UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2019March 31, 2020
or
☐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)
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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) |
Registrant’s telephone number, including area code: (502) 584-3600584-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common | RBCAA | The Nasdaq Stock Market |
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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
| Accelerated filer ☒ |
| Non-accelerated filer ☐ |
| Smaller reporting company ☐ |
Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of July 31, 2019,April 30, 2020, was 18,739,08618,696,620 and 2,207,626.2,199,851.
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4 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 68 | |
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Unregistered Sales of Equity Securities and Use of Proceeds. | ||
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2
GLOSSARY OF ABBREVIATIONS AND ACRONYMSTERMS
The acronyms and terms identified in alphabetical order below are used throughout this Form 10-Q. You may find it helpful to refer to this page as you read this report.
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| Definition | ||||
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ACH |
| Automated Clearing House | ||||||||
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ACLC |
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ACLL |
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ACLS | Allowance for Credit Losses on Securities | |||||||||
AFS |
| Available for Sale |
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AOCI |
| Accumulated Other Comprehensive Income |
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ASC |
| Accounting Standards Codification |
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ASU |
| Accounting Standards Update |
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Basic EPS |
| Basic earnings per Class A Common Share |
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BOLI |
| Bank Owned Life Insurance |
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BPO |
| Brokered Price Opinion |
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C&D |
| Construction and Development |
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C&I |
| Commercial and Industrial | ||||||||
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CECL |
| Current Expected Credit Loss |
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CMO |
| Collateralized Mortgage Obligation |
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3
PART I — FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)
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| June 30, |
| December 31, |
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| 2019 |
| 2018 |
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ASSETS |
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Cash and cash equivalents | $ | 473,779 |
| $ | 351,474 |
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Available-for-sale debt securities |
| 380,356 |
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| 475,738 |
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Held-to-maturity debt securities (fair value of $64,433 in 2019 and $64,858 in 2018) |
| 63,902 |
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| 65,227 |
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Equity securities with readily determinable fair value |
| 3,254 |
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| 2,806 |
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Mortgage loans held for sale, at fair value |
| 13,883 |
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| 8,971 |
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Reverse mortgage loans held for sale, at the lower of cost or fair value |
| 12,457 |
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Consumer loans held for sale, at the lower of cost or fair value |
| 37,609 |
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| 12,838 |
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Loans held for sale in connection with sale of banking centers, at the lower of cost or fair value |
| 111,745 |
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Loans (loans carried at fair value of $1,369 in 2019 and $1,922 in 2018) |
| 4,410,669 |
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| 4,148,227 |
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Allowance for loan and lease losses |
| (45,983) |
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| (44,675) |
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Loans, net |
| 4,364,686 |
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| 4,103,552 |
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Federal Home Loan Bank stock, at cost |
| 32,242 |
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| 32,067 |
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Premises and equipment, net |
| 42,647 |
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| 43,126 |
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Premises, held for sale |
| 1,552 |
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| 1,694 |
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Right-of-use assets |
| 37,450 |
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Goodwill |
| 16,300 |
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| 16,300 |
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Other real estate owned |
| 1,095 |
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| 160 |
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Bank owned life insurance |
| 65,642 |
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| 64,883 |
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Other assets and accrued interest receivable |
| 64,535 |
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| 61,568 |
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TOTAL ASSETS | $ | 5,723,134 |
| $ | 5,240,404 |
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LIABILITIES |
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Deposits: |
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Noninterest-bearing | $ | 1,003,793 |
| $ | 1,003,969 |
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Interest-bearing |
| 2,557,127 |
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| 2,452,176 |
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Deposits held for assumption in connection with sale of banking centers |
| 152,954 |
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Total deposits |
| 3,713,874 |
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| 3,456,145 |
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Securities sold under agreements to repurchase and other short-term borrowings |
| 226,002 |
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| 182,990 |
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Operating lease liabilities |
| 38,852 |
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Federal Home Loan Bank advances |
| 915,000 |
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| 810,000 |
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Subordinated note |
| 41,240 |
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| 41,240 |
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Other liabilities and accrued interest payable |
| 56,738 |
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| 60,095 |
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Total liabilities |
| 4,991,706 |
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| 4,550,470 |
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Commitments and contingent liabilities (Footnote 9) |
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| — |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, no par value |
| — |
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Class A Common Stock and Class B Common Stock, no par value |
| 4,907 |
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| 4,900 |
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Additional paid in capital |
| 141,525 |
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| 141,018 |
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Retained earnings |
| 581,734 |
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| 545,013 |
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Accumulated other comprehensive income (loss) |
| 3,262 |
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| (997) |
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Total stockholders’ equity |
| 731,428 |
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| 689,934 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 5,723,134 |
| $ | 5,240,404 |
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See accompanying footnotes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
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| Three Months Ended |
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| June 30, |
| June 30, |
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| 2018 |
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INTEREST INCOME: |
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Loans, including fees | $ | 60,211 |
| $ | 53,944 |
| $ | 137,039 |
| $ | 123,571 |
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Taxable investment securities |
| 3,284 |
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| 2,708 |
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| 6,875 |
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| 5,342 |
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Federal Home Loan Bank stock and other |
| 2,169 |
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| 1,704 |
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| 4,383 |
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| 3,276 |
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Total interest income |
| 65,664 |
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| 58,356 |
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| 148,297 |
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| 132,189 |
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INTEREST EXPENSE: |
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Deposits |
| 6,903 |
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| 3,934 |
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| 13,651 |
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| 7,294 |
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Securities sold under agreements to repurchase and other short-term borrowings |
| 330 |
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| 222 |
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| 751 |
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| 435 |
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Federal Home Loan Bank advances |
| 4,062 |
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| 2,723 |
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| 6,792 |
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| 4,997 |
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Subordinated note |
| 423 |
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| 393 |
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| 858 |
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| 714 |
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Total interest expense |
| 11,718 |
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| 7,272 |
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| 22,052 |
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| 13,440 |
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NET INTEREST INCOME |
| 53,946 |
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| 51,084 |
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| 126,245 |
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| 118,749 |
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Provision for loan and lease losses |
| 4,460 |
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| 4,932 |
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| 21,691 |
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| 22,187 |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES |
| 49,486 |
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| 46,152 |
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| 104,554 |
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| 96,562 |
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NONINTEREST INCOME: |
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Service charges on deposit accounts |
| 3,598 |
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| 3,574 |
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| 6,901 |
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| 7,129 |
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Net refund transfer fees |
| 3,629 |
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| 3,473 |
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| 20,729 |
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| 19,825 |
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Mortgage banking income |
| 2,416 |
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| 1,316 |
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| 3,955 |
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| 2,336 |
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Interchange fee income |
| 3,257 |
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| 2,891 |
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| 6,014 |
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| 5,558 |
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Program fees |
| 1,037 |
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| 1,323 |
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| 2,111 |
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| 3,019 |
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Increase in cash surrender value of bank owned life insurance |
| 377 |
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| 379 |
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| 759 |
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| 750 |
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Net gains on other real estate owned |
| 90 |
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| 320 |
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| 220 |
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| 452 |
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Other |
| 721 |
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| 1,020 |
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| 1,853 |
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| 2,772 |
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Total noninterest income |
| 15,125 |
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| 14,296 |
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| 42,542 |
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| 41,841 |
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NONINTEREST EXPENSE: |
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Salaries and employee benefits |
| 25,286 |
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| 22,766 |
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| 50,362 |
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| 46,600 |
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Occupancy and equipment, net |
| 6,472 |
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| 6,391 |
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| 13,056 |
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| 12,612 |
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Communication and transportation |
| 1,071 |
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| 1,241 |
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| 2,232 |
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| 2,623 |
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Marketing and development |
| 1,278 |
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| 1,283 |
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| 2,380 |
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| 2,199 |
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FDIC insurance expense |
| 295 |
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| 345 |
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| 743 |
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| 870 |
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Bank franchise tax expense |
| 935 |
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| 860 |
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| 3,431 |
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| 3,378 |
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Data processing |
| 2,217 |
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| 2,443 |
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| 4,313 |
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| 4,829 |
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Interchange related expense |
| 1,302 |
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| 1,098 |
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| 2,617 |
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| 2,105 |
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Supplies |
| 582 |
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| 303 |
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| 1,066 |
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| 684 |
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Other real estate owned and other repossession expense |
| 148 |
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| 16 |
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| 194 |
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| 61 |
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Legal and professional fees |
| 844 |
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| 728 |
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| 1,730 |
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| 1,771 |
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Other |
| 2,998 |
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| 3,158 |
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| 6,813 |
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| 5,945 |
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Total noninterest expense |
| 43,428 |
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| 40,632 |
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| 88,937 |
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| 83,677 |
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INCOME BEFORE INCOME TAX EXPENSE |
| 21,183 |
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| 19,816 |
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| 58,159 |
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| 54,726 |
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INCOME TAX EXPENSE |
| 3,176 |
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| 4,150 |
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| 10,636 |
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| 11,591 |
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NET INCOME | $ | 18,007 |
| $ | 15,666 |
| $ | 47,523 |
| $ | 43,135 |
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BASIC EARNINGS PER SHARE: |
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Class A Common Stock | $ | 0.86 |
| $ | 0.75 |
| $ | 2.29 |
| $ | 2.08 |
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Class B Common Stock |
| 0.79 |
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| 0.68 |
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| 2.08 |
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| 1.89 |
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DILUTED EARNINGS PER SHARE: |
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Class A Common Stock | $ | 0.86 |
| $ | 0.74 |
| $ | 2.28 |
| $ | 2.06 |
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Class B Common Stock |
| 0.78 |
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| 0.68 |
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| 2.07 |
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| 1.88 |
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See accompanying footnotes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
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| Three Months Ended |
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| June 30, |
| June 30, |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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Net income | $ | 18,007 |
| $ | 15,666 |
| $ | 47,523 |
| $ | 43,135 |
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OTHER COMPREHENSIVE INCOME |
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Change in fair value of derivatives used for cash flow hedges |
| (146) |
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| 77 |
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| (215) |
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| 276 |
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Reclassification amount for net derivative losses realized in income |
| (13) |
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| 9 |
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| (32) |
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| 35 |
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Change in unrealized (loss) gain on AFS debt securities |
| 2,014 |
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| (546) |
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| 5,673 |
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| (2,663) |
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Adjustment for adoption of ASU 2016-01 |
| — |
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| — |
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| — |
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| (428) |
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Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings |
| (1) |
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| (15) |
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| (34) |
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| (17) |
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Total other comprehensive income (loss) before income tax |
| 1,854 |
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| (475) |
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| 5,392 |
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| (2,797) |
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Tax effect |
| (389) |
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| 99 |
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| (1,133) |
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| 588 |
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Total other comprehensive income (loss), net of tax |
| 1,465 |
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| (376) |
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| 4,259 |
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| (2,209) |
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COMPREHENSIVE INCOME | $ | 19,472 |
| $ | 15,290 |
| $ | 51,782 |
| $ | 40,926 |
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See accompanying footnotes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
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| Three Months Ended June 30, 2019 |
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| Common Stock |
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| Accumulated |
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| Class B |
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| Additional |
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| Other |
| Total |
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| Shares |
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| Paid In |
| Retained |
| Comprehensive |
| Stockholders’ |
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(in thousands) |
| Outstanding |
| Outstanding |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Equity |
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Balance, April 1, 2019 |
| 18,698 |
| 2,213 |
| $ | 4,899 |
| $ | 141,206 |
| $ | 569,189 |
| $ | 1,797 |
| $ | 717,091 |
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Net income |
| — |
| — |
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| — |
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| — |
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| 18,007 |
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| — |
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| 18,007 |
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Net change in accumulated other comprehensive income |
| — |
| — |
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| — |
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| — |
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| — |
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| 1,465 |
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| 1,465 |
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Dividends declared on Common Stock: |
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Class A Shares ($0.264 per share) |
| — |
| — |
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| — |
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| — |
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| (4,932) |
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| — |
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| (4,932) |
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Class B Shares ($0.240 per share) |
| — |
| — |
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| — |
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| — |
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| (530) |
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| — |
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| (530) |
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Stock options exercised, net of shares redeemed |
| 34 |
| — |
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| 8 |
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| (110) |
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| — |
|
| — |
|
| (102) |
|
Conversion of Class B to Class A Common Shares |
| 5 |
| (5) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Net change in notes receivable on Class A Common Stock |
| — |
| — |
|
| — |
|
| (158) |
|
| — |
|
| — |
|
| (158) |
|
Deferred compensation - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors |
| — |
| — |
|
| — |
|
| 41 |
|
| — |
|
| — |
|
| 41 |
|
Designated key employees |
| — |
| — |
|
| — |
|
| 58 |
|
| — |
|
| — |
|
| 58 |
|
Employee stock purchase plan - Class A Common Stock |
| 2 |
| — |
|
| — |
|
| 114 |
|
| — |
|
| — |
|
| 114 |
|
Stock-based awards - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance stock units |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Restricted stock |
| 1 |
| — |
|
| — |
|
| 295 |
|
| — |
|
| — |
|
| 295 |
|
Stock options |
| — |
| — |
|
| — |
|
| 79 |
|
| — |
|
| — |
|
| 79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019 |
| 18,740 |
| 2,208 |
| $ | 4,907 |
| $ | 141,525 |
| $ | 581,734 |
| $ | 3,262 |
| $ | 731,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2018 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
|
|
|
|
|
| Accumulated |
|
|
|
| ||||||
|
| Class A |
| Class B |
|
|
|
| Additional |
|
|
|
| Other |
| Total |
| |||
|
| Shares |
| Shares |
|
|
|
| Paid In |
| Retained |
| Comprehensive |
| Stockholders’ |
| ||||
(in thousands) |
| Outstanding |
| Outstanding |
| Amount |
| Capital |
| Earnings |
| Income |
| Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 1, 2018 |
| 18,645 |
| 2,243 |
| $ | 4,902 |
| $ | 139,646 |
| $ | 510,123 |
| $ | (1,417) |
| $ | 653,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| — |
| — |
|
| — |
|
| — |
|
| 15,666 |
|
| — |
|
| 15,666 |
|
Net change in accumulated other comprehensive income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (376) |
|
| (376) |
|
Dividends declared Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Shares ($0.242 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (4,518) |
|
| — |
|
| (4,518) |
|
Class B Shares ($0.220 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (487) |
|
| — |
|
| (487) |
|
Stock options exercised, net of shares redeemed |
| 2 |
| — |
|
| — |
|
| 48 |
|
| — |
|
| — |
|
| 48 |
|
Conversion of Class B to Class A Common Shares |
| 28 |
| (28) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Net change in notes receivable on Class A Common Stock |
| — |
| — |
|
| — |
|
| 36 |
|
| — |
|
| — |
|
| 36 |
|
Deferred director compensation expense - Class A Common Stock |
| 2 |
| — |
|
| 1 |
|
| 47 |
|
| — |
|
| — |
|
| 48 |
|
Stock-based awards - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance stock units |
| — |
| — |
|
| — |
|
| 27 |
|
| — |
|
| — |
|
| 27 |
|
Restricted stock |
| — |
| — |
|
| — |
|
| 254 |
|
| — |
|
| — |
|
| 254 |
|
Stock options |
| — |
| — |
|
| — |
|
| 56 |
|
| — |
|
| — |
|
| 56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018 |
| 18,677 |
| 2,215 |
| $ | 4,903 |
| $ | 140,114 |
| $ | 520,784 |
| $ | (1,793) |
| $ | 664,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying footnotes to consolidated financial statements.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2019 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
|
|
|
|
|
| Accumulated |
|
|
|
| ||||||
|
| Class A |
| Class B |
|
|
|
| Additional |
|
|
|
| Other |
| Total |
| |||
|
| Shares |
| Shares |
|
|
|
| Paid In |
| Retained |
| Comprehensive |
| Stockholders’ |
| ||||
(in thousands) |
| Outstanding |
| Outstanding |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019 |
| 18,675 |
| 2,213 |
| $ | 4,900 |
| $ | 141,018 |
| $ | 545,013 |
| $ | (997) |
| $ | 689,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for adoption of ASU 2016-02 |
| — |
| — |
|
| — |
|
| — |
|
| 126 |
|
| — |
|
| 126 |
|
Net income |
| — |
| — |
|
| — |
|
| — |
|
| 47,523 |
|
| — |
|
| 47,523 |
|
Net change in accumulated other comprehensive income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 4,259 |
|
| 4,259 |
|
Dividends declared on Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Shares ($0.528 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (9,865) |
|
| — |
|
| (9,865) |
|
Class B Shares ($0.480 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (1,061) |
|
| — |
|
| (1,061) |
|
Stock options exercised, net of shares redeemed |
| 34 |
| — |
|
| 8 |
|
| (110) |
|
| — |
|
| — |
|
| (102) |
|
Conversion of Class B to Class A Common Shares |
| 5 |
| (5) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Repurchase of Class A Common Stock |
| (8) |
| — |
|
| (1) |
|
| (376) |
|
| (2) |
|
| — |
|
| (379) |
|
Net change in notes receivable on Class A Common Stock |
| — |
| — |
|
| — |
|
| (192) |
|
| — |
|
| — |
|
| (192) |
|
Deferred compensation - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors |
| 5 |
| — |
|
| — |
|
| 106 |
|
| — |
|
| — |
|
| 106 |
|
Designated key employees |
| — |
| — |
|
| — |
|
| 226 |
|
| — |
|
| — |
|
| 226 |
|
Employee stock purchase plan - Class A Common Stock |
| 5 |
| — |
|
| — |
|
| 235 |
|
| — |
|
| — |
|
| 235 |
|
Stock-based awards - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance stock units |
| 23 |
| — |
|
| — |
|
| (57) |
|
| — |
|
| — |
|
| (57) |
|
Restricted stock |
| 1 |
| — |
|
| — |
|
| 475 |
|
| — |
|
| ��— |
|
| 475 |
|
Stock options |
| — |
| — |
|
| — |
|
| 200 |
|
| — |
|
| — |
|
| 200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019 |
| 18,740 |
| 2,208 |
| $ | 4,907 |
| $ | 141,525 |
| $ | 581,734 |
| $ | 3,262 |
| $ | 731,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2018 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
|
|
|
|
|
| Accumulated |
|
|
|
| ||||||
|
| Class A |
| Class B |
|
|
|
| Additional |
|
|
|
| Other |
| Total |
| |||
|
| Shares |
| Shares |
|
|
|
| Paid In |
| Retained |
| Comprehensive |
| Stockholders’ |
| ||||
(in thousands) |
| Outstanding |
| Outstanding |
| Amount |
| Capital |
| Earnings |
| Income |
| Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018 |
| 18,607 |
| 2,243 |
| $ | 4,902 |
| $ | 139,406 |
| $ | 487,700 |
| $ | 416 |
| $ | 632,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for adoption of ASU 2016-01 |
| — |
| — |
|
| — |
|
| — |
|
| (35) |
|
| (338) |
|
| (373) |
|
Net income |
| — |
| — |
|
| — |
|
| — |
|
| 43,135 |
|
| — |
|
| 43,135 |
|
Net change in accumulated other comprehensive income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (1,871) |
|
| (1,871) |
|
Dividends declared Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Shares ($0.484 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (9,035) |
|
| — |
|
| (9,035) |
|
Class B Shares ($0.440 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (981) |
|
| — |
|
| (981) |
|
Stock options exercised, net of shares redeemed |
| 2 |
| — |
|
| — |
|
| 48 |
|
| — |
|
| — |
|
| 48 |
|
Conversion of Class B to Class A Common Shares |
| 28 |
| (28) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Net change in notes receivable on Class A Common Stock |
| — |
| — |
|
| — |
|
| 69 |
|
| — |
|
| — |
|
| 69 |
|
Deferred director compensation expense - Class A Common Stock |
| 5 |
| — |
|
| 1 |
|
| 102 |
|
| — |
|
| — |
|
| 103 |
|
Stock-based awards - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance stock units |
| — |
| — |
|
| — |
|
| 53 |
|
| — |
|
| — |
|
| 53 |
|
Restricted stock |
| 35 |
| — |
|
| — |
|
| 318 |
|
| — |
|
| — |
|
| 318 |
|
Stock options |
| — |
| — |
|
| — |
|
| 118 |
|
| — |
|
| — |
|
| 118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018 |
| 18,677 |
| 2,215 |
| $ | 4,903 |
| $ | 140,114 |
| $ | 520,784 |
| $ | (1,793) |
| $ | 664,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying footnotes to consolidated financial statements.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
| Six Months Ended |
| ||||
| June 30, |
| ||||
| 2019 |
| 2018 |
| ||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net income | $ | 47,523 |
| $ | 43,135 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Net amortization on investment securities |
| (21) |
|
| (231) |
|
Net accretion on loans and amortization of core deposit intangible and operating lease components |
| (1,833) |
|
| (1,863) |
|
Unrealized (gains) losses on equity securities with readily determinable fair value |
| (448) |
|
| 135 |
|
Depreciation of premises and equipment |
| 4,572 |
|
| 4,998 |
|
Amortization of mortgage servicing rights |
| 733 |
|
| 731 |
|
Provision for loan and lease losses |
| 21,691 |
|
| 22,187 |
|
Net gain on sale of mortgage loans held for sale |
| (3,478) |
|
| (1,862) |
|
Origination of mortgage loans held for sale |
| (122,696) |
|
| (84,124) |
|
Proceeds from sale of mortgage loans held for sale |
| 121,262 |
|
| 79,094 |
|
Net gain on sale of consumer loans held for sale |
| (2,618) |
|
| (2,836) |
|
Origination of consumer loans held for sale |
| (346,413) |
|
| (373,409) |
|
Proceeds from sale of consumer loans held for sale |
| 324,260 |
|
| 371,552 |
|
Net gain realized on sale of other real estate owned |
| (220) |
|
| (452) |
|
Impairment of premises held for sale |
| 132 |
|
| 230 |
|
Deferred compensation expense - Class A Common Stock |
| 332 |
|
| 103 |
|
Stock-based awards expense - Class A Common Stock |
| 618 |
|
| 489 |
|
Increase in cash surrender value of bank owned life insurance |
| (759) |
|
| (750) |
|
Net change in other assets and liabilities: |
|
|
|
|
|
|
Accrued interest receivable |
| (774) |
|
| (476) |
|
Accrued interest payable |
| 491 |
|
| (30) |
|
Other assets |
| 581 |
|
| 2,778 |
|
Other liabilities |
| (7,775) |
|
| 3,574 |
|
Net cash provided by operating activities |
| 35,160 |
|
| 62,973 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
Purchases of available-for-sale debt securities |
| — |
|
| (99,026) |
|
Purchases of held-to-maturity debt securities |
| — |
|
| (4,934) |
|
Proceeds from calls, maturities and paydowns of available-for-sale debt securities |
| 101,051 |
|
| 204,811 |
|
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities |
| 1,315 |
|
| 2,400 |
|
Net change in outstanding warehouse lines of credit |
| (269,099) |
|
| (108,269) |
|
Net change in other loans |
| (137,490) |
|
| (89,503) |
|
Proceeds from redemption of Federal Home Loan Bank stock |
| 2,102 |
|
| — |
|
Purchase of Federal Home Loan Bank stock |
| (2,277) |
|
| — |
|
Proceeds from sales of other real estate owned |
| 580 |
|
| 751 |
|
Net purchases of premises and equipment |
| (4,083) |
|
| (6,108) |
|
Net cash used in investing activities |
| (307,901) |
|
| (99,878) |
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
Net change in deposits |
| 257,729 |
|
| 40,211 |
|
Net change in securities sold under agreements to repurchase and other short-term borrowings |
| 43,012 |
|
| (28,730) |
|
Payments of Federal Home Loan Bank advances |
| (565,000) |
|
| (377,500) |
|
Proceeds from Federal Home Loan Bank advances |
| 670,000 |
|
| 500,000 |
|
Repurchase of Class A Common Stock |
| (379) |
|
| — |
|
Net proceeds from Class A Common Stock purchased through employee stock purchase plan |
| 235 |
|
| 48 |
|
Net proceeds from Class A Common Stock options exercised |
| (102) |
|
| — |
|
Cash dividends paid |
| (10,449) |
|
| (9,519) |
|
Net cash provided by (used in) financing activities |
| 395,046 |
|
| 124,510 |
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
| 122,305 |
|
| 87,605 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 351,474 |
|
| 299,351 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 473,779 |
| $ | 386,956 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION: |
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
Interest | $ | 21,561 |
| $ | 13,470 |
|
Income taxes |
| 6,726 |
|
| 8,177 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL NONCASH DISCLOSURES: |
|
|
|
|
|
|
Transfers from loans to real estate acquired in settlement of loans | $ | 1,295 |
| $ | 184 |
|
Transfers from loans held for sale to held for investment |
| — |
|
| 2,237 |
|
Transfers from loans held for investment to held for sale |
| 124,202 |
|
| — |
|
Unfunded commitments in low-income-housing investments |
| — |
|
| 9,033 |
|
Right-of-use assets recorded upon adoption of ASU 2016-02 |
| 40,202 |
|
| — |
|
See accompanying footnotes to consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – JUNE 30, 2019 and 2018 AND DECEMBER 31, 2018 (UNAUDITED)
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 and Republic Insurance Services, Inc. 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. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the United States. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.
Republic Bancorp Capital Trust is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP 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. GAAP 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 the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018.
As of June 30, 2019, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.
10
Core Bank
Traditional Banking segment — The Traditional Banking, segment provides traditional banking products primarily to customersWarehouse Lending, and Mortgage Banking reportable segments
COVID-19
Coronavirus Disease of 2019
CRE
Commercial Real Estate
Diluted EPS
Diluted earnings per Class A Common Share
EA
Easy Advance
ESPP
Employee Stock Purchase Plan
EVP
Executive Vice President
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFTR
Federal Funds Target Rate
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FICO
Fair Isaac Corporation
FNMA
Federal National Mortgage Association
FOMC
Federal Open Market Committee
FRB
Federal Reserve Bank
FTE
Full Time Equivalent
FTP
Funds Transfer Pricing
GAAP
Generally Accepted Accounting Principles in the Company’s market footprint. AsUnited States
HEAL
Home Equity Amortizing Loan
HELOC
Home Equity Line of June 30, 2019, Republic had 45 full-service banking centers and two LPOs with locations as follows:Credit
HTM
Kentucky — 32
Metropolitan Louisville — 18
Central Kentucky — 9
Elizabethtown — 1*
Frankfort — 1*
Georgetown — 1
Lexington — 5
Shelbyville — 1
Western Kentucky — 2
Owensboro — 2*
Northern Kentucky — 3
Covington — 1
Crestview Hills — 1
Florence — 1
Southern Indiana — 3
Floyds Knobs — 1
Jeffersonville — 1
New Albany — 1
Metropolitan Tampa, Florida — 8**
Metropolitan Cincinnati, Ohio — 1
Metropolitan Nashville, Tennessee — 3**
* The Company agreedHeld to sell banking center(s) in July 2019. See Note 18 in this section of the filing for additional information.Maturity
** Includes an LPOIRS
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
Traditional Banking resultsInternal Revenue Service
ITM
Interactive Teller Machine
LGD
Loss Given Default
LIBOR
London Interbank Offered Rate
LPO
Loan Production Office
LTV
Loan to Value
MBS
Mortgage Backed Securities
MSRs
Mortgage Servicing Rights
NA
Not Applicable
NM
Not Meaningful
OBS
Off-Balance Sheet
OCI
Other Comprehensive Income
OREO
Other Real Estate Owned
OTTI
Other than Temporary Impairment
PCD
Purchased with Credit Deterioration
PCI
Purchased Credit Impaired
PD
Probability of operations are primarily dependent upon net interest income, which representsDefault
PPP
SBA's Paycheck Protection Program
PPPLF
The FRB's Paycheck Protection Program Liquidity Facility
Prime
TheWall Street Journal Prime Interest Rate
Provision
Provision for Expected Credit Loss Expense
PSU
Performance Stock Unit
R&D
Research and Development
RB&T / the difference betweenBank
Republic Bank & Trust Company
RBCT
Republic Bancorp Capital Trust
RCS
Republic Credit Solutions segment
Republic / the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning Traditional Banking assets represent investment securities and commercial and consumer loans primarily secured by real estate and/or personal property. 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. FHLB advances have traditionally been a significant borrowing source for the Bank.Company
Other sources of Traditional Banking income include service charges on deposit accounts, debit and credit card interchange fee income, title insurance commissions, fees charged to clients for trust services, and increases in the cash surrender value of BOLI.Republic Bancorp, Inc.
RPG
Traditional Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, data processing, interchange related expenses, marketing and development expenses, FDIC insurance expense, franchise tax expense and various other general and administrative costs. Traditional 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.
The Traditional Bank has acquired for investment single family, first lien mortgage loans that meet the Traditional Bank’s specifications through its Correspondent Lending channel. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium.
11
Warehouse Lending segment — Through its Warehouse Lending segment, the Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single family, first lien residential real estate loans. The credit facility enables the mortgage banking clients 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 the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. 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. The Core Bank 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 client.
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 originated and sold into the secondary market, primarily to the FHLMC and the FNMA. 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 property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
Republic Processing Group
RPS
Republic Payment Solutions
RT
Refund Transfer
SBA
U.S. Small Business Administration
SEC
Securities and Exchange Commission
SSUAR
Securities Sold Under Agreements to Repurchase
SVP
Senior Vice President
TDR
Troubled Debt Restructuring
The Captive
Republic Insurance Services, Inc.
TPS
Trust Preferred Securities
TRS
Tax Refund Solutions segment
TRUP
TPS Investment
Warehouse
Warehouse Lending segment
3
PART I — FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
| ||
|
| 2020 |
| 2019 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 316,263 |
| $ | 385,303 |
|
Available-for-sale debt securities, at fair value (amortized cost of $531,974 in 2020 and $467,122 in 2019, allowance for credit losses of $126 in 2020 and $0 in 2019) |
|
| 543,859 |
|
| 471,355 |
|
Held-to-maturity debt securities (fair value of $59,725 in 2020 and $63,156 in 2019, allowance for credit losses of $171 in 2020 and $0 in 2019) |
|
| 61,664 |
|
| 62,531 |
|
Equity securities with readily determinable fair value |
|
| 2,807 |
|
| 3,188 |
|
Mortgage loans held for sale, at fair value |
|
| 39,384 |
|
| 19,224 |
|
Consumer loans held for sale, at fair value |
|
| 3,431 |
|
| 598 |
|
Consumer loans held for sale, at the lower of cost or fair value |
|
| 12,089 |
|
| 11,646 |
|
Loans (loans carried at fair value of $827 in 2020 and $998 in 2019) |
|
| 4,515,599 |
|
| 4,433,151 |
|
Allowance for credit losses |
|
| (70,431) |
|
| (43,351) |
|
Loans, net |
|
| 4,445,168 |
|
| 4,389,800 |
|
Federal Home Loan Bank stock, at cost |
|
| 38,900 |
|
| 30,831 |
|
Premises and equipment, net |
|
| 44,215 |
|
| 46,196 |
|
Right-of-use assets |
|
| 34,349 |
|
| 35,206 |
|
Goodwill |
|
| 16,300 |
|
| 16,300 |
|
Other real estate owned |
|
| 85 |
|
| 113 |
|
Bank owned life insurance |
|
| 66,822 |
|
| 66,433 |
|
Other assets and accrued interest receivable |
|
| 96,697 |
|
| 81,595 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 5,722,033 |
| $ | 5,620,319 |
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
Noninterest-bearing |
| $ | 1,300,891 |
| $ | 1,033,379 |
|
Interest-bearing |
|
| 2,770,566 |
|
| 2,752,629 |
|
Total deposits |
|
| 4,071,457 |
|
| 3,786,008 |
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase and other short-term borrowings |
|
| 126,080 |
|
| 167,617 |
|
Operating lease liabilities |
|
| 35,537 |
|
| 36,530 |
|
Federal Home Loan Bank advances |
|
| 572,500 |
|
| 750,000 |
|
Subordinated note |
|
| 41,240 |
|
| 41,240 |
|
Other liabilities and accrued interest payable |
|
| 91,173 |
|
| 74,680 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
| 4,937,987 |
|
| 4,856,075 |
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities (Footnote 9) |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value |
|
| — |
|
| — |
|
Class A Common Stock and Class B Common Stock, no par value |
|
| 4,890 |
|
| 4,907 |
|
Additional paid in capital |
|
| 141,928 |
|
| 142,068 |
|
Retained earnings |
|
| 628,397 |
|
| 614,171 |
|
Accumulated other comprehensive income |
|
| 8,831 |
|
| 3,098 |
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
| 784,046 |
|
| 764,244 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 5,722,033 |
| $ | 5,620,319 |
|
See accompanying footnotes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2020 |
| 2019 |
| ||
INTEREST INCOME: |
|
|
|
|
|
|
|
Loans, including fees |
| $ | 77,513 |
| $ | 76,828 |
|
Taxable investment securities |
|
| 2,783 |
|
| 3,591 |
|
Federal Home Loan Bank stock and other |
|
| 863 |
|
| 2,214 |
|
Total interest income |
|
| 81,159 |
|
| 82,633 |
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
Deposits |
|
| 6,302 |
|
| 6,748 |
|
Securities sold under agreements to repurchase and other short-term borrowings |
|
| 119 |
|
| 421 |
|
Federal Home Loan Bank advances |
|
| 1,648 |
|
| 2,730 |
|
Subordinated note |
|
| 352 |
|
| 435 |
|
Total interest expense |
|
| 8,421 |
|
| 10,334 |
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
| 72,738 |
|
| 72,299 |
|
Credit loss expense |
|
| 22,760 |
|
| 17,231 |
|
NET INTEREST INCOME AFTER CREDIT LOSS EXPENSE |
|
| 49,978 |
|
| 55,068 |
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME: |
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
| 3,136 |
|
| 3,303 |
|
Net refund transfer fees |
|
| 15,823 |
|
| 17,100 |
|
Mortgage banking income |
|
| 4,795 |
|
| 1,539 |
|
Interchange fee income |
|
| 2,552 |
|
| 2,757 |
|
Program fees |
|
| 2,624 |
|
| 1,074 |
|
Increase in cash surrender value of bank owned life insurance |
|
| 389 |
|
| 382 |
|
Net gains on other real estate owned |
|
| 3 |
|
| 130 |
|
Other |
|
| 1,247 |
|
| 1,132 |
|
Total noninterest income |
|
| 30,569 |
|
| 27,417 |
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE: |
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 26,622 |
|
| 25,076 |
|
Occupancy and equipment, net |
|
| 6,846 |
|
| 6,584 |
|
Communication and transportation |
|
| 1,289 |
|
| 1,161 |
|
Marketing and development |
|
| 833 |
|
| 1,102 |
|
FDIC insurance expense |
|
| — |
|
| 448 |
|
Bank franchise tax expense |
|
| 2,506 |
|
| 2,496 |
|
Data processing |
|
| 2,539 |
|
| 2,096 |
|
Interchange related expense |
|
| 1,076 |
|
| 1,315 |
|
Supplies |
|
| 452 |
|
| 484 |
|
Other real estate owned and other repossession expense |
|
| 18 |
|
| 46 |
|
Legal and professional fees |
|
| 1,237 |
|
| 886 |
|
Other |
|
| 3,551 |
|
| 3,815 |
|
Total noninterest expense |
|
| 46,969 |
|
| 45,509 |
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX EXPENSE |
|
| 33,578 |
|
| 36,976 |
|
INCOME TAX EXPENSE |
|
| 6,881 |
|
| 7,460 |
|
NET INCOME |
| $ | 26,697 |
| $ | 29,516 |
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
Class A Common Stock |
| $ | 1.29 |
| $ | 1.42 |
|
Class B Common Stock |
|
| 1.17 |
|
| 1.29 |
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
Class A Common Stock |
| $ | 1.28 |
| $ | 1.41 |
|
Class B Common Stock |
|
| 1.16 |
|
| 1.28 |
|
|
|
|
|
|
|
|
|
See accompanying footnotes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2020 |
| 2019 |
| ||
|
|
|
|
|
|
|
|
Net income |
| $ | 26,697 |
| $ | 29,516 |
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives used for cash flow hedges |
|
| (161) |
|
| (69) |
|
Reclassification amount for net derivative losses realized in income |
|
| 29 |
|
| (19) |
|
Change in unrealized gain on AFS debt securities |
|
| 7,777 |
|
| 3,659 |
|
Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings |
|
| 1 |
|
| (33) |
|
Total other comprehensive income before income tax |
|
| 7,646 |
|
| 3,538 |
|
Tax effect |
|
| (1,913) |
|
| (744) |
|
Total other comprehensive income, net of tax |
|
| 5,733 |
|
| 2,794 |
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
| $ | 32,430 |
| $ | 32,310 |
|
See accompanying footnotes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2020 |
| |||||||||||||||||
|
| 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 (Loss) |
| Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2020 |
| 18,737 |
| 2,206 |
| $ | 4,907 |
| $ | 142,068 |
| $ | 614,171 |
| $ | 3,098 |
| $ | 764,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for adoption of ASU 2016-13 |
| — |
| — |
|
| — |
|
| — |
|
| (4,291) |
|
| — |
|
| (4,291) |
|
Net income |
| — |
| — |
|
| — |
|
| — |
|
| 26,697 |
|
| — |
|
| 26,697 |
|
Net change in accumulated other comprehensive income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 5,733 |
|
| 5,733 |
|
Dividends declared on Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Shares ($0.286 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (5,358) |
|
| — |
|
| (5,358) |
|
Class B Shares ($0.260 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (572) |
|
| — |
|
| (572) |
|
Stock options exercised, net of shares withheld |
| 2 |
| — |
|
| 1 |
|
| (43) |
|
| — |
|
| — |
|
| (42) |
|
Conversion of Class B to Class A Common Shares |
| 6 |
| (6) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Repurchase of Class A Common Stock |
| (86) |
| — |
|
| (20) |
|
| (582) |
|
| (2,250) |
|
| — |
|
| (2,852) |
|
Net change in notes receivable on Class A Common Stock |
| — |
| — |
|
| — |
|
| 30 |
|
| — |
|
| — |
|
| 30 |
|
Deferred compensation - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors |
| 4 |
| — |
|
| — |
|
| 79 |
|
| — |
|
| — |
|
| 79 |
|
Designated key employees |
| — |
| — |
|
| — |
|
| 143 |
|
| — |
|
| — |
|
| 143 |
|
Employee stock purchase plan - Class A Common Stock |
| 5 |
| — |
|
| 1 |
|
| 154 |
|
| — |
|
| — |
|
| 155 |
|
Stock-based awards - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance stock units |
| 18 |
| — |
|
| — |
|
| (200) |
|
| — |
|
| — |
|
| (200) |
|
Restricted stock |
| 1 |
| — |
|
| 1 |
|
| 187 |
|
| — |
|
| — |
|
| 188 |
|
Stock options |
| — |
| — |
|
| — |
|
| 92 |
|
| — |
|
| — |
|
| 92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020 |
| 18,687 |
| 2,200 |
| $ | 4,890 |
| $ | 141,928 |
| $ | 628,397 |
| $ | 8,831 |
| $ | 784,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2019 |
| |||||||||||||||||
|
| 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, 2019 |
| 18,675 |
| 2,213 |
| $ | 4,900 |
| $ | 141,018 |
| $ | 545,013 |
| $ | (997) |
| $ | 689,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for adoption of ASU 2016-02 |
| — |
| — |
|
| — |
|
| — |
|
| 126 |
|
| — |
|
| 126 |
|
Net income |
| — |
| — |
|
| — |
|
| — |
|
| 29,516 |
|
| — |
|
| 29,516 |
|
Net change in accumulated other comprehensive income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 2,794 |
|
| 2,794 |
|
Dividends declared on Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Shares ($0.264 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (4,933) |
|
| — |
|
| (4,933) |
|
Class B Shares ($0.240 per share) |
| — |
| — |
|
| — |
|
| — |
|
| (531) |
|
| — |
|
| (531) |
|
Repurchase of Class A Common Stock |
| (8) |
| — |
|
| (1) |
|
| (376) |
|
| (2) |
|
| — |
|
| (379) |
|
Net change in notes receivable on Class A Common Stock |
| — |
| — |
|
| — |
|
| (34) |
|
| — |
|
| — |
|
| (34) |
|
Deferred compensation - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors |
| 5 |
| — |
|
| — |
|
| 65 |
|
| — |
|
| — |
|
| 65 |
|
Designated key employees |
| — |
| — |
|
| — |
|
| 168 |
|
| — |
|
| — |
|
| 168 |
|
Employee stock purchase plan - Class A Common Stock |
| 3 |
| — |
|
| — |
|
| 121 |
|
| — |
|
| — |
|
| 121 |
|
Stock-based awards - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance stock units |
| 23 |
| — |
|
| — |
|
| (57) |
|
| — |
|
| — |
|
| (57) |
|
Restricted stock |
| — |
| — |
|
| — |
|
| 180 |
|
| — |
|
| — |
|
| 180 |
|
Stock options |
| — |
| — |
|
| — |
|
| 121 |
|
| — |
|
| — |
|
| 121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019 |
| 18,698 |
| 2,213 |
| $ | 4,899 |
| $ | 141,206 |
| $ | 569,189 |
| $ | 1,797 |
| $ | 717,091 |
|
See accompanying footnotes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2020 |
| 2019 |
| ||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net income |
| $ | 26,697 |
| $ | 29,516 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Net accretion (amortization) on investment securities |
|
| 330 |
|
| (8) |
|
Net accretion on loans and amortization of core deposit intangible and operating lease components |
|
| (799) |
|
| (596) |
|
Unrealized (gains) losses on equity securities with readily determinable fair value |
|
| 381 |
|
| (289) |
|
Depreciation of premises and equipment |
|
| 2,549 |
|
| 2,263 |
|
Amortization of mortgage servicing rights |
|
| 585 |
|
| 322 |
|
Impairment of mortgage servicing rights |
|
| 100 |
|
| — |
|
Credit loss expense for on-balance sheet exposures |
|
| 22,760 |
|
| 17,231 |
|
Credit loss expense for off-balance sheet exposures |
|
| 102 |
|
| — |
|
Net gain on sale of mortgage loans held for sale |
|
| (4,805) |
|
| (1,260) |
|
Origination of mortgage loans held for sale |
|
| (125,273) |
|
| (40,714) |
|
Proceeds from sale of mortgage loans held for sale |
|
| 109,918 |
|
| 39,632 |
|
Net gain on sale of consumer loans held for sale |
|
| (2,337) |
|
| (1,405) |
|
Origination of consumer loans held for sale |
|
| (195,121) |
|
| (146,087) |
|
Proceeds from sale of consumer loans held for sale |
|
| 194,182 |
|
| 147,466 |
|
Net gain realized on sale of other real estate owned |
|
| (3) |
|
| (130) |
|
Impairment of premises held for sale |
|
| — |
|
| 66 |
|
Deferred compensation expense - Class A Common Stock |
|
| 222 |
|
| 233 |
|
Stock-based awards expense- Class A Common Stock |
|
| 280 |
|
| 244 |
|
Net gain on sale of bank premises and equipment |
|
| (353) |
|
| — |
|
Increase in cash surrender value of bank owned life insurance |
|
| (389) |
|
| (382) |
|
Net change in other assets and liabilities: |
|
|
|
|
|
|
|
Accrued interest receivable |
|
| 900 |
|
| (28) |
|
Accrued interest payable |
|
| 635 |
|
| 536 |
|
Other assets |
|
| (7,381) |
|
| (2,026) |
|
Other liabilities |
|
| 4,998 |
|
| (297) |
|
Net cash provided by operating activities |
|
| 28,178 |
|
| 44,287 |
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Purchases of available-for-sale debt securities |
|
| (138,894) |
|
| — |
|
Proceeds from calls, maturities and paydowns of available-for-sale debt securities |
|
| 73,716 |
|
| 48,775 |
|
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities |
|
| 690 |
|
| 600 |
|
Net change in outstanding warehouse lines of credit |
|
| (132,996) |
|
| (90,092) |
|
Net change in other loans |
|
| 50,510 |
|
| (63,922) |
|
Proceeds from redemption of Federal Home Loan Bank stock |
|
| 931 |
|
| 2,102 |
|
Purchase of Federal Home Loan Bank stock |
|
| (9,000) |
|
| — |
|
Proceeds from sales of other real estate owned |
|
| 31 |
|
| 229 |
|
Proceeds from sale of bank premises and equipment |
|
| 894 |
|
| — |
|
Net purchases of premises and equipment |
|
| (1,109) |
|
| (1,036) |
|
Net cash used in investing activities |
|
| (155,227) |
|
| (103,344) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Net change in deposits |
|
| 285,449 |
|
| 318,171 |
|
Net change in securities sold under agreements to repurchase and other short-term borrowings |
|
| (41,537) |
|
| (9,822) |
|
Payments of Federal Home Loan Bank advances |
|
| (602,500) |
|
| (520,000) |
|
Proceeds from Federal Home Loan Bank advances |
|
| 425,000 |
|
| 270,000 |
|
Repurchase of Class A Common Stock |
|
| (2,852) |
|
| (379) |
|
Net proceeds from Class A Common Stock purchased through employee stock purchase plan |
|
| 155 |
|
| 121 |
|
Net proceeds from Class A Common Stock options exercised and PSUs awarded |
|
| (242) |
|
| — |
|
Cash dividends paid |
|
| (5,464) |
|
| (4,996) |
|
Net cash provided by financing activities |
|
| 58,009 |
|
| 53,095 |
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
| (69,040) |
|
| (5,962) |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
| 385,303 |
|
| 351,474 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 316,263 |
| $ | 345,512 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION: |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest |
| $ | 7,786 |
| $ | 9,798 |
|
Income taxes |
|
| 465 |
|
| 387 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL NONCASH DISCLOSURES: |
|
|
|
|
|
|
|
Transfers from loans to real estate acquired in settlement of loans |
| $ | — |
| $ | 155 |
|
Right-of-use assets recorded |
|
| 626 |
|
| 40,104 |
|
Allowance for credit losses recorded upon adoption of ASC 326 |
|
| 7,241 |
|
| — |
|
See accompanying footnotes to consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –MARCH 31, 2020 and 2019 AND DECEMBER 31, 2019 (UNAUDITED)
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 and Republic Insurance Services, Inc. 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. The term “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank, as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.
Republic Bancorp Capital Trust is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP 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. GAAP 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 the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019.
As of March 31, 2020, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company’s national branchless banking platform, is part of the Traditional Banking segment.
The Company’s financial statements at and for the three months ended March 31, 2020 were impacted by the COVID-19 pandemic.
For additional discussion regarding the COVID-19 pandemic and its impact to the Company, see the following Footnotes in this section of the filing:
· | Footnote 2 “Investment Securities” |
· | Footnote 4 “Loans and Allowance for Credit Losses” |
· | Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” |
· | Footnote 17 “Subsequent Events” |
9
Core Bank
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of March 31, 2020, Republic had 42 full-service banking centers and two LPOs with locations as follows:
Kentucky — 28
Metropolitan Louisville — 18
Central Kentucky — 7
Georgetown — 1
Lexington — 5
Shelbyville — 1
Northern Kentucky — 3
Covington — 1
Crestview Hills — 1
Florence — 1
Southern Indiana — 3
Floyds Knobs — 1
Jeffersonville — 1
New Albany — 1
Metropolitan Tampa, Florida — 8*
Metropolitan Cincinnati, Ohio — 2
Metropolitan Nashville, Tennessee — 3*
*Includes one LPO
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
Traditional 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 Traditional Banking assets represent investment securities and commercial and consumer loans primarily secured by real estate and/or personal property. 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. FHLB advances have traditionally been a significant borrowing source for the Bank.
Other sources of Traditional Banking income include service charges on deposit accounts, debit and credit card interchange fee income, title insurance commissions, fees charged to clients for trust services, and increases in the cash surrender value of BOLI.
Traditional Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, data processing, interchange related expenses, marketing and development expenses, FDIC insurance expense, franchise tax expense and various other general and administrative costs. Traditional 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.
Warehouse Lending segment — Through its Warehouse segment, the Core Bank provides short-term, revolving credit facilities to mortgage bankers across the U.S. through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients 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 the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. 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. The Core Bank 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 client.
10
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 originated and sold into the secondary market, primarily to the FHLMC and the FNMA. 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 property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
Republic Processing Group
Tax Refund Solutions segment — Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.
RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost 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 by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. The EA product had the following features during 2019 and 2020:
· | Offered only during the first two months of each year; |
· | The taxpayer was given the option to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $6,250; |
· | No requirement that the taxpayer pays for another bank product, such as an RT; |
· | Multiple funds disbursement methods, including direct deposit, prepaid card, check, or Walmart Direct2Cash®, based on the taxpayer-customer’s election; |
· | Repayment of the EA to the Bank is |
· | If an insufficient refund to repay the |
| o | there is |
o | no negative credit |
The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. Credit loss expense on EAs are estimated when advances are made, with credit loss expense for all expected EA losses made in the first quarter of each year. Unpaid EAs are charged off by June 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged off loans.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is based primarily on the prior-year’s tax refund payment patterns. Because the substantial majority of the EA volume occurs each year before that year’s tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund payment patterns change materially between years.
In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EA’s product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA product offering and therefore on the Company’s financial condition and results of operations.
11
Republic Payment Solutions — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. 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 TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
The Company reports fees related to RPS programs under Program fees. Additionally, the Company’s portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under “Interchange fee income.”
Republic Credit Solutions segment — Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors including the consumer’s ability to repay. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
· | RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers in multiple states. Elevate Credit, Inc., a third-party service provider subject to the Bank’s oversight and supervision, provides the Bank with certain marketing and support services for the RCS line-of-credit program, while a separate third party provides loan servicing for the RCS line-of-credit product on the Bank’s behalf. The Bank is the lender for the RCS line-of-credit product and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of the RCS line-of-credit product. |
The Bank sells participation interests in the RCS line-of-credit product. These participation interests are a 90% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying RCS line-of-credit account with each borrower. The RCS line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale through this program are carried at the lower of cost or fair value.
· | RCS healthcare receivables products – The Bank originates healthcare-receivables products across the U.S. through two different third-party service providers. In one program, the Bank retains 100% of the receivables originated. In the other program, the Bank retains 100% of the receivables originated in some instances, and in other instances, sells 100% of the receivables within one month of origination. Loan balances held for sale through this program are carried at the lower of cost or fair value. |
· | RCS installment loan products – From the first quarter of
|
Through a new program launched in December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. A third-party service provider subject to the Bank’s oversight and supervision provides the Bank with marketing services and loan servicing for these RCS installment loans. The Bank is the lender for these RCS installment loans, and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this RCS installment loan product. Currently, all loan balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intention to sell these loans to its third-party service provider sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.
12
The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”
Recently Adopted Accounting Standards
Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaces the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and HTM securities. CECL also applies to certain off-balance sheet credit exposures. In addition to CECL, ASC 326 made changes to the accounting for AFS debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on AFS debt securities that the Company does not intend or will likely not be compelled to sell.
The Company adopted ASC 326 primarily using the modified retrospective method for its financial instruments and off-balance sheet credit exposures. Results for periods beginning after December 31, 2019 will be presented under CECL while prior-period amounts will continue to be reported under previously applicable GAAP.
The Company adopted ASC 326 using the prospective transition approach for debt securities for which OTTI had been recognized prior to January 1, 2020. As a result, the amortized cost basis will remain the same before and after the effective date of CECL. The effective interest rate on these debt securities was not changed. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.
The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as PCI assets under ASC 310-30. As allowed by ASC 326, the Company did not reassess whether PCI assets met the PCD criteria as of the date of adoption. On January 1, 2020, the amortized cost basis of PCD assets was adjusted to reflect the addition of $1.4 million of ACLL formerly classified under previous GAAP as a non-accretable credit discount within gross loans. The remaining noncredit discount on PCD assets will be accreted into interest income at the effective interest rate as of January 1, 2020.
The Company elected the fair value option for its RCS installment loan product in 2016. This product will continue to be accounted for at fair value under CECL.
When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower “expected” threshold for loss recognition versus a higher “probable” threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts.
In accordance with the adoption of ASC 326 and CECL, the Company recorded on January 1, 2020 a $6.7 million, or 16%, increase in the ACLL for its loans, a $51,000 ACLS for its investment debt securities, and a $456,000 ACLC for its off-balance sheet credit exposures. Of the $6.7 million increase in ACLL, approximately $1.4 million was a gross-up reclassification of non-accretable discount on previously-PCI, now-PCD, loans as mentioned above, and the remaining $5.3 million was a difference in ACL between CECL and the probable-incurred method. The Company also made a cumulative effect entry of $4.3 million to reduce its opening balance of retained earnings upon adoption of ASC 326, with no impact on 2020 earnings for these adoption entries. The adoption date increase in ACLL for the Company’s loans primarily reflects additional ACLL for longer duration loan portfolios, such as the Company's residential real estate and consumer loan portfolios. No additional segmentation of the Bank's loan portfolios was deemed necessary upon adoption.
13
The following table illustrates the impact of ASC 326 adoption:
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|
|
|
|
|
|
|
|
|
|
| Allowance for Credit Losses as of January 1, 2020 |
| |||||||
|
| As Reported |
|
|
|
| Impact |
| ||
|
| Under |
| Pre-ASC 326 |
| of ASC 326 |
| |||
(in thousands) |
| ASC 326 |
| Adoption |
| Adoption |
| |||
|
|
|
|
|
|
|
|
|
|
|
Assets: |
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|
|
|
|
|
|
|
|
|
Allowance for credit losses on debt securities: |
|
|
|
|
|
|
|
|
|
|
AFS debt securities - Corporate bonds |
| $ | — |
| $ | — |
| $ | — |
|
HTM debt securities - Corporate bond |
|
| 51 |
|
| — |
|
| 51 |
|
Allowance for credit losses on debt securities |
| $ | 51 |
| $ | — |
| $ | 51 |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses on loans: |
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
Owner occupied |
| $ | 8,928 |
| $ | 4,729 |
| $ | 4,199 |
|
Nonowner occupied |
|
| 1,885 |
|
| 1,737 |
|
| 148 |
|
Commercial real estate |
|
| 10,759 |
|
| 10,486 |
|
| 273 |
|
Construction & land development |
|
| 3,599 |
|
| 2,152 |
|
| 1,447 |
|
Commercial & industrial |
|
| 1,564 |
|
| 2,882 |
|
| (1,318) |
|
Lease financing receivables |
|
| 147 |
|
| 147 |
|
| — |
|
Home equity |
|
| 4,373 |
|
| 2,721 |
|
| 1,652 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
| 1,053 |
|
| 1,020 |
|
| 33 |
|
Overdrafts |
|
| 1,169 |
|
| 1,169 |
|
| — |
|
Automobile loans |
|
| 605 |
|
| 612 |
|
| (7) |
|
Other consumer |
|
| 857 |
|
| 550 |
|
| 307 |
|
Total Traditional Banking |
|
| 34,939 |
|
| 28,205 |
|
| 6,734 |
|
Warehouse lines of credit |
|
| 1,794 |
|
| 1,794 |
|
| — |
|
Total Core Banking |
|
| 36,733 |
|
| 29,999 |
|
| 6,734 |
|
|
|
|
|
|
|
|
|
|
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|
Republic Processing Group: |
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|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
| — |
|
| — |
|
| — |
|
Other TRS loans |
|
| 234 |
|
| 234 |
|
| — |
|
Republic Credit Solutions |
|
| 13,118 |
|
| 13,118 |
|
| — |
|
Total Republic Processing Group |
|
| 13,352 |
|
| 13,352 |
|
| — |
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|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses on loans |
| $ | 50,085 |
| $ | 43,351 |
| $ | 6,734 |
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|
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Liabilities: |
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|
|
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|
|
|
|
|
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Allowance for credit losses on OBS credit exposures |
| $ | 456 |
| $ | — |
| $ | 456 |
|
The following less-impactful ASUs were also adopted by the Company during the three months ended March 31, 2020:
ASU. No. | Topic | Nature of Update | Date Adopted | Method of Adoption | Financial Statement Impact | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017-04 | Intangibles - Goodwill and Other (Topic 350) | This ASU simplifies goodwill impairment testing by eliminating Step 2 from the goodwill impairment test. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the |
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2020-04
This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The
Debt Securities —Debt securities are classified as AFS when they might be sold before maturity. AFS debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Debt securities are classified as HTM and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
14 Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are amortized to the earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income. Allowance for Credit Losses on Available-for-Sale Securities — For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACLS is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACLS is recognized in other comprehensive income. For the Company’s AFS corporate bond, the Company uses PD and LGD data to estimate an ACLS in lieu of the aforementioned cash flow analysis. Changes in ACLS are recorded as a charge or credit to the Provision. Losses are charged against the ACLS when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest on AFS debt securities totaled $1 million at March 31, 2020 and is excluded from the ACLS. Accrued interest on AFS debt securities is presented as a component of other assets on the Company’s balance sheet. Allowance for Credit Losses on Held-to-Maturity Securities — The Company measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $248,000 at March 31, 2020 and is excluded from the ACLS. Accrued interest on HTM debt securities is presented as a component of other assets on the Company’s balance sheet. The estimate of ACLS on HTM debt securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company classifies its HTM portfolio into the following major security types: MBS, corporate bonds, and municipal bonds. MBS securities include CMOs. Nearly all of the MBS portfolio is issued by U.S. government entities or government sponsored entities. These securities are highly rated by major rating agencies and have a long history of no credit losses. The MBS portfolio also carries ratings no lower than investment grade. The Company uses PD and LGD estimates provided by a third party to estimate an ACLS for its corporate and municipal bond portfolios. These PD and LGD estimates are updated at least quarterly by the Company, with these estimates incorporating the most recent market expectations and forecasted information. Loans — The Bank’s financing receivables consist primarily of loans and lease financing receivables (together referred to as “loans”). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the ACLL. Amortized cost is the principal balance outstanding, net of premiums and discounts, and deferred loan fees and costs. Accrued interest on loans, which is excluded from the ACLL, totaled $10 million at March 31, 2020 and was reported as a component of other assets on the Company’s balance sheet. 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. Premiums on loans held for investment are amortized into interest income on the level-yield method over the expected life of the loan. 15 Lease financing receivables, all of which are direct financing leases, are reported at their principal balance outstanding net of any unearned income, deferred loan fees and costs, and applicable ACLL. Leasing income is recognized on a basis that achieves a constant periodic rate of return on the outstanding lease financing balances over the lease terms. 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, which may define past due status by the number of days or the number of payments past due. In most cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 80 days still on accrual include smaller balance, homogeneous loans that are evaluated collectively or individually for loss. Interest accrued but not received for all classes of loans placed on nonaccrual 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 nonaccrual status but are reviewed periodically and charged off when the loan is deemed uncollectible, generally no more than 120 days. Purchased Credit Deteriorated Loans — The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. The Company will generally classify a loan acquired in a business acquisition as PCD if it meets any of the following criteria:
PCD loans are recorded at the amount paid. An ACLL is determined using the same methodology as other loans held for investment. The initial ACLL determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and ACLL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACLL are recorded through the Provision. Allowance for Credit Losses on Loans — The ACLL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACLL when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACLL is measured on a collective or pooled basis when similar risk characteristics exist. The first table of Footnote 4 illustrates the Company’s loan portfolio by ACLL risk pool. This pooling method is primarily based on the pool’s collateral type or the pool’s purpose and generally follows the Bank’s loan segmentation for regulatory reporting. For each of its loan pools, the Company uses a “static-pool” method, which analyzes historical closed pools of similar loans over their expected lives to attain a loss rate. This loss rate is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on a forecast of the U.S. national unemployment rate, which has shown a relatively strong historical correlation to the Bank’s loan losses. Subsequent to the one-year forecast, loss rates are assumed to immediately revert back to the historical loss rate calculated under a static pool analysis plus adjustments for current conditions. Loans that do not share risk characteristics are evaluated on an individual basis, with the Company choosing to individually evaluate all TDRs. Loans evaluated individually are not also included in the pooled evaluation. When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate. 16 Determining Expected Loan Lives: Expected credit losses are estimated over the contractual loan term, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower, or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Troubled Debt Restructurings — A TDR is a 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 Company measures the ACLL for TDRs individually using either a discounted cash flow method or the collateral method, if the TDR is collateral dependent. TDRs whose ACLL is measured using a discounted cash flow method use the original pre-modification interest rate on the loan for discounting. Performing loans modified due to the COVID-19 pandemic are not classified as TDRs. For additional discussion regarding loans modified due to the COVID-19 pandemic, see Footnote 17 “Subsequent Events” in this section of the filing. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures— The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACLC is adjusted as a Provision. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The likelihood that funding will occur is based on the historical usage rate of such commitments. A listing of off-balance sheet credit exposures the Company generally considers for an ACLC is illustrated in Footnote 9 in this section of the filing. The ACLC is recorded as a component of other liabilities on the Company’s balance sheet. Credit loss expense resulting from Provisions to the ACLC are recorded on the Company’s income statement as component of other noninterest expense. 17 2. INVESTMENT SECURITIES
Available-for-Sale Debt Securities
The
Held-to-Maturity Debt Securities
The
Sales of Available-for-Sale Debt Securities
During the three
Debt Securities by Contractual Maturity
The amortized cost and fair value of debt securities by contractual maturity at
Unrealized-Loss Analysis on Debt Securities
Debt securities
At
At December 31,
At
Mortgage Backed Securities and Collateralized Mortgage Obligations
At
Trust Preferred Security
During 2015, the Parent Company purchased a $3 million floating rate TRUP at a price of 68% of par. The coupon on this security is based on the 3-month LIBOR rate plus 159 basis points. The Company performed an initial analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.
The Bank owns one private label mortgage backed security with a total carrying value of
See additional discussion regarding the Bank’s private label mortgage backed security under Footnote 10 “Fair Value” in this section of the filing.
Rollforward of the Allowance for Credit Losses on Debt Securities The table below presents a rollforward for the three months ended March 31, 2020 of the ACLS on AFS and HTM debt securities:
The Company recorded Provisions to the ACLS on its AFS and HTM corporate bonds during the three months ended March 31, 2020 based on higher PD and LGD estimates on these bonds resulting from economic concerns from the COVID-19 pandemic. There were no HTM debt securities on nonaccrual or past due over 89 days as of March 31, 2020. All of the Company’s HTM corporate bonds were rated investment grade as of March 31, 2020. There were no HTM debt securities considered collateral dependent as of March 31, 2020. 20 Pledged Debt Securities
Debt securities pledged to secure public deposits, securities sold under agreements to repurchase and debt securities held for other purposes, as required or permitted by law are as follows:
Equity Securities
The carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values were as follows:
For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of income were as follows:
3. LOANS HELD FOR SALE
In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans originated for sale are originated and sold through the RCS segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 11 “Mortgage Banking Activities” of this section of the filing.
Activity for consumer loans
Consumer Loans Held for Sale, at the Lower of Cost or Fair Value
RCS originates for sale 90% of the balances from its line-of-credit product and a portion of its hospital receivables product.
Activity for consumer loans held for sale and carried at the lower of cost or market value was as follows:
4. LOANS AND ALLOWANCE FOR
The composition of the loan portfolio follows:
*Identifies loans to borrowers located primarily outside of the Bank’s market footprint. **Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. See table directly below for expanded detail.
The following table reconciles the contractually receivable and carrying amounts of loans:
Credit Quality Indicators
The Company’s loan segments as of March 31, 2020 remain unchanged from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The following tables include loans by segment and risk
24
*The above
Allowance for
The following table presents the activity in the
The cumulative loss rate used as the basis for the estimate of ACLL at March 31, 2020 was primarily based on a static pool analysis of each of the Company’s loan pools using the Company’s loss experience from 2013 through 2019, adjusted for current and forecasted conditions that considered the economic impact of the COVID-19 pandemic. As of March 31, 2020 the Company forecasted for the upcoming year that the U.S. unemployment rate would rise above 8%, and the Company’s loan losses would rise to levels consistent with this rise in U.S. unemployment. Furthermore, it is management’s expectation that the Company’s loss rates will immediately revert back after this one-year forecast to long-term historical averages, which include periods of economic expansion and contraction.
See additional detail regarding the Company’s response to COVID-19 under Footnote 17 “Subsequent Events” of this section of the filing.
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans, nonperforming assets and select credit quality ratios follows:
*Loans on nonaccrual status include **Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
The following
* Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
* Includes interest income for loans on nonaccrual loans as of the beginning of the period that were paid off during the period.
Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous
Delinquent Loans
The following tables present the aging of the recorded investment in loans by class of loans:
*All loans past due 90-days-or-more, excluding small balance consumer loans, were on nonaccrual status. **Delinquent status may be determined by either the number of days past due or number of payments past due. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. *** Represents total loans 30-days-or-more past due by aging category divided by total loans. 29
* All loans past due 90-days-or-more, excluding smaller balance consumer loans, were on nonaccrual status. ** Delinquent status may be determined by either the number of days past due or number of payments past due. ***Represents total loans 30-days-or-more past due by aging category divided by total loans.
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2020:
Collateral-dependent loans are generally secured by real estate or personal property. If there is insufficient collateral value to secure the Company’s recorded investment in these loans, they are charged down to collateral value less estimated selling cost, when selling costs are applicable. Selling costs range from 10%-13%, with those percentages based on annual studies performed by the Company. Impaired Loans
Information regarding the Bank’s impaired loans follows:
The following
The following
Troubled Debt Restructurings
A TDR is a 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 their debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Bank’s internal underwriting policy.
Nonaccrual loans modified as TDRs typically remain on nonaccrual status and continue to be reported as nonperforming loans for a minimum of six consecutive months. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. At
Detail of TDRs differentiated by loan type and accrual status follows:
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
As of
34 A summary of the categories of TDR loan modifications by respective performance as of
The tables above are inclusive of loans that were TDRs at the end of previous periods and were re-modified, e.g., a maturity date extension during the current period.
As of
There was no significant change between the pre and post modification loan balances for the three months ending
The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of
Foreclosures
The following table presents the carrying amount of foreclosed properties held as a result of the Bank obtaining physical possession of such properties:
The following table presents the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction:
Easy Advances The Company’s TRS segment offered its EA product during the first two months of Information regarding EAs follows:
5. DEPOSITS
The composition of the deposit portfolio follows:
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase consist of short-term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit clients arising from the Bank’s treasury management program. While comparable to deposits in their transactional nature, these overnight liabilities to clients 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. Should the fair value of currently pledged securities fall below the associated repurchase agreements, the Bank would be required to pledge additional securities. To mitigate the risk of under collateralization, the Bank typically pledges at least two percent more in securities than the associated repurchase agreements. All such securities are under the Bank’s control.
At
7. RIGHT-OF-USE ASSETS AND
The Company
Prior to the release of these financial statements, the Company had not executed
The following table presents information concerning the Company’s operating lease expense recorded as a noninterest expense within the category “Occupancy and equipment, net” for the three
The following table presents the weighted average remaining term and weighted average discount rate for the Company’s non-short-term operating leases as of
40 The following table presents a maturity schedule of the Company’s operating lease liabilities based on undiscounted cash flows, and a reconciliation of those undiscounted cash flows to the operating lease liabilities recognized on the Company’s balance sheet as of March 31, 2020:
8. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances were as follows:
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
Aggregate future principal payments on FHLB advances based on contractual maturity and the weighted average cost of such advances are detailed below:
41 Due to their nature, the Bank considers average balance information more meaningful than period-end balances for its overnight borrowings from the FHLB. Information regarding overnight FHLB advances follows:
The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:
9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
The Company, 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 Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.
The Company also extends binding commitments to clients and prospective clients. Such commitments assure a borrower of financing for a specified period of time at a specified rate.
An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. 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.
The following table presents the Company’s commitments, exclusive of Mortgage Banking loan commitments, for each period ended:
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client 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 Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material. The following table presents a rollforward of the ACLC for the three months ended March 31, 2020:
The Company increased its ACLC during the three months ended March 31, 2020 based on higher loss expectations on expected usage of unused commitments. Current and forecasted economic concerns driven by the COVID-19 pandemic drove the Company’s higher loss expectations. See additional detail regarding the Company’s response to COVID-19 under Footnote 17 “Subsequent Events” of this section of the filing.
10. 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:
Available-for-sale debt securities: Except for the Bank’s private label mortgage backed security and its TRUP investment, the fair value of
The Bank’s private label mortgage backed security remains illiquid, and as such, the Bank classifies this security as a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. 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 2 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage backed security.
The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate market value at
Equity securities with readily determinable fair value: Quoted market prices in an active market are available for the Bank’s
The fair value of the Company’s Freddie Mac preferred stock is determined by matrix pricing, as described above (Level 2 inputs).
Mortgage loans held for sale, at fair value: 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.
Consumer loans held for sale, at fair value:
Consumer loans held for investment, at fair value: The Bank held an immaterial amount of consumer loans at fair value through a consumer loan program the Company is currently unwinding. The fair value of these loans was based on the discounted cash flows of the underlying loans,
Mortgage Banking derivatives: Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and interest 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: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant dealer counterparty and validated against the Company’s 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.
Mortgage servicing rights: On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded, and the respective individual tranche is carried at fair value. If the carrying amount of an individual tranche 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 can generally be validated against available market data (Level 2).
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
All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2 or 3 assets during the three
Private Label Mortgage Backed Security
The following table presents a reconciliation of the Bank’s private label mortgage backed security measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
The fair value of 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 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.
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 different fair value measurement.
Quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage backed security follows:
Trust Preferred Security
The following table presents a reconciliation of the Company’s TRUP measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
The fair value of the Company’s TRUP investment is based on the most recent bid price for this instrument, as provided by a third-party broker.
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 loans and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of
The aggregate fair value, contractual balance, and unrealized gain were as follows:
The total amount of gains and losses from changes in fair value included in earnings for the three
Consumer Loans Held for
RCS carries loans originated through its installment loan program at fair value. 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 or on nonaccrual as of
The significant unobservable inputs in the fair value measurement of the Bank’s
The following table presents quantitative information about recurring Level 3 fair value measurement inputs for installment loans:
The aggregate fair value, contractual balance, and unrealized gain on consumer loans held for
The total amount of net gains from changes in fair value included in earnings for consumer loans held for
Assets measured at fair value on a non-recurring basis are summarized below:
*The difference between the carrying value and the fair value of collateral-dependent/impaired loans measured at fair value is reconciled in a subsequent table of this Footnote.
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:
Collateral Dependent/Impaired Loans
Collateral-dependent impaired loans are generally measured for
The carrying amounts and estimated exit price fair values of all financial instruments follow:
11. MORTGAGE BANKING ACTIVITIES
Mortgage Banking activities primarily include residential mortgage originations and servicing.
Activity for mortgage loans held for sale, at fair value, was as follows:
The following table presents the components of Mortgage Banking income:
Activity for capitalized mortgage servicing rights was as follows:
Other information relating to mortgage servicing rights follows:
*Rates are applied to individual tranches with similar characteristics.
Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and interest 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. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. 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.
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 decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these 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 lock loan
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:
12. INTEREST RATE SWAPS
Interest rate swap derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a cash flow hedging relationship. 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 OCI. For derivatives not designated as hedges, the gain or loss is recognized in current period earnings.
Interest Rate Swaps Used as Cash Flow Hedges
The Bank entered into two interest rate swap agreements (“swaps”) during 2013 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 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month LIBOR. 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.
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 liabilities with changes in fair value recorded in OCI. The amount included in AOCI 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.
The following table reflects information about swaps designated as cash flow hedges:
The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income:
The following table presents the net gains (losses) recorded in OCI and the consolidated statements of income relating to the swaps designated as cash flow hedges:
The estimated net amount of the existing losses reported in AOCI at
Non-hedge Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or client owes the Bank, and results in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty, and therefore, has no credit risk.
A summary of the Bank’s interest rate swaps related to clients is included in the following table:
The Bank is required to pledge securities as collateral when the Bank is in a net loss position for all swaps with dealer counterparties when such net loss positions exceed $250,000. The fair value of cash or investment securities pledged as collateral by the Bank to cover such net loss positions totaled
13. EARNINGS PER SHARE
The Company calculates earnings per share under the two-class method. Under the two-class method, earnings available to common shareholders for the period are allocated between Class A Common Stock and Class B Common Stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. The difference in earnings per share between the two classes of common stock results from the 10% per share cash dividend premium paid on Class A Common Stock over that paid on Class B Common Stock.
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:
*To arrive at undistributed earnings per share, undistributed net income is first Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:
14. OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
The table below presents the significant amounts reclassified out of each component of AOCI:
The following is a summary of the AOCI balances, net of tax:
15. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables present the Company’s net revenue by reportable segment:
62 The following represents information for significant revenue streams subject to ASC 606:
Service charges on deposits – The Company earns revenue for account-based and event-driven services on its retail and commercial deposit accounts. Contracts for these services are generally in the form of deposit agreements, which disclose fees for deposit services. Revenue for event-driven services is recognized in close proximity or simultaneously with service performance. Revenue for certain account-based services may be recognized at a point in time or over the period the service is rendered, typically no longer than a month. Examples of account-based and event-driven service charges on deposits include per item fees, paper-statement fees, check-cashing fees, and analysis fees.
Net refund transfer fees – An RT is a fee-based product offered by the Bank through third-party tax preparers located throughout the
The Company executes contracts with individual Tax Providers to offer RTs to their taxpayers. RT revenue is recognized by the Bank immediately after the taxpayer’s refund is disbursed in accordance with the RT contract with the taxpayer. The fee paid by the taxpayer for the RT is shared between the Bank and the Tax Providers based on contracts executed between the parties.
The Company presents RT revenue net of any amounts shared with the Tax Providers. The Bank’s share of RT revenue is generally based on the obligations undertaken by the Tax Provider for each individual RT program, with more obligations generally corresponding to higher RT revenue share. The significant majority of net RT revenue is recognized and obligations under RT contracts fulfilled by the Bank during the first half of each year. Incremental expenses associated with the
Interchange fee income – As an “issuing bank” for card transactions, the Company earns interchange fee income on transactions executed by its cardholders with various third-party merchants. Through third-party intermediaries, merchants compensate the Company for each transaction for the ability to efficiently settle the transaction and for the Company’s willingness to accept certain risks inherent in the transaction. There is no written contract between the merchant and the Company, but a contract is implied between the two parties by customary business practices. Interchange fee income is recognized almost simultaneously by the Company upon the completion of a related card transaction.
The Company compensates its cardholders by way of cash or other “rewards” for generating card transactions. These rewards are disclosed in cardholder agreements between the Company and its cardholders. Reward costs are accrued over time based on card transactions generated by the cardholder. Interchange fee income is presented net of reward costs within noninterest income.
Net gains/(losses) on other real estate – The Company routinely sells OREO it has acquired through loan foreclosure. Net gains/(losses) on OREO reflect both 1) the gain or loss recognized upon an executed deed and 2) mark-to-market writedowns the Company takes on its OREO inventory.
The Company generally recognizes gains or losses on OREO at the time of an executed deed, although gains may be recognized over a financing period if the Company finances the sale. For financed OREO sales, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.
Mark-to-market writedowns taken by the Company during the property’s holding period are generally at least 10% per year but may be higher based on updated real estate appraisals or BPOs. Incremental expenditures to bring OREO to salable condition are generally expensed as-incurred.
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16. 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 business units), which are then aggregated if operating performance, products/services, and clients are similar.
As of
The nature of segment operations and the primary drivers of net revenue by reportable segment are provided below:
The accounting policies used for Republic’s reportable segments are generally the same as those described in the summary of significant accounting policies in the Company’s 64 Segment information follows:
*
65 17. SUBSEQUENT EVENTS COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. During March 2020, to slow the spread of COVID-19, jurisdictions within the U.S. began to impose increasingly tighter economic and social restrictions on the population in general and non-essential businesses in particular. These restrictions effectively suspended or curtailed economic activity for many industries across the U.S., with industries in the Company’s market footprint impacted. The potential financial impact of the COVID-19 pandemic is unknown at this time; however, this pandemic and the public’s response to it could cause the Company to experience a material adverse impact on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, MSRs, deferred tax assets, or counter-party risk derivatives. On March 27, 2020, the U.S. Congress passed the CARES Act, which provided several forms of economic relief designed to defray the impact of COVID-19. In April 2020, through its own independent relief efforts and CARES Act provisions, the Company began deferring and forbearing on loan principal and/or interest payments for many of its loan clients. The deferral and forbearance periods were generally three months. Loans deferred or in forbearance as a result of the pandemic are generally not considered TDRs by the Company if, prior to the pandemic, the borrower was performing in accordance with loan terms. The following table illustrates the loans for which COVID-19 related deferral and forbearance agreements were executed subsequent to March 31, 2020 and through April 30, 2020.
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The CARES Act provided for the SBA PPP. The PPP allows the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the pandemic. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. The following table
To provide liquidity to banks administering the SBA’s PPP, the FRB created the PPPLF, a lending facility secured by the PPP loans of the participating banks. The
PPPLF.
67 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. 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. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the
Republic Bancorp Capital Trust is a Delaware statutory business trust that is a wholly-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 I Item 1 “Financial Statements.”
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,”
Broadly speaking, forward-looking statements include:
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 the following:
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For disclosure regarding the impact to the Company’s financial statements of
BUSINESS SEGMENT COMPOSITION
As of
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of
Kentucky — Metropolitan Louisville — 18 Central Kentucky —
Georgetown — 1 Lexington — 5 Shelbyville — 1
Northern Kentucky — 3 Covington — 1 Crestview Hills — 1 Florence — 1 Southern Indiana — 3 Floyds Knobs — 1 Jeffersonville — 1 New Albany — 1 Metropolitan Tampa, Florida — 8* Metropolitan Cincinnati, Ohio — Metropolitan Nashville, Tennessee — 3* *
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
69 As of
The Bank’s principal lending activities consist of the following:
Retail Mortgage Lending — Through its retail banking centers and its Consumer Direct channel, the Bank originates single family, residential real estate loans. In addition, the Bank originates HEALs and HELOCs through its retail banking centers. Such loans are generally collateralized by owner occupied property.
Consumer Direct Lending — Through its Consumer Direct channel, formerly named its Internet Lending channel, the Bank accepts online loan applications for its RB&T branded products through its website at www.republicbank.com. Historically, the majority of loans originated through its Consumer Direct channel have been within the Bank’s traditional markets of Kentucky, Florida, Indiana, and Tennessee. Other states where loans are marketed include Alabama, Arizona, California, Colorado, Georgia, Illinois, Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia, Washington, and Wisconsin, as well as, the District of Columbia. Commercial Lending — The Bank conducts commercial lending activities primarily through Corporate Banking, Commercial
In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department. Clients are generally located within the Bank’s market footprint, or in
Construction and Land Development Lending —
Consumer Lending — Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank’s markets.
Aircraft Lending — The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.
The Bank’s other Traditional Banking activities generally consist of the following:
MemoryBank —
Private Banking — The Bank provides financial products and services to
Treasury Management Services — The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and 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 of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com. 70
Mobile Banking — The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.
Other Banking Services — The Bank also provides title insurance and other financial institution-related products and services.
Bank Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(II) Warehouse Lending segment
Through its Warehouse
See additional detail regarding the Warehouse Lending segment under Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(III) Mortgage Banking segment
Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term
See additional detail regarding the Mortgage Banking segment under Footnote 11 “Mortgage Banking Activities” and Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(IV) Tax Refund Solutions segment Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost 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 by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.” 71 The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund.
The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is based primarily on the prior-year’s tax refund payment patterns. Because the substantial majority of the EA volume occurs each year before that year’s tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund payment patterns change materially between years.
In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EA’s product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA product offering and therefore on the Company’s financial condition and results of operations. See additional detail regarding the
Republic Payment Solutions division — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. 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 TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
(V) Republic Credit Solutions segment
Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors including the consumer’s ability to repay. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
72 The Bank sells participation interests in the RCS line-of-credit product. These participation interests are a 90% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying RCS line-of-credit account with each borrower. The RCS line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale through this program are carried at the lower of cost or fair value. |
· | RCS healthcare receivables |
From the fourth quarter of 2015
· | RCS installment loan products – From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment loan product across the U.S. using a third-party service provider. As part of the program, the Bank sold 100% of the balances generated through the program back to its third-party service provider approximately 21 days after origination. During the second quarter of 2018, the Bank and its third-party service provider suspended the origination of new loans and the sale of unsold loans through this program. Since program suspension in 2018, the Bank has carried all unsold loans under this program as “held for investment” on its balance sheet and has continued to wind down those balances. Additionally, loans under this program are carried at fair value under a fair value option on the Bank’s balance sheet with the portfolio marked to market monthly. Approximately $827,000 of balances remained held for investment under this program as of March 31, 2020. |
Through a new program launched in December 2019, the Bank piloted throughbegan offering RCS a credit-card productinstallment loans with terms ranging from 12 to generally subprime60 months to borrowers acrossin multiple states. A third-party service provider subject to the United States through one third-party marketer/servicer. For outstanding cards,Bank’s oversight and supervision provides the Bank with marketing services and loan servicing for these RCS sold 90%installment loans. The Bank is the lender for these RCS installment loans, and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this RCS installment loan product. Currently, all loan balances originated under this RCS installment loan program are carried as “held for sale” on the balances generated within two business days of each transaction occurrenceBank’s balance sheet, with the intention to a special purpose entity relatedsell these loans to its third-party marketer/servicer and retainedservice provider sixteen days following the remaining 10% interest. During the fourth quarter of 2018, the Bank and its third-party marketer/servicer finalized an agreement to sell 100%Bank’s origination of the existingloans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to an unrelated third party. The sale of the RCS credit-card portfolio receivables was settled in January 2019 and all accounts and related assets were transferred in March 2019.market monthly.
The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”
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RECENT EVENTS
With the onset of the COVID-19 pandemic, the last month of the first quarter of 2020 was primarily focused on the impact of the pandemic and Republic’s corporate response to it. In that regard, the Company’s primary focus in response to the pandemic has been:
(1) safeguarding the health of the Company’s associates and its clients;
(2) cushioning the Company’s clients from the pandemic’s negative economic impact;
(3) mitigating the Company’s risk of loss; and
(4) measuring, forecasting and planning for the negative financial impact of the pandemic to the Company on a go-forward basis.
With respect to safeguarding the Company’s associates and clients, Republic quickly and successfully enacted a social distancing protocol, which allowed the substantial majority of the Company’s back-office operations to work from home. For those personnel not able to work from home, Republic physically distanced these associates from each other within its office space. Within the Company’s banking centers, Republic changed its in-person client service hours to be by appointment-only in order to limit the number of people within the banking centers at any point in time. In addition, the Company diverted much of its client service interaction to its drive-thru operations, with many of the drive-thru transactions facilitated through ITMs.
To help cushion the impact of the COVID-19 virus on the Company’s deposit clients, Republic suspended certain deposit fees for transaction accounts for a yet-to-be-determined period of time. In addition, the Company also began waiving early withdrawal penalties for its term certificates of deposits (“CDs”) during the crisis so these clients could access this source of funds at no additional cost. For the Company’s retail loan clients, Republic began offering various payment relief options depending on the loan program. In order to respond to anticipated demand for the SBA’s PPP, the Company quickly refocused its salesforce and many of its back-office operations to facilitate the program. Republic was able to start accepting applications the first day of the program.
In order to mitigate future risks and uncertainties, Republic increased its communication frequency across the organization. The Company started with its Business Continuity Planning team, enacting a seven-day-a-week daily call with the sales and operational areas to ensure that everyone in the organization was aware of the major issues at hand and that the Company was protecting its assets while providing proper service and attention to its clients.
In addition to its daily operational calls, the Company also added a second Asset-Liability Committee meeting each week to ensure its liquidity monitoring remains diligent and its loan and deposit pricing remains appropriate for the current risk environment. The Company also pledged additional collateral to the FHLB and the Federal Reserve discount window since the pandemic began, in order to fortify its liquidity position over the near term for any possible unanticipated cash-flow needs.
To further mitigate risks within its loan portfolio, the Company made changes to its overall underwriting matrices during March, including revisions to many of its minimum credit score requirements as well as its loan-to-value maximums for newly underwritten commercial and residential clients. Also, through its third-party marketer/servicer, the Company reduced marketing for its subprime RCS line-of-credit product. With the on-going fluidity in the pandemic situation, management will continue to closely monitor the Bank’s underwriting standards and make appropriate revisions as facts and circumstances warrant.
Overall, the Company is still in the early process of measuring, forecasting and planning for the negative financial impact of the pandemic. As previously disclosed, Republic adopted the CECL accounting method on January 1st of this year. Upon adoption, Republic increased its ACLL by approximately $6.7 million in order to account for the expected life-of-loan credit losses within its portfolio. This increase was offset with a tax-effected decrease to retained earnings. With the onset of the COVID-19 pandemic, Congress provided companies with an option to delay adoption of CECL within the recently enacted CARES Act. The Company, however, chose to move forward with CECL as previously planned due to the uncertainty around future adoption later this year. As a result, the Company recorded an additional $7.2 million charge to its credit loss expense during the first quarter of 2020 to account for potential losses within the portfolio brought about by the impact of the pandemic. Republic’s credit loss expense could be subject to future fluctuations, up and down, as additional information becomes available about this very uncertain pandemic situation.
In regard to industry concentrations, the Bank lends to clients in industries that have been deemed “non-essential” or that have had their business models upended by the pandemic. Further economic damage to these clients may leave them unable to service their debt with the Bank. The following table exhibits Republic’s top 20 loan concentrations by industry as of March 31, 2020.
74
Table 1 — Top 20 Industry Concentrations
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(dollars in thousands) |
|
| Mar. 31, 2020 |
| ||||||||
Industry |
|
| Outstanding |
|
| Available to Draw |
| Total Committed |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Credit (primarily Warehouse Lines of Credit) |
|
| $ | 854,191 |
|
| $ | 319,334 |
| $ | 1,173,525 |
|
Lessors of Nonresidential Buildings (except Miniwarehouses) |
|
|
| 588,503 |
|
|
| 28,404 |
|
| 616,907 |
|
Lessors of Residential Buildings and Dwellings |
|
|
| 440,979 |
|
|
| 40,953 |
|
| 481,932 |
|
Commercial Banking |
|
|
| 52,997 |
|
|
| 34,753 |
|
| 87,750 |
|
Hotels (except Casino Hotels) and Motels |
|
|
| 76,665 |
|
|
| 3,443 |
|
| 80,108 |
|
Offices of Physicians (except Mental Health Specialists) |
|
|
| 62,823 |
|
|
| 16,075 |
|
| 78,898 |
|
Limited-Service Restaurants |
|
|
| 63,004 |
|
|
| 596 |
|
| 63,600 |
|
Full-Service Restaurants |
|
|
| 49,384 |
|
|
| 4,307 |
|
| 53,691 |
|
Used Car Dealers |
|
|
| 20,731 |
|
|
| 19,867 |
|
| 40,598 |
|
Religious Organizations |
|
|
| 30,125 |
|
|
| 3,789 |
|
| 33,914 |
|
Fitness and Recreational Sports Centers |
|
|
| 30,954 |
|
|
| 1,455 |
|
| 32,409 |
|
Offices of Lawyers |
|
|
| 22,558 |
|
|
| 6,910 |
|
| 29,468 |
|
New Housing For-Sale Builders |
|
|
| 17,537 |
|
|
| 7,403 |
|
| 24,940 |
|
Lessors of Other Real Estate Property |
|
|
| 22,104 |
|
|
| 1,219 |
|
| 23,323 |
|
Offices of Dentists |
|
|
| 21,656 |
|
|
| 1,411 |
|
| 23,067 |
|
Line-Haul Railroads |
|
|
| 10,816 |
|
|
| 10,000 |
|
| 20,816 |
|
Commercial and Institutional Building Construction |
|
|
| 13,221 |
|
|
| 7,285 |
|
| 20,506 |
|
Elementary and Secondary Schools |
|
|
| 16,564 |
|
|
| 3,454 |
|
| 20,018 |
|
Fresh Fruit and Vegetable Merchant Wholesalers |
|
|
| 10,372 |
|
|
| 9,249 |
|
| 19,621 |
|
Legislative Bodies |
|
|
| 18,704 |
|
|
| — |
|
| 18,704 |
|
Total Top 20 Industry Concentrations |
|
| $ | 2,423,888 |
|
| $ | 519,907 |
| $ | 2,943,795 |
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|
See additional detail regarding the impact of COVID-19 under:
· | Part I Item 1 “Financial Statements” |
o | Footnote 2 “Investment Securities” |
o | Footnote 4 “Loans and Allowance for Credit Losses” |
o | Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” |
o | Footnote 17 “Subsequent Events” |
· | Part II Item 1A “Risk Factors” |
OVERVIEW (Three Months Ended June 30, 2019March 31, 2020 Compared to Three Months Ended June 30, 2018)March 31, 2019)
Total Company net income for the secondfirst quarter of 20192020 was $18.0$26.7 million, a $2.3$2.8 million, or 15%10%, increasedecrease from the same period in 2018.2019. Diluted EPS increaseddecreased to $0.86$1.28 for the quarterthree months ended June 30, 2019March 31, 2020 compared to $0.74$1.41 for the same period in 2018.2019. Net income was down from the first quarter of 2019, as it was significantly impacted by the increase in the Company’s estimated ACL in response to the potential impact of the COVID-19 pandemic.
OtherThe following are general highlights by reportable segment consisted of the following:segment:
Traditional Banking segment
· | Net income |
· | Net interest income |
· |
|
· | Total noninterest income increased |
· | Total noninterest expense increased |
· | Total nonperforming loans to total loans for the Traditional Banking segment was 0.58% at March 31, 2020 compared to 0.65% at December 31, 2019. |
75
· | Delinquent loans to total loans for the Traditional Banking segment was 0.34% at March 31, 2020 compared to 0.36% at December 31, 2019. |
Warehouse Lending segment
· | Net income |
· | Net interest income |
· | The Warehouse |
· | Total committed Warehouse lines remained at |
· | Average line usage was |
Mortgage Banking segment
· | Within the Mortgage Banking segment, |
· | Overall, Republic’s originations of secondary market loans totaled |
Tax Refund Solutions segment
· | Net income decreased |
· | Net interest income increased |
· | Total EA originations were $388 million during the first quarter of 2020 compared to $389 million for the first quarter of 2019. |
· | Overall, TRS recorded a net charge to |
· | Noninterest income |
· | Net RT revenue |
· | Noninterest expense was |
74
Republic Credit Solutions segment
· | Net income increased |
· | Net interest income |
· | Overall, RCS recorded a net charge to |
· | Noninterest income |
· | Noninterest expense was |
76
· | Total nonperforming loans to total loans for the RCS segment was 0.30% at March 31, 2020 compared to 0.10% at December 31, 2019. |
· | Delinquent loans to total loans for the RCS segment was 6.94% at March 31, 2020 compared to 7.25% at December 31, 2019. |
RESULTS OF OPERATIONS (Three Months Ended June 30, 2019March 31, 2020 Compared to Three Months Ended June 30, 2018)March 31, 2019)
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 interest-bearing 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.
The Core Bank indexes many of its financial instruments to either the FFTR, Prime, or LIBOR. These short-term market rates have generally trended higher since December 2015. During this period, longer-term market rates have generally not increased as much, causing the yield curve to flatten. During the first half of 2019, longer-term market rates began to generally trend lower, while the short-term market rates remained relatively stable, causing short-term market rates to be higher than some longer-term market rates on the yield curve. This event, in which short-term market rates are higher than longer-term market rates, is labelled an inverted yield curve.
A continued flattening or inverting of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease further or further invert, will likely have a negative impact on the Company’s net interest income and net interest margin. Additionally, while parallel increases in short-term and long-term interest rates are generally believed by management to be more favorable to the Core Bank’s net interest income and net interest margin in the near term, management believes stable interest rates or a parallel decrease in short-term and long-term interest rates will likely have a negative impact on the Bank’s net interest income and net interest margin. Under any interest rate scenario, however, if the Core Bank is unable to reasonably maintain its deposit balances and the cost of those deposits at acceptable levels, it will likely have a negative impact to the Core Bank’s net interest income and net interest margin.
Unknown variables, which may impact the Company’s net interest income and net interest margin in the future, include, but are not limited to, the actual shape and steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.
See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.
Total Company net interest income increased $2.9 million, or 6%,1% during the secondfirst quarter of 20192020 compared to the same period in 2018. Growth in average loans generally drove the Company’s rise in net interest income.
2019. Total Company net interest margin decreased to 4.12%5.57% during the secondfirst quarter of 20192020 compared to 4.19%5.66% for the same period in 2018.2019.
A large amount of the Company’s financial instruments track closely with or are primarily indexed to either the FFTR, Prime, or LIBOR. These market rates trended higher from December 2015 through December 2018 but began trending lower again during 2019 as the FOMC reduced the FFTR by 75 basis points during the year. The Company’s overallFOMC further lowered the FFTR 100 basis points during the first quarter of 2020 following market reactions to the COVID-19 pandemic. While the Company and its operating segments were generally able to maintain their net interest spreads during the quarter as compared to the first quarter of 2019, these same units experienced compression in their net interest margins compared to the first quarter of 2019. The compression in the net interest margin decreased due mainly to a change inacross the Company and its earning-assets mix, as the average balance of RCS’ substantially-higher-yielding line-of-credit and subprime credit card products as a percent of total interest-earning assets decreased from the second quarter of 2018operating segments was primarily attributable to the second quarter of 2019. In addition, the Core Bank’s average outstanding balances decreased value of the Company’s Warehouse lines of credit increased as a percent of total interest-earning assetsnoninterest-bearing funding sources. The difference between the Company’s net interest margin and net interest spread was 32 basis points during this same period. Concurrently, while the average outstanding Warehouse balances to total interest-earning assets increased from the secondfirst quarter of 20182020 compared to 40 basis points during the secondfirst quarter of 2019, with the Warehousedifferential representing the decreased value to the net interest margin compressed dueof noninterest-bearing deposits and stockholders’ equity. The decrease in this value resulted from a 25 basis-point decline in the yield on the Company interest-earning assets from period to higher funding costs combinedperiod. Management believes the Company’s net interest margin, as well as the net interest margin of its various operating segments will likely continue to decline in the near term as its earning asset yields continue to reprice lower, while further decreases in the rates of its interest-bearing liabilities are limited.
In addition to the general compression expected to the Company’s net interest margin in the near term, the Company’s net interest margin could be further negatively impacted by a negative interest rate environment. Some market experts are predicting a possible negative interest rate environment for the U.S., in which the yield on U.S. Treasury securities becomes negative for various terms over the yield curve. Recently, shorter term U.S. Treasury securities did experience negative yields for a brief period of time. Overall, a sustained negative interest rate phenomenon across various points on the yield curve has never occurred in the U.S. Because such an environment has never occurred in the U.S., it is difficult for management to project the impact of such an environment with competitive pricingthe Company’s existing interest rate risk model. Management does believe, however, a negative interest rate environment would likely significantly and negatively impact the Company’s net interest margin further, as overall asset yields continue to drop. Unknown variables, which may further impact the Company’s net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.
7577
pressures, which caused the overall Warehouse loan yield to decline during the same period. The margin compression resulting from the change in the Company’s interest-earning asset mix described above, more than offset the margin expansion that occurred within the Traditional Banking segment during the second quarter of 2019 compared the same period in 2018.
The following were the most significant components affecting the Company’s net interest income by reportable segment follow: segment:
Traditional Banking segment
The Traditional Banking’s net interest income increased $2.5 million,decreased $727,000, or 6%2%, for the secondfirst quarter of 20192020 compared to the same period in 2018.2019. Traditional Banking’s net interest margin was 3.75%3.80% for the secondfirst quarter of 2019, an expansion2020, a decrease of four basis points over the same period in 2018.2019.
The increasesdecrease in the Traditional Bank’s net interest income and net interest margin during the secondfirst quarter of 2019 were2020 was primarily attributable to the following factors:
· | Average loans |
· |
|
Warehouse Lending segment
DespiteAs mortgage rates fell during the first quarter of 2020, a 17%surge in consumer refinance volume for Warehouse clients drove a 58% increase in average outstanding Warehouse balances duringloans for the second quarter, of 2019 comparedwhich more than offset a 16-basis point decline in the Warehouse net interest margin. Pricing pressure to the second quarterBank on Warehouse lines of 2018, a 59-basis-pointcredit resulting from the negative impact of an inverted yield curve on the Bank’s Warehouse clients primarily drove the 16-basis-point compression in the Warehouse segment’s net interest margin duringmargin.
Tax Refund Solutions segment
TRS’s net interest income increased $87,000 for the first quarter of 2020 compared to the same period drovein 2019.
TRS’s EA product earned $19.3 million in interest income during the first quarter of 2020, a $207,000 decrease in its net interest income. The following factors led$405,000 increase resulting primarily from modifications to the overall changes in the Warehouse segment’s net interest margin and net interest income:
|
|
|
|
Dueproduct’s pricing tiers. EA pricing includes a direct fee to the volatility and seasonalitytaxpayer, with the annual percentage rate to the taxpayer for his or her portion of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demandtotal fee being less than 36% for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 64% during the third quarter of 2015. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 57% during 2016.all offering tiers.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
76
Republic Credit Solutions segment
RCS’s net interest income increased $91,000,decreased $445,000, or 1%6%, from the secondfirst quarter of 20182019 to the secondfirst quarter of 2019.2020. The increasedecrease was driven primarily by increasesa decrease in interestfee income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income decreased to $6.0 million during the first quarter of 2020 compared to $6.6 million during the same period in 2019 and hospital receivables products partially offset by aaccounted for 80% and 81% of all RCS interest income on loans during the periods. The decrease in interest income from RCS’s discontinued credit-card product. The overall net interest margin at RCS declined from 36.6% duringloan fees was the second quarterdirect result of 2018 to 26.6%a decline in outstanding line-of-credit balances as the Company, through its third-party marketer/servicer, reduced marketing for the second quarter of 2019. The decline in net interest margin at RCS was driven by a change in the mix of interest earning assets, as RCS discontinued its higher-yielding subprime credit card product in January of 2019 and substantially increasedresponse to the average balances of its lower-yielding hospital receivables over the second quarter of 2018.COVID-19 pandemic.
Future long-term growth in interestloan fee income from RCS’s higher-yielding line-of-credit product is restrictedwill likely continue to be negatively impacted by athe on-going COVID-19 pandemic. As of March 31, 2020 the current on-balance-sheet Board-approved risk limit ofwas $40 million for the Company. As of June 30, 2019,March 31, 2020, the total outstanding on-balance-sheet amount, including loans held for sale, related to this product was $30$26 million.
7778
Table 12 — Total Company Average Balance Sheets and Interest Rates
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|
|
| Three Months Ended June 30, 2019 |
| Three Months Ended June 30, 2018 |
|
| Three Months Ended March 31, 2020 |
| Three Months Ended March 31, 2019 |
|
| ||||||||||||||||||||||||||
|
| Average |
|
|
|
| Average |
|
| Average |
|
|
|
| Average |
|
|
| Average |
|
|
|
| Average |
| Average |
|
|
|
| Average |
|
| ||||
(dollars in thousands) |
| Balance |
| Interest |
| Rate |
|
| Balance |
| Interest |
| Rate |
|
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
|
| ||||||||
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ASSETS |
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|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning deposits |
| $ | 297,205 |
| $ | 1,753 |
| 2.36 | % |
| $ | 276,246 |
| $ | 1,245 |
| 1.80 | % |
|
| $ | 207,335 |
| $ | 637 |
| 1.23 | % | $ | 289,928 |
| $ | 1,724 |
| 2.38 | % |
|
Investment securities, including FHLB stock(1) |
|
| 514,366 |
|
| 3,700 |
| 2.88 |
|
|
| 506,209 |
|
| 3,167 |
| 2.50 |
|
| ||||||||||||||||||
Investment securities, including FHLB stock (1) |
|
| 519,726 |
|
| 3,009 |
| 2.32 |
|
| 563,752 |
|
| 4,081 |
| 2.90 |
|
| |||||||||||||||||||
TRS Easy Advance loans (2) |
|
| 16,687 |
|
| 195 |
| 4.67 |
|
|
| 10,380 |
|
| 38 |
| 1.46 |
|
|
|
| 135,307 |
|
| 19,261 |
| 56.94 |
|
| 121,224 |
|
| 18,857 |
| 62.22 |
|
|
Other RPG loans(3)(6) |
|
| 109,747 |
|
| 7,659 |
| 27.92 |
|
|
| 78,287 |
|
| 7,281 |
| 37.20 |
|
| ||||||||||||||||||
Other RPG loans (3) (6) |
|
| 145,793 |
|
| 8,763 |
| 24.04 |
|
| 129,627 |
|
| 9,271 |
| 28.61 |
|
| |||||||||||||||||||
Outstanding Warehouse lines of credit(4)(6) |
|
| 634,688 |
|
| 7,872 |
| 4.96 |
|
|
| 541,537 |
|
| 6,890 |
| 5.09 |
|
|
|
| 643,182 |
|
| 7,045 |
| 4.38 |
|
| 407,341 |
|
| 5,442 |
| 5.34 |
|
|
All other Traditional Bank loans(5)(6) |
|
| 3,663,783 |
|
| 44,485 |
| 4.86 |
|
|
| 3,462,184 |
|
| 39,735 |
| 4.59 |
|
| ||||||||||||||||||
All other Traditional Bank loans (5) (6) |
|
| 3,568,855 |
|
| 42,444 |
| 4.76 |
|
| 3,598,481 |
|
| 43,258 |
| 4.81 |
|
| |||||||||||||||||||
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
| 5,236,476 |
|
| 65,664 |
| 5.02 |
|
|
| 4,874,843 |
|
| 58,356 |
| 4.79 |
|
|
|
| 5,220,198 |
|
| 81,159 |
| 6.22 |
|
| 5,110,353 |
|
| 82,633 |
| 6.47 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
| (58,825) |
|
|
|
|
|
|
|
| (52,279) |
|
|
|
|
|
|
| ||||||||||||||||||
Allowance for credit loss |
|
| (53,818) |
|
|
|
|
|
|
| (50,305) |
|
|
|
|
|
|
| |||||||||||||||||||
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning cash and cash equivalents |
|
| 74,763 |
|
|
|
|
|
|
|
| 74,087 |
|
|
|
|
|
|
|
|
| 199,511 |
|
|
|
|
|
|
| 191,746 |
|
|
|
|
|
|
|
Premises and equipment, net |
|
| 43,783 |
|
|
|
|
|
|
|
| 46,843 |
|
|
|
|
|
|
|
|
| 45,628 |
|
|
|
|
|
|
| 44,321 |
|
|
|
|
|
|
|
Bank owned life insurance |
|
| 65,470 |
|
|
|
|
|
|
|
| 63,974 |
|
|
|
|
|
|
|
|
| 66,654 |
|
|
|
|
|
|
| 65,095 |
|
|
|
|
|
|
|
Other assets(1) |
|
| 118,858 |
|
|
|
|
|
|
|
| 67,313 |
|
|
|
|
|
|
| ||||||||||||||||||
Other assets (1) |
|
| 148,773 |
|
|
|
|
|
|
| 115,461 |
|
|
|
|
|
|
| |||||||||||||||||||
Total assets |
| $ | 5,480,525 |
|
|
|
|
|
|
| $ | 5,074,781 |
|
|
|
|
|
|
|
| $ | 5,626,946 |
|
|
|
|
|
| $ | 5,476,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts |
| $ | 1,138,347 |
| $ | 1,586 |
| 0.56 | % |
| $ | 1,113,097 |
| $ | 982 |
| 0.35 | % |
|
| $ | 1,128,781 |
| $ | 682 |
| 0.24 | % | $ | 1,121,205 |
| $ | 1,517 |
| 0.54 | % |
|
Money market accounts |
|
| 754,207 |
|
| 2,024 |
| 1.07 |
|
|
| 609,693 |
|
| 864 |
| 0.57 |
|
|
|
| 761,975 |
|
| 1,242 |
| 0.65 |
|
| 746,619 |
|
| 1,779 |
| 0.95 |
|
|
Time deposits |
|
| 413,530 |
|
| 2,058 |
| 1.99 |
|
|
| 340,861 |
|
| 1,336 |
| 1.57 |
|
|
|
| 418,323 |
|
| 2,156 |
| 2.06 |
|
| 384,815 |
|
| 1,831 |
| 1.90 |
|
|
Reciprocal money market and time deposits |
|
| 192,486 |
|
| 685 |
| 1.42 |
|
|
| 315,285 |
|
| 601 |
| 0.76 |
|
|
|
| 207,970 |
|
| 618 |
| 1.19 |
|
| 197,483 |
|
| 588 |
| 1.19 |
|
|
Brokered deposits |
|
| 90,266 |
|
| 550 |
| 2.44 |
|
|
| 31,394 |
|
| 151 |
| 1.92 |
|
|
|
| 338,283 |
|
| 1,604 |
| 1.90 |
|
| 179,643 |
|
| 1,033 |
| 2.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
| 2,588,836 |
|
| 6,903 |
| 1.07 |
|
|
| 2,410,330 |
|
| 3,934 |
| 0.65 |
|
|
|
| 2,855,332 |
|
| 6,302 |
| 0.88 |
|
| 2,629,765 |
|
| 6,748 |
| 1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase and other short-term borrowings |
|
| 220,189 |
|
| 330 |
| 0.60 |
|
|
| 178,063 |
|
| 222 |
| 0.50 |
|
|
|
| 208,969 |
|
| 119 |
| 0.23 |
|
| 231,602 |
|
| 421 |
| 0.73 |
|
|
Federal Home Loan Bank advances |
|
| 710,879 |
|
| 4,062 |
| 2.29 |
|
|
| 593,187 |
|
| 2,723 |
| 1.84 |
|
|
|
| 371,319 |
|
| 1,648 |
| 1.78 |
|
| 511,408 |
|
| 2,730 |
| 2.14 |
|
|
Subordinated note |
|
| 41,240 |
|
| 423 |
| 4.10 |
|
|
| 41,240 |
|
| 393 |
| 3.81 |
|
|
|
| 41,240 |
|
| 352 |
| 3.41 |
|
| 41,240 |
|
| 435 |
| 4.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
| 3,561,144 |
|
| 11,718 |
| 1.32 |
|
|
| 3,222,820 |
|
| 7,272 |
| 0.90 |
|
|
|
| 3,476,860 |
|
| 8,421 |
| 0.97 |
|
| 3,414,015 |
|
| 10,334 |
| 1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities and Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 1,098,817 |
|
|
|
|
|
|
|
| 1,146,403 |
|
|
|
|
|
|
|
|
| 1,249,025 |
|
|
|
|
|
|
| 1,258,461 |
|
|
|
|
|
|
|
Other liabilities |
|
| 91,841 |
|
|
|
|
|
|
|
| 42,481 |
|
|
|
|
|
|
|
|
| 122,161 |
|
|
|
|
|
|
| 97,362 |
|
|
|
|
|
|
|
Stockholders’ equity |
|
| 728,723 |
|
|
|
|
|
|
|
| 663,077 |
|
|
|
|
|
|
|
|
| 778,900 |
|
|
|
|
|
|
| 706,833 |
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ | 5,480,525 |
|
|
|
|
|
|
| $ | 5,074,781 |
|
|
|
|
|
|
| ||||||||||||||||||
Total liabilities and stock-holders’ equity |
| $ | 5,626,946 |
|
|
|
|
|
| $ | 5,476,671 |
|
|
|
|
|
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
| $ | 53,946 |
|
|
|
|
|
|
| $ | 51,084 |
|
|
|
|
|
|
|
| $ | 72,738 |
|
|
|
|
|
| $ | 72,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
| 3.70 | % |
|
|
|
|
|
|
| 3.89 | % |
|
|
|
|
|
|
|
| 5.25 | % |
|
|
|
|
|
| 5.26 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
| 4.12 | % |
|
|
|
|
|
|
| 4.19 | % |
|
|
|
|
|
|
|
| 5.57 | % |
|
|
|
|
|
| 5.66 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets. |
(2) | Interest income for Easy Advances is composed entirely of loan fees. |
(3) | Interest income includes loan fees of |
(4) | Interest income includes loan fees of |
(5) | Interest income includes loan fees of |
(6) | Average balances for loans include the principal balance of nonaccrual loans and loans held for sale, and are inclusive of all loan premiums, discounts, fees and costs. |
7879
Table 23 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 23 — Total Company Volume/Rate Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| Three Months Ended June 30, 2019 |
|
|
| Three Months Ended March 31, 2020 |
| |||||||||||||
|
|
| Compared to |
|
|
| Compared to |
| |||||||||||||
|
|
| Three Months Ended June 30, 2018 |
|
|
| Three Months Ended March 31, 2019 |
| |||||||||||||
|
| Total Net |
| Increase / (Decrease) Due to |
|
| Total Net |
| Increase / (Decrease) Due to |
| |||||||||||
(in thousands) |
| Change |
| Volume |
| Rate |
|
|
| Change |
| Volume |
| Rate |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal funds sold and other interest-earning deposits |
| $ | 508 |
| $ | 100 |
| $ | 408 |
|
| $ | (1,087) |
| $ | (403) |
| $ | (684) |
| |
Investment securities, including FHLB stock |
|
| 533 |
|
| 52 |
|
| 481 |
|
|
| (1,072) |
|
| (301) |
|
| (771) |
| |
TRS Easy Advance loans* |
|
| 157 |
|
| (4) |
|
| 161 |
|
|
| 404 |
|
| (59) |
|
| 463 |
| |
Other RPG loans |
|
| 378 |
|
| 2,476 |
|
| (2,098) |
|
|
| (508) |
|
| 1,075 |
|
| (1,583) |
| |
Outstanding Warehouse lines of credit |
|
| 982 |
|
| 1,159 |
|
| (177) |
|
|
| 1,603 |
|
| 2,718 |
|
| (1,115) |
| |
All other Traditional Bank loans |
|
| 4,750 |
|
| 2,381 |
|
| 2,369 |
|
|
| (814) |
|
| (354) |
|
| (460) |
| |
Net change in interest income |
|
| 7,308 |
|
| 6,164 |
|
| 1,144 |
|
|
| (1,474) |
|
| 2,676 |
|
| (4,150) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Transaction accounts |
|
| 604 |
|
| 23 |
|
| 581 |
|
|
| (835) |
|
| 10 |
|
| (845) |
| |
Money market accounts |
|
| 1,160 |
|
| 243 |
|
| 917 |
|
|
| (537) |
|
| 36 |
|
| (573) |
| |
Time deposits |
|
| 722 |
|
| 319 |
|
| 403 |
|
|
| 325 |
|
| 166 |
|
| 159 |
| |
Reciprocal money market and time deposits |
|
| 84 |
|
| (297) |
|
| 381 |
|
|
| 30 |
|
| 31 |
|
| (1) |
| |
Brokered deposits |
|
| 399 |
|
| 349 |
|
| 50 |
|
|
| 571 |
|
| 779 |
|
| (208) |
| |
Securities sold under agreements to repurchase and other short-term borrowings |
|
| 108 |
|
| 58 |
|
| 50 |
|
|
| (302) |
|
| (38) |
|
| (264) |
| |
Federal Home Loan Bank advances |
|
| 1,339 |
|
| 599 |
|
| 740 |
|
|
| (1,082) |
|
| (670) |
|
| (412) |
| |
Subordinated note |
|
| 30 |
|
| — |
|
| 30 |
|
|
| (83) |
|
| — |
|
| (83) |
| |
Net change in interest expense |
|
| 4,446 |
|
| 1,294 |
|
| 3,152 |
|
|
| (1,913) |
|
| 314 |
|
| (2,227) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net change in net interest income |
| $ | 2,862 |
| $ | 4,870 |
| $ | (2,008) |
|
| $ | 439 |
| $ | 2,362 |
| $ | (1,923) |
|
*Volume for Easy Advances is based on total fees earnedloans originated during the period presented.
7980
Provision for Loan and Lease LossesCredit Loss Expense
TheEffective January 1, 2020, the Company recorded a Provisionadopted ASC 326 Financial Instruments – Credit Losses, which replaces the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures.
See additional detail regarding the Company’s adoption of $4.5ASC 326 and the CECL method under Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
Total Company credit loss expense was $22.8 million for the secondfirst quarter of 2019,2020 compared to $4.9$17.2 million for the same period in 2018. 2019.
The following were the most significant components comprising the Company’s Provisioncredit loss expense by reportable segment were as follows:segment:
Traditional Banking segment
The Traditional Banking Provisioncredit loss expense during the secondfirst quarter of 20192020 was $1.4$5.6 million, compared to $523,000$189,000 for the secondfirst quarter of 2018.2019. An analysis of the Provisioncredit loss expense for the secondfirst quarter of 20192020 compared to the same period in 20182019 follows:
· | Related to the Bank’s pass-rated and non-rated |
· | The Bank recorded a net reduction to credit loss expense of $450,000 and $95,000 for the first quarters of 2020 and 2019 related to loans rated Substandard or Special Mention. The net reduction during the first quarter of 2020 was driven by a $470,000 recovery recorded upon the payoff of a large CRE relationship that had been partially charged-off in a prior period. |
· | Related to the Bank’s |
As a percentage of total loans, the Traditional Banking AllowanceACLL was 0.87%1.15% at June 30, 2019March 31, 2020 compared to 0.85%0.78% at December 31, 20182019 and 0.86%0.83% at June 30, 2018.March 31, 2019. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at June 30, 2019.March 31, 2020.
See the sections titled “Allowance for Loan and LeaseCredit Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provisioncredit loss expense and the Bank’s credit quality.
See additional detail regarding the impact of COVID-19 under:
· | Part I Item 1 “Financial Statements” |
o | Footnote 2 “Investment Securities” |
o | Footnote 4 “Loans and Allowance for Credit Losses” |
o | Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” |
o | Footnote 17 “Subsequent Events” |
· | Part II Item 1A “Risk Factors” |
81
Warehouse Lending segment
Warehouse recorded a net charge to the Provisioncredit loss expense of $417,000$332,000 for the secondfirst quarter of 20192020 compared to a net charge of $250,000$225,000 for the same period in 2018. Provision2019. Credit loss expense for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $167$133 million during the secondfirst quarter of 20192020 compared to an increase of $100$90 million during the secondfirst quarter of 2018.2019.
As a percentage of total Warehouse outstanding balances, the Warehouse AllowanceACLL was 0.25% at June 30, 2019,March 31, 2020, December 31, 20182019 and June 30, 2018.March 31, 2019. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at June 30, 2019.March 31, 2020.
Tax Refund Solutions segment
TRS recorded a net charge to the Provisioncredit loss expense of $392,000 for the second quarter of 2019 compared to a net credit to the Provision of $888,000 during the same period in 2018. The net credit during the second quarter of 2018 resulted from better than expected paydowns from the US Treasury on unpaid EA loans, allowing the Company to reverse a portion of the loan loss provisions it recorded$15.1 million during the first quarter of 2018. Conversely,2020 compared to a net charge of $13.4 million for the same period in 2019. Substantially all TRS credit loss expense in both periods was related to its EA product.
TRS’s projected credit loss expense for EA loan paydowns from the US Treasurylosses was $15.2 million, or 3.93% of its $388 million in EAs originated during the second quarter of 2019 approximated the Company’s estimate from the first quarter of 2019, causing the Company’s loan2020, compared to a projected credit loss reserve for EA loans to remain relatively unchanged fromexpense of $13.4 million, or 3.44% of its $389 million of EAs originated during the first quarter. Provision expense at TRS during the second quarter of 2019 primarily2019. The $1.8 million year-over-year increase in credit loss expense on EAs reflects net charges of $353,000 to the Provision for TRS’s non-EA products, including its receivable assistance program loans and its small-dollar line of credit program. A net credit to the Provision of $7,000 was made during the second quarter of 2018 for similar non-EA loan products.
With the second quarter EA paydowns, thea higher percent of unpaid EAs as of March 31, 2020 compared to totalMarch 31, 2019, as 6.77% of EAs originated droppedduring the first quarter of 2020 were unpaid as of March 31, 2020, compared to 3.45% at5.89% unpaid as of March 31, 2019. EAs are only originated during the first two months of each year, with all uncollected EAs charged off by June 30 2019. This comparesth of each year. The Company is uncertain if the COVID-19 pandemic contributed to 2.88% at June 30, 2018, a gapthe higher level of 57 basis points. By comparison, the unpaid EA percentage was 5.84%EAs at March 31, 2019,2020 compared to 4.49% at March 31, 2018, representing a gap2019, and it is uncertain if the COVID-19 pandemic could negatively impact normal paydowns of 135 basis points.EAs going forward in 2020. Management remains optimistic that this gap can continuebelieves it has adequately adjusted its expected loss rate to shrinkabsorb EA losses based on information known through the remainderdate of 2019. With all unpaid this filing.
EAs having been charged offcollected during the second half of each year are recorded as recoveries of previously charged-off loans. TRS’s loss rate as of June 30, 2019 anywas 3.45% of total originations and it finished the calendar year 2019 with an EA payments received throughout the remainderloss rate of 2019 will represent recovery credits directly to income.2.74% of total EAs originated.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Loan and LeaseCredit Losses” of Part I Item 1 “Financial Statements.”
80
Republic Credit Solutions segment
As illustrated in Table 34 below, RCS recorded a Provisioncredit loss expense of $2.2$1.7 million during the secondfirst quarter of 20192020 compared to a Provisioncredit loss expense of $5.0$3.4 million for the same period in 2018.2019. The $2.8 million decrease in the Provision resulted from lower Provisions of $1.2 million and $1.6 million, respectively, for RCS’s line-of-credit product and its discontinued credit card product. The overall improvement in the Provision for the line-of-credit productloss expense was driven by a declinereduction in its annualized historical loss rate combined with a year-to-year decrease in averageboth net charge-offs and outstanding balances. The decrease in losses within the RCS credit-card portfolio was due to the discontinuance of the program, effective January of this year.balances for RCS’s line-of-credit product.
While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS AllowanceACLL was 13.19%12.18% at June 30, 2019, 14.70%March 31, 2020, 12.45% at December 31, 20182019 and 16.13%13.83% at June 30, 2018.March 31, 2019. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at June 30, 2019.March 31, 2020.
The following table presents RCS credit loss expense by product:
Table 34 — RCS ProvisionCredit Loss Expense by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Three Months Ended Jun. 30, |
|
|
|
|
| Three Months Ended Mar. 31, |
|
|
|
|
|
| ||||||||
(in thousands) |
| 2019 |
|
| 2018 |
| $ Change |
|
| 2020 |
|
| 2019 |
| $ Change |
| % Change | |||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Line of credit |
| $ | 2,213 |
| $ | 3,445 |
| $ | (1,232) |
|
| $ | 1,707 |
| $ | 3,360 |
| $ | (1,653) |
| (49) | % |
Credit card |
| — |
| 1,556 |
| (1,556) |
| |||||||||||||||
Hospital receivables |
|
| 11 |
|
| 46 |
|
| (35) |
|
|
| (1) |
|
| 23 |
|
| (24) |
| (104) |
|
Total |
| $ | 2,224 |
| $ | 5,047 |
| $ | (2,823) |
|
| $ | 1,706 |
| $ | 3,383 |
| $ | (1,677) |
| (50) | % |
|
|
|
|
|
|
|
|
8182
Table 45 — Summary of Loan and Lease Loss Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||
|
| June 30, |
|
| March 31, |
| ||||||||
(dollars in thousands) |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at beginning of period |
| $ | 57,961 |
| $ | 52,341 |
| |||||||
ACLL at beginning of period |
| $ | 43,351 |
| $ | 44,675 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Adoption of ASC326 |
|
| 6,734 |
|
| — |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
| (368) |
|
| (22) |
|
|
| (27) |
|
| (89) |
|
Home equity |
|
| — |
|
| (13) |
| |||||||
Consumer |
|
| (495) |
|
| (510) |
| |||||||
Total Traditional Banking |
|
| (522) |
|
| (612) |
| |||||||
Warehouse lines of credit |
|
| — |
|
| — |
| |||||||
Total Core Banking |
|
| (522) |
|
| (612) |
| |||||||
|
|
|
|
|
|
|
| |||||||
Republic Processing Group: |
|
|
|
|
|
|
| |||||||
Tax Refund Solutions: |
|
|
|
|
|
|
| |||||||
Commercial & industrial |
|
| (44) |
|
| (17) |
| |||||||
Republic Credit Solutions |
|
| (2,709) |
|
| (3,824) |
| |||||||
Total Republic Processing Group |
|
| (2,753) |
|
| (3,841) |
| |||||||
Total charge-offs |
|
| (3,275) |
|
| (4,453) |
| |||||||
|
|
|
|
|
|
|
| |||||||
Recoveries: |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
| |||||||
Traditional Banking: |
|
|
|
|
|
|
| |||||||
Residential real estate |
|
| 41 |
|
| 38 |
| |||||||
Commercial real estate |
|
| 471 |
|
| 2 |
| |||||||
Commercial & industrial |
|
| — |
|
| (17) |
|
|
| 3 |
|
| 2 |
|
Home equity |
|
| — |
|
| (34) |
|
|
| 75 |
|
| 30 |
|
Consumer |
|
| (423) |
|
| (505) |
|
|
| 204 |
|
| 176 |
|
Total Traditional Banking |
|
| (791) |
|
| (578) |
|
|
| 794 |
|
| 248 |
|
Warehouse lines of credit |
|
| — |
|
| — |
|
|
| — |
|
| — |
|
Total Core Banking |
|
| (791) |
|
| (578) |
|
|
| 794 |
|
| 248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
| (13,425) |
|
| (8,773) |
|
|
| 42 |
|
| — |
|
Other TRS loans |
|
| (264) |
|
| (55) |
| |||||||
Commercial & industrial |
|
| — |
|
| 6 |
| |||||||
Republic Credit Solutions |
|
| (2,683) |
|
| (3,769) |
|
|
| 271 |
|
| 254 |
|
Total Republic Processing Group |
|
| (16,372) |
|
| (12,597) |
|
|
| 313 |
|
| 260 |
|
Total charge-offs |
|
| (17,163) |
|
| (13,175) |
| |||||||
|
|
|
|
|
|
|
| |||||||
Recoveries: |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
| |||||||
Traditional Banking: |
|
|
|
|
|
|
| |||||||
Residential real estate |
|
| 229 |
|
| 183 |
| |||||||
Commercial real estate |
|
| 2 |
|
| 3 |
| |||||||
Construction & land development |
|
| — |
|
| 25 |
| |||||||
Commercial & industrial |
|
| 3 |
|
| 4 |
| |||||||
Home equity |
|
| 8 |
|
| 203 |
| |||||||
Consumer |
|
| 119 |
|
| 155 |
| |||||||
Total Traditional Banking |
|
| 361 |
|
| 573 |
| |||||||
Warehouse lines of credit |
|
| — |
|
| — |
| |||||||
Total Core Banking |
|
| 361 |
|
| 573 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Republic Processing Group: |
|
|
|
|
|
|
| |||||||
Tax Refund Solutions: |
|
|
|
|
|
|
| |||||||
Easy Advances |
|
| 5 |
|
| 82 |
| |||||||
Other TRS loans |
|
| (6) |
|
| 4 |
| |||||||
Republic Credit Solutions |
|
| 365 |
|
| 290 |
| |||||||
Total Republic Processing Group |
|
| 364 |
|
| 376 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Total recoveries |
|
| 725 |
|
| 949 |
|
|
| 1,107 |
|
| 508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
| (16,438) |
|
| (12,226) |
|
|
| (2,168) |
|
| (3,945) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision - Core Banking |
|
| 1,844 |
|
| 773 |
|
|
| 5,675 |
|
| 414 |
|
Provision - RPG |
|
| 2,616 |
|
| 4,159 |
|
|
| 16,839 |
|
| 16,817 |
|
Total Provision |
|
| 4,460 |
|
| 4,932 |
|
|
| 22,514 |
|
| 17,231 |
|
Allowance at end of period |
| $ | 45,983 |
| $ | 45,047 |
| |||||||
ACLL at end of period |
| $ | 70,431 |
| $ | 57,961 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Total Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans |
|
| 1.04 | % |
| 1.07 | % | |||||||
Allowance to nonperforming loans |
|
| 237 |
|
| 245 |
| |||||||
ACLL to total loans |
|
| 1.56 | % |
| 1.35 | % | |||||||
ACLL to nonperforming loans |
|
| 338 |
|
| 373 |
| |||||||
Net loan charge-offs to average loans |
|
| 1.49 |
|
| 1.19 |
|
|
| 0.19 |
|
| 0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Core Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans |
|
| 0.76 | % |
| 0.76 | % | |||||||
Allowance to nonperforming loans |
|
| 171 |
|
| 179 |
| |||||||
ACLL to total loans |
|
| 0.97 | % |
| 0.75 | % | |||||||
ACLL to nonperforming loans |
|
| 210 |
|
| 205 |
| |||||||
Net loan charge-offs to average loans |
|
| 0.04 |
|
| — |
|
|
| (0.03) |
|
| 0.04 |
|
8283
Noninterest Income
Total Company noninterest income increased $829,000,$3.2 million, or 6%11%, during the secondfirst quarter of 20192020 compared to the same period in 2018.2019. The following were the most significant components comprising the total Company’s noninterest income by reportable segment were as follows:segment:
Traditional Banking segment
Traditional Banking’s noninterest income increased $128,000, or 2%,$339,000 for the secondfirst quarter of 20192020 compared to the same period in 2018.2019. The following were the most significant categories affecting the change in noninterest income for the quarter were as follows:income:
· | Service charges on deposit accounts |
· |
|
· | The Bank recognized a $353,000 net gain on sale of one of its former banking centers during the first quarter of 2020. The now-sold property is located in |
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased $1.1$3.3 million, or 84%212%, during the secondfirst quarter of 20192020 compared to the same period in 2018, which resulted from a $272019. As mortgage rates fell during the first quarter of 2020, the Company experienced strong growth in consumer refinance activity, particularly within the Company’s relatively new Consumer Direct channel. Overall, the Company originated $125 million increase in secondary market loans originated from period to period combined with a $33 million increase in the Bank’s pipeline of secondary market mortgage loans in process from June 30, 2018during the first quarter of 2020 compared to June 30, 2019. Over the previous 12 months, the Bank has continued to invest in staffing and other resources$41 million for the first quarter of 2019.
In addition to the strong mortgage banking function. A sharp decline in long-term mortgage ratesorigination volume during the first quarter combinedof 2020, the Company’s gain recognized as a percent of total originations increased to 3.84% during the first quarter of 2020 from 3.09% during the same period in 2019. The stronger gain percentages resulted from favorable market conditions on pricing during the quarter. If and when consumer refinance volume begins to slow down in the future, management believes market conditions for pricing will become more competitive and return to a range of 2.0%-3.0%, which is more in-line with historical averages for gains-as-a-percentage-of-loans-sold.
Tax Refund Solutions segment
TRS’s noninterest income decreased $1.2 million during the Bank’s continued investments in mortgage resources, contributedfirst quarter of 2020 compared to the increased quarter-over-quarter mortgage activity.same period in 2019 resulting from a $1.3 million, or 7%, decrease in net RT revenue. A 2% decrease in RTs funded along with a 7% decrease in the Company’s revenue share on RTs processed drove the year-over-year decrease in net RT revenue.
84
Republic Credit Solutions segment
RCS’s noninterest income decreased $499,000,increased $757,000, or 33%49%, during the secondfirst quarter of 20192020 compared to the same period in 2018,2019. As illustrated in Table 6 below, RCS program fees increased $1.4 million resulting primarily from RCS’s new installment loan program launched in December 2019. This increase in program fees was partially offset by a $478,000 non-recurring gain on sale of RCS’s credit card portfolio recorded during the discontinuationfirst quarter of its credit-card product.2019.
RCS’s largest noninterest income item, programs
The following table presents RCS program fees are presented by product in in the following table: product:
Table 56 — RCS Program Fees by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Three Months Ended Jun. 30, |
|
|
|
|
| Three Months Ended Mar. 31, |
|
|
|
|
|
|
| ||||||||
(in thousands) |
| 2019 |
|
| 2018 |
| $ Change |
|
| 2020 |
| 2019 |
| $ Change |
| % Change |
| ||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Line of credit |
| $ | 1,121 |
| $ | 1,158 |
| $ | (37) |
|
| $ | 919 |
| $ | 927 |
| $ | (8) |
| (1) | % |
|
Credit card |
| — |
| 464 |
| (464) |
| ||||||||||||||||
Hospital receivables |
| 58 |
| 41 |
| 17 |
|
| 18 |
| 35 |
| (17) |
| (49) |
|
| ||||||
Installment loans* |
|
| (192) |
|
| (464) |
|
| 272 |
|
|
| 1,375 |
|
| (34) |
|
| 1,409 |
| NM |
|
|
Total |
| $ | 987 |
| $ | 1,199 |
| $ | (212) |
|
| $ | 2,312 |
| $ | 928 |
| $ | 1,384 |
| 149 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of program fees.
83
Noninterest ExpensesExpense
Total Company noninterest expensesexpense increased $2.8$1.5 million, or 7%3%, during the secondfirst quarter of 20192020 compared to the same period in 2018.2019. The following were the most significant components comprising the increase in noninterest expense by reportable segment were as follows:segment:
Traditional Banking segment
Traditional Banking noninterest expensesexpense increased $2.3$1.1 million, or 7%3%, for the secondfirst quarter of 20192020 compared to the same period in 2018. The most significant categories driving the change in noninterest2019. Salaries and employee benefits expense were as follows:
|
|
|
|
Tax Refund Solutions segment
TRS’s noninterest expenses increased $576,000,expense decreased $485,000, or 25%7%, during the secondfirst quarter of 20192020 compared to the same period in 2018 resulting primarily from a $374,000 increase2019 partially due to $500,000 in salaries and employee benefits expense.
Republic Credit Solutions segment
RCS’s noninterest expense decreased $249,000, or 27%,legal reserves recorded during the second quarter of 2019 compared to the same period in 2018. A reduction of $250,000 in RCS’s data processing costs resulting from the discontinuation of RCS’s credit-card portfolio primarily drove the overall decrease from period to period.
Income Tax Expense
The Total Company effective income tax rate was 15% for the second quarter of 2019 compared to 21% for the same period in 2018. The following drove the lower rate in 2019:
|
|
|
|
2019.
84
OVERVIEW (Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018)
Total Company net income for the first six months of 2019 was $47.5 million, a $4.4 million, or 10%, increase from the same period in 2018. Diluted EPS increased to $2.28 for the six months ended June 30, 2019 compared to $2.06 for the same period in 2018.
The following are general highlights by reportable segment:
Traditional Banking segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse Lending segment
|
|
|
|
|
|
|
|
|
|
Mortgage Banking segment
|
|
|
|
Tax Refund Solutions segment
|
|
|
|
|
|
85
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2020 AND DECEMBER 31, 2019
Table 7 — Loan Portfolio Composition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) | March 31, 2020 |
| December 31, 2019 |
| $ Change |
| % Change |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
Owner occupied | $ | 916,526 |
| $ | 949,568 |
| $ | (33,042) |
| (3) | % |
Nonowner occupied |
| 256,492 |
|
| 258,803 |
|
| (2,311) |
| (1) |
|
Commercial real estate |
| 1,320,790 |
|
| 1,303,000 |
|
| 17,790 |
| 1 |
|
Construction & land development |
| 163,396 |
|
| 159,702 |
|
| 3,694 |
| 2 |
|
Commercial & industrial |
| 445,947 |
|
| 477,236 |
|
| (31,289) |
| (7) |
|
Lease financing receivables |
| 12,676 |
|
| 14,040 |
|
| (1,364) |
| (10) |
|
Home equity |
| 282,809 |
|
| 293,186 |
|
| (10,377) |
| (4) |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
| 15,608 |
|
| 17,836 |
|
| (2,228) |
| (12) |
|
Overdrafts |
| 758 |
|
| 1,522 |
|
| (764) |
| (50) |
|
Automobile loans |
| 46,837 |
|
| 52,923 |
|
| (6,086) |
| (11) |
|
Other consumer |
| 74,965 |
|
| 68,115 |
|
| 6,850 |
| 10 |
|
Total Traditional Banking |
| 3,536,804 |
|
| 3,595,931 |
|
| (59,127) |
| (2) |
|
Warehouse lines of credit* |
| 850,454 |
|
| 717,458 |
|
| 132,996 |
| 19 |
|
Total Core Banking |
| 4,387,258 |
|
| 4,313,389 |
|
| 73,869 |
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group*: |
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
| 26,242 |
|
| — |
|
| 26,242 |
| NM |
|
Other TRS loans |
| 373 |
|
| 14,365 |
|
| (13,992) |
| (97) |
|
Republic Credit Solutions |
| 101,726 |
|
| 105,397 |
|
| (3,671) |
| (3) |
|
Total Republic Processing Group |
| 128,341 |
|
| 119,762 |
|
| 8,579 |
| 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans** |
| 4,515,599 |
|
| 4,433,151 |
|
| 82,448 |
| 2 |
|
Allowance for credit losses |
| (70,431) |
|
| (43,351) |
|
| (27,080) |
| 62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net | $ | 4,445,168 |
| $ | 4,389,800 |
| $ | 55,368 |
| 1 | % |
* Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
** Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. |
|
|
|
|
Republic Credit SolutionsGross loans increased by $82 million, or 2%, during the first quarter of 2019 to $4.5 billion at March 31, 2020. The most significant components comprising the change in loans by reportable segment follow:
Traditional Banking segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS OF OPERATIONS (Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018)March 31, 2020. The decrease in loans was primarily in the owner-occupied residential real estate and C&I categories. As it relates to the owner-occupied residential real estate category, a sharp drop in long-term market interest rates during the quarter drove an increase in refinance volume in this category, which much of the refinance activity going into fixed rate products sold on the secondary market. In regard to the C&I portfolio decline, a third of the decrease resulted from the Bank’s strategic wind down of its dealer floor plan credit facilities during the period. The remaining C&I portfolio decline resulted from relatively high payoffs experienced by the Company during the first two months of 2020, as the Bank remained disciplined on its pricing in a competitive rate environment.
Net Interest Income
Banking operations are significantly dependent upon net interest income. Net interest income isSigned into law on March 27, 2020, the difference between interest income on interest-earning assets, such asCARES Act provided for the SBA PPP. The PPP allows the Bank to lend to small business clients in amounts that enables those clients to primarily meet their cash-flow needs during the pandemic. These loans and investment securities and the interest expense on interest-bearing 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.
The Core Bank indexes many of its financial instruments to either the FFTR, Prime, or LIBOR. These short-term market rates have generally trended higher since December 2015. During this period, longer-term market rates have generally not increased as much, causing the yield curve to flatten. During the first half of 2019, longer-term market rates began to generally trend lower, while the short-term market rates remained relatively stable, causing short-term market rates to be higher than some longer-term market rates on the yield curve. This event, in which short-term market rates are higher than longer-term market rates, is labelled an inverted yield curve.
A continued flattening or inverting of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease further or further invert, will likely have a negative impact on the Company’s netstated maturity of two years, a fixed interest income and net interest margin. Additionally, while parallel increases in short-term and long-term interest rates are generally believed by management to be more favorablerate of 1.0% to the Core Bank’s net interest incomeclient, and net interest margin inare 100% guaranteed by the near term, management believes stable interest rates or a parallel decrease in short-term and long-term interest rates will likely have a negative impact onSBA. In addition, under the Bank’s net interest income and net interest margin. Under any interest rate scenario, however, if the Core Bank is unable to reasonably maintain its deposit balances and the costrules of those deposits at acceptable levels, it will likely have a negative impact to the Core Bank’s net interest income and net interest margin.
See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.
86
the program, the SBA will pay an origination fee to the originating bank of 1%, 3%, or 5% based on the size of the loan. The loans are 100% forgivable to the client if certain program metrics are met.
Total Company net interestDuring April 2020, Republic originated $436 million in PPP loans, of which it expects to receive approximately $14.7 million from the SBA for its origination fees. Republic will accrete these fees into income increased $7.5 million, or 6%, duringover the first six monthslife of 2019 comparedthe loan. While no guarantee can be made as to the same period in 2018. Loan growth and margin expansion both contributedoverall life of these loans, management believes the loans are likely to remain on the Company’s growth in net interest income. Total Company net interest margin increasedbalance sheet less than one year, as it expects the substantial majority of its clients to 4.88% duringrequest forgiveness for their loans at the first six months of 2019 compared to 4.85% forearliest possible time, presuming these clients achieve the same period in 2018.required program metrics.
The following were the most significant components affecting the Company’s net interest income by reportable segment:
Traditional Banking segment
The Traditional Banking’s net interest income increased $5.7 million, or 7%, for the first six months of 2019 compared to the same period in 2018. Traditional Banking’s net interest margin was 3.81% for the first six months of 2019, an increase of 16 basis points over the same period in 2018.
The increases in the Traditional Bank’s net interest income and net interest margin during the first six months of 2019 were primarily attributable to the following factors:
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Warehouse Lending segment
Despite a 5% increaseOutstanding Warehouse period end balances increased $133 million from December 31, 2019 to March 31, 2020. A sharp decline in average outstanding Warehouse balanceslong-term fixed mortgage rates during the first six monthsquarter of 2019 compared to2020 drove the same periodincrease in 2018, a 50-basis-point compression in the Warehouse segment’s net interest margin during the same period drove a $903,000 decrease in its net interest income. The following factors led to the overall changes in the Warehouse segment’s net interest margin and net interest income:
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balances. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 64%71% during the thirdfourth quarter of 2015.2019. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 57%59% during 2016.2019.
87
Tax Refund Solutions segment
TRS’s net interest incomeOutstanding TRS loans increased $2.1$12 million forfrom December 31, 2019 to March 31, 2020 primarily reflecting $26 million of unpaid EAs partially offset by a $14 million reduction in other TRS loans. EAs are only made during the first sixtwo months of each year, with all unpaid EAs charged off by June 30th of each year. Other TRS loans at December 31, 2019 compared to the same period in 2018, resulting from a $1.2 million increase in interest income from its EA product and a $426,000 increase in interest income fromwere primarily commercial loans to its Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by the end of the first quarter of the following year.
TRS’s EARepublic Credit Solutions segment
Outstanding RCS loans decreased $4 million from December 31, 2019 to March 31, 2020 primarily reflecting a $3 million decrease in outstanding balances for RCS’s line-of-credit product. As previously mentioned, the decrease in balances for RCS’s line-of-credit product earned $19.1 millionwas the direct result of a reduction in interest income duringmarketing for the first six monthsproduct in response to the COVID-19 pandemic.
See additional detail regarding the impact of 2019, a $1.2 million, or 7%, increase from the same period in 2018. For the first six months 2019 tax season, TRS modified its EA product offering with the following changes:COVID-19 under:
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Despite the increase in the available EA maximum amount, the average loan amount for the first six months of 2019 decreased by 9% compared to the first six months 2018 tax season, as the taxpayer base generally opted for lower loan amounts this tax season. While the average amount borrowed per loan decreased during 2019, the average fee per loan increased 7% for the same period, as the combined Tax Provider and taxpayer fee for 2019 resulted in a higher total average fee per loan than the lone tax provider fee in 2018.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Loan and LeaseCredit Losses” of Part I Item 1 “Financial Statements.”
Republic Credit Solutions segment
RCS’s net interest income increased $480,000, or 3%, from the first six months of 2018 to the first six months of 2019. The increase was driven primarily by an increase in fee income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income increased to $12.7 million during the first six months of 2019 compared to $12.3 million during the same period in 2018 and accounted for 80% and 83% of all RCS interest income on loans during the periods.
Future long-term growth in interest income from RCS’s higher-yielding line-of-credit product will be restricted by a current on-balance-sheet Board-approved risk limit of $40 million for the Company. As of June 30, 2019, the total outstanding on-balance-sheet amount, including loans held for sale, related to this product was $30 million.
88
Table 6 — Total Company Average Balance Sheets and Interest Rates
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| Six Months Ended June 30, 2019 |
| Six Months Ended June 30, 2018 |
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| Average |
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| Average |
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| Average |
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| Average |
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(dollars in thousands) |
| Balance |
| Interest |
| Rate |
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| Balance |
| Interest |
| Rate |
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ASSETS |
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Interest-earning assets: |
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Federal funds sold and other interest-earning deposits |
| $ | 293,587 |
| $ | 3,477 |
| 2.37 | % |
| $ | 279,684 |
| $ | 2,321 |
| 1.66 | % |
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Investment securities, including FHLB stock(1) |
|
| 538,923 |
|
| 7,781 |
| 2.89 |
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|
| 529,356 |
|
| 6,297 |
| 2.38 |
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TRS Easy Advance loans (2) |
|
| 68,667 |
|
| 19,052 |
| 55.49 |
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| 62,855 |
|
| 17,830 |
| 56.73 |
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Other RPG loans(3)(6) |
|
| 119,632 |
|
| 16,930 |
| 28.30 |
|
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| 83,983 |
|
| 15,499 |
| 36.91 |
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Outstanding Warehouse lines of credit(4)(6) |
|
| 521,643 |
|
| 13,314 |
| 5.10 |
|
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| 495,046 |
|
| 12,300 |
| 4.97 |
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All other Traditional Bank loans(5)(6) |
|
| 3,631,312 |
|
| 87,743 |
| 4.83 |
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| 3,445,363 |
|
| 77,942 |
| 4.52 |
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Total interest-earning assets |
|
| 5,173,764 |
|
| 148,297 |
| 5.73 |
|
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| 4,896,287 |
|
| 132,189 |
| 5.40 |
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Allowance for loan and lease losses |
|
| (54,588) |
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| (50,950) |
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Noninterest-earning assets: |
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Noninterest-earning cash and cash equivalents |
|
| 132,931 |
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|
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|
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| 159,303 |
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Premises and equipment, net |
|
| 44,051 |
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| 46,569 |
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Bank owned life insurance |
|
| 65,283 |
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| 63,781 |
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Other assets(1) |
|
| 117,168 |
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| 60,937 |
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Total assets |
| $ | 5,478,609 |
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| $ | 5,175,927 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Interest-bearing liabilities: |
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Transaction accounts |
| $ | 1,129,824 |
| $ | 3,104 |
| 0.55 | % |
| $ | 1,109,066 |
| $ | 1,742 |
| 0.31 | % |
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Money market accounts |
|
| 750,434 |
|
| 3,803 |
| 1.01 |
|
|
| 590,986 |
|
| 1,496 |
| 0.51 |
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Time deposits |
|
| 399,252 |
|
| 3,889 |
| 1.95 |
|
|
| 332,164 |
|
| 2,452 |
| 1.48 |
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Reciprocal money market and time deposits |
|
| 194,971 |
|
| 1,274 |
| 1.31 |
|
|
| 329,031 |
|
| 1,127 |
| 0.69 |
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Brokered deposits |
|
| 134,707 |
|
| 1,581 |
| 2.35 |
|
|
| 51,973 |
|
| 477 |
| 1.84 |
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Total interest-bearing deposits |
|
| 2,609,188 |
|
| 13,651 |
| 1.05 |
|
|
| 2,413,220 |
|
| 7,294 |
| 0.60 |
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Securities sold under agreements to repurchase and other short-term borrowings |
|
| 225,864 |
|
| 751 |
| 0.67 |
|
|
| 217,532 |
|
| 435 |
| 0.40 |
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Federal Home Loan Bank advances |
|
| 611,695 |
|
| 6,792 |
| 2.22 |
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| 569,613 |
|
| 4,997 |
| 1.75 |
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Subordinated note |
|
| 41,240 |
|
| 858 |
| 4.16 |
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| 41,240 |
|
| 714 |
| 3.46 |
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Total interest-bearing liabilities |
|
| 3,487,987 |
|
| 22,052 |
| 1.26 |
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|
| 3,241,605 |
|
| 13,440 |
| 0.83 |
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Noninterest-bearing liabilities and Stockholders’ equity: |
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|
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Noninterest-bearing deposits |
|
| 1,178,198 |
|
|
|
|
|
|
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| 1,232,652 |
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Other liabilities |
|
| 94,586 |
|
|
|
|
|
|
|
| 49,263 |
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|
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Stockholders’ equity |
|
| 717,838 |
|
|
|
|
|
|
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| 652,407 |
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Total liabilities and stock-holders’ equity |
| $ | 5,478,609 |
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| $ | 5,175,927 |
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Net interest income |
|
|
|
| $ | 126,245 |
|
|
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|
|
|
| $ | 118,749 |
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Net interest spread |
|
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|
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|
| 4.47 | % |
|
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|
|
|
| 4.57 | % |
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Net interest margin |
|
|
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|
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| 4.88 | % |
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|
|
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| 4.85 | % |
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89
Table 7 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 7 — Total Company Volume/Rate Variance Analysis
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| Six Months Ended June 30, 2019 |
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| Compared to |
| ||||||
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| Six Months Ended June 30, 2018 |
| ||||||
|
| Total Net |
| Increase / (Decrease) Due to |
| |||||
(in thousands) |
| Change |
| Volume |
| Rate |
| |||
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Interest income: |
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Federal funds sold and other interest-earning deposits |
| $ | 1,156 |
| $ | 120 |
| $ | 1,036 |
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Investment securities, including FHLB stock |
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| 1,484 |
|
| 116 |
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| 1,368 |
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TRS Easy Advance loans |
|
| 1,222 |
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| (1,816) |
|
| 3,038 |
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Other RPG loans |
|
| 1,431 |
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| 5,589 |
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| (4,158) |
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Outstanding Warehouse lines of credit |
|
| 1,014 |
|
| 673 |
|
| 341 |
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All other Traditional Bank loans |
|
| 9,801 |
|
| 4,333 |
|
| 5,468 |
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Net change in interest income |
|
| 16,108 |
|
| 9,015 |
|
| 7,093 |
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Interest expense: |
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|
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Transaction accounts |
|
| 1,362 |
|
| 33 |
|
| 1,329 |
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Money market accounts |
|
| 2,307 |
|
| 489 |
|
| 1,818 |
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Time deposits |
|
| 1,437 |
|
| 556 |
|
| 881 |
|
Reciprocal money market and time deposits |
|
| 147 |
|
| (588) |
|
| 735 |
|
Brokered deposits |
|
| 1,104 |
|
| 939 |
|
| 165 |
|
Securities sold under agreements to repurchase and other short-term borrowings |
|
| 316 |
|
| 17 |
|
| 299 |
|
Federal Home Loan Bank advances |
|
| 1,795 |
|
| 390 |
|
| 1,405 |
|
Subordinated note |
|
| 144 |
|
| — |
|
| 144 |
|
Net change in interest expense |
|
| 8,612 |
|
| 1,836 |
|
| 6,776 |
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|
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|
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Net change in net interest income |
| $ | 7,496 |
| $ | 7,179 |
| $ | 317 |
|
*Volume for Easy Advances is based on total loans originated during the period presented.
90
Provision for Loan and Lease Losses
The Company recorded a Provision of $21.7 million for the first six months of 2019 compared to $22.2 million for the same period in 2018. The following were the most significant components comprising the Company’s Provision by reportable segment:
Traditional Banking segment
The Traditional Banking Provision during the first six months of 2019 was $1.6 million, compared to $1.5 million for the first six months of 2018. An analysis of the Provision for the first six months of 2019 compared to the same period in 2018 follows:
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As a percentage of total loans, the Traditional Banking Allowance was 0.87% at June 30, 2019 compared to 0.85% at December 31, 2018 and 0.86% at June 30, 2018. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at June 30, 2019.
See the sections titled “Allowance for Loan and Lease Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provision and the Bank’s credit quality.
Warehouse Lending segment
Warehouse recorded a net charge to the Provision of $642,000 for the first six months of 2019 compared to a net charge of $271,000 for the same period in 2018. Provision expense for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $257 million during the first six months of 2019 compared to an increase of $108 million during the first six months of 2018.
As a percentage of total Warehouse outstanding balances, the Warehouse Allowance was 0.25% at June 30, 2019, December 31, 2018 and June 30, 2018. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at June 30, 2019.
Tax Refund Solutions segment
TRS recorded a net charge to the Provision of $13.8 million during the first six months of 2019 compared to a net charge of $12.5 million for the same period in 2018. TRS’s Provision for EA loan losses was $13.4 million, or 3.45% of its $389 million in EAs originated during the first six months of 2019, compared to a Provision of $12.4 million, or 2.88% of its $430 million of EAs originated during the first six months of 2018.
The unpaid EA percentage was 5.84% at March 31, 2019, compared to 4.49% at March 31, 2018, representing a gap of 135 basis points. The unpaid EAs to total EAs originated dropped to 3.45% at June 30, 2019. This compares to 2.88% at June 30, 2018, a gap of 57 basis points. Management remains optimistic that this gap can continue to shrink through the remainder of 2019. With all unpaid EAs having been charged off as of June 30, 2019, any EA payments received throughout the remainder of 2019 will represent recovery credits directly to income.
91
Provision expense at TRS during the first six months of 2019 also reflects net charges of $406,000 to the Provision for TRS’s non-EA products, including its receivable assistance program loans and its small-dollar line of credit program. A net charge to the Provision of $105,000 was made during the first six months of 2018 for similar non-EA loan products.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements.”
Republic Credit Solutions segment
As illustrated in Table 8 below, RCS recorded a Provision of $5.6 million during the first six months of 2019 compared to a Provision of $8.0 million for the same period in 2018. The $2.3 million decrease in the Provision from period to period was primarily attributable to a decrease in Provision for RCS’s discontinued credit-card product.
While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS Allowance was 13.19% at June 30, 2019, 14.70% at December 31, 2018 and 16.13% at June 30, 2018. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at June 30, 2019.
The following table presents RCS Provision by product:
Table 8 — RCS Provision by Product
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| Six Months Ended Jun. 30, |
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(in thousands) |
| 2019 |
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| 2018 |
| $ Change |
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|
|
|
|
|
|
|
Product: |
|
|
|
|
|
|
|
|
|
|
Line of credit |
| $ | 5,573 |
| $ | 5,644 |
| $ | (71) |
|
Credit card |
|
| — |
|
| 2,268 |
|
| (2,268) |
|
Hospital receivables |
|
| 34 |
|
| 41 |
|
| (7) |
|
Total |
| $ | 5,607 |
| $ | 7,953 |
| $ | (2,346) |
|
|
|
|
|
|
|
|
|
|
|
|
92
Table 9 — Summary of Loan and Lease Loss Experience
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
(dollars in thousands) |
| 2019 |
| 2018 |
| ||
|
|
|
|
|
|
|
|
Allowance at beginning of period |
| $ | 44,675 |
| $ | 42,769 |
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
Residential real estate |
|
| (457) |
|
| (358) |
|
Commercial & industrial |
|
| — |
|
| (125) |
|
Home equity |
|
| (13) |
|
| (34) |
|
Consumer |
|
| (933) |
|
| (1,007) |
|
Total Traditional Banking |
|
| (1,403) |
|
| (1,524) |
|
Warehouse lines of credit |
|
| — |
|
| — |
|
Total Core Banking |
|
| (1,403) |
|
| (1,524) |
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
Easy Advances |
|
| (13,425) |
|
| (12,478) |
|
Commercial & industrial |
|
| (281) |
|
| (55) |
|
Republic Credit Solutions |
|
| (6,507) |
|
| (7,465) |
|
Total Republic Processing Group |
|
| (20,213) |
|
| (19,998) |
|
Total charge-offs |
|
| (21,616) |
|
| (21,522) |
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
Residential real estate |
|
| 267 |
|
| 225 |
|
Commercial real estate |
|
| 4 |
|
| 128 |
|
Construction & land development |
|
| — |
|
| 27 |
|
Commercial & industrial |
|
| 5 |
|
| 35 |
|
Home equity |
|
| 38 |
|
| 229 |
|
Consumer |
|
| 295 |
|
| 334 |
|
Total Traditional Banking |
|
| 609 |
|
| 978 |
|
Warehouse lines of credit |
|
| — |
|
| — |
|
Total Core Banking |
|
| 609 |
|
| 978 |
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
Easy Advances |
|
| 5 |
|
| 82 |
|
Commercial & industrial |
|
| — |
|
| 5 |
|
Republic Credit Solutions |
|
| 619 |
|
| 548 |
|
Total Republic Processing Group |
|
| 624 |
|
| 635 |
|
Total recoveries |
|
| 1,233 |
|
| 1,613 |
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
| (20,383) |
|
| (19,909) |
|
|
|
|
|
|
|
|
|
Provision - Core Banking |
|
| 2,258 |
|
| 1,733 |
|
Provision - RPG |
|
| 19,433 |
|
| 20,454 |
|
Total Provision |
|
| 21,691 |
|
| 22,187 |
|
Allowance at end of period |
| $ | 45,983 |
| $ | 45,047 |
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Total Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans |
|
| 1.04 | % |
| 1.07 | % |
Allowance to nonperforming loans |
|
| 237 |
|
| 245 |
|
Net loan charge-offs to average loans |
|
| 0.94 |
|
| 0.97 |
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Core Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans |
|
| 0.76 | % |
| 0.76 | % |
Allowance to nonperforming loans |
|
| 171 |
|
| 179 |
|
Net loan charge-offs to average loans |
|
| 0.04 |
|
| 0.03 |
|
93
Noninterest Income
Total Company noninterest income increased $701,000, or 2%, during the first six months of 2019 compared to the same period in 2018. The following were the most significant components comprising the total Company’s noninterest income by reportable segment:
Traditional Banking segment
Traditional Banking’s noninterest income increased $22,000 for the first six months of 2019 compared to the same period in 2018. The following were the most significant categories affecting the change in noninterest income:
|
|
|
|
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased $1.6 million, or 69%, during the first six months of 2019 compared to the same period in 2018, which resulted from a $39 million increase in secondary market loans originated from period to period combined with a $33 million increase in the Bank’s pipeline of secondary market loans in process from June 30, 2018 to June 30, 2019. Over the previous 12 months, the Bank has continued to invest in staffing and other resources for the mortgage banking function. A sharp decline in long-term mortgage rates during the period, combined with the Bank’s continued investments in mortgage resources, contributed to the increased period-to-period mortgage activity.
Tax Refund Solutions segment
TRS’s noninterest income decreased $53,000, during the first six months of 2019 compared to the same period in 2018 resulting from a $904,000, or 5%, increase in net RT revenue that was more than fully offset by the lack of a one-time $1.0 million nonrefundable capital commitment fee recorded during the first six months of 2018. A nominal increase in RT pricing and a shift in the RT mix among the various Tax Providers primarily drove the rise in net RT revenues.
Republic Credit Solutions segment
RCS’s noninterest income decreased $900,000, or 26%, during the first six months of 2019 compared to the same period in 2018. As illustrated in Table 10 below, RCS program fees decreased $921,000, resulting primarily from a reduction in fees associated with the discontinuance of RCS’s credit-card product.
94
The following table presents RCS program fees by product:
Table 10 — RCS Program Fees by Product
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended Jun. 30, |
|
|
|
| ||||
(in thousands) |
| 2019 |
|
| 2018 |
| $ Change |
| ||
|
|
|
|
|
|
|
|
|
|
|
Product: |
|
|
|
|
|
|
|
|
|
|
Line of credit |
| $ | 2,047 |
| $ | 2,129 |
| $ | (82) |
|
Credit card |
|
| — |
|
| 1,036 |
|
| (1,036) |
|
Hospital receivables |
|
| 93 |
|
| 73 |
|
| 20 |
|
Installment loans* |
|
| (225) |
|
| (402) |
|
| 177 |
|
Total |
| $ | 1,915 |
| $ | 2,836 |
| $ | (921) |
|
|
|
|
|
|
|
|
|
|
|
|
*The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of program fees.
Noninterest Expense
Total Company noninterest expense increased $5.3 million, or 6%, during the first six months of 2019 compared to the same period in 2018. The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking segment
Traditional Banking noninterest expense increased $4.5 million, or 7%, for the first six months of 2019 compared to the same period in 2018. The most significant categories driving the change in noninterest expense were as follows:
|
|
|
|
Tax Refund Solutions segment
TRS’s noninterest expense increased $1.2 million, or 13%, during the first six months of 2019 compared to the same period in 2018 primarily due to $567,000 in legal reserves recorded during the first six months of 2019.
Republic Credit Solutions segment
RCS’s noninterest expense decreased $567,000, or 28%, during the first six months of 2019 compared to the same period in 2018 due to a $550,000 decrease in data processing expense resulting from the discontinuance of RCS’s credit card product.
Income Tax Expense
The Total Company effective income tax rate was 18% for the first six months of 2019 compared to 21% for the same period in 2018. The following drove the lower rate in 2019:
|
|
|
|
95
|
|
|
COMPARISON OF FINANCIAL CONDITION AT June 30, 2019 AND December 31, 2018
Table 11 — Loan Portfolio Composition
|
|
|
|
|
|
|
(in thousands) | June 30, 2019 |
| December 31, 2018 |
| ||
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
Owner occupied | $ | 907,826 |
| $ | 907,005 |
|
Owner occupied - correspondent* |
| 78,943 |
|
| 94,827 |
|
Nonowner occupied |
| 259,166 |
|
| 242,846 |
|
Commercial real estate |
| 1,253,868 |
|
| 1,248,940 |
|
Construction & land development |
| 190,984 |
|
| 175,178 |
|
Commercial & industrial |
| 447,295 |
|
| 430,355 |
|
Lease financing receivables |
| 17,271 |
|
| 15,031 |
|
Home equity |
| 296,834 |
|
| 332,548 |
|
Consumer: |
|
|
|
|
|
|
Credit cards |
| 17,429 |
|
| 19,095 |
|
Overdrafts |
| 894 |
|
| 1,102 |
|
Automobile loans |
| 63,553 |
|
| 63,475 |
|
Other consumer |
| 53,768 |
|
| 46,642 |
|
Total Traditional Banking |
| 3,587,831 |
|
| 3,577,044 |
|
Warehouse lines of credit* |
| 725,337 |
|
| 468,695 |
|
Total Core Banking |
| 4,313,168 |
|
| 4,045,739 |
|
|
|
|
|
|
|
|
Republic Processing Group*: |
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
Easy Advances |
| — |
|
| — |
|
Other TRS loans |
| 711 |
|
| 13,744 |
|
Republic Credit Solutions |
| 96,790 |
|
| 88,744 |
|
Total Republic Processing Group |
| 97,501 |
|
| 102,488 |
|
|
|
|
|
|
|
|
Total loans** |
| 4,410,669 |
|
| 4,148,227 |
|
Allowance for loan and lease losses |
| (45,983) |
|
| (44,675) |
|
|
|
|
|
|
|
|
Total loans, net | $ | 4,364,686 |
| $ | 4,103,552 |
|
* Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
** Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans increased by $262 million, or 6%, during the first six months of 2019 to $4.4 billion at June 30, 2019. The most significant components comprising the change in loans by reportable segment follow:
Traditional Banking segment
Traditional Banking loans increased $11 million during the first six months of 2019, with $123 million of loan growth offset by $112 million of loans held for investment reclassified to held for sale during the second quarter of 2019. The Bank entered into a definitive agreement in July 2019 to sell four of its banking centers, with the loans related to this agreement classified as held for sale as of June 30, 2019.
96
See Footnote 18 “Subsequent Event” of Part I Item 1 “Financial Statements” for additional information concerning the Bank’s agreement to sell four of its banking centers.
Warehouse Lending segment
Outstanding Warehouse balances increased $257 million from December 31, 2018 to June 30, 2019. A sharp decline in long-term fixed mortgage rates during 2019, along with normal seasonal increases in Warehouse usage rates, drove the increase in Warehouse balances.
Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 64% during the third quarter of 2015. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 57% during 2016.
Allowance for Loan and Lease Losses
TheAt March 31, 2020, the Bank maintainsmaintained an AllowanceACLL for probable incurredexpected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the AllowanceACLL monthly and presents and discusses the analysis with the Audit Committee and the Board of Directors quarterly.
Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaces the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures.
87
When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower “expected” threshold for loss recognition versus a higher “probable” threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts. The Company’s Allowance increased $1CECL method is a “static-pool” method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use the U.S. national unemployment rate as its primary forecasting tool.
In accordance with the adoption of ASC 326 and CECL, the Company recorded on January 1, 2020 a $6.7 million, or 3%16%, increase in the ACLL for its loans, a $51,000 ACLS for its investment debt securities, and a $456,000 ACLC for its off-balance sheet credit exposures. Of the $6.7 million increase in ACLL, approximately $1.4 million was a gross-up reclassification of non-accretable discount on previously-PCI, now-PCD loans, and the remaining $5.3 million was a difference in ACL between CECL and the probable-incurred method. The Company also made a cumulative effect entry of $4.3 million to reduce its opening balance of retained earnings upon adoption of ASC 326, with no impact on 2020 earnings for these adoption entries. The adoption date increase in ACLL for the Company’s loans primarily reflects additional ACLL for longer duration loan portfolios, such as the Company's residential real estate and consumer loan portfolios. No additional segmentation of the Bank's loan portfolios was deemed necessary upon adoption.
See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
The Company’s ACLL increased $27 million from $43 million at December 31, 20182019 to $46$70 million at June 30, 2019, primarily driven by general growth in some Core Bank portfolios.March 31, 2020. As a percent of total loans, the total Company’s Allowance decreasedACLL increased to 1.04%1.56% at June 30, 2019March 31, 2020 compared to 1.08%0.98% at December 31, 2018.2019. An analysis of the AllowanceACL by reportable segment follows:
Traditional Banking segment
The Traditional Banking AllowanceACLL increased $13 million to $41 million at March 31, 2020, driven partially by the Company’s January 1, 2020 CECL adoption entry of approximately $7 million and partially by approximately $7 million of reserves for the expected impact of the COVID-19 pandemic. The pandemic is projected to increase the Traditional Bank’s losses in the near-term to loss levels consistent with unemployment levels above 8%. Offsetting the increase in the ACLL due to the pandemic was a reduction in the ACLL of approximately $1 million consistent with a $59 million decrease in Traditional Bank spot balances from January 1, 2020 to $31 million, driven primarily by a $1.2 million Provision for one large C&I relationship that defaulted during the second quarter of 2019.March 31, 2020. The Traditional Bank AllowanceACLL to total Traditional Bank loans increased two37 basis pointpoints to 0.87%1.15% when comparing June 30, 2019March 31, 2020 to December 31, 2018. As historical losses within2019.
Following the Traditional Banking segment have remained relatively stable and lowCompany’s $51,000 ASC 326 adoption entry on January 1, 2020 establishing an ACLS for a sustained period of time, no material changes to its reserve percentages were required fordebt securities, the Company increased its ACLS $246,000 during the first six monthsquarter of 2019.2020 to $297,000 based on higher PD and LGD expectations on its corporate bond portfolios. These higher PD and LGD expectations generally reflect economic concerns from the COVID-19 pandemic.
Following the Company’s ASC 326 adoption entry on January 1, 2020 for an ACLC on its off-balance sheet credit exposures of $456,000, the Company increased its ACLC $102,000 during the first quarter of 2020 to $558,000 at March 31, 2020. The higher ACLC at March 31, 2020 reflects higher assumed loss rates on these exposures as they convert to outstanding balances over their expected lives. The ACLC is recorded on the liability side of the balance sheet, with provisions for credit loss expense recorded within other noninterest expense, not as a component of credit loss expense.
88
Warehouse Lending segment
The Warehouse AllowanceACLL increased to approximately $2$1.8 million, and the Warehouse AllowanceACLL to total Warehouse loans remained at 0.25% when comparing June 30, 2019March 31, 2020 to December 31, 2018.2019. As of June 30, 2019,March 31, 2020, the Warehouse had not incurred any historical losses, and as a result, its AllowanceACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first quarter of 2020. Warehouse lines are generally short-term, sound quality facilities secured by marketable collateral; therefore, the Company made no adjustment to the Warehouse ACLL upon adoption of CECL. Additionally, the Company made no ACLL adjustment for Warehouse lines for COVID-19 concerns at March 31, 2020, as its Warehouse clients are experiencing relatively high demand for refinance transactions as borrowers take advantage of the low interest rate environment.
The TRS ACLL increased to $15 million at March 31, 2020 from $234,000 at December 31, 2019, driven primarily by estimated losses on TRS’s EA product. Due to the seasonal nature of the EA, estimated reserves are generally made during the first two months of the year when the product is offered, with losses charged against those reserves in the second quarter of each year. Based on the timing of EA reserves versus charge-offs, the ACLL for EAs to total remaining outstanding EAs is relatively substantial at the end of the first quarter, or 58% and 59% at March 31, 2020 and March 31, 2019. The Company provided an ACLL for expected losses equal to 3.93% of total originations during the first quarter of 2020 as compared to 3.44% during the first quarter of 2019 because a higher percentage of EAs remained outstanding at March 31, 2020 compared to March 31, 2019. The Company is uncertain if the COVID-19 pandemic contributed to the higher level of unpaid EAs at March 31, 2020 compared to March 31, 2019, and it is uncertain if the COVID-19 pandemic could negatively impact normal paydowns of EAs going forward in 2020. Management believes it has adequately adjusted its expected loss rate to absorb EA losses based on information known through the date of this filing.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
Republic Credit Solutions segment
The RCS Allowance remainedACLL decreased $1 million to $12 million at March 31, 2020 from $13 million fromat December 31, 20182019. The decrease in ACLL was driven by a $3 million decrease in outstanding balances for RCS’s subprime line-of-credit product partially offset by a higher estimated loss rate on this product to June 30, 2019. account for COVID-19 economic concerns. As previously mentioned, the decrease in balances for RCS’s line-of-credit product was the direct result of a reduction in marketing for the product in response to the COVID-19 pandemic.
RCS maintained an AllowanceACLL for two distinct credit products offered at June 30, 2019,March 31, 2020, including its line-of-credit product and its healthcare-receivables product. At June 30, 2019,March 31, 2020, the AllowanceACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables product to as high as 46%49% for its line-of-credit product. The lower reserve percentage of 0.25% was provided for RCS’s healthcare receivables, as such receivables have recourse back to the third-party providers.
See additional detail regarding the impact of COVID-19 under:
· | Part I Item 1 “Financial Statements” |
o | Footnote 2 “Investment Securities” |
o | Footnote 4 “Loans and Allowance for Credit Losses” |
o | Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” |
o | Footnote 17 “Subsequent Events” |
· | Part II Item 1A “Risk Factors” |
9789
Asset Quality
Classified and Special Mention Loans
The Bank applies credit quality indicators, or “ratings,” to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated “Loss,” “Doubtful,” “Substandard,” and PCI-SubPCI/PCD-Substandard are considered “Classified.” Loans rated “Special Mention” or PCI-1PCI/PCD-Special Mention are considered Special Mention. The Bank’s Classified and Special Mention loans increased $4decreased$2 million during the first six monthsquarter of 20192020 resulting primarily from the downgradepayoff of one C&I relationship to Substandard during the second quarter of 2019. Despite personal guarantees associated with this relationship, the Company recorded a $1.2 million Provision for this C&I relationship due to the potential for a protracted legal conflict and the uncertainty associated with these types of legal conflicts, in general.Special Mention loans.
See Footnote 4 “Loans and Allowance for Loan and LeaseCredit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special Mention loans.
Table 128 — Classified and Special Mention Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in thousands) |
| June 30, 2019 |
| December 31, 2018 |
|
| March 31, 2020 |
| December 31, 2019 |
| $ Change |
| % Change | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
| $ | — |
| $ | — |
|
| $ | — |
| $ | — |
| $ | — |
| — | % |
Doubtful |
|
| — |
|
| — |
|
|
| — |
|
| — |
| — |
| — |
| |
Substandard |
|
| 24,458 |
|
| 19,860 |
|
|
| 32,434 |
|
| 33,297 |
| (863) |
| (3) |
| |
Purchased Credit Impaired - Substandard |
|
| 1,388 |
|
| 1,559 |
| ||||||||||||
PCI/PCD* - Substandard |
|
| 2,043 |
|
| 1,289 |
|
| 754 |
| 58 |
| |||||||
Total Classified Loans |
|
| 25,846 |
|
| 21,419 |
|
|
| 34,477 |
|
| 34,586 |
|
| (109) |
| (0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Special Mention |
|
| 20,826 |
|
| 21,205 |
|
|
| 19,495 |
|
| 21,754 |
| (2,259) |
| (10) |
| |
Purchased Credit Impaired - Group 1 |
|
| 1,065 |
|
| 1,121 |
| ||||||||||||
PCI/PCD* - Special Mention |
|
| 1,267 |
|
| 797 |
|
| 470 |
| 59 |
| |||||||
Total Special Mention Loans |
|
| 21,891 |
|
| 22,326 |
|
|
| 20,762 |
|
| 22,551 |
|
| (1,789) |
| (8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Classified and Special Mention Loans |
| $ | 47,737 |
| $ | 43,745 |
|
| $ | 55,239 |
| $ | 57,137 |
| $ | (1,898) |
| (3) | % |
*The Bank’s PCI loans at December 31, 2019 were reclassified to PCD loans on January 1, 2020 in connection with the Company’s adoption of ASC 326.See Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements” for additional discussion regarding the Company’s adoption of ASC 326.
98
Nonperforming Loans
Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. Impaired loans that are not placed on nonaccrual status are not included as nonperforming loans. The nonperforming loan category includes TDRs totaling approximately $11$6 million and $8$10 million at June 30, 2019March 31, 2020 and December 31, 2018. Generally, all nonperforming loans are considered impaired.2019.
Nonperforming loans to total loans increaseddecreased to 0.44%0.46% at June 30, 2019March 31, 2020 from 0.39%0.53% at December 31, 2018,2019, as the total balance of nonperforming loans increaseddecreased by $3 million, or 20%11%, while total loans increased $262$82 million, or 6%2%, during the first six months of 2019. One C&I relationship placed on nonaccrual status during the second quarter of 2019 primarily drove the increase in nonperforming loans.2020.
90
Table 9 — Nonperforming Loans and Nonperforming Assets Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| June 30, 2019 |
| December 31, 2018 |
|
|
| March 31, 2020 |
| December 31, 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans on nonaccrual status* |
| $ | 19,238 |
| $ | 15,993 |
|
|
| $ | 20,358 |
| $ | 23,332 |
|
Loans past due 90-days-or-more and still on accrual** |
|
| 166 |
|
| 145 |
|
|
|
| 495 |
|
| 157 |
|
Total nonperforming loans |
|
| 19,404 |
|
| 16,138 |
|
|
|
| 20,853 |
|
| 23,489 |
|
Other real estate owned |
|
| 1,095 |
|
| 160 |
|
|
|
| 85 |
|
| 113 |
|
Total nonperforming assets |
| $ | 20,499 |
| $ | 16,298 |
|
|
| $ | 20,938 |
| $ | 23,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Total Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
| 0.44 | % |
| 0.39 | % |
|
|
| 0.46 | % |
| 0.53 | % |
Nonperforming assets to total loans (including OREO) |
|
| 0.46 |
|
| 0.39 |
|
|
|
| 0.46 |
|
| 0.53 |
|
Nonperforming assets to total assets |
|
| 0.36 |
|
| 0.31 |
|
|
|
| 0.37 |
|
| 0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Core Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
| 0.45 | % |
| 0.40 | % |
|
|
| 0.46 | % |
| 0.54 | % |
Nonperforming assets to total loans (including OREO) |
|
| 0.47 |
|
| 0.40 |
|
|
|
| 0.47 |
|
| 0.54 |
|
Nonperforming assets to total assets |
|
| 0.37 |
|
| 0.32 |
|
|
|
| 0.38 |
|
| 0.43 |
|
*Loans on nonaccrual status include impairedcollateral-dependent loans. See Footnote 4 “Loans and Allowance for Loan and LeaseCredit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding impairedcollateral-dependent loans.
** Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
Table 10 — Nonperforming Loan Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2020 | December 31, 2019 |
| ||||||||||
|
|
|
|
|
| Percent of |
|
|
|
| Percent of |
| ||
|
|
|
|
|
| Total |
|
|
|
| Total |
| ||
(in thousands) |
| Balance |
| Loan Class | Balance |
| Loan Class |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
| $ | 13,120 |
| 1.43 | % |
| $ | 12,220 |
| 1.29 | % |
|
Nonowner occupied |
|
|
| 620 |
| 0.24 |
|
|
| 623 |
| 0.24 |
|
|
Commercial real estate |
|
|
| 3,108 |
| 0.24 |
|
|
| 6,865 |
| 0.53 |
|
|
Construction & land development |
|
|
| — |
| — |
|
|
| 143 |
| 0.09 |
|
|
Commercial & industrial |
|
|
| 1,494 |
| 0.34 |
|
|
| 1,424 |
| 0.30 |
|
|
Lease financing receivables |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
Home equity |
|
|
| 1,832 |
| 0.65 |
|
|
| 1,865 |
| 0.64 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
Overdrafts |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
Automobile loans |
|
|
| 169 |
| 0.36 |
|
|
| 179 |
| 0.34 |
|
|
Other consumer |
|
|
| 15 |
| 0.02 |
|
|
| 13 |
| 0.02 |
|
|
Total Traditional Banking |
|
|
| 20,358 |
| 0.58 |
|
|
| 23,332 |
| 0.65 |
|
|
Warehouse lines of credit |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
Total Core Banking |
|
|
| 20,358 |
| 0.46 |
|
|
| 23,332 |
| 0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
Other TRS loans |
|
|
| 189 |
| 50.67 |
|
|
| 53 |
| 0.37 |
|
|
Republic Credit Solutions |
|
|
| 306 |
| 0.30 |
|
|
| 104 |
| 0.10 |
|
|
Total Republic Processing Group |
|
|
| 495 |
| 0.39 |
|
|
| 157 |
| 0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
| $ | 20,853 |
| 0.46 | % |
| $ | 23,489 |
| 0.53 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9991
Table 1411 — Stratification of Nonperforming Loan CompositionLoans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| June 30, 2019 | December 31, 2018 |
|
| Number of Nonperforming Loans and Recorded Investment |
| |||||||||||||||||||||||||||||||
|
|
|
|
|
| Percent of |
|
|
|
| Percent of |
|
|
|
|
|
|
|
|
|
| Balance |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
| Total |
|
|
|
| Total |
| ||||||||||||||||||||||||||
(in thousands) |
| Balance |
| Loan Class | Balance |
| Loan Class |
| ||||||||||||||||||||||||||||||
March 31, 2020 |
|
|
| Balance |
|
|
|
| > $100 & |
|
|
|
| Balance |
|
|
|
| Total |
| ||||||||||||||||||
(dollars in thousands) |
| No. |
| <= $100 |
|
| No. |
| <= $500 |
|
| No. |
| > $500 |
|
| No. |
| Balance |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
| $ | 8,879 |
| 0.98 | % |
| $ | 10,800 |
| 1.19 | % |
|
| 143 |
| $ | 5,252 |
|
| 24 |
| $ | 4,565 |
|
| 3 |
| $ | 3,303 |
|
| 170 |
| $ | 13,120 |
|
Owner occupied - correspondent |
|
|
| 848 |
| 1.07 |
|
|
| 382 |
| 0.40 |
|
| ||||||||||||||||||||||||
Nonowner occupied |
|
|
| 461 |
| 0.18 |
|
|
| 669 |
| 0.28 |
|
|
| 2 |
|
| 81 |
|
| — |
|
| — |
|
| 1 |
|
| 539 |
|
| 3 |
|
| 620 |
|
Commercial real estate |
|
|
| 2,361 |
| 0.19 |
|
|
| 2,318 |
| 0.19 |
|
|
| 2 |
|
| 45 |
|
| 3 |
|
| 900 |
|
| 1 |
|
| 2,163 |
|
| 6 |
|
| 3,108 |
|
Construction & land development |
|
|
| 134 |
| 0.07 |
|
|
| — |
| — |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial & industrial |
|
|
| 5,046 |
| 1.13 |
|
|
| 630 |
| 0.15 |
|
|
| — |
|
| — |
|
| 4 |
|
| 629 |
|
| 1 |
|
| 865 |
|
| 5 |
|
| 1,494 |
|
Lease financing receivables |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Home equity |
|
|
| 1,444 |
| 0.49 |
|
|
| 1,095 |
| 0.33 |
|
|
| 27 |
|
| 908 |
|
| 5 |
|
| 924 |
|
| — |
|
| — |
|
| 32 |
|
| 1,832 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Overdrafts |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Automobile loans |
|
|
| 47 |
| 0.07 |
|
|
| 75 |
| 0.12 |
|
|
| 13 |
|
| 169 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 13 |
|
| 169 |
|
Other consumer |
|
|
| 18 |
| 0.03 |
|
|
| 37 |
| 0.08 |
|
|
| 6 |
|
| 15 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6 |
|
| 15 |
|
Total Traditional Banking |
|
|
| 19,238 |
| 0.54 |
|
|
| 16,006 |
| 0.45 |
|
|
| 193 |
|
| 6,470 |
|
| 36 |
|
| 7,018 |
|
| 6 |
|
| 6,870 |
|
| 235 |
|
| 20,358 |
|
Warehouse lines of credit |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Total Core Banking |
|
|
| 19,238 |
| 0.45 |
|
|
| 16,006 |
| 0.40 |
|
|
| 193 |
|
| 6,470 |
|
| 36 |
|
| 7,018 |
|
| 6 |
|
| 6,870 |
|
| 235 |
|
| 20,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Other TRS loans |
|
|
| 13 |
| 1.83 |
|
|
| 4 |
| 0.03 |
|
|
| NM |
|
| 189 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| NM |
|
| 189 |
|
Republic Credit Solutions |
|
|
| 153 |
| 0.16 |
|
|
| 128 |
| 0.14 |
|
|
| NM |
|
| 306 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| NM |
|
| 306 |
|
Total Republic Processing Group |
|
|
| 166 |
| 0.17 |
|
|
| 132 |
| 0.13 |
|
|
| NM |
|
| 495 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| NM |
|
| 495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
| $ | 19,404 |
| 0.44 | % |
| $ | 16,138 |
| 0.39 | % |
| ||||||||||||||||||||||||
Total |
| 193 |
| $ | 6,965 |
|
| 36 |
| $ | 7,018 |
|
| 6 |
| $ | 6,870 |
|
| 235 |
| $ | 20,853 |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of Nonperforming Loans and Recorded Investment |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Balance |
|
|
|
|
|
|
|
|
|
|
|
|
| |
December 31, 2019 |
|
|
| Balance |
|
|
|
| > $100 & |
|
|
|
| Balance |
|
|
|
| Total |
| ||||
(dollars in thousands) |
| No. |
| <= $100 |
|
| No. |
| <= $500 |
|
| No. |
| > $500 |
|
| No. |
| Balance |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
| 137 |
| $ | 5,005 |
|
| 24 |
| $ | 4,525 |
|
| 3 |
| $ | 2,690 |
|
| 164 |
| $ | 12,220 |
|
Nonowner occupied |
| 3 |
|
| 84 |
|
| — |
|
| — |
|
| 1 |
|
| 539 |
|
| 4 |
|
| 623 |
|
Commercial real estate |
| 2 |
|
| 45 |
|
| 2 |
|
| 609 |
|
| 4 |
|
| 6,211 |
|
| 8 |
|
| 6,865 |
|
Construction & land development |
| — |
|
| — |
|
| 1 |
|
| 143 |
|
| — |
|
| — |
|
| 1 |
|
| 143 |
|
Commercial & industrial |
| — |
|
| — |
|
| 2 |
|
| 397 |
|
| 1 |
|
| 1,027 |
|
| 3 |
|
| 1,424 |
|
Lease financing receivables |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Home equity |
| 23 |
|
| 795 |
|
| 5 |
|
| 1,070 |
|
| — |
|
| — |
|
| 28 |
|
| 1,865 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Overdrafts |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Automobile loans |
| 13 |
|
| 179 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 13 |
|
| 179 |
|
Other consumer |
| 7 |
|
| 13 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
| 13 |
|
Total Traditional Banking |
| 185 |
|
| 6,121 |
|
| 34 |
|
| 6,744 |
|
| 9 |
|
| 10,467 |
|
| 228 |
|
| 23,332 |
|
Warehouse lines of credit |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Total Core Banking |
| 185 |
|
| 6,121 |
|
| 34 |
|
| 6,744 |
|
| 9 |
|
| 10,467 |
|
| 228 |
|
| 23,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Other TRS loans |
| NM |
|
| 53 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| NM |
|
| 53 |
|
Republic Credit Solutions |
| NM |
|
| 104 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| NM |
|
| 104 |
|
Total Republic Processing Group |
| NM |
|
| 157 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| NM |
|
| 157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| 185 |
| $ | 6,278 |
|
| 34 |
| $ | 6,744 |
|
| 9 |
| $ | 10,467 |
|
| 228 |
| $ | 23,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10092
Table 15 — Stratification of Nonperforming Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of Nonperforming Loans and Recorded Investment |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Balance |
|
|
|
|
|
|
|
|
|
|
|
|
| |
June 30, 2019 |
|
|
| Balance |
|
|
|
| > $100 & |
|
|
|
| Balance |
|
|
|
| Total |
| ||||
(dollars in thousands) |
| No. |
| <= $100 |
|
| No. |
| <= $500 |
|
| No. |
| > $500 |
|
| No. |
| Balance |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
| 104 |
| $ | 4,499 |
|
| 12 |
| $ | 2,146 |
|
| 2 |
| $ | 2,234 |
|
| 118 |
| $ | 8,879 |
|
Owner occupied - correspondent |
| — |
|
| — |
|
| 2 |
|
| 848 |
|
| — |
|
| — |
|
| 2 |
|
| 848 |
|
Nonowner occupied |
| 2 |
|
| 30 |
|
| 1 |
|
| 431 |
|
| — |
|
| — |
|
| 3 |
|
| 461 |
|
Commercial real estate |
| 2 |
|
| 46 |
|
| 2 |
|
| 646 |
|
| 1 |
|
| 1,669 |
|
| 5 |
|
| 2,361 |
|
Construction & land development |
| — |
|
| — |
|
| 1 |
|
| 134 |
|
| — |
|
| — |
|
| 1 |
|
| 134 |
|
Commercial & industrial |
| 3 |
|
| 146 |
|
| 2 |
|
| 474 |
|
| 2 |
|
| 4,426 |
|
| 7 |
|
| 5,046 |
|
Lease financing receivables |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Home equity |
| 14 |
|
| 360 |
|
| 5 |
|
| 1,084 |
|
| — |
|
| — |
|
| 19 |
|
| 1,444 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Overdrafts |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Automobile loans |
| 4 |
|
| 47 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4 |
|
| 47 |
|
Other consumer |
| 9 |
|
| 18 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 9 |
|
| 18 |
|
Total Traditional Banking |
| 138 |
|
| 5,146 |
|
| 25 |
|
| 5,763 |
|
| 5 |
|
| 8,329 |
|
| 168 |
|
| 19,238 |
|
Warehouse lines of credit |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Total Core Banking |
| 138 |
|
| 5,146 |
|
| 25 |
|
| 5,763 |
|
| 5 |
|
| 8,329 |
|
| 168 |
|
| 19,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Other TRS loans |
| 34 |
|
| 13 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 34 |
|
| 13 |
|
Republic Credit Solutions |
| 231 |
|
| 153 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 231 |
|
| 153 |
|
Total Republic Processing Group |
| 265 |
|
| 166 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 265 |
|
| 166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| 403 |
| $ | 5,312 |
|
| 25 |
| $ | 5,763 |
|
| 5 |
| $ | 8,329 |
|
| 433 |
| $ | 19,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of Nonperforming Loans and Recorded Investment |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Balance |
|
|
|
|
|
|
|
|
|
|
|
|
| |
December 31, 2018 |
|
|
| Balance |
|
|
|
| > $100 & |
|
|
|
| Balance |
|
|
|
| Total |
| ||||
(dollars in thousands) |
| No. |
| <= $100 |
|
| No. |
| <= $500 |
|
| No. |
| > $500 |
|
| No. |
| Balance |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
| 108 |
| $ | 4,859 |
|
| 11 |
| $ | 2,401 |
|
| 3 |
| $ | 3,540 |
|
| 122 |
| $ | 10,800 |
|
Owner occupied - correspondent |
| — |
|
| — |
|
| 1 |
|
| 382 |
|
| — |
|
| — |
|
| 1 |
|
| 382 |
|
Nonowner occupied |
| 4 |
|
| 169 |
|
| — |
|
| — |
|
| 1 |
|
| 500 |
|
| 5 |
|
| 669 |
|
Commercial real estate |
| 5 |
|
| 201 |
|
| 1 |
|
| 397 |
|
| 2 |
|
| 1,720 |
|
| 8 |
|
| 2,318 |
|
Construction & land development |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial & industrial |
| 2 |
|
| 59 |
|
| 2 |
|
| 571 |
|
| — |
|
| — |
|
| 4 |
|
| 630 |
|
Lease financing receivables |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Home equity |
| 19 |
|
| 417 |
|
| 4 |
|
| 678 |
|
| — |
|
| — |
|
| 23 |
|
| 1,095 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Overdrafts |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Automobile loans |
| 5 |
|
| 75 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5 |
|
| 75 |
|
Other consumer |
| 14 |
|
| 37 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 14 |
|
| 37 |
|
Total Traditional Banking |
| 157 |
|
| 5,817 |
|
| 19 |
|
| 4,429 |
|
| 6 |
|
| 5,760 |
|
| 182 |
|
| 16,006 |
|
Warehouse lines of credit |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Total Core Banking |
| 157 |
|
| 5,817 |
|
| 19 |
|
| 4,429 |
|
| 6 |
|
| 5,760 |
|
| 182 |
|
| 16,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Other TRS loans |
| 6 |
|
| 4 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6 |
|
| 4 |
|
Republic Credit Solutions |
| 960 |
|
| 128 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 960 |
|
| 128 |
|
Total Republic Processing Group |
| 966 |
|
| 132 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 966 |
|
| 132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| 1,123 |
| $ | 5,949 |
|
| 19 |
| $ | 4,429 |
|
| 6 |
| $ | 5,760 |
|
| 1,148 |
| $ | 16,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
Table 1612 — Rollforward of Nonperforming Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| |||||||||||||
|
| June 30, |
| June 30, |
|
| March 31, |
| |||||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Nonperforming loans at the beginning of the period |
| $ | 15,560 |
| $ | 16,128 |
| $ | 16,138 |
| $ | 15,074 |
|
| $ | 23,489 |
| $ | 16,138 |
| |
Loans added to nonperforming status during the period that remained nonperforming at the end of the period |
|
| 6,575 |
|
| 3,733 |
|
| 7,680 |
|
| 5,922 |
|
|
| 2,629 |
|
| 1,508 |
| |
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below) |
|
| (2,119) |
|
| (639) |
|
| (3,478) |
|
| (1,944) |
|
|
| (4,975) |
|
| (1,376) |
| |
Principal balance paydowns of loans nonperforming at both period ends |
|
| (578) |
|
| (441) |
|
| (956) |
|
| (594) |
|
|
| (628) |
|
| (764) |
| |
Net change in principal balance of other loans nonperforming at both period ends* |
|
| (34) |
|
| (421) |
|
| 20 |
|
| (98) |
|
|
| 338 |
|
| 54 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Nonperforming loans at the end of the period |
| $ | 19,404 |
| $ | 18,360 |
| $ | 19,404 |
| $ | 18,360 |
|
| $ | 20,853 |
| $ | 15,560 |
|
*Includes relatively small consumer portfolios, e.g., RCS loans.
Table 1713 — Detail of Loans Removed from Nonperforming Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Three Months Ended |
| Six Months Ended |
|
|
| Three Months Ended |
| ||||||||||||
|
| June 30, |
| June 30, |
|
| March 31, |
| |||||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loans charged off |
| $ | (285) |
| $ | — |
| $ | (298) |
| $ | (10) |
|
| $ | (43) |
| $ | (13) |
| |
Loans transferred to OREO |
|
| (980) |
|
| — |
|
| (1,036) |
|
| (184) |
|
|
| — |
|
| (56) |
| |
Loans refinanced at other institutions |
|
| (830) |
|
| (639) |
|
| (2,060) |
|
| (1,520) |
|
|
| (4,907) |
|
| (1,236) |
| |
Loans returned to accrual status |
|
| (24) |
|
| — |
|
| (84) |
|
| (230) |
|
|
| (25) |
|
| (71) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period |
| $ | (2,119) |
| $ | (639) |
| $ | (3,478) |
| $ | (1,944) |
|
| $ | (4,975) |
| $ | (1,376) |
|
Based on the Bank’s review at June 30, 2019,March 31, 2020, management believes that its reserves are adequate to absorb probableexpected losses on all nonperforming loans.
Delinquent Loans
Total Company delinquent loans to total loans increased to 0.44%0.94% at June 30, 2019,March 31, 2020, from 0.38%0.47% at December 31, 2018,2019, primarily due to one C&I relationship that defaulteddelinquent EAs as of March 31, 2020. All EAs not paid off during the second quarter of 2019. will be charged off by June 30, 2020.
Core Bank delinquent loans to total Core Bank loans increaseddecreased to 0.29%0.27% at June 30, 2019March 31, 2020 from 0.22%0.30% at December 31, 2018, primarily due to the previously mentioned C&I relationship that defaulted during the second quarter of 2019. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of June 30, 2019March 31, 2020 and December 31, 20182019 were on nonaccrual status.
10293
Table 1814 — Delinquent Loan Composition*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| June 30, 2019 | December 31, 2018 |
|
| March 31, 2020 | December 31, 2019 |
| ||||||||||||||||||||
|
|
|
|
|
| Percent of |
|
|
|
| Percent of |
|
|
|
|
|
| Percent of |
|
|
|
| Percent of |
| ||||
|
|
|
|
|
| Total |
|
|
|
| Total |
|
|
|
|
|
| Total |
|
|
|
| Total |
| ||||
(in thousands) |
| Balance |
| Loan Class | Balance |
| Loan Class |
|
| Balance |
| Loan Class | Balance |
| Loan Class |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
| $ | 4,058 |
| 0.45 | % |
| $ | 5,525 |
| 0.61 | % |
|
|
| $ | 3,682 |
| 0.40 | % |
| $ | 4,434 |
| 0.47 | % |
|
Owner occupied - correspondent |
|
|
| — |
| — |
|
|
| — |
| — |
|
| ||||||||||||||
Nonowner occupied |
|
|
| 671 |
| 0.26 |
|
|
| 1,008 |
| 0.42 |
|
|
|
|
| 898 |
| 0.35 |
|
|
| 539 |
| 0.21 |
|
|
Commercial real estate |
|
|
| 898 |
| 0.07 |
|
|
| 1,099 |
| 0.09 |
|
|
|
|
| 3,734 |
| 0.28 |
|
|
| 3,300 |
| 0.25 |
|
|
Construction & land development |
|
|
| 540 |
| 0.28 |
|
|
| — |
| — |
|
|
|
|
| 295 |
| 0.18 |
|
|
| — |
| — |
|
|
Commercial & industrial |
|
|
| 4,933 |
| 1.10 |
|
|
| 25 |
| 0.01 |
|
|
|
|
| 1,240 |
| 0.28 |
|
|
| 1,355 |
| 0.28 |
|
|
Lease financing receivables |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
|
|
| — |
| — |
|
|
| — |
| — |
|
|
Home equity |
|
|
| 978 |
| 0.33 |
|
|
| 784 |
| 0.24 |
|
|
|
|
| 1,680 |
| 0.59 |
|
|
| 2,918 |
| 1.00 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
| 90 |
| 0.52 |
|
|
| 129 |
| 0.68 |
|
|
|
|
| 97 |
| 0.62 |
|
|
| 155 |
| 0.87 |
|
|
Overdrafts |
|
|
| 278 |
| 31.10 |
|
|
| 230 |
| 20.87 |
|
|
|
|
| 172 |
| 22.69 |
|
|
| 283 |
| 18.59 |
|
|
Automobile loans |
|
|
| 64 |
| 0.10 |
|
|
| 28 |
| 0.04 |
|
|
|
|
| 47 |
| 0.10 |
|
|
| 49 |
| 0.09 |
|
|
Other consumer |
|
|
| 14 |
| 0.03 |
|
|
| 47 |
| 0.10 |
|
|
|
|
| 18 |
| 0.02 |
|
|
| 9 |
| 0.01 |
|
|
Total Traditional Banking |
|
|
| 12,524 |
| 0.35 |
|
|
| 8,875 |
| 0.25 |
|
|
|
|
| 11,863 |
| 0.34 |
|
|
| 13,042 |
| 0.36 |
|
|
Warehouse lines of credit |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
|
|
| — |
| — |
|
|
| — |
| — |
|
|
Total Core Banking |
|
|
| 12,524 |
| 0.29 |
|
|
| 8,875 |
| 0.22 |
|
|
|
|
| 11,863 |
| 0.27 |
|
|
| 13,042 |
| 0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
|
| — |
| — |
|
|
| — |
| — |
|
|
|
|
| 23,467 |
| 89.43 |
|
|
| — |
| — |
|
|
Other TRS loans |
|
|
| 75 |
| 10.55 |
|
|
| 10 |
| 0.07 |
|
|
|
|
| 235 |
| 63.00 |
|
|
| 119 |
| 0.83 |
|
|
Republic Credit Solutions |
|
|
| 6,727 |
| 6.95 |
|
|
| 7,077 |
| 7.97 |
|
|
|
|
| 7,062 |
| 6.94 |
|
|
| 7,643 |
| 7.25 |
|
|
Total Republic Processing Group |
|
|
| 6,802 |
| 6.98 |
|
|
| 7,087 |
| 6.91 |
|
|
|
|
| 30,764 |
| 23.97 |
|
|
| 7,762 |
| 6.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquent loans |
|
| $ | 19,326 |
| 0.44 | % |
| $ | 15,962 |
| 0.38 | % |
|
|
| $ | 42,627 |
| 0.94 | % |
| $ | 20,804 |
| 0.47 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Represents total loans 30-days-or-more past due. Delinquent status may be determined by either the number of days past due or number of payments past due. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority.
10394
Table 1915 — Rollforward of Delinquent Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||||
|
| June 30, |
| June 30, |
|
| March 31, |
| ||||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans at the beginning of the period |
| $ | 34,187 |
| $ | 25,833 |
| $ | 15,962 |
| $ | 14,101 |
|
| $ | 20,804 |
| $ | 15,962 |
|
Loans that became delinquent during the period - Easy Advances* |
|
| 23,467 |
|
| 19,099 |
| |||||||||||||
Loans added to delinquency status during the period and remained in delinquency status at the end of the period |
|
| 8,685 |
|
| 3,472 |
|
| 8,519 |
|
| 4,456 |
|
|
| 3,950 |
|
| 2,378 |
|
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below) |
|
| (22,991) |
|
| (16,227) |
|
| (4,661) |
|
| (4,085) |
|
|
| (4,702) |
|
| (3,312) |
|
Principal balance paydowns of loans delinquent at both period ends |
|
| (84) |
|
| (69) |
|
| (293) |
|
| (106) |
|
|
| (95) |
|
| (117) |
|
Net change in principal balance of other loans delinquent at both period ends** |
|
| (471) |
|
| 123 |
|
| (201) |
|
| (1,234) |
|
|
| (797) |
|
| 177 |
|
Delinquent loans at the end of period |
| $ | 19,326 |
| $ | 13,132 |
| $ | 19,326 |
| $ | 13,132 |
|
| $ | 42,627 |
| $ | 34,187 |
|
*EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority.
**Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 2016 — Detail of Loans Removed from Delinquent Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||||
|
| June 30, |
| June 30, |
|
| March 31, |
| ||||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
| $ | (306) |
| $ | (136) |
| $ | (316) |
| $ | (33) |
|
| $ | — |
| $ | (13) |
|
Easy Advances* paid-off or charged-off |
|
| (19,099) |
|
| (13,163) |
|
| — |
|
| — |
| |||||||
Loans transferred to OREO |
|
| (1,062) |
|
| — |
|
| (1,119) |
|
| (184) |
|
|
| — |
|
| (56) |
|
Loans refinanced at other institutions |
|
| (746) |
|
| (570) |
|
| (1,309) |
|
| (1,643) |
|
|
| (2,442) |
|
| (955) |
|
Loans paid current |
|
| (1,778) |
|
| (2,358) |
|
| (1,917) |
|
| (2,225) |
|
|
| (2,260) |
|
| (2,288) |
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period |
| $ | (22,991) |
| $ | (16,227) |
| $ | (4,661) |
| $ | (4,085) |
|
| $ | (4,702) |
| $ | (3,312) |
|
ImpairedCollateral Dependent Loans and Troubled Debt Restructurings
When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate. The Bank’s policy is to charge-off all or that portion of its recorded investment in a collateral-dependent impaired creditloans upon a determination that it is probableexpects the full amount of contractual principal and interest will not be collected. Impaired loans totaled $43 million at June 30, 2019 compared to $41 million at December 31, 2018, an increase of $2 million during the first six months of 2019.
A TDR is thea 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), reducing the loan’s interest rate and/or extending the maturity date of the debt. Nonaccrual loans modified as TDRs remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. As of June 30, 2019, the Bank had $33 million in TDRs, of which $11 million were also on nonaccrual status. As of December 31, 2018, the Bank had $33 million in TDRs, of which $8 million were also on nonaccrual status.
Table 2117 — Impaired Loan CompositionCollateral-Dependent Loans and Troubled Debt Restructurings
|
|
|
|
|
|
|
|
(in thousands) |
| June 30, 2019 |
| December 31, 2018 |
| ||
|
|
|
|
|
|
|
|
Troubled debt restructurings |
| $ | 32,911 |
| $ | 32,863 |
|
Impaired loans (which are not TDRs) |
|
| 9,769 |
|
| 8,572 |
|
Total recorded investment in impaired loans |
| $ | 42,680 |
| $ | 41,435 |
|
|
|
|
|
|
|
|
|
(in thousands) |
| March 31, 2020 |
| December 31, 2019 |
| ||
|
|
|
|
|
|
|
|
Cashflow-dependent TDRs |
| $ | 13,461 |
| $ | 14,348 |
|
Collateral-dependent TDRs |
|
| 14,275 |
|
| 16,433 |
|
Total TDRs |
|
| 27,736 |
|
| 30,781 |
|
Collateral dependent loans (which are not TDRs) |
|
| 19,997 |
|
| 19,569 |
|
Total recorded investment in TDRs and collateral-dependent loans |
| $ | 47,733 |
| $ | 50,350 |
|
See Footnote 4 “Loans and Allowance for Loan and LeaseCredit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding impairedcollateral-dependent loans and TDRs.
10495
Deposits
Table 2218 — Deposit Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in thousands) |
| June 30, 2019 |
| December 31, 2018 |
|
| March 31, 2020 |
| December 31, 2019 |
| $ Change |
| % Change |
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Core Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Demand |
| $ | 906,179 |
| $ | 937,402 |
|
| $ | 959,911 |
| $ | 922,972 |
| $ | 36,939 |
| 4 | % |
| |
Money market accounts |
|
| 727,718 |
|
| 717,954 |
|
|
| 697,828 |
|
| 793,950 |
|
| (96,122) |
| (12) |
|
| |
Savings |
|
| 177,421 |
|
| 187,868 |
|
|
| 183,445 |
|
| 175,588 |
|
| 7,857 |
| 4 |
|
| |
Individual retirement accounts(1) |
|
| 50,970 |
|
| 53,524 |
| ||||||||||||||
Time deposits, $250 and over(1) |
|
| 93,713 |
|
| 84,104 |
| ||||||||||||||
Other certificates of deposit(1) |
|
| 246,392 |
|
| 239,324 |
| ||||||||||||||
Individual retirement accounts (1) |
|
| 51,639 |
|
| 51,548 |
|
| 91 |
| 0 |
|
| ||||||||
Time deposits, $250 and over (1) |
|
| 112,003 |
|
| 104,412 |
|
| 7,591 |
| 7 |
|
| ||||||||
Other certificates of deposit (1) |
|
| 261,386 |
|
| 248,161 |
|
| 13,225 |
| 5 |
|
| ||||||||
Reciprocal money market and time deposits |
|
| 192,792 |
|
| 217,153 |
|
|
| 255,256 |
|
| 189,774 |
|
| 65,482 |
| 35 |
|
| |
Brokered deposits(1) |
|
| 159,615 |
|
| 9,394 |
| ||||||||||||||
Brokered deposits (1) |
|
| 180,245 |
|
| 200,072 |
|
| (19,827) |
| (10) |
|
| ||||||||
Total Core Bank interest-bearing deposits |
|
| 2,554,800 |
|
| 2,446,723 |
|
|
| 2,701,713 |
|
| 2,686,477 |
|
| 15,236 |
| 1 |
|
| |
Total Core Bank noninterest-bearing deposits |
|
| 937,487 |
|
| 971,422 |
|
|
| 1,042,311 |
|
| 981,164 |
|
| 61,147 |
| 6 |
|
| |
Total Core Bank deposits |
|
| 3,492,287 |
|
| 3,418,145 |
|
|
| 3,744,024 |
|
| 3,667,641 |
|
| 76,383 |
| 2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Money market accounts |
|
| 2,327 |
|
| 5,453 |
|
|
| 68,853 |
|
| 66,152 |
|
| 2,701 |
| 4 |
|
| |
Total RPG interest-bearing deposits |
|
| 2,327 |
|
| 5,453 |
|
|
| 68,853 |
|
| 66,152 |
|
| 2,701 |
| 4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Brokered prepaid card deposits |
|
| 10,854 |
|
| 4,350 |
|
|
| 42,962 |
|
| 9,128 |
|
| 33,834 |
| 371 |
|
| |
Other noninterest-bearing deposits |
|
| 55,452 |
|
| 28,197 |
|
|
| 215,618 |
|
| 43,087 |
|
| 172,531 |
| 400 |
|
| |
Total RPG noninterest-bearing deposits |
|
| 66,306 |
|
| 32,547 |
|
|
| 258,580 |
|
| 52,215 |
|
| 206,365 |
| 395 |
|
| |
Total RPG deposits |
|
| 68,633 | �� |
| 38,000 |
|
|
| 327,433 |
|
| 118,367 |
|
| 209,066 |
| 177 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deposits held for assumption in connection with sale of banking centers(3) |
|
| 152,954 |
|
| — |
| ||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||
Total deposits |
| $ | 3,713,874 |
| $ | 3,456,145 |
|
| $ | 4,071,457 |
| $ | 3,786,008 |
| $ | 285,449 |
| 8 | % |
|
(1) | Includes time deposits. |
|
|
|
|
Total Company deposits increased $258$285 million, or 7%8%, from December 31, 20182019 to $3.7$4.1 billion at June 30, 2019.March 31, 2020. Total deposits at June 30, 2019 includes $153March 31, 2020 included $140 million of short-term RT deposits held for assumption in connection with the Bank’s agreement to sell four of its banking centers.by TRS. These deposits held for assumption at June 30, 2019 include $105 million of interest-bearing and $48 million of noninterest-bearing deposits.are expected to exit the Company shortly after March 31, 2020.
See Footnote 18 “Subsequent Event”Total Company noninterest-bearing deposits increased $268 million, or 26%, with growth driven by the previously discussed $140 million in short-term RT deposits and the remainder primarily driven by business accounts. Management believes much of Part I Item 1 “Financial Statements”the remaining growth in noninterest-bearing deposits was a flight to safety brought about by the COVID-19 pandemic. At this time, management is unable to predict how long these funds might remain at the Bank due to the uncertain economic environment for additional information concerningmany of the Bank’s agreement to sell four of its banking centers.depositors, including the depositors’ short-term and long-term cash needs.
Total Company interest-bearing deposits increased $210approximately $18 million or 4%,for the first quarter, with Core Bank interest-bearing deposits representing approximately $15 million of that increase. Included in the $15 million net increase during the first six months of 2019 primarilyquarter was a $36 million decline in MemoryBank’s online money market accounts, as the Bank significantly lowered its pricing during the quarter due to the acquisition of $150overall decrease in market interest rates. In addition to the decline in MemoryBank balances, the Bank also had a $37 million of wholesale-brokered deposits. Promotional rates fordeposit outflow from one money-market client. At this time, deposits and money market accounts offered throughmanagement does not anticipate this large deposit will be replaced by this one client in the Company’s MemoryBank digital brand primarily drove the remaining growth in interest-bearing deposits.foreseeable future.
Total Company noninterest-bearing deposits increased $48 million, or 5%, resulting primarily from a $34 million increase in RPG short-term deposits.
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
SSUARs are collateralized by securities and 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.
SSUARs increased approximately $43 million, or 24%, during the first six months of 2019, with this growth driven by one large corporate client. The substantial majority of SSUARs are indexed to immediately repricing indices such as the FFTR.
105
Federal Home Loan Bank Advances
Primarily to fund a seasonalAs the overall increase in usage rates on its warehouse lines of credit,deposits outpaced the Company experienced a $160 millionoverall increase in itsinterest-earning assets for the first quarter of 2020, FHLB overnight advances declined by $178 million from December 31, 20182019 to June 30, 2019.March 31, 2020. The Bank held $670$125 million in overnight advances at a rate of 2.46%0.14% as of June 30, 2019,March 31, 2020, compared to $510$200 million in overnight advances at a rate of 2.45%1.63% at December 31, 2018. Management anticipates its2019. The usage of overnight FHLB advances will decrease duringis expected to continue to fluctuate based on the third quarter asoverall usage rates onfor the Bank’s warehouse lines descend from their seasonal highs.of credit, which are also tied to short-term repricing indices, as well as current favorable deposit gathering trends.
OverallThe Bank currently borrows from the FHLB substantially on an overnight basis due to its current interest rate risk position. The overall use and types of FHLB 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. Because of the Bank’s current interest rate position, management expects the Company will continue to predominately borrow on an overnight basis from the FHLB. If a meaningful amount of the Bank’s loan originations in the future have repricing terms longer than five years, management will likelycould elect to borrow
96
additional longer-term funds from the FHLB 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.
Interest Rate Swaps
Interest Rate Swaps Used as Cash Flow Hedges
The Bank entered into two interest rate swap agreements during 2013 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 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month LIBOR. 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.
Non-hedge Interest Rate Swaps
The Bank also enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 12 “Interest Rate Swaps” of Part I Item 1 “Financial Statements” for additional discussion regarding the Bank’s interest rate swaps.
Liquidity
The Bank had a loan to deposit ratio (excluding brokered deposits) of 181%118% at June 30, 2019March 31, 2020 and 120%126% at December 31, 2018.2019. At June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company had cash and cash equivalents on-hand of $474$316 million and $351$385 million. The Bank also had available borrowing capacity of $166$409 million and $254$259 million from the FHLB at June 30, 2019March 31, 2020 and December 31, 2018.2019. In addition, the Bank’s liquidity resources included unencumbered debt securities of $169$451 million and $300$304 million as of June 30, 2019March 31, 2020 and December 31, 20182019 and unsecured lines of credit of $125 million available through various other financial institutions as of the same period-ends.
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 AFS debt securities, principal paydowns on loans and mortgage backed securities 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 June 30, 2019March 31, 2020 and December 31, 2018,2019, these pledged investment securities had a fair value of $275$155 million and $241$230 million. Republic’s banking centers and its websites, www.republicbank.com and www.mymemorybank.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 canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs.
106
At June 30, 2019,March 31, 2020, the Bank had approximately $974 million$1.1 billion in deposits from 154180 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $497$464 million, or 13%11%, of the Company’s total deposit balances at June 30, 2019.March 31, 2020. These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were 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 wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.
Due to its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached and, periodically during each quarter, has fallen short of its Board-approved minimum internal policy limits for liquidity management. Most recently, the Bank has experienced a significant increase in its outstanding Warehouse line-of-credit balances. Because management as set forth bydeems this increase in Warehouse balances to not be long-term in nature and the Bank’s BoardBank is asset sensitive for its interest
97
rate risk position, it has elected to utilize overnight borrowings from the FHLB in order to fund these outstanding balances. While the Bank was in compliance with all Board-approved liquidity policies however,as of March 31, 2020, it was not always within policy parameters for each day of the quarter. The Bank will likely continue to maintain its liquidity levels near the Bank’s Board-approved minimums for the foreseeable future. It isfuture and will also likely utilize much of its FHLB borrowing capacity or short-term brokered deposits to fund the current spike in Warehouse balances.
In addition to its typical operations which impacts liquidity, the COVID-19 pandemic could create both substantially positive and negative impacts to the Bank’s liquidity over the short-term and long-term. The overall impact to Bank’s liquidity over the long-term will likely depend heavily on the length of the economy’s shut-down.
A near-term positive to the Bank’s liquidity is the apparent flight to safety by its clients and the increase in the Bank’s deposit balances. Management is uncertain as to how long these deposit balances might stay in the Bank, however, as it manages its liquidity levelsa protracted shut-down of the economy could put a financial strain on the Banks’ clients requiring them to drawdown their deposit funds in order to maximize its overall earnings, will continue to fall shortmeet their own liquidity demands.
Also negatively impacting the Bank’s liquidity in the near term is the demand for the SBA’s PPP program. As of April 30, 2020, the Bank had originated approximately $436 million of these minimums on occasionloans, with another $86 million in its pipeline. The Bank did begin participating in the future, particularlyFederal Reserve’s PPPLF on April 24, 2020. Under the PPLF program, the Bank can fully fund these loans on a dollar-for-dollar basis at a borrowing rate of 0.35%. While management believes that a full-funding of the PPP loans will be available to the Bank through the PPPLF program until these loans are forgiven by the SBA or paid off by the borrower over their two-year terms, if the PPPLF program were to go away or be significantly modified for any reason during the first quarterterm of each year whenthe PPP loans it could be a strain on the Bank’s overall liquidity.
To further protect itself from short-term Easy Advance loans are originated.liquidity demands, the Bank did raise $100 million of broker deposits subsequent to March 31, 2020. In addition, the Bank also pledged additional collateral to the FHLB and the Federal Reserve discount window since the pandemic began, in order to fortify its liquidity position over the near term for any possible unanticipated cash-flow needs.
See additional detail regarding the impact of COVID-19 under:
· | Part I Item 1 “Financial Statements” |
o | Footnote 2 “Investment Securities” |
o | Footnote 4 “Loans and Allowance for Credit Losses” |
o | Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” |
o | Footnote 17 “Subsequent Events” |
· | Part II Item 1A“Risk Factors” |
Capital
Total stockholders’ equity increased from $690$764 million at December 31, 20182019 to $731$784 million at June 30, 2019.March 31, 2020. The increase in stockholders’ equity was primarily attributable to net income earned during 2019 reduced by cash dividends declared.
See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” for additional detail regarding stock repurchases and stock buyback programs.
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 June 30, 2019,March 31, 2020, RB&T could, without prior approval, declare dividends of approximately $118$145 million.
98
Regulatory Capital Requirements — The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. 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 regarding components, risk weightings and other factors.
Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 10.0% Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total Risk-Based Capital ratio, and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, the Company and Bank must hold a capital conservation buffer of 2.5% composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements.
107
Republic continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based Capital, Tier I Risk Based 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 and the FDIC, in addition to the Capital Conservation Buffer. Republic’s average stockholders’ equity to average assets ratio was 13.10%13.84% at June 30, 2019March 31, 2020 compared to 13.02%13.16% at December 31, 2018.2019. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
In 2005, RBCT, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. The sole asset of RBCT represents the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. The RBCT TPS are treated as part of Republic’s Tier I Capital.
The subordinated note and related interest expense are included in Republic’s consolidated financial statements. The subordinated note paid a fixed interest rate of 6.015% through September 30, 2015 and adjusted to 3-month LIBOR plus 1.42% on a quarterly basis thereafter. The subordinated note matures on December 31, 2035 and is redeemable at the Company’s option on a quarterly basis. The Company chose not to redeem the subordinated note on JulyApril 1, 20192020 and is currently carrying the note at a cost of LIBOR plus 1.42%.
Table 2319 — Capital Ratios (1)
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| As of June 30, 2019 |
| As of December 31, 2018 |
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| As of March 31, 2020 |
| As of December 31, 2019 |
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(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
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Total capital to risk-weighted assets |
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Republic Bancorp, Inc. |
| $ | 795,533 |
| 16.16 | % | $ | 757,727 |
| 16.80 | % |
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| $ | 864,844 |
| 17.33 | % | $ | 825,987 |
| 17.01 | % |
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Republic Bank & Trust Company |
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| 692,049 |
| 14.07 |
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| 654,258 |
| 14.52 |
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| 764,802 |
| 15.34 |
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| 723,248 |
| 14.91 |
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Common equity tier 1 capital to risk-weighted assets |
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Republic Bancorp, Inc. |
| $ | 709,550 |
| 14.41 | % | $ | 673,052 |
| 14.92 | % |
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| $ | 766,032 |
| 15.35 | % | $ | 742,636 |
| 15.29 | % |
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Republic Bank & Trust Company |
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| 646,066 |
| 13.14 |
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| 609,583 |
| 13.53 |
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| 705,990 |
| 14.16 |
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| 679,897 |
| 14.01 |
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Tier 1 (core) capital to risk-weighted assets |
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Republic Bancorp, Inc. |
| $ | 749,550 |
| 15.23 | % | $ | 713,052 |
| 15.81 | % |
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| $ | 806,032 |
| 16.15 | % | $ | 782,636 |
| 16.11 | % |
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Republic Bank & Trust Company |
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| 646,066 |
| 13.14 |
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| 609,583 |
| 13.53 |
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| 705,990 |
| 14.16 |
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| 679,897 |
| 14.01 |
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Tier 1 leverage capital to average assets |
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Republic Bancorp, Inc. |
| $ | 749,550 |
| 13.72 | % | $ | 713,052 |
| 14.11 | % |
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| $ | 806,032 |
| 14.35 | % | $ | 782,636 |
| 13.93 | % |
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Republic Bank & Trust Company |
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| 646,066 |
| 11.83 |
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| 609,583 |
| 12.06 |
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| 705,990 |
| 12.56 |
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| 679,897 |
| 12.11 |
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(1) | As of March 31, 2020, the Company and the Bank elected to defer the impact of CECL on regulatory capital. The deferral period is five years, with the total estimated CECL impact 100% deferred for the first two years, then phased in over the next three years. If not for this election, the Company’s regulatory capital ratios would have been approximately 19 basis points lower than those presented in the table above as of March 31, 2020. |
10899
Asset/Liability Management and Market Risk
Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards and achieve acceptable net interest income based on the Bank’s risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, 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 a significant risk to the Bank’s overall earnings and balance sheet.
The interest sensitivity profile of the Bank 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 changes in market interest rates, deposit and loan balances and other factors.
The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a “Base” case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many 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 incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic 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 the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.
As of June 30, 2019,March 31, 2020, a dynamic simulation model was run for interest rate changes from “Down 200”100” basis points to “Up 300”400” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning JulyApril 1, 20192020 and ending June 30, 2020March 31, 2021 based on instantaneous movements in interest rates from Down 200100 to Up 300400 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees and excludes Traditional Bank loan fees.
Table 2420 — Bank Interest Rate Sensitivity
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| Change in Rates | ||||||||||||||
| -200 |
| -100 |
| +100 |
| +200 |
| +300 |
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| Basis Points |
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% Change from base net interest income at June 30, 2019 |
| (5.1) | % |
| (3.8) | % |
| 2.3 | % |
| 4.2 | % |
| 5.9 | % |
% Change from base net interest income at December 31, 2018 |
| NA |
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| (2.9) | % |
| 0.9 | % |
| 0.3 | % |
| (0.9) | % |
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| Change in Rates |
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| (100) |
| +100 |
| +200 |
| +300 |
| +400 |
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| Basis Points |
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% Change from base net interest income at March 31, 2020 |
| (3.0) | % |
| (2.4) | % |
| (3.5) | % |
| (4.3) | % |
| (3.3) | % |
% Change from base net interest income at December 31, 2019 |
| (4.3) | % |
| 0.9 | % |
| 1.6 | % |
| 1.9 | % |
| 2.5 | % |
The Bank’s dynamic simulation model run for JuneDecember 2019 projected a decrease in the Bank’s net interest income for the Down 200 and 100 scenarios. Thescenario but increases for Up 100 through Up 300400. The Down 100 through Up 400 scenarios for June 2019March 2020 reflected an increasedecreases in net interest income, with this increasethese decreases more favorable in the Down 100 but less favorable in the Up 100 through Up 400 scenarios than the comparable scenarios at December 2018. June 2019 scenarios were overall more favorable than December 2018.2019. The primary drivers behind this changedeterioration in the up-rateUp rate scenarios are general increaseswas generally due to the impact of an expected reduction in variablesecondary market loan fees in a rising rate assets, along with increasesenvironment. The improvement in low-beta depositsthe Down rate scenario primarily related to the amount of loans that have reached or will reach their interest rate floors, and decreases in high-beta deposits. In addition, the second quarter and a 12-month forecast for market interest rates projected intermediate and long-term ratestherefore not subject to be much lower than the December 2018 forecast.further rate reductions.
The Core Bank indexes many of its financial instruments to either the FFTR, Prime, or LIBOR. These short-term market rates haveCompany’s interest rate risk projections, generally trended higher since December 2015. During this period, longer-term market rates have generally not increased as much, causingassumes parallel shifts in the yield curve to flatten. During the first half of 2019, longer-term market rates began to generally trend lower, while the short-term market rates remained relatively stable, causing short-term market rates to be higher than some longer-term market ratesacross all points on the yield curve. This event, in which short-term market rates are higher than longer-term market rates, is labelled an inverted yield curve.
109
A continued flattening or inverting of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease further or further invert, willwould likely have a further negative impact on the Company’s net interest income and net interest margin. Additionally, while parallel increases in short-term and long-term interest rates are generally believed by management to be more favorable to the Core Bank’s net interest income and net interest margin in the near term, management believes stable interest rates or a parallel decrease in short-term and long-term interest will likely have a negative impact on the Bank’s net interest income and net interest margin. Under any interest rate scenario, however, if the Core Bank is unable to reasonably maintain its deposit balances and the cost of those deposits at acceptable levels, it will likely have a negative impact to the Core Bank’s net interest income and net interest margin.
100
For additional discussion regarding the Bank’s net interest income, see the sections titled “Net Interest Income” in this section of the filing under “RESULTS OF OPERATIONS (Three Months Ended June 30, 2019March 31, 2020 Compared to Three Months Ended June 30, 2018)March 31, 2019)” and RESULTS OF OPERATIONS (Six(Three Months Ended June 30, 2019March 31, 2020 Compared to SixThree Months Ended June 30, 2018)March 31, 2019).”
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
Information required by this item is included under Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4.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 its 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 these 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 fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
There were no changes in Republic’s internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, Republic’s internal control over financial reporting.
On January 1, 2020, Republic adopted Accounting Standards Codification 326, Financial Instruments - Credit Losses. Republic enhanced its internal controls to enable the preparation of financial information as part of the adoption. There were no significant changes to Republic’s internal control over financial reporting due to the adoption of the new standard.
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.
101
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the additional risk factor information described below, there have been no material changes in ourthe Company’s risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of ourits Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019. You should carefully consider the risk factorsfactor discussed below and in our 2018Republic’s 2019 Form 10-K, which could materially affect ourits business, financial condition or future results.
The planned discontinuance of LIBOR presentsCOVID-19 pandemic and the public’s response to this pandemic present unique risks to the Company becauseCompany’s operations and the markets it serves. The Company’s operations and the markets it serves have been and will continue to be significantly impacted by the COVID-19 pandemic and the public’s response to this pandemic. The following are relevant to the Company uses LIBOR as a reference rate for a portion ofand its financial instruments. LIBOR is used as a reference rate for a meaningful amount of the Company’s financial instruments, which means it is the base on which relevant interest rates are determined. Transactions include those in which the Company lends and borrows money, purchases securities, and enters into derivatives to manage client risk. The United Kingdom Financial Conduct Authority, the institution that regulates LIBOR, announced in July 2017 that it intends to stop persuading or compelling institutions to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021.operations:
· | Adverse Economic Conditions – COVID-19 has led to a curtailment or suspension of social and economic activity in many areas of the U.S., including areas where the Bank operates. The length and breadth of these negative economic conditions is currently unknown. These conditions are expected to continue to have a significant negative impact on the Bank’s ability and willingness to offer its traditional loan products. Instead of the Bank’s traditional products, government-backed financial products, such as the SBA’s PPP program, have been and are expected to continue to be a strong focus of the Bank’s operations in the near term. Government-backed products may be substantially less profitable than the Bank’s traditional products. Additionally, these economic conditions may lead to the impairment of the Company’s intangible assets, including its goodwill and MSRs. |
· | Loan and Credit Losses – COVID-19 has led to the closure of businesses deemed non-essential by various jurisdictions, with many businesses ceasing or substantially reducing operations. Employees for many businesses have been and may continue to be furloughed or laid off. The Bank’s credit delinquencies and losses may rise steeply due to these events. Specifically, concentrations of credit in certain markets and in certain industries currently are and may continue to be more susceptible to delinquency and loss. |
o | Geographic Concentrations – COVID-19 has impacted certain areas of the U.S. harder than others. The Company’s market footprint is primarily in Kentucky, Florida, Ohio, Tennessee, and Indiana. These areas may be more susceptible to economic hardship in the near term. |
o | Industry Concentrations – The Bank lends to clients in industries that have been deemed “non-essential” or that have had their business models upended by the pandemic. Further economic damage to these clients may leave them unable to service their debt with the Bank. |
o | Warehouse Lending – Through its Warehouse Lending segment, the Bank maintains a significant concentration of loans in the form of short-term, revolving credit facilities to mortgage bankers across the U.S. The Bank’s Warehouse Lending clients may face increased stress on their liquidity and overall financial condition due to their mortgage-servicing obligations. Such increased stress may lead to default on their underlying credit facility with the Bank. |
o | Borrower Relief – In response to the pandemic, the Bank has suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions, and is offering fee waivers, payment deferrals, and other expanded assistance for credit card, automobile, mortgage, small business and personal lending customers, and future governmental actions may require these and other types of customer-related responses. |
· | Reliance on Forecasted Information – The Company’s model for estimating credit losses relies on forecasted economic projections. Such projections could be materially inaccurate, with different projections leading to a material adverse impact on the Company’s financial position and results of operations. |
· | Capital and Liquidity – A prolonged period of economic stress leading to increased borrower defaults and corresponding servicing obligations could substantially weaken the Company’s capital and liquidity. As a result, the Company may lose access to capital markets and may need to suspend paying dividends. |
110102
· | Interconnectedness of Financial Institutions – The Company depends on other financial institutions. Negative events or publicity for other financial institutions may flow to the Bank due the interconnectedness of the financial industry. |
There are ongoing efforts to establish an alternative reference rate. The Secured Overnight Financing Rate (“SOFR”) is considered the most likely alternative reference rate suitable for replacing LIBOR, but issues remain with respect to its implementation. As a result, the scope of its ultimate acceptance and the impact on rates, pricing and the ability to manage risk, including through derivatives, remain uncertain. No other alternative rate is currently under wide consideration. If SOFR or another rate does not achieve wide acceptance as the alternative to LIBOR, there likely will be disruption to all of the markets relying on the availability of a broadly accepted reference rate. Even if SOFR or another reference rate ultimately replaces LIBOR, risks will remain for the Company with respect to outstanding loans, derivatives or other instruments referencing LIBOR. Those risks arise in connection with transitioning those instruments to a new reference rate and the corresponding value transfer that may occur in connection with that transition. That is because a new reference rate likely will not exactly imitate LIBOR. As a result, for example, over the life of a transaction that transitions from LIBOR to a new reference rate, the Company’s monetary obligations to its counterparties and its yield from transactions with clients may change, potentially adversely to the Company. For some instruments, the method of transitioning to a new reference rate may be challenging, especially if parties to an instrument cannot agree as to how to perform that transition. If a contract is not transitioned to a new reference rate and LIBOR ceases to exist, the impact on the Company’s obligations is likely to vary by asset class and contract. In addition, prior to LIBOR discontinuance, instruments that continue to refer to LIBOR may be impacted if there is a change in the availability or calculation of LIBOR. Risks related to transitioning instruments to a new reference rate or to how LIBOR is derived, and its availability include impacts on the yield on loans or securities held by the Company, amounts paid on Company debt, or amounts received and paid on derivative instruments it has contracted. The value of loans, securities, or derivative instruments tied to LIBOR and the trading market for LIBOR-based securities could also be impacted upon its discontinuance or if it is limited.
· | Governmental Restrictions on Operations – Certain loan collection efforts, such as loan foreclosures, have been and may continue to be prohibited by legal or regulatory bodies. |
· | Real Estate Market and Real Estate Lending – The COVID-19 pandemic may lead to a drop in real estate values and reduced demand for commercial and residential real estate. |
· | Ability of Key Personnel to Perform Their Duties – Key Company personnel may be personally and directly impacted by COVID-19 and may be unable to perform their duties. |
· | Cybersecurity – The Company and its third-party service providers have been and may continue to be subject to a heightened risk of cyber attacks due to the number of employees working remotely. |
· | Consumer Behavior – Consumers may behave differently in the aftermath of the pandemic, placing less value on face-to-face interaction. The Bank is a community bank that places high value on personal connection. |
· | Reliance on Third Parties – The Company’s third-party service providers may be unable to meet their service level commitments to the Company. |
· | Negative Interest Rates – Speculation has been building regarding the COVID-19 conditions leading to negative interest rates in the U.S. The Bank has not traditionally modeled the impact of negative interest rates and this condition would be substantially negative to the Company’s financial performance. |
· | Stock Price Fluctuations – The Company has and could continue to experience higher than historical volatility in its stock price as a direct result of COVID-19 driven economic conditions. |
· | Business Interruption Insurance – Business interruption insurance may fail to cover material COVID-19 related costs of the Company. |
· | Increased Litigation Risk – The Bank may experience an increase in litigation stemming from the COVID-19 pandemic. |
· | Company Reputation – The Company and the Bank’s reputation could be negatively impacted by the public’s perception of how the Company and Bank have operated during the pandemic. |
While the Company expects LIBOR to continue to be available in substantially its current form until the end
103
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Details of Republic’s Class A Common Stock purchases during the secondfirst quarter of 20192020 are included in the following table:
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| Total Number of |
| Maximum Number |
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| of Shares that May |
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| as Part of Publicly |
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Period |
| Shares Purchased |
| Paid Per Share |
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January 1 - January 31 |
| — |
| $ | — |
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February 1 - February 29 |
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| — |
| — |
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March 1 - March 31 |
| 85,437 |
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| 33.37 |
| 85,437 |
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Total |
| 85,437 |
| $ | 33.37 |
| 85,437 |
| 87,423 |
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The Company repurchased no85,437 shares during the secondfirst quarter of 2019. There2020. In addition, in connection with employee stock awards, there were 42,4525,333 shares exchanged forwithheld upon award of Performance Stock Units to cover withholding taxes and 1,067 shares withheld upon exercise of stock option exercises duringoptions to cover withholding taxes and the second quarter of 2019.exercise price. During 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 June 30, 2019,March 31, 2020, the Company had 195,52087,423 shares that could be repurchased under its current share repurchase programs.
During the secondfirst quarter of 2019,2020, there were 4,8616,561 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 provisioncredit loss expense option of the Class B Common Stock. The exemption from registration of newly issued Class A Common Stock relies upon 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.
111104
The following exhibits are filed or furnished as a part of this report:
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Exhibit Number |
| Description of Exhibit |
10.1 | ||
10.2 | ||
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31.1 |
| Certification of Principal Executive Officer pursuant to the Sarbanes-Oxley Act of 2002 |
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31.2 |
| Certification of Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 |
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32* |
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101 |
| Interactive data files: (i) Consolidated Balance Sheets at |
* 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.
112105
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| REPUBLIC BANCORP, INC. | |
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| (Registrant) | |
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| Principal Executive Officer: | |
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Date: |
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| /s/ Steven E. Trager | |
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| By: Steven E. Trager |
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| Chairman and Chief Executive Officer | |
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| Principal Financial Officer: | |
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Date: |
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| /s/ Kevin Sipes | |
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| By: Kevin Sipes |
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| Executive Vice President, Chief Financial | |
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| Officer and Chief Accounting Officer |
113106