Republic Bank & Trust

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Republic Bancorp, Inc. (“Republic” or the “Company”) concluded 2013 with annual net income of $25.4 million resulting in Diluted Earnings per Class A Common share of $1.22. Return on average assets (“ROA”) and return on average equity (“ROE”) in 2013 were 0.75% and 4.65%, respectively. Net income for the fourth quarter of 2013 was $1.3 million resulting in Diluted Earnings per Class A Common Share of $0.07 with ROA and ROE of 0.16% and 0.98%, respectively.

Steve Trager, Chairman and CEO of Republic, made the following comment in regards to that announcement:

“This past year was challenging in many regards, but we managed to maintain beneficial returns despite industry-wide margin compression. With our industry-strong credit quality and capital levels, we remain well-positioned to take advantage of emerging opportunities in an ever-changing marketplace. While FDIC-assisted bank acquisitions did not materialize for us in 2013, growing our Bank and leveraging our capital through acquisition(s) remains a high priority for our Company in 2014.”

Republic Bancorp, Inc.(NASDAQ: RBCAA), headquartered in Louisville, Kentucky, is the holding company for Republic Bank & Trust Company (“RB&T”) and Republic Bank (“RB”), (collectively the “Bank”).

Results of Operations for the Fourth Quarter of 2013 Compared to the Fourth Quarter of 2012

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

Net income from Core Banking was $5.1 million for the fourth quarter of 2013, a decrease of $3.7 million from the fourth quarter of 2012. In general, the decline in net income at the Core Bank was largely attributable to lower net interest income and lower Mortgage Banking income, which was partially offset by improvement in the Core Bank’s provision for loan losses.

Net interest income within the Core Bank for the fourth quarter of 2013 was $26.7 million compared to $30.5 million for the fourth quarter of 2012. The Core Bank’s net interest margin for the fourth quarter of 2013 was 3.27% compared to 3.69% for the fourth quarter of 2012. As expected, the Core Bank’s net interest income continued to benefit from its 2012 FDIC-assisted acquisitions, although to a lesser degree than the fourth quarter of 2012. Overall, the total contribution to net interest income from the Bank’s Tennessee and Minnesota portfolios for the fourth quarter of 2013 was $2.4 million, a decline of $1.0 million from the fourth quarter of 2012. The decline in net interest income from the Tennessee and Minnesota markets was due to a $42 million decrease in their combined portfolios from year-end 2012, as the Bank’s Special Assets group continued to successfully reduce its problem credits from the 2012 FDIC-assisted acquisitions. For the fourth quarter of 2013, the Bank’s 2012 FDIC-assisted acquisitions added approximately 18 basis points to the Core Bank’s net interest margin, as compared to a 20 basis point contribution for the fourth quarter of 2012.

Within the Core Bank’s historical footprint, net interest income was lower during the quarter as a result of the reinvestment of strong cash in-flows during the previous twelve months into lower yielding assets. In addition, the Core Bank’s net interest income also experienced a $732,000 decline from its mortgage warehouse lending product, as a slowdown in consumer refinance activity of 1-4 single family mortgages contributed to a decrease in demand for the product. Management believes that maintaining current net interest income and net interest margin levels will remain a challenge for its Core Bank operations, as well as the banking industry as a whole.

The Core Bank’s provision for loan losses was $552,000 for the fourth quarter of 2013 reflecting a positive $1.1 million, or 67%, decrease from the fourth quarter of 2012. Approximately $281,000 of the Core Bank’s provision expense for the fourth quarter of 2013 related to its purchased credit-impaired loans acquired as part of its 2012-FDIC assisted acquisitions compared to $213,000 for the same quarter in the prior year. A significant portion of the Core Bank’s provision for loan losses for the fourth quarter of 2012 related to charges associated with troubled debt restructurings.

The following chart highlights Core Banking credit quality at year end, which continues to place it among the best in its peer group:

Non-interest income for the Core Bank was $7.0 million for the fourth quarter of 2013 compared to $9.1 million for the fourth quarter of 2012. The decline in non-interest income was primarily due to a decrease of $2.1 million in Mortgage Banking income, as long-term interest rates increased substantially during 2013, dramatically reducing consumer demand for long-term secondary market mortgage loans. As a result, the Core Bank’s pipeline of secondary market loan applications, in which the consumer had locked the rate on his or her loan, declined to $4 million at December 31, 2013 compared to $29 million at December 31, 2012. With long-term mortgage interest rates forecasted to remain near or higher than current levels, management anticipates Mortgage Banking income will likely remain at or below its fourth quarter 2013 level for the foreseeable future.

The Core Bank’s fourth quarter 2013 non-interest expenses increased $1.5 million from the fourth quarter of 2012 to $26.1 million. The increase primarily related to the following:

• Salaries and benefits expense increased $253,000 for the fourth quarter of 2013 compared to 2012. The Core Bank incurred a $932,000 benefit during the fourth quarter of 2013, as the Company further reduced its incentive compensation accruals to be in-line with its revised payout estimates for 2013 bonuses. By comparison, the Core Bank recorded a credit to salary expense for reduced incentive compensation accruals of $1.3 million during the fourth quarter of 2012.
• Bank franchise tax expense increased $283,000 for the quarter in direct correlation to the increase in the Bank’s five-year average capital.
• Other non-interest expense categories that experienced meaningful fluctuations included “audit and professional fees” and “core deposit intangible amortization,” which increased from the fourth quarter of 2012 by $258,000 and $210,000, respectively. The overall increase in audit and professional fees primarily related to valuations performed on certain assets from the 2012-FDIC assisted acquisitions and additional services for the Bank’s warehouse lending division and correspondent lending initiative. Amortization expense related to the Company’s core deposit intangible from its Minnesota acquisition was accelerated during the fourth quarter of 2013, consistent with the Company’s decision to close its sole banking center in the Minnesota market.

Republic Processing Group (“RPG”)

RPG, which derives substantially all of its revenues during the first and second quarters of the year, historically operates at a net loss during the third and fourth quarters, as the Company prepares for the upcoming tax season. For the fourth quarter of 2013, RPG recorded a net loss of $3.7 million compared to a net loss of $2.1 million for the fourth quarter of 2012. RPG’s net loss during the fourth quarter of 2013 was significantly impacted by higher legal expense and higher state income tax expense.

Overall, RPG experienced a $1.0 million increase in legal expenses during the fourth quarter of 2013, which was primarily driven by its third-party arbitration with Jackson Hewitt Tax Services. RPG’s third party arbitration with Jackson Hewitt was concluded during the fourth quarter of 2013 and the Company does not anticipate any additional future legal expenses associated with this matter. With the matter resolved, the Company entered into a new two-year agreement with Jackson Hewitt that begins in January 2014 and is expected to increase RPG’s 2014 and 2015 annual net revenues by approximately 12% over its 2013 net revenue. Additional overhead expenses with the new contract are expected to be minimal.

In addition to the higher legal expenses during the quarter, RPG also experienced a notable increase in income tax expense for the fourth quarter of 2013. The increase in income tax expenses for the quarter was related to additional 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 all of the Company’s state income tax exposure outside of its geographic footprint during those tax years.

Conclusion

“While everyone at Republic is proud of the Company’s successful history, all businesses must continue to challenge everything they do and how they do it in order to thrive. These on-going self-evaluations are both necessary and vital for the long-term health and well-being of any company. Looking ahead to 2014, the Company has implemented several measures on both the revenue and expense sides of the ledger intended to enhance earnings.

One of our new initiatives for 2014 includes a plan to introduce a correspondent lending channel in the first quarter to partner with our relatively new and successful mortgage warehouse lending division. If successful, the new correspondent lending channel is expected to provide a supplement to our existing branch network as a source of new loan growth for the Bank. Additionally, the Bank began offering a new conservatively underwritten, 100%-financing residential real estate loan product during the fourth quarter of 2013, which we expect to grow to $40 million in outstanding balances by July 2014.

On the expense side of the ledger, we implemented several initiatives during the fourth quarter in order to reduce our non-interest expenses. More specifically we implemented a modest reduction to our workforce during the fourth quarter of 2013, with the expectation of saving approximately $2.3 million in salaries and benefits on an annual basis going forward. In addition, we announced plans to close three low-traffic banking centers during the first quarter of 2014, while we look to deploy our resources into locations that can provide the Bank greater access to clients. The closing of the three low-traffic banking centers is expected to save the Company nearly $1 million in overhead expenses on an annual basis.

Overall, we remain excited about our position in the industry as a very well-capitalized, high performing financial institution poised to take advantage of opportunities as they arise. We are committed to appropriately managing risk, while achieving long-term returns for our shareholders. As always, ‘We were here for you yesterday. We are here for you today. We will be here for you tomorrow,’” concluded Steve Trager.

Republic Bancorp, Inc. currently has 43 banking centers and is the parent company of Republic Bank & Trust Company (“RB&T”) and Republic Bank (“RB”). RB&T has 34 banking centers in 12 Kentucky communities - Covington, Crestwood, Elizabethtown, Florence, Frankfort, Georgetown, Independence, Lexington, Louisville, Owensboro, Shelbyville and Shepherdsville; three banking centers in southern Indiana – Floyds Knobs, Jeffersonville and New Albany; and two banking centers in Tennessee – Cool Springs (Franklin) and Green Hills (Nashville). RB has banking centers in Hudson, Port Richey and Temple Terrace, Florida as well as Blue Ash (Cincinnati), Ohio. Republic offers internet banking at www.republicbank.com. Republic has $3.4 billion in assets and is headquartered in Louisville, Kentucky. Republic’s Class A Common Stock is listed under the symbol “RBCAA” on the NASDAQ Global Select Market.

We were here for you yesterday. We are here for you today. We will be here for you tomorrow.^®

Forward-Looking Statements

This release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, future acquisitions, future challenges of growing or maintaining non interest income, net interest income and net interest margin in the Company’s Core Bank operations, the future impact of expense reduction initiatives, the future growth and performance of Republic Processing Group, current expectations and assumptions regarding its business, the economy and other future conditions. Forward-looking statements can be identified by the use of the words “expect,” “anticipate,” “believe,” “intend,” “could” and “should,” and other words of similar meaning. These forward-looking statements express management’s current expectations or forecasts of future events and, by their nature, are subject to risks and uncertainties and there are a number of factors that could cause actual results to differ materially from those in such statements.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual results may differ materially from those contemplated by the forward-looking statements. The Company cautions you therefore against relying on any of these forward-looking statements, which speak only as of the date on which they are made. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include factors disclosed from time to time in the Company’s filings with the U.S. Securities and Exchange Commission, including those factors set forth as “Risk Factors” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2012 and quarterly report on Form 10-Q for the period ended June 30, 2013. The Company undertakes no obligation to update any forward-looking statements. These forward-looking statements are made only as of the date of this release, and the Company undertakes no obligation to release revisions to these forward-looking statements to reflect events or conditions after the date of this release.

Republic Bancorp, Inc. Financial Information
Fourth Quarter 2013 Earnings Release (continued)

Segment Data:

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 and RB, the RCS division is piloting short-term consumer credit products.

For the projected near-term, as these 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, Refund Anticipation Loan (“RAL”) fees and net Refund Transfer (“RT”) fees provided the majority of the revenue for RPG. In 2013, net RT fees have provided, and are expected to continue to provide 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 in the Company’s most recent Annual Report on Form 10-K. 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 fair value.

Segment information for the three months and years ended December 31, 2013 and 2012 follows:

Republic Bancorp, Inc. Financial Information
Fourth Quarter 2013 Earnings Release (continued)

(1) – The amount of loan fee income included in total interest income was $2.1 million and $2.4 million for the quarters ended December 31, 2013 and 2012. The amount of loan fee income included in total interest income was $10.9 million and $50.8 million for the years ended December 31, 2013 and 2012.

The amount of loan fee income included in total interest income per quarter was as follows: $2.1 million (quarter ended December 31, 2013), $3.3 million (quarter ended September 30, 2013), $3.0 million (quarter ended June 30, 2013), $2.6 million (quarter ended March 31, 2013), and $2.4 million (quarter ended December 31, 2012).

(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.