unwinding of the transaction had no impact on RB&T’s two Tier 1 related capital ratios and only a minimal impact on its Total Risk Based Capital ratio.

 

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14.               INCOME TAXES

 

Allocation of federal income tax between current and deferred portion is as follows:

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Current expense:

 

 

 

 

 

 

 

Federal

 

$

20,668

 

$

51,888

 

$

50,326

 

State

 

2,167

 

1,565

 

996

 

 

 

 

 

 

 

 

 

Deferred expense:

 

 

 

 

 

 

 

Federal

 

(7,395

)

10,798

 

(1,287

)

State

 

(365

)

355

 

13

 

 

 

 

 

 

 

 

 

Total

 

$

15,075

 

$

64,606

 

$

50,048

 

 

Effective tax rates differ from federal statutory rate of 35% applied to income before income taxes due to the following:

 

Years Ended December 31,

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Federal statutory rate times financial statement income

 

35.00

%

35.00

%

35.00

%

Effect of:

 

 

 

 

 

 

 

State taxes, net of federal benefit

 

2.89

%

0.68

%

0.46

%

General business tax credits

 

-0.73

%

-0.34

%

-0.69

%

Other, net

 

0.06

%

-0.22

%

-0.06

%

Effective tax rate

 

37.22

%

35.12

%

34.71

%

 

Year-end deferred tax assets and liabilities were due to the following:

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

Allowance for loan losses

 

$

7,622

 

$

7,970

 

Accrued expenses

 

3,571

 

5,128

 

Net operating loss carryforward(1)

 

1,587

 

1,349

 

Depreciation

 

519

 

334

 

Other-than-temporary impairment

 

749

 

884

 

Partnership losses

 

832

 

794

 

Other

 

834

 

333

 

Total deferred tax assets

 

15,714

 

16,792

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

Unrealized investment securities gains

 

(1,621

)

(3,022

)

Federal Home Loan Bank dividends

 

(4,309

)

(4,362

)

Deferred loan fees

 

(653

)

(706

)

Mortgage servicing rights

 

(1,958

)

(1,877

)

Bargain purchase gain

 

(5,460

)

(14,454

)

New market tax credits

 

(1,517

)

(1,368

)

Total deferred tax liabilities

 

(15,518

)

(25,789

)

 

 

 

 

 

 

Less: Valuation allowance

 

(1,684

)

(1,592

)

Net deferred tax liability

 

$

(1,488

)

$

(10,589

)

 


(1) The Company has a Kentucky net operating loss carry forward of $22 million which began to expire in 2012 and a Florida net operating loss carryforward of $5 million which begins to expire in 2030. The Company maintains a valuation allowance as it does not anticipate generating taxable income in Kentucky or Florida to utilize these carryforwards prior to expiration.

 

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14.               INCOME TAXES (continued)

 

Unrecognized Tax Benefits

 

The Company has not filed tax returns in certain jurisdictions where it has conducted limited lending activity but had no offices; therefore, the Company is open to examination for all years in which the lending activity has occurred. The Company adopted the provisions of ASC 740-10, formerly FIN 48, on January 1, 2007 and recognized a liability for the amount of tax which would be due to those jurisdictions should it be determined that income tax filings were required. It is the Company’s policy to recognize interest and penalties as a component of income tax expense related to its unrecognized tax benefits.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Balance, beginning of year

 

$

595

 

$

506

 

Additions based on tax related to the current year

 

39

 

146

 

Additions for tax positions of prior years

 

783

 

 

Reductions for tax positions of prior years

 

 

 

Reductions due to the statute of limitations

 

(36

)

(57

)

Settlements

 

 

 

 

 

 

 

 

 

Balance, end of year

 

$

1,381

 

$

595

 

 

Of the 2013 total, $898,000 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

 

The total amount of interest and penalties recorded in the income statement was an expense of $401,000 and $28,000 for the years ended December 31, 2013 and 2012. The Company had accrued approximately $567,000 and $166,000 for the payment of interest and penalties at December 31, 2013 and 2012.

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Interest and penalties recorded in the income statement

 

$

401

 

$

28

 

Interest and penalties accrued

 

567

 

166

 

 

The Company files income tax returns in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for all years prior to and including 2009.

 

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15.     EARNINGS PER SHARE

 

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. See Footnote 16, “Stockholders’ Equity and Regulatory Capital Matters” of this section of the filing.

 

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:

 

Years Ended December 31, (in thousands, except per share data)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net income

 

$

25,423

 

$

119,339

 

$

94,149

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

20,807

 

20,959

 

20,945

 

Effect of dilutive securities

 

97

 

69

 

48

 

Average shares outstanding including dilutive securities

 

20,904

 

21,028

 

20,993

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.23

 

$

5.71

 

$

4.50

 

Class B Common Stock

 

$

1.17

 

$

5.55

 

$

4.45

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.22

 

$

5.69

 

$

4.49

 

Class B Common Stock

 

$

1.16

 

$

5.53

 

$

4.44

 

 

Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:

 

Years Ended December 31, 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Antidilutive stock options

 

18,000

 

122,450

 

585,720

 

Average antidilutive stock options

 

15,667

 

120,353

 

585,147

 

 

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16.     STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL MATTERS

 

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.

 

Dividend Restrictions — 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 December 31, 2013, RB&T could, without prior approval, declare dividends of approximately $75 million. The Company does not plan to pay dividends from RB in the foreseeable future.

 

Regulatory Capital Requirements — The Parent Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

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 December 31, 2013 and 2012, 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 RB, 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. RB met the requirements of the QTL test for 2013.

 

New Capital Rules  On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

 

The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and will refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Bank under the final rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

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16.     STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL MATTERS (continued)

 

The final rules implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

 

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

 

The final rules set forth certain changes for the calculation of risk-weighted assets, which the Bank will be required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.

 

Based on the Bank’s current capital composition and levels, management believes it will be in compliance with the requirements as set forth in the final rules.

 

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16.  STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL MATTERS (continued)

 

 

 

Actual

 

Minimum
Requirement for
Capital Adequacy
Purposes

 

Minimum Requirement
to be Well Capitalized
Under Prompt
Corrective Action
Provisions

 

(dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

592,531

 

26.71

%

$

177,457

 

8

%

N/A

 

N/A

 

Republic Bank & Trust Co.

 

439,143

 

20.61

 

170,478

 

8

 

$

213,098

 

10

%

Republic Bank

 

15,860

 

18.69

 

6,788

 

8

 

8,485

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (core) capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

569,505

 

25.67

 

88,729

 

4

 

N/A

 

N/A

 

Republic Bank & Trust Co.

 

418,348

 

19.63

 

85,239

 

4

 

127,859

 

6

 

Republic Bank

 

14,785

 

17.42

 

3,394

 

4

 

5,091

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

569,505

 

16.81

 

135,515

 

4

 

N/A

 

N/A

 

Republic Bank & Trust Co.

 

418,348

 

12.73

 

131,491

 

4

 

164,364

 

5

 

Republic Bank

 

14,785

 

14.41

 

4,105

 

4

 

5,132

 

5

 

 

 

 

Actual

 

Minimum Requirement
for Capital Adequacy
Purposes

 

Minimum Requirement to
be Well Capitalized
Under Prompt Corrective
Action Provisions

 

(dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

581,189

 

25.28

%

$

183,939

 

8

%

N/A

 

N/A

 

Republic Bank & Trust Co.

 

451,898

 

20.37

 

177,448

 

8

 

$

221,811

 

10

%

Republic Bank

 

14,494

 

18.02

 

6,434

 

8

 

8,043

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (core) capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

558,982

 

24.31

 

91,969

 

4

 

N/A

 

N/A

 

Republic Bank & Trust Co.

 

407,261

 

18.36

 

88,724

 

4

 

133,086

 

6

 

Republic Bank

 

13,474

 

16.75

 

3,217

 

4

 

4,826

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

558,982

 

16.36

 

136,646

 

4

 

N/A

 

N/A

 

Republic Bank & Trust Co.

 

407,261

 

12.18

 

133,696

 

4

 

167,120

 

5

 

Republic Bank

 

13,474

 

13.43

 

4,013

 

4

 

5,016

 

5

 

 

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17.               STOCK PLANS AND STOCK BASED COMPENSATION

 

At December 31, 2013, the Company had a stock option plan, which also allows for the issuance of restricted stock awards, and a director deferred compensation plan. The stock option plan, which allows for the issuance of restricted stock awards, is part of the 2005 Stock Incentive Plan (“2005 Plan”).

 

Stock Options

 

The Company recorded expense related to stock options as follows:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Stock option expense

 

$

205

 

$

792

 

$

277

 

 

The stock options are incentive stock options with no disqualifying dispositions; therefore, no tax benefit was recognized related to the expense. No stock options were modified during the years ended December 31, 2013, 2012 and 2011.

 

The 2005 Plan permits the grant of stock options and restricted stock awards for up to 3,307,500 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards generally become fully exercisable at the end of five to six years of continued employment and must be exercised within one year from the date the options become exercisable. There were no Class B stock options outstanding during each of the periods presented. All stock options have an exercise price that is at least equal to the fair market value of the Company’s stock on the date the options were granted. All shares issued under the above mentioned plans came from authorized and unissued shares. Currently, the Company has a sufficient number of shares to satisfy expected option exercises.

 

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of Republic’s stock and other factors. Expected dividends are based on dividend trends and the market price of Republic’s stock price at grant. Republic uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant.

 

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17.          STOCK PLANS AND STOCK BASED COMPENSATION (continued)

 

The fair value of stock options granted was determined using the following weighted average assumptions as of grant date:

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

0.80

%

1.04

%

2.29

%

Expected dividend yield

 

2.95

%

2.79

%

2.59

%

Expected stock price volatility

 

31.95

%

33.35

%

30.88

%

Expected life of options (in years)

 

6

 

6

 

6

 

Estimated fair value per share

 

$

5.21

 

$

5.62

 

$

5.56

 

 

A summary of stock option activity for 2013 follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

Options

 

Average

 

Remaining

 

Aggregate

 

 

 

Class A

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term

 

Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding, beginning of year

 

460,200

 

$

20.86

 

 

 

 

 

Granted

 

6,000

 

23.42

 

 

 

 

 

Exercised

 

(31,200

)

21.26

 

 

 

 

 

Forfeited or expired

 

(107,500

)

23.41

 

 

 

 

 

Outstanding, end of year

 

327,500

 

$

20.03

 

1.57

 

$

1,482,580

 

 

 

 

 

 

 

 

 

 

 

Fully vested and expected to vest

 

327,500

 

$

20.03

 

1.57

 

$

1,482,580

 

Exercisable (vested) at end of year

 

142,000

 

$

20.01

 

0.86

 

$

644,818

 

 

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Table of Contents

 

17.          STOCK PLANS AND STOCK BASED COMPENSATION (continued)

 

Information related to the stock option plan during each year follows:

 

December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Intrinsic value of options exercised

 

$

131

 

$

56

 

$

315

 

Cash received from options exercised, net of shares redeemed

 

439

 

147

 

438

 

Total fair value of options granted

 

31

 

17

 

28

 

 

Loan balances of non-executive officer employees that were originated solely to fund stock option exercises were as follows:

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Outstanding loans

 

$

217

 

$

466

 

 

Restricted Stock Awards

 

Restricted stock awards generally become fully vested at the end of five to six years of continued employment. Information related to restricted stock awards granted follows:

 

December 31, (in thousands except per share data)

 

2013

 

2012

 

 

 

 

 

 

 

Shares granted

 

 

82

 

Weighted-average grant date fair value

 

$

 

$

19.85

 

Restricted stock award expense

 

$

298

 

$

50

 

 

The following table summarizes the activity for non-vested restricted stock awards for the years ended December 31, 2013 and 2012.

 

 

 

2013

 

2012

 

 

 

Shares

 

Shares

 

Outstanding, beginning of year

 

82,000

 

 

Granted

 

 

82,000

 

Forfeited or expired

 

 

 

Earned and issued

 

 

 

Outstanding, end of year

 

82,000

 

82,000

 

 

The fair value of the restricted stock awards is based on the closing stock price on the date of grant with the associated expense amortized to compensation expense over the vesting period, generally five to six years

 

Unrecognized stock option and restricted stock award expense related to unvested options and awards (net of estimated forfeitures) are estimated as follows:

 

Year

 

Awards

 

Options

 

Total

 

2014

 

$

298

 

$

115

 

$

413

 

2015

 

298

 

20

 

318

 

2016

 

298

 

12

 

310

 

2017

 

249

 

9

 

258

 

2018

 

136

 

5

 

141

 

2019

 

 

2

 

2

 

 

 

 

 

 

 

 

 

Total

 

$

1,279

 

$

163

 

$

1,442

 

 

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17.          STOCK PLANS AND STOCK BASED COMPENSATION (continued)

 

Director Deferred Compensation

 

In November 2004, the Company’s Board of Directors approved a Non-Qualified Deferred Compensation Plan (the “Plan”). The Plan governs the deferral of board and committee fees of non-employee members of the Board of Directors. Members of the Board of Directors may defer up to 100% of their board and committee fees for a specified period ranging from two to five years. The value of the deferred director compensation account is deemed “invested” in Company stock and is immediately vested. On a quarterly basis, the Company reserves shares of Republic’s stock within the Company’s stock option plan for ultimate distribution to Directors at the end of the deferral period. The Plan has not and will not materially impact the Company, as director compensation expense has been and will continue to be recorded when incurred.

 

The following table presents information on director deferred compensation shares reserved for the periods shown:

 

 

 

2013

 

2012

 

2011

 

Years ended December 31, 

 

Shares
Deferred

 

Weighted Average
Market Price at
Date of Deferral

 

Shares
Deferred

 

Weighted Average
Market Price at Date
of Deferral

 

Shares
Deferred

 

Weighted Average
Market Price at Date
of Deferral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

50,414

 

20.64

 

43,990

 

$

20.19

 

37,842

 

$

20.30

 

Awarded

 

7,768

 

24.32

 

9,871

 

22.02

 

8,658

 

19.77

 

Released

 

(5,046

)

20.16

 

(3,447

)

18.93

 

(2,510

)

20.42

 

Balance, end of period

 

53,136

 

21.23

 

50,414

 

20.64

 

43,990

 

$

20.19

 

 

Director deferred compensation has been expensed as follows:

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Director deferred compensation expense

 

$

193

 

$

227

 

$

171

 

 

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18.          BENEFIT PLANS

 

401 (k) Plan

 

Republic maintained a 401(k) plan for eligible employees who have been employed for at least 30-days and have reached the age of 21. The 30-day employment requirement was removed for plan participation, effective January 1, 2014. During 2011, participants in the plan had the option to contribute from 1% to 75% of their annual eligible compensation up to the maximum allowed by the IRS. Effective January 1, 2012, participants in the plan had the option to contribute from 1% to 75% of their annual eligible compensation up to the maximum allowed by the IRS. The Company matches 100% of participant contributions up to 1% and an additional 75% for participant contributions between 2% and 5% of each participant’s annual eligible compensation. Participants are fully vested after two years of employment.

 

Republic also contributes bonus contributions in addition to the aforementioned matching contributions if the Company achieves certain operating goals. Normal and bonus contributions for each of the periods ended were as follows:

 

Years Ended December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Employer matching contributions

 

$

1,576

 

$

1,470

 

$

1,388

 

Discretionary employer bonus matching contributions

 

$

 

$

446

 

$

420

 

 

Employee Stock Ownership Plan

 

Republic terminated its Employee Stock Ownership Plan (“ESOP”) effective December 31, 2012 and fully liquidated the ESOP on August 31, 2013. Employees were given the option to rollover cash or Company stock to the Company’s 401(k) plan or take a distribution in cash or Company stock. All ESOP shares were previously allocated through December 31, 2008 and effective July 1, 2007, the Company ceased accepting new participants into the ESOP plan. The table below presents information regarding the ESOP plan for each period end presented:

 

Years Ended December 31, (dollars in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Shares allocated to participants in the plan

 

 

255,374

 

274,742

 

Fair value of shares

 

$

 

$

5,396

 

$

6,292

 

 

Death Benefit

 

The Company maintained a death benefit for the former deceased Chairman of the Company, Bernard M. Trager, equal to three times the average annual compensation paid to Mr. Trager for the two years preceding his death. Upon Mr. Trager’s death on February 10, 2012, the Company began making a payout under this agreement, which was fully accrued for in prior years, of approximately $2 million.  Approximately $853,000 of this death benefit remained unpaid as of December 31, 2013.

 

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19.          TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES

 

Republic leases office facilities under operating leases from limited liability companies in which Republic’s Chairman/Chief Executive Officer and President are partners. Rent expense under these leases was as follows:

 

Years Ended December 31, ($ in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Rent expense under leases from related parties

 

$

3,372

 

$

3,254

 

$

3,158

 

 

Total minimum lease commitments under non-cancelable operating leases are as follows:

 

(in thousands)

 

Affiliate

 

Other

 

Total

 

2014

 

3,455

 

3,391

 

6,846

 

2015

 

3,209

 

2,994

 

6,203

 

2016

 

2,643

 

1,499

 

4,142

 

2017

 

1,827

 

1,368

 

3,195

 

2018

 

1,281

 

1,196

 

2,477

 

Thereafter

 

 

5,507

 

5,507

 

 

 

 

 

 

 

 

 

Total

 

$

12,415

 

$

15,955

 

$

28,370

 

 

A director of Republic Bancorp, Inc. is the President and Chief Executive Officer of a company that leases space to the Bank. Fees paid to the Bank totaled $14,000, $14,000 and $14,000 for years ended December 31, 2013, 2012 and 2011.

 

A director of Republic Bancorp, Inc. is “of counsel” to a local law firm. Fees paid by the Bank to this firm totaled $1.0 million, $181,000 and $293,000 in 2013, 2012 and 2011.

 

A director of RB&T is an executive of two consulting firms. Fees paid by the Bank to these firms totaled $101,000, $173,000 and $12,000 in 2013, 2012 and 2011.

 

A director of RB&T is a partner of an accounting firm that received fees from the Bank of $9,000, $8,000 and $8,000 in 2013, 2012 and 2011.

 

Loans made to executive officers and directors of Republic and their related interests during 2013 were as follows:

 

 

 

(in thousands)

 

 

 

 

 

Beginning balance

 

$

20,953

 

Effect of changes in composition of related parties

 

(338

)

New loans

 

6,981

 

Repayments

 

(7,888

)

 

 

 

 

Ending balance

 

$

19,708

 

 

Deposits from executive officers, directors, and their affiliates totaled $70 million and $70 million at December 31, 2013 and 2012.

 

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19.          TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES (continued)

 

By an agreement dated December 14, 1989, as amended August 8, 1994, RB&T entered into a split-dollar insurance agreement with a trust established by the Company’s deceased former Chairman, Bernard M. Trager. Pursuant to the agreement, from 1989 through 2002 RB&T paid $690,000 in total annual premiums on the insurance policies held in the trust. The policies are joint-life policies payable upon the death of Ms. Jean Trager, as the survivor of her husband Bernard M. Trager. The cash surrender value of the policies was approximately $1.9 million and $1.8 million as of December 31, 2013 and 2012.

 

Pursuant to the terms of the trust, the beneficiaries of the trust will each receive the proceeds of the policies after the repayment of the $690,000 of indebtedness to RB&T. The aggregate amount of such unreimbursed premiums constitutes indebtedness from the trust to RB&T and is secured by a collateral assignment of the policies. As of December 31, 2013 and 2012, the net death benefit under the policies was approximately $3.5 million. Upon the termination of the agreement, whether by the death of Ms. Trager or earlier cancellation, RB&T is entitled to be repaid by the trust the amount of indebtedness outstanding at that time.

 

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20.          OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

 

The Bank, in the normal course of business, is party to financial instruments with off balance sheet risk. 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 the Bank pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case by case basis in accordance with the Bank’s credit policies. Collateral from the customer may be required based on the Bank’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.

 

The Bank 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 the Bank under such loan commitments is limited by the terms of the contracts. For example, the Bank 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. Loan commitments generally have open-ended maturities and variable rates.

 

The table below presents the Bank’s commitments, exclusive of Mortgage Banking loan commitments for each year ended:

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Unused warehouse lines of credit

 

$

208,424

 

$

113,924

 

Unused home equity lines of credit

 

230,361

 

232,719

 

Unused loan commitments - other

 

178,776

 

163,523

 

Standby letters of credit

 

2,308

 

16,985

 

FHLB letters of credit

 

3,200

 

11,908

 

Total off balance sheet items

 

$

623,069

 

$

539,059

 

 

Standby letters of credit are conditional commitments issued by the Bank 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. In addition to credit risk, the Bank also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Bank does not deem this risk to be material.

 

At December 31, 2013 and 2012 the Bank had letters of credit from the FHLB issued on behalf of RB&T clients. These letters of credit were used as credit enhancements for client bond offerings and reduced RB&T’s available borrowing line at the FHLB. The Bank uses a blanket pledge of eligible real estate loans to secure these letters of credit.

 

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20.          OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES (continued)

 

Legal Proceedings

 

On August 1, 2011, a lawsuit was filed in the U.S. District Court for the Western District of Kentucky styled Brenda Webb vs. Republic Bank & Trust Company d/b/a Republic Bank, Civil Action No. 3:11-CV-00423-TBR. The Complaint was brought as a putative class action and seeks monetary damages, restitution and declaratory relief allegedly arising from the manner in which RB&T assessed overdraft fees. In the Complaint, the Plaintiff pleads seven claims against RB&T alleging: breach of contract and breach of the covenant of good faith and fair dealing (Count I), unconscionability (Count II), conversion (Count III), unjust enrichment (Count IV), violation of the Electronic Funds Transfer Act and Regulation E (Count V), and violations of the Kentucky Consumer Protection Act, (Count VI). RB&T filed a Motion to Dismiss the case on January 12, 2012. In response, Plaintiff filed her Motion to Amend the Complaint on February 23, 2012. In Plaintiff’s proposed Amended Complaint, Plaintiff acknowledged disclosure of the Overdraft Honor Policy and did not seek to add any claims to the Amended Complaint. However, Plaintiff divided the breach of contract and breach of the covenant of good faith and fair dealing claims into two counts (Counts One and Two). In the original Complaint, those claims were combined in Count One. RB&T filed its objection to Plaintiff’s Motion to Amend. On June 16, 2012, the District Court denied the Plaintiff’s Motion to Amend concluding that the Plaintiff lacked the ability to automatically amend the complaint as of right. However, the Court held that the Plaintiff could be permitted to amend if the Plaintiff could first demonstrate that her amendment would not be futile and that the Plaintiff had standing to sue despite RB&T’s offer of judgment. The Court declined to rule on that issue at that time and ordered the case stayed pending a decision by the U.S. Court of Appeals for the Sixth Circuit in a case on appeal with the same standing issue. The Sixth Circuit ruled on June 11, 2013 and concluded that the offer of judgment did not moot the matter before it only because the offer of judgment in question did not afford the Plaintiff complete relief. The District Court lifted the stay of this matter on June 14, 2013 and permitted Plaintiff to file her Amended Complaint.  Plaintiff filed her Amended Complaint on June 21, 2013 and brought seven claims: breach of contract and breach of the covenant of good faith and fair dealing (Counts I & II), unconscionability (Count III), conversion (Count IV), unjust enrichment (Count V), violation of the Electronic Funds Transfer Act, (Count VI) and violation of the Kentucky Consumer Protection Act (Count VII).  RB&T filed its Motion to Dismiss the Amended Complaint on July 15, 2013. On September 30, 2013 the Court issued its decision granting the Motion to Dismiss in part and denying it in part.  The Court initially concluded that the offer of judgment did not moot the case and deprive it of subject matter jurisdiction as it did not provide Plaintiff with all of the relief she sought.  The Court dismissed the conversion, unconscionability and Electronic Funds Transfer Act claims in their entirety for failure to state a claim. With respect to the remaining claims, the Court dismissed them to the extent they are premised upon any overdraft charges incurred by the Plaintiff on or after January 6, 2010, the date on which she received the Overdraft Honor Policy.  The Court concluded that Plaintiff could not state any claim for the time period after she received the Policy with respect to the manner in which RB&T assessed overdraft fees. The Answer to the remaining claims was filed on October 14, 2013 and the matter now proceeds into discovery.

 

21.          PARENT COMPANY CONDENSED FINANCIAL INFORMATION

 

BALANCE SHEETS

 

December 31, (in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

130,750

 

$

115,984

 

Investment in subsidiaries

 

448,388

 

463,316

 

Other assets

 

10,624

 

2,737

 

 

 

 

 

 

 

Total assets

 

$

589,762

 

$

582,037

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

Subordinated note

 

$

41,240

 

$

41,240

 

Other liabilities

 

5,729

 

4,095

 

Stockholders’ equity

 

542,793

 

536,702

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

589,762

 

$

582,037

 

 

219



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21.  PARENT COMPANY CONDENSED FINANCIAL INFORMATION (continued)

 

STATEMENTS OF INCOME

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends from subsidiary

 

$

16,376

 

$

115,476

 

$

35,476

 

Interest income

 

2

 

3

 

81

 

Other income

 

39

 

39

 

39

 

Less: Interest expense

 

2,515

 

2,522

 

2,515

 

Less: Other expenses

 

368

 

441

 

382

 

 

 

 

 

 

 

 

 

Income before income tax benefit

 

13,534

 

112,555

 

32,699

 

Income tax benefit

 

958

 

997

 

961

 

 

 

 

 

 

 

 

 

Income before equity in undistributed net income of subsidiaries

 

14,492

 

113,552

 

33,660

 

Equity in undistributed net income of subsidiaries

 

10,931

 

5,787

 

60,489

 

 

 

 

 

 

 

 

 

Net income

 

$

25,423

 

$

119,339

 

$

94,149

 

 

STATEMENTS OF CASH FLOWS

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

25,423

 

$

119,339

 

$

94,149

 

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

 

 

 

 

 

 

 

Equity in undistributed net income of subsidiaries

 

(10,931

)

(5,787

)

(60,489

)

Director deferred compensation - Parent Company

 

99

 

121

 

104

 

Change in other assets

 

(7,895

)

(1,917

)

1,127

 

Change in other liabilities

 

2,114

 

741

 

(187

)

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

8,810

 

112,497

 

34,704

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of Republic Investment Company common stock

 

23,621

 

 

 

Net cash provided by operating activities

 

23,621

 

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock repurchases

 

(4,095

)

(1,668

)

(492

)

Net proceeds from Common Stock options exercised

 

439

 

147

 

438

 

Cash dividends paid

 

(14,009

)

(36,116

)

(12,315

)

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(17,665

)

(37,637

)

(12,369

)

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

14,766

 

74,860

 

22,335

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

115,984

 

41,124

 

18,789

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

130,750

 

$

115,984

 

$

41,124

 

 

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22.               SEGMENT INFORMATION

 

Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and subsidiary banks), which are then aggregated if operating performance, products/services, and customers are similar.

 

As of December 31, 2013, 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 RPG segment. Along with the TRS division, Republic Payment Solutions (“RPS”) and Republic Credit Solutions (“RCS”) were created to operate as divisions of the RPG segment.

 

Nationally, through RB&T, RPG facilitates the receipt and payment of federal and state tax refund products under the TRS division. Through RB, the RPS division is an issuing bank offering general purpose reloadable prepaid debit cards through third party program managers. Through RB&T, the RCS division is piloting short-term consumer credit products.

 

For the projected near-term, as programs are being established, the operating results of these divisions 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 and RCS divisions will not be reported as separate business operating segments until such time, if any, that they become material to the Company’s overall results of operations.

 

Loans, investments and deposits provide the majority of the net revenue from Traditional Banking operations, while servicing fees and loan sales provide the majority of revenue from Mortgage Banking operations.  Prior to 2013, RAL fees and net RT fees provided the majority of the revenue for RPG.  In 2013, net RT fees have provided, and are expected to continue to provide going forward, the majority of revenues for RPG as the Company no longer offers RALs. All Company operations are domestic.

 

The accounting policies used for Republic’s reportable segments are the same as those described in the summary of significant accounting policies. Segment performance is evaluated using operating income. Goodwill is not allocated. Income taxes which are not segment specific are allocated based on income before income tax expense. Transactions among reportable segments are made at carrying value.

 

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22.               SEGMENT INFORMATION (continued)

 

Segment information for the years ended December 31, 2013, 2012 and 2011 is as follows:

 

 

 

Year Ended December 31, 2013

 

 

 

 

 

 

 

Republic

 

 

 

 

 

Traditional

 

Mortgage

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Banking

 

Group

 

Company

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

112,556

 

$

471

 

$

148

 

$

113,175

 

Provision for loan losses

 

3,828

 

 

(845

)

2,983

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 

13,884

 

13,884

 

Mortgage banking income

 

 

7,258

 

 

7,258

 

Bargain purchase gain - FCB

 

1,324

 

 

 

1,324

 

Other non interest income

 

24,497

 

131

 

875

 

25,503

 

Total non interest income

 

25,821

 

7,389

 

14,759

 

47,969

 

 

 

 

 

 

 

 

 

 

 

Total non interest expenses

 

98,064

 

3,418

 

16,181

 

117,663

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax expense

 

36,485

 

4,442

 

(429

)

40,498

 

Income tax expense

 

12,557

 

1,555

 

963

 

15,075

 

Net income (loss)

 

$

23,928

 

$

2,887

 

$

(1,392

)

$

25,423

 

 

 

 

 

 

 

 

 

 

 

Segment end of period total assets

 

$

3,354,850

 

$

9,307

 

$

7,747

 

$

3,371,904

 

Net interest margin

 

3.51

%

NM

 

NM

 

3.48

%

 

 

 

Year Ended December 31, 2012

 

 

 

 

 

 

 

Republic

 

 

 

 

 

Traditional

 

Mortgage

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Banking

 

Group

 

Company

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

114,831

 

$

400

 

$

45,424

 

$

160,655

 

Provision for loan losses

 

8,167

 

 

6,876

 

15,043

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 

78,304

 

78,304

 

Mortgage banking income

 

 

8,447

 

 

8,447

 

Net gain on sales, calls and impairment of securities

 

56

 

 

 

56

 

Bargain purchase gain - TCB

 

27,614

 

 

 

27,614

 

Bargain purchase gain - FCB

 

27,824

 

 

 

27,824

 

Other non interest income

 

22,574

 

39

 

220

 

22,833

 

Total non interest income

 

78,068

 

8,486

 

78,524

 

165,078

 

 

 

 

 

 

 

 

 

 

 

Total non interest expenses

 

100,380

 

3,842

 

22,523

 

126,745

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

84,352

 

5,044

 

94,549

 

183,945

 

Income tax expense

 

29,178

 

1,765

 

33,663

 

64,606

 

Net income

 

$

55,174

 

$

3,279

 

$

60,886

 

$

119,339

 

 

 

 

 

 

 

 

 

 

 

Segment end of period total assets

 

$

3,371,934

 

$

15,752

 

$

6,713

 

$

3,394,399

 

Net interest margin

 

3.64

%

NM

 

NM

 

4.82

%

 

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22.               SEGMENT INFORMATION (continued)

 

 

 

Year Ended December 31, 2011

 

 

 

 

 

 

 

Republic

 

 

 

 

 

Traditional

 

Mortgage

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Banking

 

Group

 

Company

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

105,346

 

$

401

 

$

59,113

 

$

164,860

 

Provision for loan losses

 

6,406

 

 

11,560

 

17,966

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 

88,195

 

88,195

 

Mortgage banking income

 

 

3,899

 

 

3,899

 

Net gain on sales, calls and impairment of securities

 

2,006

 

 

 

2,006

 

Other non interest income

 

25,089

 

78

 

357

 

25,524

 

Total non interest income

 

27,095

 

3,977

 

88,552

 

119,624

 

 

 

 

 

 

 

 

 

 

 

Total non interest expenses

 

87,389

 

3,849

 

31,083

 

122,321

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

38,646

 

529

 

105,022

 

144,197

 

Income tax expense

 

12,183

 

185

 

37,680

 

50,048

 

Net income

 

$

26,463

 

$

344

 

$

67,342

 

$

94,149

 

 

 

 

 

 

 

 

 

 

 

Segment end of period total assets

 

$

3,099,426

 

$

10,880

 

$

309,685

 

$

3,419,991

 

Net interest margin

 

3.55

%

NM

 

NM

 

5.09

%

 


Segment assets are reported as of the respective period ends while income and margin data are reported for the respective periods.

NM — Not Meaningful

 

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23.               SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)

 

Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2013 and 2012.

 

 

 

Fourth

 

Third

 

Second

 

First

 

($ in thousands, except per share data)

 

Quarter

 

Quarter

 

Quarter

 

Quarter(1)

 

2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

32,039

 

$

34,009

 

$

34,119

 

$

34,401

 

Interest expense

 

5,300

 

5,470

 

5,352

 

5,271

 

Net interest income

 

26,739

 

28,539

 

28,767

 

29,130

 

Provision for loan losses

 

503

 

2,200

 

905

 

(625

)

Net interest income after provision

 

26,236

 

26,339

 

27,862

 

29,755

 

Non interest income

 

7,122

 

7,539

 

10,783

 

22,525

 

Non interest expenses (3)

 

30,337

 

26,325

 

29,699

 

31,302

 

Income before income tax expense

 

3,021

 

7,553

 

8,946

 

20,978

 

Income tax expense (4)

 

1,676

 

2,950

 

2,827

 

7,622

 

Net income

 

1,345

 

4,603

 

6,119

 

13,356

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

0.07

 

0.22

 

0.30

 

0.64

 

Class B Common Stock

 

0.05

 

0.21

 

0.28

 

0.63

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

0.07

 

0.22

 

0.30

 

0.64

 

Class B Common Stock

 

0.05

 

0.21

 

0.28

 

0.62

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

0.176

 

0.176

 

0.176

 

0.165

 

Class B Common Stock

 

0.160

 

0.160

 

0.160

 

0.150

 

 

 

 

Fourth

 

Third

 

Second

 

First

 

($ in thousands, except per share data)

 

Quarter

 

Quarter

 

Quarter

 

Quarter(1)

 

2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

35,930

 

$

34,128

 

$

33,814

 

$

79,587

 

Interest expense

 

5,379

 

5,556

 

5,502

 

6,367

 

Net interest income

 

30,551

 

28,572

 

28,312

 

73,220

 

Provision for loan losses

 

1,324

 

2,083

 

466

 

11,170

 

Net interest income after provision

 

29,227

 

26,489

 

27,846

 

62,050

 

Non interest income (2)

 

9,338

 

34,845

 

14,086

 

106,809

 

Non interest expenses (3)

 

28,379

 

29,762

 

27,451

 

41,153

 

Income before income tax expense

 

10,186

 

31,572

 

14,481

 

127,706

 

Income tax expense

 

3,565

 

10,904

 

4,903

 

45,234

 

Net income

 

6,621

 

20,668

 

9,578

 

82,472

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

0.33

 

0.99

 

0.46

 

3.94

 

Class B Common Stock

 

0.21

 

0.97

 

0.44

 

3.92

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

0.33

 

0.98

 

0.46

 

3.92

 

Class B Common Stock

 

0.21

 

0.97

 

0.44

 

3.90

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share:

 

 

 

 

 

 

 

 

 

Class A Common Stock (4)

 

1.265

 

0.165

 

0.165

 

0.154

 

Class B Common Stock (4)

 

1.150

 

0.150

 

0.150

 

0.140

 

 

(continued)

 

224



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23.               SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)

 

(1) - The first quarters of 2013 and 2012 were significantly impacted by the TRS operating division.

 

For additional discussion regarding TRS, a division of Republic Processing Group, see the following sections:

·                  Part I Item 1A “Risk Factors”

·                  Republic Processing Group

·                  Part II Item 8 “Financial Statements and Supplementary Data”

·                  Footnote 1 “Summary of Significant Accounting Policies”

·                  Footnote 4 “Loans and Allowance for Loan Losses”

·                  Footnote 22 “Segment Information”

 

(2) - Non-interest income:

 

During the first quarter of 2012, the Company recorded a pre-tax bargain purchase gain of $27.9 million as a result of the TCB acquisition. The bargain purchase gain was realized because the overall price paid by RB&T was substantially less than the fair value of the TCB assets acquired and liabilities assumed in the transaction.

 

During the third quarter of 2012, the Bank recorded a pre-tax bargain purchase gain of $27.1 million as a result of the FCB acquisition. The bargain purchase gain was realized because the overall price paid by RB&T was substantially less than the fair value of the FCB assets acquired and liabilities assumed in the transaction.

 

(3) - Non-interest expenses:

 

During the fourth quarter of 2013, the TRS division of the RPG segment incurred $1.4 million in expenses associated with the conclusions of RPG’s third party arbitration with JHI.

 

During the third quarter of 2013, the Bank reversed $3.3 million of 2013 incentive compensation accruals based on revised payout estimates.

 

During the first quarter 2012, the Bank experienced increases of $939,000 to non-interest expenses as a result of the TCB acquisition.

 

During the first quarter of 2012, the Bank prepaid $81 million in FHLB advances that were originally scheduled to mature between October 2012 and May 2013. These advances had a weighted average cost of 3.56%. The Bank recognized a $2.4 million early termination penalty during the first quarter of 2012 in connection with this prepayment.

 

During the third quarter of 2012, the Bank experienced increases of approximately $3.0 million as a result of the 2012 acquisitions.

 

(4) — Dividends declared per common share:

 

During the fourth quarter of 2012, the Bank declared a special one-time cash dividend of $1.10 per share on Class A Common Stock and $1.00 per share on Class B Common Stock.

 

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24.               OTHER COMPREHENSIVE INCOME

 

OCI components and related tax effects were as follows:

 

Years Ended December 31, (in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Available for Sale Securities:

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale

 

$

(4,747

)

$

1,043

 

$

(893

)

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

 

742

 

1,279

 

(145

)

Reclassification adjustment for gains recognized in earnings

 

 

(56

)

(2,285

)

Reclassification adjustment for other-than-temporary impairment recognized in earnings

 

 

 

279

 

Net unrealized gains (losses)

 

(4,005

)

2,266

 

(3,044

)

Tax effect

 

1,403

 

(793

)

1,065

 

Net of tax

 

(2,602

)

1,473

 

(1,979

)

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

170

 

 

 

Reclassification adjustment for gains realized in income

 

 

 

 

Net unrealized gains

 

170

 

 

 

Tax effect

 

(59

)

 

 

Net of tax

 

111

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(2,491

)

$

1,473

 

$

(1,979

)

 

The following is a summary of the accumulated OCI balances, net of tax:

 

(in thousands)

 

Balance at 
December 31,
 2012

 

Current Year 
Change

 

Balance at
 December 31, 
2013

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale

 

$

5,610

 

$

(3,084

)

$

2,526

 

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

 

2

 

482

 

484

 

Unrealized gains on cash flow hedge

 

 

111

 

111

 

 

 

$

5,612

 

$

(2,491

)

$

3,121

 

 

226



Table of Contents

 

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None

 

Item 9A.  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 the Company’s Chairman/Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s 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 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 fourth quarter of the Company’s fiscal year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting and on the Financial Statements, thereon are set forth under Part II Item 8 “Financial Statements and Supplementary Data.”

 

Item 9B.  Other Information.

 

None

 

227



Table of Contents

 

PART III

 

Item 10.  Directors, Executive Officers and Corporate Governance.

 

The information required by this Item appears under the headings “PROPOSAL ONE: ELECTION OF DIRECTORS,” “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” and “THE BOARD OF DIRECTORS AND ITS COMMITTEES” of the Proxy Statement of Republic Bancorp, Inc. for the 2014 Annual Meeting of Shareholders (“Proxy Statement”) to be held April 24, 2014, all of which is incorporated herein by reference.

 

The following table sets forth certain information with respect to the Company’s executive officers:

 

Name

 

Age

 

Position with the Company

Steven E. Trager (1)

 

53

 

Chairman and Chief Executive Officer

A. Scott Trager (2)

 

61

 

Vice Chair and President

Kevin Sipes (3)

 

42

 

Executive Vice President, Chief Financial Officer and Chief Accounting Officer

William R. Nelson (4)

 

50

 

President, Republic Processing Group

Steven E. DeWeese (5)

 

45

 

Executive Vice President, Republic Bank & Trust Company and Republic Bank

Robert J. Arnold (6)

 

55

 

Senior Vice President, Republic Bank & Trust Company and Republic Bank

 

Executive officers of the Company are elected by the Board of Directors and serve at the pleasure of the Board of Directors. Steven E. Trager and A. Scott Trager are cousins.

 


(1)         Steven E. Trager began serving as Chairman and CEO of Republic in February, 2012 and has served as Chairman and CEO of Republic Bank & Trust Company (the “Bank”) since 1998.  Since 2006, he also has served as Chairman of Republic Bank, a federally chartered thrift subsidiary based in Florida.  From 1994 to 1997 he served as Vice Chairman of the Bank.  From 1994 to 1998 he served as Secretary, and from 1998 to 2012 he served as President and CEO of Republic.

 

(2)         A. Scott Trager has served as President of Republic since February, 2012 and as President of Republic Bank & Trust Company since 1984.  He has served as a director of Republic Bank since January, 2009.  From 1994 to 2012, he served as Vice Chairman of Republic.

 

(3)         Kevin Sipes has served as Executive Vice President and Treasurer of Republic and Republic Bank & Trust Company since 2002 and CFO of Republic and Republic Bank & Trust Company since 2000. He has served as a director of Republic Bank since 2006. He began serving as Chief Accounting Officer and Controller of Republic Bank & Trust Company in 2000. He joined Republic Bank & Trust Company in 1995.

 

(4)         William R. Nelson has served as President of Republic Processing Group, formerly known as (f/k/a) Tax Refund Solutions, of Republic Bank & Trust Company since 2007.  He previously served as Director of Relationship Management of HSBC, Taxpayer Financial Services, in 2004 and was promoted to Group Director — Independent Program in 2006 through 2007.  He previously served as Director of Sales, Marketing and Customer Service with Republic Bank & Trust Company from 1999 through 2004.

 

(5)         Steven E. DeWeese joined Republic Bank & Trust Company in 1990 and has held various positions within the Bank and Republic Bank since then.  In 2000, he was promoted to SVP.  In 2003, he was promoted to Managing Director of Business Development.  In 2006, he was promoted to Managing Director of Retail Banking, and in January, 2010 he was promoted to Executive Vice President of Republic Bank & Trust Company and Republic Bank.

 

(6)         Robert J. Arnold joined Republic Bank & Trust Company in 2006 as Senior Vice President and Chief Operating Officer of Commercial Banking. He has also served as Executive Director of Republic Bank  since 2007.

 

228



Table of Contents

 

Item 11.  Executive Compensation.

 

The information required by this Item appears under the sub-heading “Director Compensation” and under the headings “CERTAIN INFORMATION AS TO MANAGEMENT” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” of the Proxy Statement all of which is incorporated herein by reference.

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Equity Compensation Plan Information

 

The following table sets forth information regarding Republic’s Common Stock that may be issued upon exercise of options, warrants and rights under all equity compensation plans as of December 31, 2013. There were no equity compensation plans not approved by security holders at December 31, 2013.

 

 

 

(1)

 

(2)

 

(3)

 

Plan Category

 

Number of Securities to be
Issued Upon Exercise of 
Outstanding Options,
Warrants and Rights

 

Weighted-Average Exercise 
Price of Outstanding Options,
Warrants and Rights

 

Number of Securities 
Remaining Available for 
Future Issuance Under Equity 
Compensation Plans 
(Excluding Securities 
Reflected in Column (1))

 

 

 

 

 

 

 

 

 

2005 Stock Incentive Plan

 

409,500

 

$

19.99

 

2,898,000

 

 

Column (1) above represents options issued for Class A Common Stock only. Options for Class B Common Stock have been authorized but are not issued.

 

Additional information required by this Item appears under the heading “SHARE OWNERSHIP” of the Proxy Statement, which is incorporated herein by reference.

 

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

 

Information required by this Item is under the headings “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” and “CERTAIN OTHER RELATIONSHIPS AND RELATED TRANSACTIONS” of the Proxy Statement, all of which is incorporated herein by reference.

 

Item 14.  Principal Accounting Fees and Services.

 

Information required by this Item appears under the heading “INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” of the Proxy Statement which is incorporated herein by reference.

 

229



Table of Contents

 

PART IV

 

Item 15.  Exhibits, Financial Statement Schedules.

 

(a)(1) Financial Statements:

 

The following are included under Item 8 “Financial Statements and Supplementary Data:”

 

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated balance sheets — December 31, 2013 and 2012

Consolidated statements of income and comprehensive income — years ended December 31, 2013, 2012 and 2011

Consolidated statements of stockholders’ equity — years ended December 31, 2013, 2012 and 2011

Consolidated statements of cash flows — years ended December 31, 2013, 2012 and 2011

Notes to consolidated financial statements

 

(a)(2) Financial Statements Schedules:

 

Financial statement schedules are omitted because the information is not applicable.

 

(a)(3) Exhibits:

 

The Exhibit Index of this report is incorporated herein by reference. The management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K pursuant to Item 15(b) are noted in the Exhibit Index.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

REPUBLIC BANCORP, INC.

 

 

 

GRAPHIC

March 14, 2014

By:

Steven E. Trager

 

 

Chairman and Chief Executive Officer

 

230



Table of Contents

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

 

 

/s/ Steven E. Trager

 

Chairman, Chief Executive Officer

March 14, 2014

Steven E. Trager

 

and Director

 

 

 

 

 

 

 

 

 

/s/ A. Scott Trager

 

President and Director

March 14, 2014

A. Scott Trager

 

 

 

 

 

 

 

 

 

 

 

/s/ Kevin Sipes

 

Chief Financial Officer and

March 14, 2014

Kevin Sipes

 

Chief Accounting Officer

 

 

 

 

 

 

 

 

 

/s/ Craig A. Greenberg

 

Director

March 14, 2014

Craig Greenberg

 

 

 

 

 

 

 

 

 

 

 

/s/ Michael T. Rust

 

Director

March 14, 2014

Michael T. Rust

 

 

 

 

 

 

 

 

 

 

 

/s/ Sandra Metts Snowden

 

Director

March 14, 2014

Sandra Metts Snowden

 

 

 

 

 

 

 

 

 

 

 

/s/ R. Wayne Stratton

 

Director

March 14, 2014

R. Wayne Stratton

 

 

 

 

 

 

 

 

 

 

 

/s/ Susan Stout Tamme

 

Director

March 14, 2014

Susan Stout Tamme

 

 

 

 

231



Table of Contents

 

INDEX TO EXHIBITS

 

No.

 

Description

 

 

 

3(i)

 

Articles of Incorporation of Registrant, as amended (Incorporated by reference to Exhibit 3(i) to the Registration Statement on Form S-1 of Registrant (Registration No. 333-56583))

 

 

 

3(ii)

 

Amended Bylaws (Incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2006 (Commission File Number: 0-24649))

 

 

 

4.1

 

Provisions of Articles of Incorporation of Registrant defining rights of security holders (see Articles of Incorporation, as amended, of Registrant incorporated as Exhibit 3(i) herein)

 

 

 

4.2

 

Agreement Pursuant to Item 601 (b)(4)(iii) of Regulation S-K (Incorporated by reference to Exhibit 4.2 of the Annual Report on Form 10-K of Registrant for the year ended December 31, 1997 (Commission File Number: 33-77324))

 

 

 

10.01*

 

Officer Compensation Continuation Agreement with Steven E. Trager, dated January 12, 1995 (Incorporated by reference to Exhibit 10.1 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324))

 

 

 

10.02*

 

Officer Compensation Continuation Agreement, as amended and restated, with Steven E. Trager effective January 1, 2006 (Incorporated by reference to Exhibit 10.34 of Registrant’s Form 10-K for the year ended December 31, 2005 (Commission File Number: 0-24649))

 

 

 

10.03*

 

Officer Compensation Continuation Agreement, as amended, with Steven E. Trager effective February 15, 2006 (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed February 21, 2006 (Commission File Number: 0-24649))

 

 

 

10.04*

 

Officer Compensation Continuation Agreement, as amended and restated, with Steven E. Trager effective April 30, 2008 (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 10-Q for the quarter ended March 31, 2008 (Commission File Number: 0-24649))

 

 

 

10.05*

 

Officer Compensation Continuation Agreement with A. Scott Trager, dated January 12, 1995 (Incorporated by reference to Exhibit 10.5 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324))

 

 

 

10.06*

 

Officer Compensation Continuation Agreement, as amended and restated, with A. Scott Trager effective January 1, 2006 (Incorporated by reference to Exhibit 10.35 of Registrant’s Form 10-K for the year ended December 31, 2005 (Commission File Number: 0-24649))

 

 

 

10.07*

 

Officer Compensation Continuation Agreement, as amended, with A. Scott Trager effective February 15, 2006 (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed February 21, 2006 (Commission File Number: 0-24649))

 

 

 

10.08*

 

Officer Compensation Continuation Agreement, as amended and restated, with A. Scott Trager effective April 30, 2008 (Incorporated by reference to Exhibit 10.3 of Registrant’s Form 10-Q for the quarter ended March 31, 2008 (Commission File Number: 0-24649))

 

 

 

10.09*

 

Officer Compensation Continuation Agreement with A. Scott Trager, effective March 21, 2012 (Incorporated by reference to Exhibit 10.3 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (Commission File Number: 0-24649))

 

 

 

10.10*

 

Officer Compensation Continuation Agreement with Kevin Sipes, dated June 15, 2001 (Incorporated by reference to Exhibit 10.23 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (Commission File Number: 0-24649))

 

232



Table of Contents

 

No.

 

Description

 

 

 

10.11*

 

Officer Compensation Continuation Agreement, as amended and restated, with Kevin Sipes effective January 1, 2006 (Incorporated by reference to Exhibit 10.38 of Registrant’s Form 10-K for the year ended December 31, 2005 (Commission File Number: 0-24649))

 

 

 

10.12*

 

Officer Compensation Continuation Agreement, as amended, with Kevin Sipes effective February 15, 2006 (Incorporated by reference to Exhibit 10.5 of Registrant’s Form 8-K filed February 21, 2006 (Commission File Number: 0-24649))

 

 

 

10.13*

 

Officer Compensation Continuation Agreement, as amended and restated, with Kevin Sipes effective April 30, 2008 (Incorporated by reference to Exhibit 10.4 of Registrant’s Form 10-Q for the quarter ended March 31, 2008 (Commission File Number: 0-24649))

 

 

 

10.14*

 

Officer Compensation Continuation Agreement with Kevin Sipes, effective March 21, 2012 (Incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (Commission File Number: 0-24649))

 

 

 

10.15*

 

Officer Compensation Continuation Agreement with Kevin Sipes, effective March 21, 2012 (Incorporated by reference to Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (Commission File Number: 0-24649))

 

 

 

10.16*

 

Officer Compensation Continuation Agreement with Kevin Sipes, effective November 7, 2012 (Incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012 (Commission File Number: 0-24649))

 

 

 

10.17*

 

Officer Compensation Continuation Agreement with Kevin Sipes, effective November 7, 2012 (Incorporated by reference to Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012 (Commission File Number: 0-24649))

 

 

 

10.18*

 

Death Benefit Agreement with Bernard M. Trager dated September 10, 1996 (Incorporated by reference to Exhibit 10.9 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File Number: 33-77324))

 

 

 

10.19

 

Right of First Offer Agreement by and among Republic Bancorp, Inc., Teebank Family Limited Partnership, Bernard M. Trager and Jean S. Trager. (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed September 19, 2007 (Commission File Number: 0-24649))

 

 

 

10.20

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 1, 1982, relating to 2801 Bardstown Road, Louisville (Incorporated by reference to Exhibit 10.11 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File Number: 0-24649))

 

 

 

10.21

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 1, 2008, relating to 2801 Bardstown Road, Louisville (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed June 9, 2008 (Commission File Number: 0-24649))

 

 

 

10.22

 

Lease between Republic Bank & Trust Company and Teeco Properties, dated April 1, 1995, relating to property at 601 West Market Street (Incorporated by reference to exhibit 10.10 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File Number: 0-24649))

 

 

 

10.23

 

Lease between Republic Bank & Trust Company and Teeco Properties, dated October 1, 1996, relating to property at 601 West Market Street (Incorporated by reference to exhibit 10.10 of Registrant’s Form S-1 (Commission File Number: 0-24649))

 

233



Table of Contents

 

No.

 

Description

 

 

 

10.24

 

Lease extension between Republic Bank & Trust Company and Teeco Properties, dated September 25, 2001, relating to property at 601 West Market Street (Incorporated by reference to exhibit 10.25 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 (Commission File Number: 0-24649))

 

 

 

10.25

 

Lease between Republic Bank & Trust Company and Teeco Properties, dated May 1, 2002, relating to property at 601 West Market Street (Incorporated by reference to exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (Commission File Number: 0-24649))

 

 

 

10.26

 

Lease between Republic Bank & Trust Company and Teeco Properties, dated October 1, 2005, relating to property at 601 West Market Street, Louisville, KY (Floor 4), amending and modifying previously filed exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (Incorporated by reference to exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 (Commission File Number: 0-24649))

 

 

 

10.27

 

Lease between Republic Bank & Trust Company and Teeco Properties, as of October 1, 2006, relating to property at 601 West Market Street, Louisville, KY. (Incorporated by reference to exhibit 10.1 of Registrant’s Form 8-K filed September 25, 2006 (Commission File Number: 0-24649))

 

 

 

10.28

 

Lease between Republic Bank & Trust Company and Teeco Properties, as of July 8, 2008, as amended, relating to property at 601 West Market Street (Floors 1,2,3,5 and 6), Louisville, KY. (Incorporated by reference to exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (Commission File Number: 0-24649))

 

 

 

10.29

 

Lease between Republic Bank & Trust Company and Teeco Properties, as of July 8, 2008, as amended, relating to property at 601 West Market Street (Floor 4), Louisville, KY. (Incorporated by reference to exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (Commission File Number: 0-24649))

 

 

 

10.30

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 3, 1993, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.12 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File Number: 0-24649))

 

 

 

10.31

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 1999, as amended, relating to 661 South Hurstbourne Parkway (Incorporated by reference to Exhibit 10.17 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (Commission File Number: 0-24649))

 

 

 

10.32

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 2000, as amended, relating to 661 South Hurstbourne Parkway (Incorporated by reference to Exhibit 10.21 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 (Commission File Number: 0-24649))

 

 

 

10.33

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated July 1, 2003, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (Commission File Number: 0-24649))

 

 

 

10.34

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 2, 1993, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.16 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File Number: 0-24649))

 

234



Table of Contents

 

No.

 

Description

 

 

 

10.35

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 1, 1995, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.18 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File Number: 0-24649))

 

 

 

10.36

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 16, 1996, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.19 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File Number: 0-24649))

 

 

 

10.37

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated January 21, 1998, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.20 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File Number: 0-24649))

 

 

 

10.38

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 11, 1998, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.21 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File Number: 0-24649))

 

 

 

10.39

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 2004, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (Commission File Number: 0-24649))

 

 

 

10.40

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 1, 2005, as amended, relating to 661 South Hurstbourne Parkway, Louisville, KY, amending and modifying previously filed exhibit 10.12 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Incorporated by reference to Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 (Commission File Number: 0-24649))

 

 

 

10.41

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated July 1, 2008, as amended, relating to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed June 9, 2008 (Commission File Number: 0-24649))

 

 

 

10.42

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated November 17, 1997, as amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.18 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File Number: 0-24649))

 

 

 

10.43

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 1, 1999, as amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.18 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (Commission File Number: 0-24649))

 

 

 

10.44

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated October 30, 1999, as amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.20 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 (Commission File Number: 0-24649))

 

235



Table of Contents

 

No.

 

Description

 

 

 

10.45

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated May 1, 2003, as amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (Commission File Number: 0-24649))

 

 

 

10.46

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated November 1, 2005, as amended, relating to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.33 of Registrant’s Form 10-K for the year ended December 31, 2005 (Commission File Number: 0-24649))

 

 

 

10.47

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated January 15, 2014, as amended, relating to 9600 Brownsboro Road (Commission File Number: 0-24649))

 

 

 

10.48

 

Assignment and Assumption of Lease by Republic Bank & Trust Company with the consent of Jaytee Properties, dated May 1, 2006, relating to 9600 Brownsboro Road, Louisville, KY. (Incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (Commission File Number: 0-24649))

 

 

 

10.49

 

Lease between Republic Bank & Trust Company and Jaytee Properties, dated January 17, 2008, as amended, relating to 9600 Brownsboro Road, Louisville, KY (Incorporated by reference to Exhibit 10.40 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (Commission File Number: 0-24649))

 

 

 

10.50

 

Ground lease between Republic Bank & Trust Company and Jaytee Properties, relating to 9600 Brownsboro Road, dated January 17, 2008, as amended, relating to 9600 Brownsboro Road, Louisville, KY (Incorporated by reference to Exhibit 10.40 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (Commission File Number: 0-24649))

 

 

 

10.51

 

Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated June 27, 2008, relating to 200 South Seventh Street, Louisville, KY. (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed July 1, 2008 (Commission File Number: 0-24649))

 

 

 

10.52

 

Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated January 31, 2011, relating to 200 South Seventh Street, Louisville, KY (Incorporated by reference to Exhibit 10.66 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 (Commission File Number: 0-24649))

 

 

 

10.53

 

Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated July 31, 2013, relating to 200 South Seventh Street, Louisville, KY (Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (Commission File Number: 0-24649))

 

 

 

10.54

 

Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated January 15, 2014, as amended, relating to 200 South Seventh Street, Louisville, KY (Commission File Number: 0-24649))

 

 

 

10.55*

 

1995 Stock Option Plan (as amended to date) (Incorporated by reference to Registrant’s Form S-8 filed November 30, 2004 (Commission File Number: 333-120856))

 

 

 

10.56*

 

Form of Stock Option Agreement for Directors and Executive Officers (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 10-Q for the quarter ended December 31, 2004 (Commission File Number: 0-24649))

 

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Table of Contents

 

No.

 

Description

 

 

 

10.57*

 

2005 Stock Incentive Plan (Incorporated by reference to Form 8-K filed March 18, 2005 (Commission File Number: 0-24649))

 

 

 

10.58*

 

2005 Stock Incentive Plan Amendment Number 1 (Incorporated by reference to Exhibit 10.61 of Registrant’s Form 10-K filed March 6, 2009 (Commission File Number: 0-24649))

 

 

 

10.59*

 

2005 Stock Incentive Plan Amendment, as amended November 14, 2012 (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed November 19, 2012 (Commission File Number: 0-24649))

 

 

 

10.60*

 

Republic Bancorp, Inc. 401(k)/Profit Sharing Plan and Trust (Incorporated by reference to Form S-8 filed December 28, 2005 (Commission File Number: 0-24649))

 

 

 

10.61*

 

Republic Bancorp, Inc. 401(k) Retirement Plan, as Amended and Restated, effective April 1, 2011 (Incorporated by reference to Form 11-K filed June 28, 2012 (Commission File Number: 0-24649))

 

 

 

10.62*

 

Republic Bancorp, Inc. and subsidiaries Non-Employee Director and Key Employee Deferred Compensation and the Republic Bank & Trust Company Non-Employee Director and Key Employee Deferred Compensation Plan (as adopted November 18, 2004) (Incorporated by reference to Form S-8 filed November 30, 2004 (Commission File Number: 333-120857))

 

 

 

10.63*

 

Republic Bancorp, Inc. and Subsidiaries Non-Employee Director and Key Employee Deferred Compensation Plan Post-Effective Amendment No. 1 (Incorporated by reference to Form S-8 filed April 13, 2005 (Commission File Number: 333-120857))

 

 

 

10.64*

 

Republic Bancorp, Inc. and subsidiaries Non-Employee Director and Key Employee Deferred Compensation, as amended and restated as of March 16, 2005 (Incorporated by reference to Form 8-K filed March 18, 2005 (Commission File Number: 333-120857))

 

 

 

10.65*

 

Republic Bancorp, Inc. and subsidiaries Non-Employee Director and Key Employee Deferred Compensation as amended and restated as of March 19, 2008 (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 10-Q for the quarter ended March 31, 2008 (Commission File Number: 0-24649))

 

 

 

10.66

 

Junior Subordinated Indenture, Amended and Restated Trust Agreement, and Guarantee Agreement (Incorporated by reference to Exhibit 4.1 of Registrant’s Form 8-K filed August 19, 2005 (Commission File Number: 0-24649))

 

 

 

10.67*

 

Restricted Stock Award Agreement, as amended November 14, 2012 (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 10-K filed November 19, 2013 (Commission File Number: 0-24649))

 

 

 

10.68*

 

Cash Bonus Plan for Acquisitions, effective November 7, 2012 (Incorporated by reference to Exhibit 10.3 of Registrant’s Form 10-Q for the quarter ended December 31, 2012 (Commission File Number: 0-24649))

 

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Table of Contents

 

No.

 

Description

 

 

 

10.69

 

Purchase and Assumption Agreement — Whole Bank; All Deposits, among the Federal Deposit Insurance Corporation, receiver of Tennessee Commerce Bank, Franklin, Tennessee, the Federal Deposit Insurance Corporation and Republic Bank & Trust Company, dated as of January 27, 2012. (Incorporated by reference to Exhibit 2.1 of Registrant’s Form 8-K filed February 1, 2012 (Commission File Number: 0-24649))

 

 

 

10.70

 

Split Dollar Insurance Policy with Citizens Fidelity Bank and Trust Company as the Trustee of the Bernard Trager Irrevocable Trust, dated December 14, 1989, as amended August 8, 1994 (Incorporated by reference to Exhibit 10.70 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 (Commission File Number: 33-77324))

 

 

 

21

 

Subsidiaries of Republic Bancorp, Inc.

 

 

 

23

 

Consent of Independent Registered Public Accounting Firm

 

 

 

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 2003

 

 

 

101***

 

Interactive data files: (i) Consolidated Balance Sheets at December 31, 2013 and December 31, 2012, (ii) Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2013, 2012 and 2011, (iii) Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 and (v) Notes to Consolidated Financial Statements.

 


*              Denotes management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K pursuant to Item 15(b).

 

**           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.

 

***         Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

238