Republic in Ky. Eager to Complete More FDIC-Assisted Deals

If its first failed bank acquisition is any indication, Republic Bancorp is well on its way to replace one of its recently extinguished revenue drivers.

The $3.34 billion-asset company reported last week that it had booked a $28 million bargain purchase gain from the late January purchase of Tennessee Commerce Bank in Franklin from the Federal Deposit Insurance Corp. 

The Louisville, Ky., company is late to the failed bank party, but it is already prepared to take on similar deals.

"Once you have one done, you have the experience and are hopefully even better at doing the next one," Steve Trager, Republic's president and CEO, said in an interview Friday. "It is hard to say what opportunities will arise, but I would be disappointed if we don't do more acquisitions over the next year."

Bargain purchase gains are accounting functions that occur when auditors compare the value of a failed bank's assets against the amount a company pays for them.

Tennessee Commerce had $1.2 billion in assets at the time of its failure, but Republic took on only $203.9 million. The company also assumed all of Tennessee Commerce's $1.15 billion in deposits in its deal with the FDIC.

Trager's eagerness to pursue more acquisitions is likely fueled by a blend of necessity and pent-up desire. The company stands to lose about $24.5 million in annual earnings as it winds down its refund-anticipation loan business.

After a terse battle with regulators, Republic relented late last year and agreed to stop offering the product following the 2012 tax season. Revenue from this year's tax season, however, was down from previous seasons. The tax business, which includes the loan product and refund check processing, earned $61.9 million in the first quarter, down 10% from a year earlier.
Republic attributed the decline to a "shift in consumer demand toward lower priced on-line tax preparation services and increased competition."

Largely fueled by its tax business and strong credit quality, Republic remained profitable throughout the economic downturn. The company earned $4.49 a share last year.

Ross Demmerle, an analyst at Hilliard Lyons, on Thursday raised his estimate for 2012 from $4.28 a share to $4.70 to include the bargain purchase gain. Demmerle says he expects Republic to earn $2.80 a share next year unless the company can find other deals.

"Hopefully, they can continue to find acquisitions. Otherwise, they are looking at a 40% decline in earnings," Demmerle said in an interview Friday. On Thursday, the company reported that its first-quarter earnings increased 15% from a year earlier, to $82.5 million.

Republic is well-positioned for more acquisitions. It had a tangible common equity ratio of 15.6% at March 31. The company's nonperforming assets made up 2.02% of total assets at the end of the first quarter. Republic, however, was unable to participate in failed bank acquisitions until earlier this year because such transactions require regulatory approval.

"I think they were champing at the bit to make acquisitions," Demmerle said.

Maybe a little, Trager admitted. "We are always looking to serve new people, so to some extent, it was frustrating," he said. "We would have been a good solution for a lot of banks that were out there and we weren't."

Although Republic is entering the failed bank space at a time when the flow of failures has slowed to a crawl, there are still deals to be had, said Lori Buerger, a lawyer at Schiff Hardin in Chicago. "It is clear to everyone that there is a slower pace of failures, but the number of banks on the troubled list is still so robust," she said.

Roughly 800 banks remain on the troubled bank list. "Even though the pace of failures is a whole lot slower than it was a year or two ago, there is still a whole lot of inventory out there," Buerger said.

Trager said he is looking for acquisitions to complement Republic's existing franchise, which includes Florida, Kentucky, Ohio and Tennessee. He said Florida is at the top of his list for failed bank acquisitions.

Competition has been intense for failed banks in the Sunshine State, but Trager said Republic might have an advantage because it prefers deals without loss-share arrangements. "Because our capital position allows us to do these without loss share, we think we are an attractive bidder," he said.

Buerger cautioned that banks need to be judicious in placing bids, regardless of their structures.

"It is incumbent to bid in a disciplined and well-informed way," she said.