Attached files

file filename
EX-32 - EXHIBIT 32 - REPUBLIC BANCORP INC /KY/a6484669ex32.htm
EX-10.2 - EXHIBIT 10.2 - REPUBLIC BANCORP INC /KY/a6484669ex10-2.htm
EX-31.2 - EXHIBIT 31.2 - REPUBLIC BANCORP INC /KY/a6484669ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - REPUBLIC BANCORP INC /KY/a6484669ex31-1.htm
EX-10.1 - EXHIBIT 10.1 - REPUBLIC BANCORP INC /KY/a6484669ex10-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-24649

REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
Kentucky 61-0862051
(State of other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
 
601 West Market Street, Louisville, Kentucky 40202
(Address of principal executive offices)  (Zip Code)
 
(502) 584-3600
 (Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           þ     Yes   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).

o Yes   o    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
  Large accelerated filer     o Accelerated filer                         þ  
  Non-accelerated filer       o Smaller reporting company       o  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes   þ    No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of October 26, 2010, was 18,627,220 and 2,308,101, respectively.

 
 

 

TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION
   
Item 1.
Financial Statements.
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
   
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
   
Item 4.
Controls and Procedures.
   
   
   
PART II – OTHER INFORMATION
   
Item 1.
Legal Proceedings.
   
Item 1A.
Risk Factors.
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
   
Item 4
(Removed and Reserved)
   
Item 6.
Exhibits.
   
   
 
SIGNATURES
 
 
 
 
2

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) 


   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS:
           
             
Cash and cash equivalents
  $ 171,024     $ 1,068,179  
Securities available for sale
    561,483       416,311  
Securities to be held to maturity (fair value of $39,695 in 2010 and $51,135 in 2009)
    39,351       50,924  
Mortgage loans held for sale
    5,783       5,445  
Loans, net of allowance for loan losses of $24,566 and $22,879 (2010 and 2009)
    2,132,764       2,245,353  
Federal Home Loan Bank stock, at cost
    26,274       26,248  
Premises and equipment, net
    38,171       39,380  
Goodwill
    10,168       10,168  
Other assets and accrued interest receivable
    50,751       56,760  
                 
TOTAL ASSETS
  $ 3,035,769     $ 3,918,768  
                 
LIABILITIES
               
                 
Deposits
               
    Non interest-bearing
  $ 328,083     $ 318,275  
    Interest-bearing
    1,409,019       2,284,206  
Total deposits
    1,737,102       2,602,481  
                 
Securities sold under agreements to repurchase and other short-term borrowings
    286,510       299,580  
Federal Home Loan Bank advances
    565,424       637,607  
Subordinated note
    41,240       41,240  
Other liabilities and accrued interest payable
    34,668       21,840  
                 
Total liabilities
    2,664,944       3,602,748  
                 
STOCKHOLDERS' EQUITY
               
                 
Preferred stock, no par value
    -       -  
Class A Common Stock and Class B Common Stock, no par value
    4,944       4,917  
Additional paid in capital
    129,429       126,376  
Retained earnings
    229,552       178,944  
Accumulated other comprehensive income
    6,900       5,783  
                 
Total stockholders' equity
    370,825       316,020  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 3,035,769     $ 3,918,768  
                 

See accompanying footnotes to consolidated financial statements.
 
 
3

 
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except per share data) 

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
INTEREST INCOME:
                       
                         
Loans, including fees
  $ 31,021     $ 33,413     $ 146,212     $ 159,136  
Taxable investment securities
    3,788       4,441       11,252       14,283  
Tax exempt investment securities
    -       5       11       17  
Federal Home Loan Bank stock and other
    461       406       1,911       1,692  
Total interest income
    35,270       38,265       159,386       175,128  
                                 
INTEREST EXPENSE:
                               
                                 
Deposits
    2,946       3,630       10,366       18,584  
Securities sold under agreements to repurchase and
                               
    other short-term borrowings
    262       238       746       819  
Federal Home Loan Bank advances
    4,978       6,027       15,014       17,371  
Subordinated note
    632       634       1,883       1,881  
Total interest expense
    8,818       10,529       28,009       38,655  
                                 
NET INTEREST INCOME
    26,452       27,736       131,377       136,473  
                                 
Provision for loan losses
    (1,804 )     1,427       17,966       28,778  
                                 
NET INTEREST INCOME AFTER PROVISION
                               
    FOR LOAN LOSSES
    28,256       26,309       113,411       107,695  
                                 
NON INTEREST INCOME:
                               
                                 
Service charges on deposit accounts
    3,847       4,990       11,728       14,404  
Electronic refund check fees
    293       137       58,513       25,272  
Net RAL securitization income
    8       26       228       498  
Mortgage banking income
    1,679       1,667       4,094       9,358  
Debit card interchange fee income
    1,213       1,321       3,745       3,792  
                      -          
Total impairment losses on investment securities
    -       (850 )     (126 )     (5,871 )
Loss recognized in other comprehensive income
    -       -       -       -  
   Net impairment loss recognized in earnings
    -       (850 )     (126 )     (5,871 )
                                 
Other
    783       597       1,822       1,844  
Total non interest income
    7,823       7,888       80,004       49,297  
                                 
NON INTEREST EXPENSES:
                               
                                 
Salaries and employee benefits
    13,399       12,652       43,743       39,815  
Occupancy and equipment, net
    5,114       5,474       16,585       16,811  
Communication and transportation
    887       1,056       4,075       4,000  
Marketing and development
    722       722       10,116       12,362  
FDIC insurance expense
    586       999       2,485       4,053  
Bank franchise tax expense
    642       685       2,432       1,957  
Data processing
    660       766       1,978       2,315  
Debit card interchange expense
    299       702       1,234       2,070  
Supplies
    219       463       1,597       1,739  
Other real estate owned expense
    562       82       1,365       2,065  
Charitable contributions
    282       343       6,064       1,085  
FHLB advance prepayment expense
    -       -       1,531       -  
Other
    1,750       1,795       7,701       7,663  
Total non interest expenses
    25,122       25,739       100,906       95,935  
                                 
INCOME BEFORE INCOME TAX EXPENSE
    10,957       8,458       92,509       61,057  
INCOME TAX EXPENSE
    3,647       2,797       32,174       22,770  
NET INCOME
  $ 7,310     $ 5,661     $ 60,335     $ 38,287  
                                 
 
(continued)
 
 
4

 
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) (continued)
(in thousands, except per share data)


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
OTHER COMPREHENSIVE INCOME, NET OF TAX
                       
                         
Unrealized gain (loss) on securities available for sale, net
  $ (385 )   $ 1,606     $ 693     $ (130 )
Other-than-temporary-impairment on available for sale
                               
    securities recorded on other comprehensive income, net
    -       -       -       1,800  
Change in unrealized losses on securities available for sale for
                         
which a portion of an other-than-temporary impairment has
                         
    been recognized in earnings
    81       -       506       -  
Reclassification adjustment for losses (gains) realized in income
    -       553       (82 )     3,816  
Other comprehensive income (loss)
    (304 )     2,159       1,117       5,486  
                                 
COMPREHENSIVE INCOME
  $ 7,006     $ 7,820     $ 61,452     $ 43,773  
                                 
BASIC EARNINGS PER SHARE:
                               
                                 
Class A Common Stock
  $ 0.35     $ 0.27     $ 2.90     $ 1.85  
Class B Common Stock
    0.34       0.26       2.86       1.82  
                                 
DILUTED EARNINGS PER SHARE:
                               
                                 
Class A Common Stock
  $ 0.35     $ 0.27     $ 2.89     $ 1.84  
Class B Common Stock
    0.34       0.26       2.85       1.80  
                                 
                                 
See accompanying footnotes to consolidated financial statements.
                         
                                 
 
 
5

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED) 


   
Common Stock
                     
Accumulated
       
   
Class A
   
Class B
         
Additional
         
Other
   
Total
 
   
Shares
   
Shares
         
Paid In
   
Retained
   
Comprehensive
   
Stockholders'
 
(in thousands, except per share data)
 
Outstanding
   
Outstanding
   
Amount
   
Capital
   
Earnings
   
Income
   
Equity
 
                                           
Balance, January 1, 2010
    18,499       2,309     $ 4,917     $ 126,376     $ 178,944     $ 5,783     $ 316,020  
                                                         
Net income
    -       -       -       -       60,335       -       60,335  
                                                         
Net change in accumulated other comprehensive
                                                 
   income
    -       -       -       -       -       1,117       1,117  
                                                         
Dividend declared Common Stock:
                                                       
         Class A ($0.418 per share)
    -       -       -       -       (7,759 )     -       (7,759 )
         Class B ($0.380 per share)
    -       -       -       -       (877 )     -       (877 )
                                                         
Stock options exercised, net of shares redeemed
    137       -       31       2,666       (814 )     -       1,883  
                                                         
Repurchase of Class A Common Stock
    (11 )     -       (4 )     (106 )     (277 )     -       (387 )
                                                         
Conversion of Class B Common Stock to Class A
                                                 
   Common Stock
    1       (1 )     -       -       -       -       -  
                                                         
Notes receivable on Common Stock, net of
                                                       
   cash payments
    -       -       -       (26 )     -       -       (26 )
                                                         
Deferred director compensation expense -
                                                       
   Company Stock
    1       -       -       118       -       -       118  
                                                         
Stock based compensation expense
    -       -       -       401       -       -       401  
                                                         
Balance, September 30, 2010
    18,627       2,308     $ 4,944     $ 129,429     $ 229,552     $ 6,900     $ 370,825  
                                                         

See accompanying footnotes to consolidated financial statements.

 
6

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (in thousands) 

   
2010
   
2009
 
OPERATING ACTIVITIES:
           
Net income
  $ 60,335     $ 38,287  
Adjustments to reconcile net income to net cash provided
               
    by operating activities:
               
      Depreciation, amortization and accretion, net
    8,719       8,615  
      Provision for loan losses
    20,366       28,778  
      Net gain on sale of mortgage loans held for sale
    (4,130 )     (9,814 )
      Origination of mortgage loans held for sale
    (196,853 )     (507,757 )
      Proceeds from sale of mortgage loans held for sale
    200,645       520,272  
      Net realized recovery of mortgage servicing rights
    -       (1,255 )
      Increase in RAL securitization residual
    (228 )     (498 )
      Paydown of trading securities
    228       498  
      Net realized impairment of mortgage servicing rights
    157       -  
      Net realized loss on sales, calls and impairment of securities
    126       8,640  
      Net gain on sale of other real estate owned
    (135 )     (7 )
      Writedowns of other real estate owned
    993       1,873  
      Deferred director compensation expense - Company Stock
    118       128  
      Stock based compensation expense
    401       539  
      Net change in other assets and liabilities:
               
         Accrued interest receivable
    18       2,769  
         Accrued interest payable
    (659 )     (3,881 )
         Other assets
    5,009       (10,128 )
         Other liabilities
    6,566       (5,626 )
              Net cash provided by operating activities
    101,676       71,433  
                 
INVESTING ACTIVITIES
               
Purchases of securities available for sale
    (563,688 )     (427,600 )
Purchases of securities to be held to maturity
    (685 )     (18,525 )
Purchases of Federal Home Loan Bank stock
    (26 )     (1,166 )
Proceeds from calls, maturities and paydowns of securities available for sale
    424,804       853,136  
Proceeds from calls, maturities and paydowns of securities to be held to maturity
    12,259       4,000  
Proceeds from sales of other real estate owned
    7,421       6,365  
Net change in loans
    82,494       (16,665 )
Purchases of premises and equipment
    (3,342 )     (2,885 )
              Net cash provided by/(used in) investing activities
    (40,763 )     396,660  
                 
FINANCING ACTIVITIES
               
Net change in deposits
    (865,379 )     (1,064,936 )
Net change in securities sold under agreements to repurchase and other short-term borrowings
    (13,070 )     (58,171 )
Payments on Federal Home Loan Bank advances
    (117,183 )     (50,545 )
Proceeds from Federal Home Loan Bank advances
    45,000       235,000  
Repurchase of Common Stock
    (387 )     (867 )
Net proceeds from Common Stock options exercised
    1,883       1,692  
Cash dividends paid
    (8,932 )     (7,663 )
              Net cash used in financing activities
    (958,068 )     (945,490 )
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (897,155 )     (477,397 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    1,068,179       616,303  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 171,024     $ 138,906  
                 
 
(continued)

 
7

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (in thousands)


   
2010
   
2009
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
           
             
Cash paid during the period for:
           
    Interest
  $ 28,758     $ 42,536  
    Income taxes
    19,905       24,029  
                 
                 
SUPPLEMENTAL NONCASH DISCLOSURES
               
                 
Transfers from loans to real estate acquired in settlement of loans
  $ 9,703     $ 3,637  
                 

See accompanying footnotes to consolidated financial statements.

 
8

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – SEPTEMBER 30, 2010 AND 2009 (UNAUDITED) AND DECEMBER 31, 2009


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries: Republic Bank & Trust Company (“RB&T”) and Republic Bank (collectively referred together with RB&T as the “Bank”), Republic Funding Company and Republic Invest Co. Republic Invest Co. includes its subsidiary, Republic Capital LLC. The consolidated financial statements also include the wholly-owned subsidiaries of RB&T: Republic Financial Services, LLC, TRS RAL Funding, LLC and Republic Insurance Agency, LLC. Republic Bancorp Capital Trust (“RBCT”) is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc. All companies are collectively referred to as “Republic” or the “Company.” All significant intercompany balances and transactions are eliminated in consolidation.

Republic operates 44 banking centers, primarily in the retail banking industry, and conducts its operations predominately in metropolitan Louisville, Kentucky, central Kentucky, northern Kentucky, southern Indiana, metropolitan Tampa, Florida, metropolitan Cincinnati, Ohio and through an Internet banking delivery channel. Republic’s consolidated results of operations are primarily dependent upon net interest income, which represents the difference between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning assets represent investment securities and real estate mortgage, commercial and consumer loans. Interest-bearing liabilities primarily consist of interest-bearing deposit accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources.

Other sources of traditional 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.

Republic’s operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, marketing and development expenses, Federal Deposit Insurance Corporation (“FDIC”) insurance expense, bank franchise tax expense, data processing, debit card interchange expense and other general and administrative costs. Republic’s results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory agencies.

Republic, through its Tax Refund Solutions (“TRS”) segment, is one of a limited number of financial institutions which facilitates the payment of federal and state tax refunds through third party tax-preparers located throughout the U.S., as well as tax-preparation software providers. The Company facilitates the payment of these tax refunds through three primary products: Electronic Refund Checks (“ERCs”), Electronic Refund Deposits (“ERDs”) and Refund Anticipation Loans (“RALs”). Substantially all of the business generated by TRS occurs in the first quarter of the year. TRS traditionally operates at a loss during the second half of the year, during which the segment incurs costs preparing for the upcoming tax season.

ERCs/ERDs are products whereby a tax refund is issued to the taxpayer after the Company has received the refund from the federal or state government. There is no credit risk or borrowing cost for the Company 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 ERCs/ERDs are reported as non interest income under the line item “Electronic Refund Check fees.”

RALs are short-term consumer loans offered to taxpayers that are secured by the customer’s anticipated tax refund, which represents the source of repayment. The Company underwrites the RAL application through an automated credit review process utilizing information contained in the taxpayer’s tax return and the tax-preparer’s history. If the application is approved, the Company advances the amount of the refund due on the taxpayer’s return up to specified amounts less the loan fee due to the Company and, if requested by the taxpayer, the fees due for preparation of the return to the tax-preparer. As part of the RAL application process, each taxpayer signs an agreement directing the IRS to send the taxpayer’s refund directly to the Company. The refund received from the IRS is used by the Company to pay off the RAL. Any amount due the taxpayer above the amount of the RAL is remitted to the taxpayer once the refund is received by the Company. The funds advanced by the Company are generally repaid by the IRS within two weeks. The fees earned on RALs are reported as interest income under the line item “Loans, including fees.”

 
9

 
 
For additional discussion regarding TRS, see the following sections:

      Part I Item 1 “Financial Statements:”
o      Footnote 3 “Loans and Allowance for Loan Losses”
o      Footnote 10 “Segment Information”
o      Footnote 11 “Regulatory Matters”
      Part II Item 1A “Risk Factors”

Recently Issued Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements.” The update requires new disclosures including significant transfers in and out of Level 1 and Level 2 fair value measurements. Also, the ASU provides an update on the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The new guidance is effective for interim and annual periods beginning after December 15, 2009, except for the update on the reconciliation of Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The portion that is currently effective did not have an impact on the Company’s consolidated financial statements. The portion that is not yet effective is also not expected to have an impact on Company’s financial statements.
 
In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables, which for the Company includes loans and standby letters of credit. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for loan losses is to be disclosed by portfolio segment, while credit quality information, impaired loans and nonaccrual status are to be presented by class. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. The adoption of ASU 2010-20 is expected to result in additional quarterly and annual disclosures beginning in the fourth quarter of 2010.
 
Recent Legislative Developments
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”) was signed into law on July 21, 2010. Generally, the Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law. Uncertainty remains as to the ultimate impact of the Act, which could have an adverse impact on the financial services industry as a whole and on the Company’s business, results of operations and financial condition.

Reclassifications – Certain amounts presented in prior periods have been reclassified to conform to the current period presentation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in Republic’s Form 10-K for the year ended December 31, 2009.

 
10

 
 
2.    INVESTMENT SECURITIES

Securities available for sale:

The gross amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
 
   
Gross
   
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
September 30, 2010 (in thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
                         
U.S. Treasury securities and
                       
    U.S. Government agencies
  $ 176,868     $ 1,220     $ -     $ 178,088  
Private label mortgage backed and other
                               
    private label mortgage-related securities
    6,769       104       (1,509 )     5,364  
Mortgage backed securities - residential
    164,332       8,955       -       173,287  
Collateralized mortgage obligations
    202,898       1,879       (33 )     204,744  
Total securities available for sale
  $ 550,867     $ 12,158     $ (1,542 )   $ 561,483  
                                 
                                 
   
Gross
   
Gross
   
Gross
         
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2009 (in thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
                                 
U.S. Treasury securities and
                               
    U.S. Government agencies
  $ 48,000     $ 82     $ -     $ 48,082  
Private label mortgage backed and other
                               
    private label mortgage-related securities
    8,085       -       (2,184 )     5,901  
Mortgage backed securities - residential
    227,792       10,362       -       238,154  
Collateralized mortgage obligations
    123,536       765       (127 )     124,174  
Total securities available for sale
  $ 407,413     $ 11,209     $ (2,311 )   $ 416,311  
 
Mortgage backed Securities

At September 30, 2010, with the exception of the $5.4 million private label mortgage backed and other private label mortgage-related securities, all other mortgage backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”) and Fannie Mae (“FNMA”), institutions which the government has affirmed its commitment to support. At September 30, 2010, there were gross unrealized losses of $56,000 related to available for sale and held to maturity mortgage backed securities other than the private label mortgage backed and other private label mortgage-related 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 Company 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, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2010.

As mentioned throughout this filing, the Company’s mortgage backed securities portfolio includes private label mortgage backed and other private label mortgage-related securities with a fair value of $5.4 million which had net unrealized losses of approximately $1.5 million at September 30, 2010. As of September 30, 2010, the Company believes there is no further material credit loss component of other-than-temporary impairment (“OTTI”) in addition to that which has already been recorded. Additionally, the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.

 
11

 
 
Securities to be held to maturity:

The carrying value, gross unrecognized gains and losses, and fair value of securities to be held to maturity were as follows:
 
         
Gross
   
Gross
       
   
Carrying
   
Unrecognized
   
Unrecognized
   
Fair
 
September 30, 2010 (in thousands)
 
Value
   
Gains
   
Losses
   
Value
 
                         
U.S. Treasury securities and
                       
    U.S. Government agencies
  $ 4,190     $ 34     $ -     $ 4,224  
Obligations of states and political
                               
    subdivisions
    -       -       -       -  
Mortgage backed securities - residential
    2,140       122       -       2,262  
Collateralized mortgage obligations
    33,021       211       (23 )     33,209  
Total securities to be held to maturity
  $ 39,351     $ 367     $ (23 )   $ 39,695  
                                 
                                 
           
Gross
   
Gross
         
   
Carrying
   
Unrecognized
   
Unrecognized
   
Fair
 
December 31, 2009 (in thousands)
 
Value
   
Gains
   
Losses
   
Value
 
                                 
U.S. Treasury securities and
                               
    U.S. Government agencies
  $ 9,187     $ 90     $ -     $ 9,277  
Obligations of states and political
                               
    subdivisions
    384       38       -       422  
Mortgage backed securities - residential
    2,748       108       (1 )     2,855  
Collateralized mortgage obligations
    38,605       84       (108 )     38,581  
Total securities to be held to maturity
  $ 50,924     $ 320     $ (109 )   $ 51,135  
 
Sales of Securities Available for Sale

During the three and nine month periods ended September 30, 2010 and 2009, there were no sales or calls of securities available for sale.
 
 
12

 
 
 
Market Loss Analysis

Securities with unrealized losses at September 30, 2010 and December 31, 2009, 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
 
September 30, 2010 (in thousands)
 
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
                                     
U.S. Treasury securities and
                                   
    U.S. Government agencies
  $ -     $ -     $ -     $ -     $ -     $ -  
Private label mortgage backed and other
                                               
    private label mortgage-related securities
    -       -       4,529       (1,509 )     4,529       (1,509 )
Mortgage backed securities - residential,
                                               
   including Collateralized mortgage obligations
    20,782       (56 )     -       -       20,782       (56 )
                                                 
Total
  $ 20,782     $ (56 )   $ 4,529     $ (1,509 )   $ 25,311     $ (1,565 )
                                                 
   
Less than 12 months
   
12 months or more
   
Total
 
December 31, 2009 (in thousands)    
Fair Value
     
Unrealized Losses
     
Fair Value
     
Unrealized Losses
     
Fair Value
     
Unrealized Losses
 
                                                 
U.S. Treasury securities and
                                               
    U.S. Government agencies
  $ -     $ -     $ -     $ -     $ -     $ -  
Private label mortgage backed and other
                                               
    private label mortgage-related securities
    5,901       (2,184 )     -       -       5,901       (2,184 )
Mortgage backed securities - residential,
                                               
   including Collateralized mortgage obligations
    19,738       (64 )     12,093       (172 )     31,831       (236 )
                                                 
Total
  $ 25,639     $ (2,248 )   $ 12,093     $ (172 )   $ 37,732     $ (2,420 )
 
As of September 30, 2010, the Company’s security portfolio consisted of 154 securities, 8 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-backed and other securities, as discussed below.

The amortized cost and fair value of the investment securities portfolio by contractual maturity at September 30, 2010 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
 
September 30 2010, (in thousands)
 
Cost
   
Value
   
Value
   
Value
 
                         
Due in one year or less
  $ -     $ -     $ 495     $ 506  
Due from one year to five years
    170,874       172,094       1,198       1,204  
Due from five years to ten years
    5,994       5,994       2,497       2,514  
Private label mortgage backed and other
                               
    private label mortgage-related securities
    6,769       5,364       -       -  
Mortgage backed securities - residential
    164,332       173,287       2,140       2,262  
Collateralized mortgage obligations
    202,898       204,744       33,021       33,209  
Total
  $ 550,867     $ 561,483     $ 39,351     $ 39,695  
 
 
13

 
 
Other-than-temporary impairment (“OTTI”)

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

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

Nationally, residential real estate values have declined significantly since 2007. These declines in value, coupled with the reduced ability of certain homeowners to refinance or repay their residential real estate obligations, have led to elevated delinquencies and losses in residential real estate loans. Many of these loans have previously been securitized and sold to investors as private label mortgage backed and other private label mortgage-related securities. The Company owned and continues to own four private label mortgage backed and other private label mortgage-related securities with an amortized cost of $6.8 million at September 30, 2010. For one of these securities, the Company has fully reserved for its projected losses through OTTI charges. The Company has partially written off the principal associated with this security, as a portion of its losses were passed through by the servicer/trustee.

None of these private label securities are guaranteed by government agencies. Approximately $1.0 million (Securities 1 through 3 in the table below) of these securities is mostly backed by “Alternative A” first lien mortgage loans. The remaining $5.8 million (Security 4 in the table below) represents an asset backed security with an insurance “wrap” or guarantee. The average life of securities 1 through 3 is currently estimated to be 7 months. The average life of security 4 is currently estimated to be 5 years. Due to current market conditions, all of these assets remain extremely illiquid, and as such, the Company determined that these securities are Level 3 securities in accordance with FASB ASC topic 820, “Fair Value Measurements and Disclosures.” Based on this determination, the Company utilized an income valuation model (present value model) approach, in determining the fair value of these securities. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for these investments. See Footnote 6, “Fair Value” for additional discussion.

The following table presents a rollforward of the credit losses recognized in earnings for the three and nine month periods ended September 30, 2010:

 
 
 
14

 
 
 
    Three Months Ended    
Nine Months Ended
 
 (in thousands)
  September 30, 2010    
September 30, 2010
 
             
Beginning balance
  $ 13,115     $ 17,266  
Realized pass through of actual losses
    (2,304 )     (6,581 )
Amounts related to credit loss for which an other-than-
               
    temporary impairment was not previously recognized
    -       126  
Additions/Subtractions:
               
    Increases to the amount related to the credit loss for
               
    which other-than-temporary impairment was
               
    previously recognized
    -       -  
Ending balance, September 30, 2010
  $ 10,811     $ 10,811  
 
Further deterioration in economic conditions could cause the Company to record additional impairment charges related to credit losses of up to $6.8 million, which is the current gross amortized cost of the Company’s private label mortgage backed securities and other private label mortgage-related securities.

The following table details the total impairment loss related to “all other factors” recorded as a component of accumulated other comprehensive income for the Company’s private label mortgage backed and other private label mortgage-related securities as of September 30, 2010:
 
 
               
Gross
   
Cumulative
 
               
Unrealized
   
Credit
 
   
Amortized
   
Fair
   
Gains /
   
OTTI
 
 (in thousands)
 
Cost
   
Value
   
(Losses)
   
Losses
 
                         
Security 1
  $ -     $ -     $ -     $ (3,701 )
Security 2
    731       835       104       (3,329 )
Security 3
    220       134       (86 )     (1,766 )
Security 4
    5,818       4,395       (1,423 )     (2,015 )
  Total
  $ 6,769     $ 5,364     $ (1,405 )   $ (10,811 )


The credit ratings for the Company’s private label mortgage backed and other private label mortgage-related securities range from “imminent default” to “speculative” at September 30, 2010.

Pledged Investment Securities

Investment securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other purposes, as required or permitted by law are as follows:
 
 
(in thousands)
 
September 30, 2010
   
December 31, 2009
 
             
Carrying amount
  $ 406,673     $ 427,444  
Fair value
    406,881       427,444  
 
 
 
15

 

 
3.     LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio follows:
 
(in thousands)
 
September 30, 2010
   
December 31, 2009
 
             
Residential real estate
  $ 1,025,732     $ 1,097,311  
Commercial real estate
    638,763       641,451  
Real estate construction
    73,846       83,090  
Commercial
    98,701       104,274  
Consumer
    17,739       21,651  
Overdrafts
    1,072       2,006  
Home equity
    301,477       318,449  
                 
Total loans
    2,157,330       2,268,232  
Less: Allowance for loan losses
    24,566       22,879  
                 
Loans, net
  $ 2,132,764     $ 2,245,353  

Activity in the allowance for loan losses follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
                         
Allowance for loan losses at beginning of period
  $ 26,659     $ 19,886     $ 22,879     $ 14,832  
                                 
Charge offs - Traditional Banking
    (4,057 )     (2,588 )     (8,451 )     (5,114 )
Charge offs - Tax Refund Solutions
    -       -       (14,584 )     (31,179 )
  Total charge offs
    (4,057 )     (2,588 )     (23,035 )     (36,293 )
                                 
Recoveries - Traditional Banking
    238       186       636       650  
Recoveries - Tax Refund Solutions
    3,530       882       6,120       11,826  
  Total recoveries
    3,768       1,068       6,756       12,476  
                                 
Net loan charge offs/recoveries - Traditional Banking
    (3,819 )     (2,402 )     (7,815 )     (4,464 )
Net loan charge offs/recoveries - Tax Refund Solutions
    3,530       882       (8,464 )     (19,353 )
  Net loan charge offs/recoveries
    (289 )     (1,520 )     (16,279 )     (23,817 )
                                 
Provision for loan losses - Traditional Banking
    1,726       2,309       9,502       9,425  
Provision for loan losses - Tax Refund Solutions
    (3,530 )     (882 )     8,464       19,353  
  Provision for loan losses
    (1,804 )     1,427       17,966       28,778  
                                 
Allowance for loan losses at end of period
  $ 24,566     $ 19,793     $ 24,566     $ 19,793