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Republic Bancorp Inc. 10-Q Summary: Period Ended September 30, 2010

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2010, for Republic Bancorp, Inc., a bank holding company headquartered in Louisville, Kentucky. The Company operates through three primary segments: Traditional Banking (retail and commercial banking), Tax Refund Solutions (TRS) (Refund Anticipation Loans and electronic refund services), and Mortgage Banking. The TRS segment is highly seasonal, with the majority of its revenue generated in the first quarter of the fiscal year.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income for the nine months ended September 30, 2010, increased 58% to $60.3 million compared to $38.3 million in the prior year period. This was primarily driven by the TRS segment, which contributed $46.9 million in net income for the nine-month period.
• TRS Performance: The TRS segment recorded a provision for loan losses of $8.5 million for the nine months ended September 30, 2010, a significant decrease from $19.4 million in the same period in 2009. This improvement was due to better underwriting criteria and a lower loss rate (0.37% vs. 0.93% in 2009).
• Deposit Contraction: Total deposits decreased by $865 million from December 31, 2009, to September 30, 2010. This decline was largely due to the runoff of $890 million in brokered certificates of deposit that were acquired in late 2009 specifically to fund the 2010 tax season RAL program.
• Net Interest Margin Compression: The Traditional Banking segment's net interest margin declined 30 basis points to 3.49% for the quarter, attributed to loan paydowns and reinvestment of proceeds into lower-yielding short-term assets.

Guidance, Outlook, and Risks

• IRS Debt Indicator (DI) Elimination: The IRS announced it will no longer provide the Debt Indicator (DI) starting with the 2011 tax season. The DI was a critical underwriting tool for RALs. Management expects this will lead to higher loan loss provisions in 2011. To mitigate this, the Company plans to increase pricing, tighten underwriting standards, and reduce maximum RAL amounts, potentially reducing RAL volume to one-third of 2010 levels.
• Regulatory Matters: The Company received a "Needs to Improve" rating on its 2009 Community Reinvestment Act (CRA) evaluation due to alleged Regulation B violations regarding spousal obligations in commercial lending. The FDIC has referred the matter for administrative handling, and the Company expects further corrective actions.
• Asset Quality: Non-performing loans decreased to 1.69% of total loans. However, the Company holds $6.8 million in private label mortgage-backed securities with elevated credit risk. Further deterioration in economic conditions could result in additional impairment charges up to the full amortized cost of these securities.
• Liquidity: The Company maintains a loan-to-deposit ratio of 133% (excluding brokered deposits). Liquidity risk is heightened during the first quarter due to RAL funding requirements. The Company has $185 million in available FHLB borrowing capacity and $216 million in unsecured lines of credit.

Investor Verification Checklist

• TRS Loss Rates: Verify the actual loss rate on RALs for the 2010 tax season against the 0.37% reported to ensure the provision reserve is adequate for future seasons without the DI.
• Brokered Deposit Runoff: Confirm the stability of the remaining deposit base and the cost of funds for the upcoming 2011 tax season funding strategy.
• Private Label Securities: Review the specific credit quality and valuation of the $6.8 million private label mortgage-backed securities portfolio for potential future write-downs.
• Regulatory Compliance: Monitor the status of the FDIC's "Needs to Improve" CRA rating and any resulting supervisory orders or penalties.
• Overdraft Fee Revenue: Assess the impact of Regulation E "opt-in" rules on future service charge revenue, as the Company noted a negative impact in the third quarter.