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REPUBLIC BANCORP INC /KY/ - Quarter Report: 2017 March (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended March 31, 2017

 

or

 

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

 

Commission File Number: 0-24649

 

Picture 1

 

REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Kentucky

 

61-0862051

(State of other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

601 West Market Street, Louisville, Kentucky

 

40202

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (502) 584-3600

 

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒ 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.

 

 

 

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting company ☐ 

Emerging growth company ☐

 

 

 

 

 

 

 

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 April 30, 2017, was 18,615,302 and 2,242,965.

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements.

3

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

63

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk.

97

 

 

 

Item 4. 

Controls and Procedures.

97

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings.

97

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds.

98

 

 

 

Item 6. 

Exhibits.

99

 

 

 

 

SIGNATURES

100

 

2


 

Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 (in thousands)

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

206,187

 

$

289,309

 

Securities available for sale

 

526,270

 

 

481,275

 

Securities held to maturity (fair value of $52,479 in 2017 and $53,249 in 2016)

 

51,860

 

 

52,864

 

Mortgage loans held for sale, at fair value

 

5,193

 

 

11,662

 

Consumer loans held for sale, at fair value

 

3,679

 

 

2,198

 

Consumer loans held for sale, at the lower of cost or fair value

 

1,420

 

 

1,310

 

Loans

 

3,710,376

 

 

3,810,778

 

Allowance for loan and lease losses

 

(42,362)

 

 

(32,920)

 

Loans, net

 

3,668,014

 

 

3,777,858

 

Federal Home Loan Bank stock, at cost

 

28,208

 

 

28,208

 

Premises and equipment, net

 

43,962

 

 

42,869

 

Goodwill

 

16,300

 

 

16,300

 

Other real estate owned

 

1,362

 

 

1,391

 

Bank owned life insurance

 

62,185

 

 

61,794

 

Other assets and accrued interest receivable

 

50,152

 

 

49,271

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

4,664,792

 

$

4,816,309

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

$

1,070,237

 

$

971,952

 

Interest-bearing

 

2,278,547

 

 

2,188,740

 

Total deposits

 

3,348,784

 

 

3,160,692

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase and other short-term borrowings

 

144,375

 

 

173,473

 

Federal Home Loan Bank advances

 

467,500

 

 

802,500

 

Subordinated note

 

41,240

 

 

41,240

 

Other liabilities and accrued interest payable

 

42,229

 

 

33,998

 

 

 

 

 

 

 

 

Total liabilities

 

4,044,128

 

 

4,211,903

 

 

 

 

 

 

 

 

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

 

4,904

 

 

4,906

 

Additional paid in capital

 

138,634

 

 

138,192

 

Retained earnings

 

475,885

 

 

460,621

 

Accumulated other comprehensive income

 

1,241

 

 

687

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

620,664

 

 

604,406

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

4,664,792

 

$

4,816,309

 

 

See accompanying footnotes to consolidated financial statements.

 

3


 

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)  

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2017

 

2016

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

58,004

 

$

41,429

 

Taxable investment securities

 

 

2,155

 

 

1,855

 

Federal Home Loan Bank stock and other

 

 

724

 

 

731

 

Total interest income

 

 

60,883

 

 

44,015

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,879

 

 

1,392

 

Securities sold under agreements to repurchase and other short-term borrowings

 

 

25

 

 

25

 

Federal Home Loan Bank advances

 

 

2,292

 

 

2,953

 

Subordinated note

 

 

249

 

 

211

 

Total interest expense

 

 

4,445

 

 

4,581

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

56,438

 

 

39,434

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

12,351

 

 

5,186

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

 

 

44,087

 

 

34,248

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

3,247

 

 

3,140

 

Net refund transfer fees

 

 

15,382

 

 

17,078

 

Mortgage banking income

 

 

1,160

 

 

1,261

 

Interchange fee income

 

 

2,326

 

 

2,123

 

Program fees

 

 

1,091

 

 

319

 

Increase in cash surrender value of bank owned life insurance

 

 

391

 

 

339

 

Net gains on other real estate owned

 

 

142

 

 

248

 

Other

 

 

1,184

 

 

413

 

Total noninterest income

 

 

24,923

 

 

24,921

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

21,211

 

 

17,083

 

Occupancy and equipment, net

 

 

5,967

 

 

5,419

 

Communication and transportation

 

 

1,272

 

 

1,073

 

Marketing and development

 

 

1,004

 

 

507

 

FDIC insurance expense

 

 

450

 

 

658

 

Bank franchise tax expense

 

 

2,435

 

 

2,451

 

Data processing

 

 

1,652

 

 

1,333

 

Interchange related expense

 

 

1,058

 

 

904

 

Supplies

 

 

527

 

 

449

 

Other real estate owned expense

 

 

97

 

 

80

 

Legal and professional fees

 

 

752

 

 

823

 

Other

 

 

2,514

 

 

1,761

 

Total noninterest expenses

 

 

38,939

 

 

32,541

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

 

 

30,071

 

 

26,628

 

INCOME TAX EXPENSE

 

 

10,054

 

 

8,893

 

NET INCOME

 

$

20,017

 

$

17,735

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.97

 

$

0.86

 

Class B Common Stock

 

 

0.88

 

 

0.78

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.96

 

$

0.85

 

Class B Common Stock

 

 

0.88

 

 

0.77

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.209

 

$

0.198

 

Class B Common Stock

 

 

0.190

 

 

0.180

 

 

See accompanying footnotes to consolidated financial statements.

 

4


 

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2017

    

2016

 

 

 

 

 

 

 

 

Net income

$

20,017

 

$

17,735

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

28

 

 

(571)

 

Reclassification amount for derivative losses realized in income

 

66

 

 

87

 

Change in unrealized gain (loss) on securities available for sale

 

706

 

 

2,292

 

Change in unrealized gain on security available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings

 

53

 

 

(149)

 

Net unrealized gains

 

853

 

 

1,659

 

Tax effect

 

(299)

 

 

(580)

 

Total other comprehensive income, net of tax

 

554

 

 

1,079

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

$

20,571

 

$

18,814

 

 

See accompanying footnotes to consolidated financial statements.

 

5


 

Table of Contents

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2017

 

18,615

 

2,245

 

$

4,906

 

$

138,192

 

$

460,621

 

$

687

 

$

604,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

20,017

 

 

 —

 

 

20,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in accumulated other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

554

 

 

554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,891)

 

 

 —

 

 

(3,891)

Class B Shares

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(427)

 

 

 —

 

 

(427)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised, net of shares redeemed

 

 2

 

 —

 

 

 —

 

 

33

 

 

 —

 

 

 —

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Class A Common Stock

 

(13)

 

 —

 

 

(2)

 

 

(107)

 

 

(435)

 

 

 —

 

 

(544)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class B Common Stock to Class A Common Stock

 

 2

 

(2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Class A Common Stock

 

 —

 

 —

 

 

 —

 

 

51

 

 

 —

 

 

 —

 

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred director compensation expense - Class A Common Stock

 

 5

 

 —

 

 

 —

 

 

55

 

 

 —

 

 

 —

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - performance stock units

 

 —

 

 —

 

 

 —

 

 

132

 

 

 —

 

 

 —

 

 

132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - restricted stock

 

 4

 

 —

 

 

 —

 

 

215

 

 

 —

 

 

 —

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense - stock options

 

 —

 

 —

 

 

 —

 

 

63

 

 

 —

 

 

 —

 

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2017

 

18,615

 

2,243

 

$

4,904

 

$

138,634

 

$

475,885

 

$

1,241

 

$

620,664

 

See accompanying footnotes to consolidated financial statements.

 

6


 

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 

(in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2017

    

2016

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

20,017

 

$

17,735

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Amortization on investment securities, net

 

138

 

 

135

 

Accretion on loans, deposits and core deposit intangible, net

 

(583)

 

 

(873)

 

Depreciation of premises and equipment

 

2,100

 

 

1,716

 

Amortization of mortgage servicing rights

 

353

 

 

305

 

Provision for loan and lease losses

 

12,351

 

 

5,186

 

Net gain on sale of mortgage loans held for sale

 

(977)

 

 

(1,095)

 

Origination of mortgage loans held for sale

 

(33,245)

 

 

(36,992)

 

Proceeds from sale of mortgage loans held for sale

 

40,691

 

 

35,022

 

Net gain on sale of consumer loans held for sale

 

(1,108)

 

 

(433)

 

Origination of consumer loans held for sale

 

(126,924)

 

 

(44,068)

 

Proceeds from sale of consumer loans held for sale

 

126,441

 

 

44,034

 

Net gain realized on sale of other real estate owned

 

(212)

 

 

(248)

 

Writedowns of other real estate owned

 

70

 

 

 —

 

Deferred director compensation expense - Class A Common Stock

 

55

 

 

62

 

Stock based compensation expense

 

410

 

 

261

 

Increase in cash surrender value of bank owned life insurance

 

(391)

 

 

(339)

 

Net change in other assets and liabilities:

 

 

 

 

 

 

Accrued interest receivable

 

209

 

 

(180)

 

Accrued interest payable

 

(90)

 

 

54

 

Other assets

 

(2,096)

 

 

(2,390)

 

Other liabilities

 

8,700

 

 

7,878

 

Net cash provided by operating activities

 

45,909

 

 

25,770

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchases of securities available for sale

 

(54,390)

 

 

(370,084)

 

Proceeds from calls, maturities and paydowns of securities available for sale

 

10,017

 

 

370,390

 

Proceeds from calls, maturities and paydowns of securities held to maturity

 

1,002

 

 

882

 

Net change in outstanding warehouse lines of credit

 

90,274

 

 

(7,257)

 

Purchase of non-business-acquisition loans, including premiums paid

 

(1,224)

 

 

(23,188)

 

Net change in other loans

 

8,800

 

 

4,274

 

Proceeds from sales of other real estate owned

 

501

 

 

588

 

Net purchases of premises and equipment

 

(3,193)

 

 

(887)

 

Net cash provided by (used in) investing activities

 

51,787

 

 

(25,282)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Net change in deposits

 

188,092

 

 

249,169

 

Net change in securities sold under agreements to repurchase and other short-term borrowings

 

(29,098)

 

 

(75,540)

 

Payments of Federal Home Loan Bank advances

 

(435,000)

 

 

(182,000)

 

Proceeds from Federal Home Loan Bank advances

 

100,000

 

 

 —

 

Repurchase of Class A Common Stock

 

(544)

 

 

 —

 

Net proceeds from Common Stock options exercised

 

33

 

 

55

 

Cash dividends paid

 

(4,301)

 

 

(4,082)

 

Net cash used in financing activities

 

(180,818)

 

 

(12,398)

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(83,122)

 

 

(11,910)

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

289,309

 

 

210,082

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

206,187

 

$

198,172

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

$

4,535

 

$

4,527

 

Income taxes

 

331

 

 

156

 

 

 

 

 

 

 

 

SUPPLEMENTAL NONCASH DISCLOSURES:

 

 

 

 

 

 

Transfers from loans to real estate acquired in settlement of loans

$

330

 

$

656

 

Loans provided for sales of other real estate owned

 

 —

 

 

256

 

 

See accompanying footnotes to consolidated financial statements.

 

7


 

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – MARCH 31, 2017 and 2016 AND DECEMBER 31, 2016 (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 (“RB&T” or the “Bank”) and Republic Insurance Services, Inc. (the “Captive”). The Bank is a Kentucky-based, state chartered non-member financial institution that provides both traditional and non-traditional banking products through four distinct operating 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 10 other third-party insurance captives for which insurance may not be available or economically feasible.  Republic Bancorp Capital Trust (“RBCT”) is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc. All companies are collectively referred to as (“Republic” or the “Company”). All significant intercompany balances and transactions are eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

 

As of March 31, 2017, the Company was divided into four distinct operating segments: Traditional Banking, Warehouse Lending (“Warehouse”), Mortgage Banking and Republic Processing Group (“RPG”). Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” activities. Correspondent Lending operations and the Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment. The RPG segment includes the following divisions: Tax Refund Solutions (“TRS”), Republic Credit Solutions (“RCS”) and Republic Payment Solutions (“RPS”). TRS generates the majority of RPG’s income, with the relatively smaller divisions of RPG, RCS and RPS, considered immaterial for separate and independent segment reporting. All divisions of the RPG segment operate through the Bank.

 

 

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Core Banking (includes Traditional Banking, Warehouse Lending and Mortgage Banking segments)

 

The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of March 31, 2017, Republic had 45 full-service banking centers and one loan production office (“LPO”) with locations as follows:

 

Kentucky — 33

Metropolitan Louisville — 19

Central Kentucky — 9

Elizabethtown — 1

Frankfort — 1

Georgetown — 1

Lexington — 5

Shelbyville — 1

Western Kentucky — 2

Owensboro — 2

Northern Kentucky — 3

Covington — 1

Florence — 1

Independence — 1

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 6

Metropolitan Cincinnati, Ohio — 1

Metropolitan Nashville, Tennessee — 3*


*Includes one LPO

 

Republic’s headquarters are located in Louisville, which is the largest city in Kentucky based on population.

 

Core 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 Core 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. Federal Home Loan Bank (“FHLB”) advances have traditionally been a significant borrowing source for the Bank.

 

Other sources of Core 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, increases in the cash surrender value of Bank Owned Life Insurance (“BOLI”) and revenue generated from Mortgage Banking activities. Mortgage Banking activities represent both the origination and sale of loans in the secondary market and the servicing of loans for others, primarily the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”) and the Federal National Mortgage Association (“Fannie Mae” or “FNMA”).

 

Core 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, Federal Deposit Insurance Corporation (“FDIC”) insurance expense, franchise tax expense and various other general and administrative costs. Core 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.

 

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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 or purchased by the Bank through its Correspondent Lending channel. 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.

 

Primarily from its Warehouse clients, the Core Bank acquires single family, first lien mortgage loans that meet the Core Bank’s specifications through its Correspondent Lending channel. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium.  Loans acquired through the Correspondent Lending channel generally reflect borrowers outside of the Bank’s historical market footprint, with 74% of loans acquired through this origination channel as of March 31, 2017, secured by collateral in the state of California.

 

 

Republic Processing Group

Tax Refund Solutions division — Through its TRS division, 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 United States, as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS division occurs in the first half of the year. The TRS division traditionally operates at a loss during the second half of the year, during which time the division incurs costs preparing for the upcoming year’s first quarter tax season.

Refund Transfers (“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 on RTs, net of rebates, are reported as noninterest income under the line item “Net refund transfer fees.”

TRS first offered its Easy Advance (“EA”) tax credit product during the first two months of 2016 and for a second successive year during the first two months of 2017.  For the first quarter 2017 tax season the Company modified the EA product offering to have more than one advance amount and a different price structure to the Tax Providers based on the amount borrowed by the taxpayer.  All other features of the product remained substantially the same as those from the first quarter 2016 tax season, including the following: 

·

No EA fee charged to the taxpayer customer;

·

All fees for the product were paid by the Tax Providers with a restriction prohibiting the Tax Providers from passing along the fees to the taxpayer customer;

·

No requirement that the taxpayer customer pay for another bank product, such as an RT;

·

Multiple funds disbursement methods, including direct deposit, prepaid card, check or Walmart Direct2Cash®  product, based on the taxpayer customer’s election;

·

Repayment of the EA to the Bank was deducted from the taxpayer customer’s tax refund proceeds; and

·

If an insufficient refund to repay the EA occurred:

o

there was no recourse to the taxpayer customer, 

o

no negative credit reporting on the taxpayer customer, and

o

no collection efforts against the taxpayer customer.  

Fees paid by the Tax Providers to the Company for the EA product are reported as interest income on loans.  EAs during 2017 and 2016 were generally repaid within three weeks after the taxpayer customer’s tax return was submitted to the applicable taxing authority.  EAs do not have a contractual due date but are eligible for delinquency consideration three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with all expected loss provisions made in the first quarter of each year. Unpaid EAs are generally charged-off within 81 days after the taxpayer customer’s tax return is submitted to the applicable taxing authority, with the majority of charge-offs typically recorded during the second quarter of the year.

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Related to the overall credit losses on EAs, the Bank’s ability to control those 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 funding patterns. Because much of the loan volume occurs each year before that year’s tax refund funding 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 funding patterns change materially between years.   

 

Republic Credit Solutions division — Through its RCS division, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans with maturities of 30-days-or-more, and are dependent on various factors including the consumer’s ability to repay. 

 

The Company reports RCS loans originated for investment under “Loans,” while loans originated for sale are reported under “Consumer loans held for sale.”  The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale reported as noninterest income under “Program fees.”

 

Republic Payment Solutions division — Through its RPS division, the Bank is an issuing bank offering general-purpose reloadable prepaid cards through third-party program managers.

 

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.”

 

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Accounting Standards Updates (“ASUs”)

 

The following ASUs were issued prior to March 31, 2017 and are considered relevant to the Company’s financial statements. Generally, if an issued-but-not-yet-effective ASU with an expected immaterial impact to the Company has been disclosed in prior Company financial statements, it will not be included below. 

 

 

 

 

 

 

 

 

 

 

 

 

ASU. No.

 

Topic

 

Nature of Update

 

Date Adoption Required

 

Method of Adoption

 

Expected Impact to Company's Financial Statements

2014-09

    

Revenue from Contracts with Customers (Topic 606)

    

Requires that revenue from contracts with clients be recognized upon transfer of control of a good or service in the amount of consideration expected to be received.  Changes the accounting for certain contract costs, including whether they may be offset against revenue in the statements of income, and requires additional disclosures about revenue and contract costs.

    

January 1, 2018

    

Full retrospective approach or a modified-retrospective approach.

    

While the Company believes this ASU will have an immaterial impact, it continues to evaluate this ASU for changing facts and circumstances in the Company's operations as the effective date approaches.

 

 

 

 

 

 

 

 

 

 

 

2016-02

    

Leases (Topic 842)

    

Most leases are considered operating leases, which are not accounted for on the lessees’ balance sheets. The significant change under this ASU is that those operating leases will be recorded on the balance sheet. 

    

January 1, 2019

    

Modified-retrospective approach, which includes a number of optional practical expedients.

    

Currently under analysis. During 2017, the Company continued to review all of its operating leases and analyze the impact of adopting this ASU.

 

 

 

 

 

 

 

 

 

 

 

2016-13

 

Financial Instruments – Credit Losses (Topic 326)

 

Amends guidance on reporting credit losses for assets held at amortized-cost basis and available-for-sale debt securities.

 

January 1, 2020

 

Modified-retrospective approach.

 

The Company expects a substantial, yet fully undetermined, increase in its allowance for credit losses. During 2016 and into 2017, the Company formed a committee to implement the transition and also began analyzing its loan-level data.

 

 

 

 

 

 

 

 

 

 

 

2016-18

 

Statement of Cash Flows (Topic 230)

 

Requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents.

 

January 1, 2018

 

Retrospective transition.

 

Immaterial

 

 

 

 

 

 

 

 

 

 

 

2017-01

 

Business Combinations (Topic 805)

 

Clarifies the definition of a business.  The amendments in this ASU are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

 

January 1, 2018

 

Prospectively.

 

Immaterial

 

 

 

 

 

 

 

 

 

 

 

2017-03

 

Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)

 

These amendments add text of “SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin ["SAB"] Topic 11.M).”

This announcement applies to ASU No. 2014-09, ASU No. 2016-02, and ASU No. 206-13 above.

 

N/A

 

N/A

 

Immaterial

 

 

 

 

 

 

 

 

 

 

 

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 goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

 

January 1, 2020

 

Prospectively, with early adoption permitted.

 

Immaterial

 

 

 

 

 

 

 

 

 

 

 

2017-08

 

Receivables - Nonrefundable Fees and Other Costs (Topic 310-20)

 

This ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the ASU requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

 

January 1, 2019

 

Modified retrospective, with early adoption permitted.

 

Currently under analysis.

 

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2. 2016 ACQUISITION OF CORNERSTONE BANCORP, INC.

 

OVERVIEW

 

On May 17, 2016, the Company completed its acquisition of Cornerstone Bancorp, Inc. (“Cornerstone”), and its wholly-owned bank subsidiary Cornerstone Community Bank, for approximately $32 million in cash. The primary reason for the acquisition of Cornerstone was to expand the Company’s footprint in the Tampa, Florida metropolitan statistical area.

 

ACQUISITION SUMMARY

 

The following table provides a summary of the assets acquired and liabilities assumed as recorded by Cornerstone, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, final recast adjustments to those previously reported preliminary fair values, and the final fair values of those assets and liabilities as recorded by the Company. Effective October 1, 2016, management believed it had finalized the fair values of the acquired assets and assumed liabilities within the 12 months following the date of acquisition, as allowed by GAAP.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of Assets Acquired and Liabilities Assumed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 17, 2016

 

 

As Previously Reported

 

As Recasted

 

 

 

As Recorded

 

 

Fair Value

 

 

 

 

Recast

 

 

 

As Recorded

(in thousands)

 

 

by Cornerstone

 

 

Adjustments

 

 

 

 

Adjustments

 

 

 

by Republic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,707

 

$

 —

 

 

 

$

 —

 

 

$

22,707

Investment securities

 

 

329

 

 

 —

 

 

 

 

 —

 

 

 

329

Loans

 

 

195,136

 

 

(5,525)

 

a

 

 

13

 

a

 

189,624

Allowance for loan and lease losses

 

 

(1,955)

 

 

1,955

 

a

 

 

 —

 

 

 

 —

Loans, net

 

 

193,181

 

 

(3,570)

 

 

 

 

13

 

 

 

189,624

Federal Home Loan Bank stock, at cost

 

 

224

 

 

 —

 

 

 

 

 —

 

 

 

224

Premises and equipment, net

 

 

7,770

 

 

4,457

 

b

 

 

 —

 

 

 

12,227

Core deposit intangible

 

 

 —

 

 

1,205

 

c

 

 

 —

 

 

 

1,205

Deferred income taxes

 

 

3,714

 

 

(74)

 

d

 

 

 —

 

 

 

3,640

Bank owned life insurance

 

 

7,461

 

 

 —

 

 

 

 

 —

 

 

 

7,461

Other assets and accrued interest receivable

 

 

658

 

 

 —

 

 

 

 

 —

 

 

 

658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets acquired

 

$

236,044

 

$

2,018

 

 

 

$

13

 

 

$

238,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Noninterest-bearing

 

$

52,908

 

$

 —

 

 

 

$

 —

 

 

$

52,908

   Interest-bearing

 

 

152,257

 

 

92

 

e

 

 

 —

 

 

 

152,349

Total deposits

 

 

205,165

 

 

92

 

 

 

 

 —

 

 

 

205,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinated note

 

 

4,124

 

 

 —

 

 

 

 

 —

 

 

 

4,124

Other liabilities and accrued interest payable

 

 

2,244

 

 

787

 

f

 

 

 —

 

 

 

3,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities assumed

 

 

211,533

 

 

879

 

 

 

 

 —

 

 

 

212,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets acquired

 

$

24,511

 

$

1,139

 

 

 

$

13

 

 

 

25,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash consideration paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,795)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,132

 

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Explanation of fair value adjustments

a.

Reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the acquiree’s recorded allowance for loan losses.

b.

Reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired.

c.

Reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.

d.

Reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting purposes and their basis for federal income tax purposes.

e.

Reflects the fair value adjustment based on the Company’s evaluation of the assumed time deposits.

f.

Reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly attributable to the acquisition of Cornerstone.

 

Goodwill of approximately $6 million, which is the excess of the merger consideration over the fair value of net assets acquired, was recorded in the Cornerstone acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Traditional Banking segment and is not expected to be deductible for tax purposes.

 

For the three months ended March 31, 2016, the Company’s consolidated statements of income include approximately $194,000 of acquisition-related costs associated with the Cornerstone acquisition. With regard to the Company’s Cornerstone acquisition, pro forma financial information as if the acquisition had occurred at the beginning of 2016 is not considered material and is not included in this filing.

 

 

 

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3. INVESTMENT SECURITIES

 

Securities Available for Sale

 

The gross amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (“AOCI”) were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

March 31, 2017 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

320,381

 

$

92

 

$

(948)

 

$

319,525

 

Private label mortgage backed security

 

 

3,543

 

 

1,139

 

 

 —

 

 

4,682

 

Mortgage backed securities - residential

 

 

95,857

 

 

2,191

 

 

(226)

 

 

97,822

 

Collateralized mortgage obligations

 

 

83,317

 

 

394

 

 

(780)

 

 

82,931

 

Freddie Mac preferred stock

 

 

 —

 

 

394

 

 

 —

 

 

394

 

Community Reinvestment Act mutual fund

 

 

2,500

 

 

 —

 

 

(42)

 

 

2,458

 

Corporate bonds

 

 

15,003

 

 

255

 

 

 —

 

 

15,258

 

Trust preferred security

 

 

3,460

 

 

 —

 

 

(260)

 

 

3,200

 

Total securities available for sale

 

$

524,061

 

$

4,465

 

$

(2,256)

 

$

526,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2016 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

295,425

 

$

226

 

$

(1,107)

 

$

294,544

 

Private label mortgage backed security

 

 

3,691

 

 

1,086

 

 

 —

 

 

4,777

 

Mortgage backed securities - residential

 

 

71,197

 

 

2,027

 

 

(220)

 

 

73,004

 

Collateralized mortgage obligations

 

 

88,559

 

 

334

 

 

(1,239)

 

 

87,654

 

Freddie Mac preferred stock

 

 

 —

 

 

483

 

 

 —

 

 

483

 

Community Reinvestment Act mutual fund

 

 

2,500

 

 

 —

 

 

(45)

 

 

2,455

 

Corporate bonds

 

 

15,004

 

 

154

 

 

 —

 

 

15,158

 

Trust preferred security

 

 

3,449

 

 

 —

 

 

(249)

 

 

3,200

 

Total securities available for sale

 

$

479,825

 

$

4,310

 

$

(2,860)

 

$

481,275

 

 

Securities Held to Maturity

 

The carrying value, gross unrecognized gains and losses, and fair value of securities held to maturity were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Carrying

 

Unrecognized

 

Unrecognized

 

Fair

 

March 31, 2017 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

504

 

$

 —

 

$

(1)

 

$

503

 

Mortgage backed securities - residential

 

 

156

 

 

11

 

 

 —

 

 

167

 

Collateralized mortgage obligations

 

 

26,141

 

 

267

 

 

(36)

 

 

26,372

 

Corporate bonds

 

 

25,059

 

 

439

 

 

(61)

 

 

25,437

 

Total securities held to maturity

 

$

51,860

 

$

717

 

$

(98)

 

$

52,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Carrying

 

Unrecognized

 

Unrecognized

 

Fair

 

December 31, 2016 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

506

 

$

 —

 

$

(2)

 

$

504

 

Mortgage backed securities - residential

 

 

158

 

 

12

 

 

 —

 

 

170

 

Collateralized mortgage obligations

 

 

27,142

 

 

250

 

 

(124)

 

 

27,268

 

Corporate bonds

 

 

25,058

 

 

312

 

 

(63)

 

 

25,307

 

Total securities held to maturity

 

$

52,864

 

$

574

 

$

(189)

 

$

53,249

 

 

At March 31, 2017 and December 31, 2016, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

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Sales of Securities Available for Sale

 

During the three months ended March 31, 2017 and 2016 there were no gains or losses on sales or calls of securities available for sale.

 

Investment Securities by Contractual Maturity

 

The amortized cost and fair value of the investment securities portfolio by contractual maturity at March 31, 2017 follows. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

 

Securities

 

 

 

Available for Sale

 

Held to Maturity

 

 

    

Amortized

    

Fair

    

Carrying

    

Fair

 

March 31, 2017 (in thousands)

 

Cost

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

96,033

 

$

96,079

 

$

504

 

$

502

 

Due from one year to five years

 

 

229,351

 

 

228,480

 

 

5,075

 

 

5,015

 

Due from five years to ten years

 

 

10,000

 

 

10,224

 

 

19,984

 

 

20,423

 

Due beyond ten years

 

 

3,460

 

 

3,200

 

 

 —

 

 

 —

 

Private label mortgage backed security

 

 

3,543

 

 

4,682

 

 

 —

 

 

 —

 

Mortgage backed securities - residential

 

 

95,857

 

 

97,822

 

 

156

 

 

167

 

Collateralized mortgage obligations

 

 

83,317

 

 

82,931

 

 

26,141

 

 

26,372

 

Freddie Mac preferred stock

 

 

 —

 

 

394

 

 

 —

 

 

 —

 

Community Reinvestment Act mutual fund

 

 

2,500

 

 

2,458

 

 

 —

 

 

 —

 

Total securities

 

$

524,061

 

$

526,270

 

$

51,860

 

$

52,479

 

 

Freddie Mac Preferred Stock

 

During 2008, the U.S. Treasury, the Federal Reserve Board and the Federal Housing Finance Agency (“FHFA”) announced that the FHFA was placing Freddie Mac under conservatorship and giving management control to the FHFA. The Bank contemporaneously determined that its 40,000 shares of Freddie Mac preferred stock were fully impaired and recorded an other-than-temporary impairment (“OTTI”) charge of $2.1 million in 2008.  The OTTI charge brought the carrying value of the stock to $0.  In 2014, based on active trading volume of Freddie Mac preferred stock, the Company determined it appropriate to record an unrealized gain to AOCI related to its Freddie Mac preferred stock holdings.  Based on the stock’s market closing price as of March 31, 2017, the Company’s unrealized gain for its Freddie Mac preferred stock totaled $394,000.  

 

Corporate Bonds

 

During 2013 and 2016, the Bank purchased floating rate corporate bonds. The bonds were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 7% and 8% of the Bank’s investment portfolio as of March 31, 2017 and December 31, 2016.

 

Mortgage Backed Securities and Collateralized Mortgage Obligations

 

At March 31, 2017, with the exception of the $4.7 million private label mortgage backed security, all other mortgage backed securities and collateralized mortgage obligations (“CMOs”) held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac and the Fannie Mae. At March 31, 2017 and December 31, 2016, there were gross unrealized losses of $1.0 million and $1.5 million related to available for sale mortgage backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to have OTTI.

 

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Table of Contents

Trust Preferred Security

 

During the fourth quarter of 2015, the Parent Company purchased a $3 million floating rate trust preferred security (“TRUP”) at a price of 68% of par.  The coupon on this security is based on the 3-month London Interbank Borrowing Rate (“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.

 

Unrealized-Loss Analysis

 

Securities with unrealized losses at March 31, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

 

 

    

Unrealized

 

March 31, 2017 (in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

 —

 

$

 —

 

$

183,282

 

$

(948)

 

$

183,282

 

$

(948)

 

Mortgage backed securities - residential

 

 

 —

 

 

 —

 

 

17,537

 

 

(226)

 

 

17,537

 

 

(226)

 

Collateralized mortgage obligations

 

 

 —

 

 

 —

 

 

46,440

 

 

(780)

 

 

46,440

 

 

(780)

 

Community Reinvestment Act mutual fund

 

 

2,458

 

 

(42)

 

 

 —

 

 

 —

 

 

2,458

 

 

(42)

 

Trust preferred security

 

 

 —

 

 

 —

 

 

3,200

 

 

(260)

 

 

3,200

 

 

(260)

 

Total securities available for sale

 

$

2,458

 

$

(42)

 

$

250,459

 

$

(2,214)

 

$

252,917

 

$

(2,256)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

 

 

    

Unrealized

 

December 31, 2016 (in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

138,002

 

$

(1,107)

 

$

 —

 

$

 —

 

$

138,002

 

$

(1,107)

 

Mortgage backed securities - residential

 

 

9,427

 

 

(122)

 

 

4,211

 

 

(98)

 

 

13,638

 

 

(220)

 

Collateralized mortgage obligations

 

 

37,547

 

 

(690)

 

 

15,668

 

 

(549)

 

 

53,215

 

 

(1,239)

 

Community Reinvestment Act mutual fund

 

 

2,455

 

 

(45)

 

 

 —

 

 

 —

 

 

2,455

 

 

(45)

 

Trust preferred security

 

 

3,200

 

 

(249)

 

 

 —

 

 

 —

 

 

3,200

 

 

(249)

 

Total securities available for sale

 

$

190,631

 

$

(2,213)

 

$

19,879

 

$

(647)

 

$

210,510

 

$

(2,860)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

 

 

    

Unrealized

 

March 31, 2017 (in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

503

 

$

(1)

 

$

 —

 

$

 —

 

$

503

 

$

(1)

 

Collateralized mortgage obligations

 

 

 —

 

 

 —

 

 

7,066

 

 

(36)

 

 

7,066

 

 

(36)

 

Corporate bonds

 

 

 —

 

 

 —

 

 

4,940

 

 

(61)

 

 

4,940

 

 

(61)

 

Total securities held to maturity

 

$

503

 

$

(1)

 

$

12,006

 

$

(97)

 

$

12,509

 

$

(98)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

 

 

    

Unrealized

 

December 31, 2016 (in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

506

 

$

(2)

 

$

 —

 

$

 —

 

$

506

 

$

(2)

 

Collateralized mortgage obligations

 

 

13,315

 

 

(124)

 

 

 —

 

 

 —

 

 

13,315

 

 

(124)

 

Corporate bonds

 

 

 —

 

 

 —

 

 

4,937

 

 

(63)

 

 

4,937

 

 

(63)

 

Total securities held to maturity

 

$

13,821

 

$

(126)

 

$

4,937

 

$

(63)

 

$

18,758

 

$

(189)

 

 

 

At March 31, 2017, the Bank’s security portfolio consisted of 182 securities, 47 of which were in an unrealized loss position.

 

At December 31, 2016, the Bank’s security portfolio consisted of 179 securities, 45 of which were in an unrealized loss position.

 

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Other-than-temporary impairment (“OTTI”)

 

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

 

·

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

·

The Bank’s intent to hold until maturity or sell the debt security prior to maturity;

·

An analysis of whether it is more-likely-than-not that the Bank will be required to sell the debt security before its anticipated recovery;

·

Adverse conditions specifically related to the security, an industry, or a geographic area;

·

The historical and implied volatility of the fair value of the security;

·

The payment structure of the security and the likelihood of the issuer being able to make payments;

·

Failure of the issuer to make scheduled interest or principal payments;

·

Any rating changes by a rating agency; and

·

Recoveries or additional decline in fair value subsequent to the balance sheet date.

 

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.

 

The Bank owns one private label mortgage backed security with a total carrying value of $4.7 million at March 31, 2017. This security is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

 

See additional discussion regarding the Bank’s private label mortgage backed security under Footnote 10 “Fair Value” in this section of the filing.

 

Pledged Investment Securities

 

Investment securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other purposes, as required or permitted by law are as follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

224,778

 

$

231,695

 

Fair value

 

 

224,978

 

 

231,891

 

 

 

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4. 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 operations, while consumer loans originated for sale are originated and sold through the RCS division of the Company’s RPG 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.

 

Consumer Loans Held for Sale, at Fair Value

 

During the first quarter of 2016, RCS initiated an installment loan program, in which the Company sells 100% of the receivables approximately 21 days after origination.  The Company carries these loans at fair value, with the loans marked to market on a monthly basis, and any changes in their fair value reported as a component of “Program fees.”

 

Activity for consumer loans held for sale and carried at fair value was as follows:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

March 31, 

(in thousands)

 

2017

    

2016

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,198

 

$

 —

Origination of consumer loans held for sale

 

 

12,238

 

 

415

Proceeds from the sale of consumer loans held for sale

 

 

(10,783)

 

 

 —

Net gain on sale of consumer loans held for sale

 

 

26

 

 

 —

Balance, end of period

 

$

3,679

 

$

415

 

Consumer Loans Held for Sale, at Lower of Cost or Fair Value

 

RCS originates for sale its line-of-credit product and its credit card product. The Bank sells 90% of the balances maintained through these products within two days of loan origination and retains a 10% interest. The line-of-credit product represents the substantial majority of activity in consumer loans held for sale and carried at the lower of cost or fair value, as RCS moved beyond the pilot phase for this product in June 2015. In December 2015, RCS began piloting its credit card product.  Any gains or losses on the sale of RCS products are reported as a component of “Program fees.”

 

Activity for consumer loans held for sale and carried at the lower of cost or market value was as follows:

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

March 31, 

(in thousands)

 

2017

    

2016

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,310

 

$

514

Origination of consumer loans held for sale

 

 

114,686

 

 

43,653

Proceeds from the sale of consumer loans held for sale

 

 

(115,658)

 

 

(44,034)

Net gain on sale of consumer loans held for sale

 

 

1,082

 

 

433

Balance, end of period

 

$

1,420

 

$

566

 

 

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5. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The composition of the loan portfolio at period end follows:

 

 

 

 

 

 

 

 

(in thousands)

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

Owner occupied

$

969,705

 

$

1,000,148

 

Owner occupied - correspondent*

 

141,375

 

 

149,028

 

Nonowner occupied

 

164,742

 

 

156,605

 

Commercial real estate

 

1,049,193

 

 

1,060,496

 

Construction & land development

 

130,766

 

 

119,650

 

Commercial & industrial

 

270,652

 

 

259,026

 

Lease financing receivables

 

13,853

 

 

13,614

 

Warehouse lines of credit*

 

495,165

 

 

585,439

 

Home equity

 

341,611

 

 

341,285

 

Consumer:

 

 

 

 

 

 

Credit cards

 

14,644

 

 

13,414

 

Overdrafts

 

786

 

 

803

 

Automobile loans

 

55,962

 

 

52,579

 

Other consumer

 

19,215

 

 

19,744

 

Total Core Bank

 

3,667,669

 

 

3,771,831

 

 

 

 

 

 

 

 

Republic Processing Group*:

 

 

 

 

 

 

Commercial & industrial

 

14

 

 

6,695

 

Consumer:

 

 

 

 

 

 

Easy Advances

 

10,672

 

 

 —

 

Republic Credit Solutions

 

32,021

 

 

32,252

 

Total Republic Processing Group

 

42,707

 

 

38,947

 

 

 

 

 

 

 

 

Total loans**

 

3,710,376

 

 

3,810,778

 

Allowance for loan and lease losses

 

(42,362)

 

 

(32,920)

 

 

 

 

 

 

 

 

Total loans, net

$

3,668,014

 

$

3,777,858

 


*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 at March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

(in thousands)

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

Contractual receivable

$

3,715,075

 

$

3,816,086

 

Unearned income(1)

 

(1,098)

 

 

(1,050)

 

Unamortized premiums(2)

 

1,654

 

 

1,838

 

Unaccreted discounts(3)

 

(8,842)

 

 

(9,397)

 

Net unamortized deferred origination fees and costs

 

3,587

 

 

3,301

 

Carrying value of loans

$

3,710,376

 

$

3,810,778

 


(1)

Unearned income relates to lease financing receivables.

(2)

Premiums predominately relate to loans acquired through the Bank’s Correspondent Lending channel.

(3)

Unaccreted discounts include accretable and non-accretable discounts and predominately relate to loans acquired in the Bank’s 2016 Cornerstone acquisition and its 2012 FDIC-assisted transactions.

 

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Loan Purchases

 

The Core Bank acquires for investment single family, first lien mortgage loans that meet the Core Bank’s specifications through its Correspondent Lending channel. In addition, the Bank has acquired in the past unsecured consumer installment loans for investment from a third-party originator. Such consumer loans were purchased at par and were selected by the Bank based on certain underwriting specifications.

 

The following table reflects the purchased activity of single family, first lien mortgage loans and unsecured consumer loans, by class, during the three months ended March 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

(in thousands)

2017

    

2016

 

 

Residential real estate:

 

 

 

 

 

 

 

Owner occupied - correspondent*

$

1,224

 

$

20,521

 

 

Consumer:

 

 

 

 

 

 

 

Other consumer*

 

 —

 

 

2,667

 

 

Total purchased loans**

$

1,224

 

$

23,188

 

 


* Represents origination amount, inclusive of applicable purchase premiums.

**Purchases are all part of Core Bank operations.

 

Loans Acquired in Cornerstone Acquisition

 

The following table summarizes loans acquired in the Company’s May 17, 2016 Cornerstone acquisition, finalized as of October 1, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 17, 2016

(in thousands)

Contractual Receivable

    

Non-accretable Discount

 

Accretable Discount

    

Acquisition-Day Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

$

15,487

 

$

 —

 

$

(393)

 

$

15,094

Nonowner occupied

 

11,196

 

 

 —

 

 

(101)

 

 

11,095

Commercial real estate

 

106,089

 

 

 —

 

 

(1,498)

 

 

104,591

Construction & land development

 

18,277

 

 

 —

 

 

(502)

 

 

17,775

Commercial & industrial

 

11,462

 

 

 —

 

 

(191)

 

 

11,271

Home equity

 

20,652

 

 

 —

 

 

(350)

 

 

20,302

Consumer and other

 

2,347

 

 

 —

 

 

(147)

 

 

2,200

 

 

 

 

 

 

 

 

 

 

 

 

Total loans - ASC 310-20

 

185,510

 

 

 —

 

 

(3,182)

 

 

182,328

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

2,963

 

 

(822)

 

 

(15)

 

 

2,126

Nonowner occupied

 

1,721

 

 

(320)

 

 

(167)

 

 

1,234

Commercial real estate

 

4,315

 

 

(617)

 

 

(197)

 

 

3,501

Construction & land development

 

175

 

 

 —

 

 

 —

 

 

175

Commercial & industrial

 

66

 

 

(1)

 

 

 1

 

 

66

Home equity

 

382

 

 

(178)

 

 

(11)

 

 

193

Consumer and other

 

 4

 

 

(3)

 

 

 —

 

 

 1

 

 

 

 

 

 

 

 

 

 

 

 

Total loans - ASC 310-30 - PCI loans

 

9,626

 

 

(1,941)

 

 

(389)

 

 

7,296

 

 

 

 

 

 

 

 

 

 

 

 

Total loans acquired

$

195,136

 

$

(1,941)

 

$

(3,571)

 

$

189,624

 

 

21


 

Table of Contents

Purchased-Credit-Impaired (“PCI”) Loans

 

The Bank acquired PCI loans on May 17, 2016 in its Cornerstone acquisition and during the year ended December 31, 2012 in two FDIC-assisted transactions. PCI loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

 

Management utilized the following criteria in determining which loans were classified as PCI loans for its May 17, 2016 Cornerstone acquisition:

 

·

Loans for which the Bank assigned a non-accretable discount

·

Loans classified as nonaccrual when acquired

·

Loans past due 90-days-or-more when acquired

 

The following table reconciles the contractually required and carrying amounts of all PCI loans at March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Contractually-required principal

 

$

14,926

 

$

15,587

 

Non-accretable amount

 

 

(1,806)

 

 

(1,713)

 

Accretable amount

 

 

(3,409)

 

 

(3,600)

 

Carrying value of loans

 

$

9,711

 

$

10,274

 

 

The following table presents a rollforward of the accretable amount on all PCI loans for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

(in thousands)

 

2017

    

2016

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(3,600)

 

$

(4,125)

 

Transfers between non-accretable and accretable

 

 

90

 

 

(455)

 

Net accretion into interest income on loans, including loan fees

 

 

101

 

 

727

 

Balance, end of period

 

$

(3,409)

 

$

(3,853)

 

 

22


 

Table of Contents

Credit Quality Indicators

 

Based on the Bank’s internal analyses performed as of March 31, 2017 and December 31, 2016, the following tables reflect loans by risk category. Risk categories are defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Special

 

 

 

 

Doubtful /

 

PCI Loans -

 

PCI Loans -

 

Total Rated

 

(in thousands)

 

Pass

 

Mention*

 

Substandard*

 

Loss

 

Group 1

 

Substandard

 

Loans**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

20,549

 

$

12,972

 

$

 

$

186

 

$

1,799

 

$

35,506

 

Owner occupied - correspondent

 

 

 

 

 —

 

 

 

 

 

 

 

 

 

 

 —

 

Nonowner occupied

 

 

 

 

649

 

 

1,079

 

 

 

 

518

 

 

 

 

2,246

 

Commercial real estate

 

 

1,031,746

 

 

6,345

 

 

4,107

 

 

 

 

6,995

 

 

 

 

1,049,193

 

Construction & land development

 

 

129,894

 

 

89

 

 

783

 

 

 

 

 —

 

 

 

 

130,766

 

Commercial & industrial

 

 

269,756

 

 

722

 

 

151

 

 

 

 

23

 

 

 

 

270,652

 

Lease financing receivables

 

 

13,853

 

 

 

 

 

 

 

 

 

 

 —

 

 

 

 

13,853

 

Warehouse lines of credit

 

 

495,165

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

495,165

 

Home equity

 

 

 

 

232

 

 

2,035

 

 

 —

 

 

92

 

 

97

 

 

2,456

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 

 

 —

 

Overdrafts

 

 

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

 —

 

Automobile loans

 

 

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

 —

 

Other consumer

 

 

 

 

 —

 

 

211

 

 

 

 

 1

 

 

 

 

212

 

Total Core Bank

 

 

1,940,414

 

 

28,586

 

 

21,338

 

 

 —

 

 

7,815

 

 

1,896

 

 

2,000,049

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

14

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

 —

 

Republic Credit Solutions

 

 

 

 

 —

 

 

122

 

 

 

 

 —

 

 

 

 

122

 

Total Republic Processing Group:

 

 

14

 

 

 —

 

 

122

 

 

 —

 

 

 —

 

 

 —

 

 

136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rated loans

 

$

1,940,428

 

$

28,586

 

$

21,460

 

$

 —

 

$

7,815

 

$

1,896

 

$

2,000,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Special

 

 

 

 

Doubtful /

 

PCI Loans -

 

PCI Loans -

 

Total Rated

 

(in thousands)

 

Pass

 

Mention*

 

Substandard*

 

Loss

 

Group 1

 

Substandard

 

Loans**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

21,344

 

$

13,117

 

$

 

$

218

 

$

2,267

 

$

36,946

 

Owner occupied - correspondent

 

 

 

 

 —

 

 

 

 

 

 

 

 

 

 

 —

 

Nonowner occupied

 

 

 

 

656

 

 

1,115

 

 

 

 

523

 

 

 

 

2,294

 

Commercial real estate

 

 

1,042,137

 

 

7,086

 

 

4,224

 

 

 

 

7,049

 

 

 

 

1,060,496

 

Construction & land development

 

 

118,769

 

 

90

 

 

791

 

 

 

 

 —

 

 

 

 

119,650

 

Commercial & industrial

 

 

257,579

 

 

1,270

 

 

154

 

 

 

 

23

 

 

 

 

259,026

 

Lease financing receivables

 

 

13,614

 

 

 

 

 

 

 

 

 

 

 —

 

 

 

 

13,614

 

Warehouse lines of credit

 

 

585,439

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

585,439

 

Home equity

 

 

 

 

256

 

 

1,763

 

 

 —

 

 

94

 

 

99

 

 

2,212

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 

 

 —

 

Overdrafts

 

 

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

 —

 

Automobile loans

 

 

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

 —

 

Other consumer

 

 

 

 

 —

 

 

166

 

 

 

 

 1

 

 

 

 

167

 

Total Core Bank

 

 

2,017,538

 

 

30,702

 

 

21,330

 

 

 —

 

 

7,908

 

 

2,366

 

 

2,079,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

6,695

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,695

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

 —

 

Republic Credit Solutions

 

 

 

 

 —

 

 

82

 

 

 

 

 —

 

 

 

 

82

 

Total Republic Processing Group:

 

 

6,695

 

 

 —

 

 

82

 

 

 —

 

 

 —

 

 

 —

 

 

6,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rated loans

 

$

2,024,233

 

$

30,702

 

$

21,412

 

$

 —

 

$

7,908

 

$

2,366

 

$

2,086,621

 

 


*At March 31, 2017 and December 31, 2016, Special Mention included $2 million and $2 million and Substandard included $1 million and $1 million that were removed from PCI accounting in accordance with ASC 310-30-35-13 due to a post-acquisition troubled debt restructuring.

 

** The above tables exclude all non-classified residential real estate, home equity and consumer loans at the respective period ends. 

23


 

Table of Contents

Allowance for Loan and Lease Losses

 

Activity in the allowance for loan and lease losses (“Allowance”) by loan class follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance Rollforward

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2017

 

 

March 31, 2016

 

 

 

 

Beginning

 

 

 

Charge-

 

 

 

Ending

 

 

Beginning

 

 

 

Charge-

 

 

 

Ending

 

(in thousands)

 

 

Balance

 

Provision

 

offs

 

Recoveries

 

Balance

 

 

Balance

 

Provision

 

offs

 

Recoveries

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

$

7,158

 

$

(143)

 

$

(3)

 

$

59

 

$

7,071

 

 

$

8,301

 

$

(182)

 

$

(144)

 

$

74

 

$

8,049

 

Owner occupied - correspondent

 

 

 

373

 

 

(9)

 

 

(11)

 

 

 —

 

 

353

 

 

 

623

 

 

(16)

 

 

 —

 

 

 —

 

 

607

 

Nonowner occupied

 

 

 

1,139

 

 

59

 

 

 —

 

 

 —

 

 

1,198

 

 

 

1,052

 

 

87

 

 

(44)

 

 

 —

 

 

1,095

 

Commercial real estate

 

 

 

8,078

 

 

(197)

 

 

 —

 

 

17

 

 

7,898

 

 

 

7,672

 

 

20

 

 

(41)

 

 

27

 

 

7,678

 

Construction & land development

 

 

 

1,850

 

 

383

 

 

 —

 

 

 —

 

 

2,233

 

 

 

1,303

 

 

69

 

 

(44)

 

 

20

 

 

1,348

 

Commercial & industrial

 

 

 

1,511

 

 

(44)

 

 

 —

 

 

21

 

 

1,488

 

 

 

1,455

 

 

(75)

 

 

 —

 

 

 4

 

 

1,384

 

Lease financing receivables

 

 

 

136

 

 

 9

 

 

 —

 

 

 —

 

 

145

 

 

 

89

 

 

 8

 

 

 —

 

 

 —

 

 

97

 

Warehouse lines of credit

 

 

 

1,464

 

 

(226)

 

 

 —

 

 

 —

 

 

1,238

 

 

 

967

 

 

18

 

 

 —

 

 

 —

 

 

985

 

Home equity

 

 

 

3,757

 

 

69

 

 

(4)

 

 

 9

 

 

3,831

 

 

 

2,996

 

 

67

 

 

(35)

 

 

26

 

 

3,054

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

490

 

 

38

 

 

(27)

 

 

 5

 

 

506

 

 

 

448

 

 

21

 

 

(12)

 

 

 9

 

 

466

 

Overdrafts

 

 

 

675

 

 

83

 

 

(184)

 

 

67

 

 

641

 

 

 

351

 

 

184

 

 

(161)

 

 

76

 

 

450

 

Automobile loans

 

 

 

526

 

 

36

 

 

 —

 

 

 1

 

 

563

 

 

 

56

 

 

89

 

 

 —

 

 

 —

 

 

145

 

Other consumer

 

 

 

771

 

 

183

 

 

(230)

 

 

101

 

 

825

 

 

 

479

 

 

208

 

 

(131)

 

 

92

 

 

648

 

Total Core Bank

 

 

 

27,928

 

 

241

 

 

(459)

 

 

280

 

 

27,990

 

 

 

25,792

 

 

498

 

 

(612)

 

 

328

 

 

26,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

 

25

 

 

(25)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 

 —

 

 

8,601

 

 

(860)

 

 

 —

 

 

7,741

 

 

 

 —

 

 

3,574

 

 

(405)

 

 

 —

 

 

3,169

 

Refund Anticipation Loans

 

 

 

 —

 

 

(235)

 

 

 —

 

 

235

 

 

 —

 

 

 

 —

 

 

(247)

 

 

 —

 

 

247

 

 

 —

 

Republic Credit Solutions

 

 

 

4,967

 

 

3,769

 

 

(2,285)

 

 

180

 

 

6,631

 

 

 

1,699

 

 

1,361

 

 

(846)

 

 

86

 

 

2,300

 

Total Republic Processing Group

 

 

 

4,992

 

 

12,110

 

 

(3,145)

 

 

415

 

 

14,372

 

 

 

1,699

 

 

4,688

 

 

(1,251)

 

 

333

 

 

5,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

32,920

 

$

12,351

 

$

(3,604)

 

$

695

 

$

42,362

 

 

$

27,491

 

$

5,186

 

$

(1,863)

 

$

661

 

$

31,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Nonperforming Loans and Nonperforming Assets

 

Detail of nonperforming loans and nonperforming assets follows:

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

March 31, 2017

    

December 31, 2016

    

 

 

 

 

 

 

 

 

 

 

Loans on nonaccrual status*

 

$

16,793

 

$

15,892

 

 

Loans past due 90-days-or-more and still on accrual**

 

 

203

 

 

167

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans

 

 

16,996

 

 

16,059

 

 

Other real estate owned

 

 

1,362

 

 

1,391

 

 

Total nonperforming assets

 

$

18,358

 

$

17,450

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.46

%  

 

0.42

%  

 

Nonperforming assets to total loans (including OREO)

 

 

0.49

 

 

0.46

 

 

Nonperforming assets to total assets

 

 

0.39

 

 

0.36

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.46

%  

 

0.42

%  

 

Nonperforming assets to total loans (including OREO)

 

 

0.50

 

 

0.46

 

 

Nonperforming assets to total assets

 

 

0.40

 

 

0.36

 

 


*Loans on nonaccrual status include impaired loans.

**Loans past due 90-days-or-more and still accruing consist of PCI loans or smaller balance consumer loans.

24


 

Table of Contents

 

The following table presents the recorded investment in nonaccrual loans and loans past due 90-days-or-more and still on accrual by class of loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due 90-Days-or-More

 

 

 

Nonaccrual

 

 

and Still Accruing Interest*

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

    

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

11,731

 

$

10,955

 

 

$

 —

 

$

 —

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Nonowner occupied

 

 

818

 

 

852

 

 

 

 —

 

 

 —

 

Commercial real estate

 

 

2,674

 

 

2,725

 

 

 

 —

 

 

 —

 

Construction & land development

 

 

74

 

 

77

 

 

 

 —

 

 

 —

 

Commercial & industrial

 

 

151

 

 

154

 

 

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Home equity

 

 

1,268

 

 

1,069

 

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Overdrafts

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Automobile loans

 

 

24

 

 

 —

 

 

 

 —

 

 

 —

 

Other consumer

 

 

53

 

 

60

 

 

 

81

 

 

85

 

Total Core Bank

 

 

16,793

 

 

15,892

 

 

 

81

 

 

85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Republic Credit Solutions

 

 

 —

 

 

 —

 

 

 

122

 

 

82

 

Total Republic Processing Group

 

 

 —

 

 

 —

 

 

 

122

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

16,793

 

$

15,892

 

 

$

203

 

$

167

 


*  Loans past due 90-days-or-more and still accruing consist of PCI loans or smaller balance consumer loans.

 

Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Nonaccrual loans are typically returned to accrual status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months and future contractual payments are reasonably assured. Troubled Debt Restructurings (“TDRs”) on nonaccrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms.

 

25


 

Table of Contents

Delinquent Loans

 

The following tables present the aging of the recorded investment in loans by class of loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

30 - 59

    

60 - 89

    

90 or More

    

    

 

    

    

 

    

    

 

 

March 31, 2017

Days

 

Days

 

Days

 

Total

 

Total

 

 

 

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent*

 

Delinquent**

 

Current

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

2,205

 

$

420

 

$

1,263

 

$

3,888

 

$

965,817

 

$

969,705

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

141,375

 

 

141,375

 

Nonowner occupied

 

 

 5

 

 

 —

 

 

35

 

 

40

 

 

164,702

 

 

164,742

 

Commercial real estate

 

 

140

 

 

85

 

 

416

 

 

641

 

 

1,048,552

 

 

1,049,193

 

Construction & land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

130,766

 

 

130,766

 

Commercial & industrial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

270,652

 

 

270,652

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,853

 

 

13,853

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

495,165

 

 

495,165

 

Home equity

 

 

440

 

 

25

 

 

442

 

 

907

 

 

340,704

 

 

341,611

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

16

 

 

14

 

 

 —

 

 

30

 

 

14,614

 

 

14,644

 

Overdrafts

 

 

142

 

 

 3

 

 

 —

 

 

145

 

 

641

 

 

786

 

Automobile loans

 

 

22

 

 

 —

 

 

 —

 

 

22

 

 

55,940

 

 

55,962

 

Other consumer

 

 

86

 

 

110

 

 

83

 

 

279

 

 

18,936

 

 

19,215

 

Total Core Bank

 

 

3,056

 

 

657

 

 

2,239

 

 

5,952

 

 

3,661,717

 

 

3,667,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14

 

 

14

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

8,350

 

 

 —

 

 

 —

 

 

8,350

 

 

2,322

 

 

10,672

 

Republic Credit Solutions

 

 

1,508

 

 

231

 

 

122

 

 

1,861

 

 

30,160

 

 

32,021

 

Total Republic Processing Group

 

 

9,858

 

 

231

 

 

122

 

 

10,211

 

 

32,496

 

 

42,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

12,914

 

$

888

 

$

2,361

 

$

16,163

 

$

3,694,213

 

$

3,710,376

 

Delinquency ratio***

 

 

0.35

%  

 

0.02

%  

 

0.06

%  

 

0.44

%  

 

 

 

 

 

 

 


*All loans past due 90-days-or-more, excluding PCI loans and 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. Easy Advances do not have a contractual due date but are eligible for delinquency consideration three weeks after the taxpayer customer’s tax return is submitted to the applicable tax authority. 

***Represents total loans 30-days-or-more past due by aging category divided by total loans.

 

26


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

30 - 59

    

60 - 89

    

90 or More

    

    

 

    

    

 

    

    

 

 

December 31, 2016

Days

 

Days

 

Days

 

Total

 

Total

 

 

 

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent*

 

Delinquent**

 

Current

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,696

 

$

337

 

$

2,521

 

$

4,554

 

$

995,594

 

$

1,000,148

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

149,028

 

 

149,028

 

Nonowner occupied

 

 

 —

 

 

 —

 

 

46

 

 

46

 

 

156,559

 

 

156,605

 

Commercial real estate

 

 

 8

 

 

 —

 

 

417

 

 

425

 

 

1,060,071

 

 

1,060,496

 

Construction & land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

119,650

 

 

119,650

 

Commercial & industrial

 

 

342

 

 

 —

 

 

 —

 

 

342

 

 

258,684

 

 

259,026

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,614

 

 

13,614

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

585,439

 

 

585,439

 

Home equity

 

 

316

 

 

160

 

 

494

 

 

970

 

 

340,315

 

 

341,285

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

14

 

 

 4

 

 

 —

 

 

18

 

 

13,396

 

 

13,414

 

Overdrafts

 

 

159

 

 

 1

 

 

 1

 

 

161

 

 

642

 

 

803

 

Automobile loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

52,579

 

 

52,579

 

Other consumer

 

 

114

 

 

106

 

 

85

 

 

305

 

 

19,439

 

 

19,744

 

Total Core Bank

 

 

2,649

 

 

608

 

 

3,564

 

 

6,821

 

 

3,765,010

 

 

3,771,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,695

 

 

6,695

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Republic Credit Solutions

 

 

1,751

 

 

304

 

 

82

 

 

2,137

 

 

30,115

 

 

32,252

 

Total Republic Processing Group

 

 

1,751

 

 

304

 

 

82

 

 

2,137

 

 

36,810

 

 

38,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,400

 

$

912

 

$

3,646

 

$

8,958

 

$

3,801,820

 

$

3,810,778

 

Delinquency ratio***

 

 

0.12

%  

 

0.02

%  

 

0.10

%  

 

0.24

%  

 

 

 

 

 

 


*All loans past due 90-days-or-more, excluding PCI loans and 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.

***Represents total loans 30-days-or-more past due by aging category divided by total loans.

 

Impaired Loans

 

Information regarding the Bank’s impaired loans follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Loans with no allocated Allowance

 

$

20,056

 

$

21,416

 

Loans with allocated Allowance

 

 

28,914

 

 

31,268

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$

48,970

 

$

52,684

 

 

 

 

 

 

 

 

 

Amount of the Allowance

 

$

4,901

 

$

4,925

 

 

Approximately $2 million and $4 million of impaired loans at March 31, 2017 and December 31, 2016 were PCI loans. Approximately $3 million and $3 million of impaired loans at March 31, 2017 and December 31, 2016 were formerly PCI loans that became classified as “Impaired” through a post-acquisition troubled debt restructuring.

27


 

Table of Contents

The following tables present the balance in the Allowance and the recorded investment in loans by portfolio class based on impairment method as of March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

 

Loans

 

 

Individually

    

 

    

PCI with

    

PCI without

    

    

 

 

    

Individually

    

 

    

PCI with

    

PCI without

    

    

 

March 31, 2017

 

Evaluated

 

Collectively

 

Post Acquisition

 

Post Acquisition

 

Total

 

 

Evaluated

 

Collectively

 

Post Acquisition

 

Post Acquisition

 

Total

(dollars in thousands)

 

Excluding PCI

 

Evaluated

 

Impairment

 

Impairment

 

Allowance

 

 

Excluding PCI

 

Evaluated

 

Impairment

 

Impairment

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

3,250

 

$

3,671

 

$

150

 

$

 —

 

$

7,071

 

 

$

30,924

 

$

936,796

 

$

1,799

 

$

186

 

$

969,705

Owner occupied - correspondent

 

 

 —

 

 

353

 

 

 —

 

 

 —

 

 

353

 

 

 

 —

 

 

141,375

 

 

 —

 

 

 —

 

 

141,375

Nonowner occupied

 

 

62

 

 

1,129

 

 

 7

 

 

 —

 

 

1,198

 

 

 

1,632

 

 

162,592

 

 

265

 

 

253

 

 

164,742

Commercial real estate

 

 

447

 

 

7,414

 

 

37

 

 

 —

 

 

7,898

 

 

 

10,711

 

 

1,031,487

 

 

148

 

 

6,847

 

 

1,049,193

Construction & land development

 

 

110

 

 

2,123

 

 

 —

 

 

 —

 

 

2,233

 

 

 

872

 

 

129,894

 

 

 —

 

 

 —

 

 

130,766

Commercial & industrial

 

 

152

 

 

1,336

 

 

 —

 

 

 —

 

 

1,488

 

 

 

207

 

 

270,422

 

 

 —

 

 

23

 

 

270,652

Lease financing receivables

 

 

 —

 

 

145

 

 

 —

 

 

 —

 

 

145

 

 

 

 —

 

 

13,853

 

 

 —

 

 

 —

 

 

13,853

Warehouse lines of credit

 

 

 —

 

 

1,238

 

 

 —

 

 

 —

 

 

1,238

 

 

 

 —

 

 

495,165

 

 

 —

 

 

 —

 

 

495,165

Home equity

 

 

529

 

 

3,204

 

 

98

 

 

 —

 

 

3,831

 

 

 

2,185

 

 

339,237

 

 

98

 

 

91

 

 

341,611

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 —

 

 

506

 

 

 —

 

 

 —

 

 

506

 

 

 

 —

 

 

14,644

 

 

 —

 

 

 —

 

 

14,644

Overdrafts

 

 

 —

 

 

641

 

 

 —

 

 

 —

 

 

641

 

 

 

 —

 

 

786

 

 

 —

 

 

 —

 

 

786

Automobile loans

 

 

 —

 

 

563

 

 

 —

 

 

 —

 

 

563

 

 

 

 —

 

 

55,962

 

 

 —

 

 

 —

 

 

55,962

Other consumer

 

 

59

 

 

766

 

 

 —

 

 

 —

 

 

825

 

 

 

129

 

 

19,085

 

 

 —

 

 

 1

 

 

19,215

Total Core Bank

 

 

4,609

 

 

23,089

 

 

292

 

 

 —

 

 

27,990

 

 

 

46,660

 

 

3,611,298

 

 

2,310

 

 

7,401

 

 

3,667,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

14

 

 

 —

 

 

 —

 

 

14

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

7,741

 

 

 —

 

 

 —

 

 

7,741

 

 

 

 —

 

 

10,672

 

 

 —

 

 

 —

 

 

10,672

Republic Credit Solutions

 

 

 —

 

 

6,631

 

 

 —

 

 

 —

 

 

6,631

 

 

 

 —

 

 

32,021

 

 

 —

 

 

 —

 

 

32,021

Total Republic Processing Group

 

 

 —

 

 

14,372

 

 

 —

 

 

 —

 

 

14,372

 

 

 

 —

 

 

42,707

 

 

 —

 

 

 —

 

 

42,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,609

 

$

37,461

 

$

292

 

$

 —

 

$

42,362

 

 

$

46,660

 

$

3,654,005

 

$

2,310

 

$

7,401

 

$

3,710,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

 

Loans

 

 

Individually

    

 

    

PCI with

    

PCI without

    

    

 

 

    

Individually

    

 

    

PCI with

    

PCI without

    

    

 

December 31, 2016

 

Evaluated

 

Collectively

 

Post Acquisition

 

Post Acquisition

 

Total

 

 

Evaluated

 

Collectively

 

Post Acquisition

 

Post Acquisition

 

Total

(dollars in thousands)

 

Excluding PCI

 

Evaluated

 

Impairment

 

Impairment

 

Allowance

 

 

Excluding PCI

 

Evaluated

 

Impairment

 

Impairment

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

3,203

 

$

3,797

 

$

158

 

$

 —

 

$

7,158

 

 

$

31,908

 

$

965,755

 

$

2,297

 

$

188

 

$

1,000,148

Owner occupied - correspondent

 

 

 —

 

 

373

 

 

 —

 

 

 —

 

 

373

 

 

 

 —

 

 

149,028

 

 

 —

 

 

 —

 

 

149,028

Nonowner occupied

 

 

65

 

 

1,067

 

 

 7

 

 

 —

 

 

1,139

 

 

 

1,601

 

 

154,481

 

 

268

 

 

255

 

 

156,605

Commercial real estate

 

 

532

 

 

7,501

 

 

45

 

 

 —

 

 

8,078

 

 

 

11,769

 

 

1,041,678

 

 

1,164

 

 

5,885

 

 

1,060,496

Construction & land development

 

 

120

 

 

1,730

 

 

 —

 

 

 —

 

 

1,850

 

 

 

882

 

 

118,768

 

 

 —

 

 

 —

 

 

119,650

Commercial & industrial

 

 

227

 

 

1,284

 

 

 —

 

 

 —

 

 

1,511

 

 

 

686

 

 

258,317

 

 

 —

 

 

23

 

 

259,026

Lease financing receivables

 

 

 —

 

 

136

 

 

 —

 

 

 —

 

 

136

 

 

 

 —

 

 

13,614

 

 

 —

 

 

 —

 

 

13,614

Warehouse lines of credit

 

 

 —

 

 

1,464

 

 

 —

 

 

 —

 

 

1,464

 

 

 

 —

 

 

585,439

 

 

 —

 

 

 —

 

 

585,439

Home equity

 

 

433

 

 

3,225

 

 

99

 

 

 —

 

 

3,757

 

 

 

1,929

 

 

339,163

 

 

99

 

 

94

 

 

341,285

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 —

 

 

490

 

 

 —

 

 

 —

 

 

490

 

 

 

 —

 

 

13,414

 

 

 —

 

 

 —

 

 

13,414

Overdrafts

 

 

 —

 

 

675

 

 

 —

 

 

 —

 

 

675

 

 

 

 —

 

 

803

 

 

 —

 

 

 —

 

 

803

Automobile loans

 

 

 —

 

 

526

 

 

 —

 

 

 —

 

 

526

 

 

 

 —

 

 

52,579

 

 

 —

 

 

 —

 

 

52,579

Other consumer

 

 

36

 

 

735

 

 

 —

 

 

 —

 

 

771

 

 

 

81

 

 

19,662

 

 

 —

 

 

 1

 

 

19,744

Total Core Bank

 

 

4,616

 

 

23,003

 

 

309

 

 

 —

 

 

27,928

 

 

 

48,856

 

 

3,712,701

 

 

3,828

 

 

6,446

 

 

3,771,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

 —

 

 

25

 

 

 —

 

 

 —

 

 

25

 

 

 

 —

 

 

6,695

 

 

 —

 

 

 —

 

 

6,695

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Republic Credit Solutions

 

 

 —

 

 

4,967

 

 

 —

 

 

 —

 

 

4,967

 

 

 

 —

 

 

32,252

 

 

 —

 

 

 —

 

 

32,252

Total Republic Processing Group

 

 

 —

 

 

4,992

 

 

 —

 

 

 —

 

 

4,992

 

 

 

 —

 

 

38,947

 

 

 —

 

 

 —

 

 

38,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,616

 

$

27,995

 

$

309

 

$

 —

 

$

32,920

 

 

$

48,856

 

$

3,751,648

 

$

3,828

 

$

6,446

 

$

3,810,778

 

 

 

 

 

28


 

Table of Contents

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016. The difference between the “Unpaid Principal Balance” and “Recorded Investment” columns represents life-to-date partial write downs/charge offs taken on individual impaired credits.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

Three Months Ended

 

 

 

March 31, 2017

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Cash Basis

 

 

    

Unpaid

    

    

 

    

    

 

    

Average

    

Interest

    

Interest

    

 

 

Principal

 

Recorded

 

Allowance

 

Recorded

 

Income

 

Income

 

(in thousands)

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

12,874

 

$

11,892

 

$

 —

 

$

12,261

 

$

29

 

$

 —

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Nonowner occupied

 

 

1,445

 

 

1,411

 

 

 —

 

 

1,394

 

 

 8

 

 

 —

 

Commercial real estate

 

 

5,946

 

 

4,769

 

 

 —

 

 

5,153

 

 

21

 

 

 —

 

Construction & land development

 

 

476

 

 

476

 

 

 —

 

 

476

 

 

 5

 

 

 —

 

Commercial & industrial

 

 

55

 

 

55

 

 

 —

 

 

61

 

 

 1

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

1,488

 

 

1,413

 

 

 —

 

 

1,350

 

 

 4

 

 

 —

 

Consumer

 

 

40

 

 

40

 

 

 —

 

 

43

 

 

 —

 

 

 —

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

20,848

 

 

20,831

 

 

3,400

 

 

21,204

 

 

181

 

 

 —

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Nonowner occupied

 

 

486

 

 

486

 

 

69

 

 

490

 

 

 6

 

 

 —

 

Commercial real estate

 

 

6,090

 

 

6,090

 

 

484

 

 

6,744

 

 

67

 

 

 —

 

Construction & land development

 

 

396

 

 

396

 

 

110

 

 

401

 

 

 5

 

 

 —

 

Commercial & industrial

 

 

152

 

 

152

 

 

152

 

 

386

 

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

871

 

 

870

 

 

627

 

 

806

 

 

10

 

 

 —

 

Consumer

 

 

90

 

 

89

 

 

59

 

 

63

 

 

 —

 

 

 —

 

Total impaired loans

 

$

51,257

 

$

48,970

 

$

4,901

 

$

50,832

 

$

337

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

Three Months Ended

 

 

 

December 31, 2016

 

March 31, 2016

 

 

 

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

Cash Basis

 

 

    

Unpaid

 

 

 

 

 

 

 

Average

 

Interest

 

Interest

 

 

 

Principal

 

Recorded

 

Allowance

 

Recorded

 

Income

 

Income

    

(in thousands)

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

13,727

 

$

12,629

 

$

 —

 

$

13,050

 

$

23

 

$

 —

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Non owner occupied

 

 

1,399

 

 

1,376

 

 

 —

 

 

1,971

 

 

 7

 

 

 —

 

Commercial real estate

 

 

6,610

 

 

5,536

 

 

 —

 

 

7,180

 

 

54

 

 

 —

 

Construction & land development

 

 

476

 

 

476

 

 

 —

 

 

1,272

 

 

 5

 

 

 —

 

Commercial & industrial

 

 

67

 

 

67

 

 

 —

 

 

14

 

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

1,358

 

 

1,287

 

 

 —

 

 

2,139

 

 

 7

 

 

 —

 

Consumer

 

 

45

 

 

45

 

 

 —

 

 

92

 

 

 —

 

 

 —

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

21,595

 

 

21,576

 

 

3,361

 

 

25,069

 

 

214

 

 

 —

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

1,124

 

 

 —

 

 

 —

 

Non owner occupied

 

 

491

 

 

493

 

 

73

 

 

9,546

 

 

13

 

 

 —

 

Commercial real estate

 

 

7,397

 

 

7,397

 

 

577

 

 

543

 

 

96

 

 

 —

 

Construction & land development

 

 

405

 

 

406

 

 

120

 

 

1,502

 

 

 5

 

 

 —

 

Commercial & industrial

 

 

619

 

 

619

 

 

227

 

 

 —

 

 

20

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

742

 

 

741

 

 

532

 

 

171

 

 

 —

 

 

 —

 

Consumer

 

 

37

 

 

36

 

 

35

 

 

45

 

 

 —

 

 

 —

 

Total impaired loans

 

$

54,968

 

$

52,684

 

$

4,925

 

$

63,718

 

$

444

 

$

 —

 

 

29


 

Table of Contents

 

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.

 

All TDRs are considered “Impaired,” including PCI loans subsequently restructured. The majority of the Bank’s commercial related and construction TDRs involve a restructuring of financing terms such as a reduction in the payment amount to require only interest and escrow (if required) and/or extending the maturity date of the debt. The substantial majority of the Bank’s residential real estate TDR concessions involve reducing the client’s loan payment through a rate reduction for a set period based on the borrower’s ability to service the modified loan payment. Retail loans may also be classified as TDRs due to legal modifications, such as bankruptcies.

 

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 March 31, 2017 and December 31, 2016, $9 million and $10 million of TDRs were on nonaccrual status.

 

Detail of TDRs differentiated by loan type and accrual status follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Troubled Debt

    

Troubled Debt

    

Total

 

 

 

Restructurings on

 

Restructurings on

 

Troubled Debt

 

 

 

Nonaccrual Status

 

Accrual Status

 

Restructurings

 

 

    

Number of

    

Recorded

    

Number of

    

Recorded

    

Number of

    

Recorded

 

March 31, 2017 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate

 

77

 

$

6,725

 

193

 

$

20,748

 

270

 

$

27,473

 

Commercial real estate

 

 6

 

 

2,382

 

15

 

 

7,830

 

21

 

 

10,212

 

Construction & land development

 

 1

 

 

74

 

 4

 

 

797

 

 5

 

 

871

 

Commercial & industrial

 

 1

 

 

151

 

 2

 

 

55

 

 3

 

 

206

 

Total troubled debt restructurings

 

85

 

$

9,332

 

214

 

$

29,430

 

299

 

$

38,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Troubled Debt

    

Troubled Debt

    

Total

 

 

 

Restructurings on

 

Restructurings on

 

Troubled Debt

 

 

 

Nonaccrual Status

 

Accrual Status

 

Restructurings

 

 

    

Number of

    

Recorded

    

Number of

    

Recorded

    

Number of

    

Recorded

 

December 31, 2016 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate

 

79

 

$

7,199

 

198

 

$

21,554

 

277

 

$

28,753

 

Commercial real estate

 

 6

 

 

2,430

 

17

 

 

8,835

 

23

 

 

11,265

 

Construction & land development

 

 1

 

 

77

 

 4

 

 

804

 

 5

 

 

881

 

Commercial & industrial

 

 1

 

 

154

 

 2

 

 

533

 

 3

 

 

687

 

Total troubled debt restructurings

 

87

 

$

9,860

 

221

 

$

31,726

 

308

 

$

41,586

 

 

30


 

Table of Contents

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 March 31, 2017 and December 31, 2016 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Troubled Debt

    

Troubled Debt

    

 

 

    

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

 

 

Performing to

 

Not Performing to

 

Troubled Debt

 

 

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

    

Number of

    

Recorded

    

Number of

    

Recorded

    

Number of

    

Recorded

 

March 31, 2017 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 2

 

$

158

 

 1

 

$

485

 

 3

 

$

643

 

Rate reduction

 

148

 

 

17,961

 

55

 

 

5,924

 

203

 

 

23,885

 

Principal deferral

 

 6

 

 

314

 

 7

 

 

271

 

13

 

 

585

 

Legal modification

 

20

 

 

895

 

31

 

 

1,465

 

51

 

 

2,360

 

Total residential TDRs

 

176

 

 

19,328

 

94

 

 

8,145

 

270

 

 

27,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 5

 

 

2,626

 

 1

 

 

403

 

 6

 

 

3,029

 

Rate reduction

 

 7

 

 

4,051

 

 2

 

 

225

 

 9

 

 

4,276

 

Principal deferral

 

 9

 

 

2,006

 

 5

 

 

1,978

 

14

 

 

3,984

 

Total commercial TDRs

 

21

 

 

8,683

 

 8

 

 

2,606

 

29

 

 

11,289

 

Total troubled debt restructurings

 

197

 

$

28,011

 

102

 

$

10,751

 

299

 

$

38,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Troubled Debt

    

Troubled Debt

    

 

 

    

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

 

 

Performing to

 

Not Performing to

 

Troubled Debt

 

 

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

    

Number of

    

Recorded

    

Number of

    

Recorded

    

Number of

    

Recorded

 

December 31, 2016 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 2

 

$

155

 

 1

 

$

493

 

 3

 

$

648

 

Rate reduction

 

148

 

 

18,125

 

57

 

 

6,213

 

205

 

 

24,338

 

Principal deferral

 

 7

 

 

616

 

 7

 

 

306

 

14

 

 

922

 

Legal modification

 

17

 

 

806

 

38

 

 

2,039

 

55

 

 

2,845

 

Total residential TDRs

 

174

 

 

19,702

 

103

 

 

9,051

 

277

 

 

28,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 5

 

 

2,666

 

 1

 

 

413

 

 6

 

 

3,079

 

Rate reduction

 

 8

 

 

4,769

 

 2

 

 

228

 

10

 

 

4,997

 

Principal deferral

 

10

 

 

2,737

 

 5

 

 

2,020

 

15

 

 

4,757

 

Total commercial TDRs

 

23

 

 

10,172

 

 8

 

 

2,661

 

31

 

 

12,833

 

Total troubled debt restructurings

 

197

 

$

29,874

 

111

 

$

11,712

 

308

 

$

41,586

 

 

As of March 31, 2017 and December 31, 2016, 72% and 72% of the Bank’s TDRs were performing according to their modified terms. The Bank had provided $4 million and $4 million of specific reserve allocations to clients whose loan terms have been modified in TDRs as of March 31, 2017 and December 31, 2016. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships at March 31, 2017 or December 31, 2016.

 

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A summary of the categories of TDR loan modifications by respective performance as of March 31, 2017 and 2016 that were modified during the three months ended March 31, 2017 and 2016 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Troubled Debt

    

Troubled Debt

    

 

 

    

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

 

 

Performing to

 

Not Performing to

 

Troubled Debt

 

 

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

    

Number of

    

Recorded

    

Number of

    

Recorded

    

Number of

    

Recorded

 

March 31, 2017 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 —

 

$

 —

 

 —

 

$

 —

 

 —

 

$

 —

 

Rate reduction

 

 1

 

 

159

 

 —

 

 

 —

 

 1

 

 

159

 

Principal deferral

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Legal modification

 

 2

 

 

38

 

 —

 

 

 —

 

 2

 

 

38

 

Total residential TDRs

 

 3

 

 

197

 

 —

 

 

 —

 

 3

 

 

197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Rate reduction

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Principal deferral

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Total commercial TDRs

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Total troubled debt restructurings

 

 3

 

$

197

 

 —

 

$

 —

 

 3

 

$

197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Troubled Debt

    

Troubled Debt

    

 

 

    

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

 

 

Performing to

 

Not Performing to

 

Troubled Debt

 

 

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

    

Number of

    

Recorded

    

Number of

    

Recorded

    

Number of

    

Recorded

 

March 31, 2016 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 —

 

$

 —

 

 —

 

$

 —

 

 —

 

$

 —

 

Rate reduction

 

 2

 

 

57

 

 1

 

 

55

 

 3

 

 

112

 

Principal deferral

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Legal modification

 

 2

 

 

88

 

 2

 

 

80

 

 4

 

 

168

 

Total residential TDRs

 

 4

 

 

145

 

 3

 

 

135

 

 7

 

 

280

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 —

 

 

 —

 

 1

 

 

433

 

 1

 

 

433

 

Rate reduction

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Principal deferral

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Total commercial TDRs

 

 —

 

 

 —

 

 1

 

 

433

 

 1

 

 

433

 

Total troubled debt restructurings

 

 4

 

$

145

 

 4

 

$

568

 

 8

 

$

713

 


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 March 31, 2017 and 2016, 100% and 20% of the Bank’s TDRs that occurred during the first quarters of 2017 and 2016 were performing according to their modified terms. The Bank provided approximately $29,000 and $17,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during the first quarters of 2017 and 2016.

 

There was no significant change between the pre and post modification loan balances for the three months ending March 31, 2017 and 2016.

 

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The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of March 31, 2017 and 2016 and for which there was a payment default during the three months ended March 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

 

2017

 

2016

 

 

    

     

Number of

    

Recorded

     

Number of

    

Recorded

 

(dollars in thousands)

 

 

Loans

 

Investment

 

Loans

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 —

 

$

 —

 

 2

 

$

513

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 —

 

 

 —

 

Nonowner occupied

 

 

 

 

 

 —

 

 

 —

 

Commercial real estate

 

 

 —

 

 

 —

 

 4

 

 

2,306

 

Construction & land development

 

 

 

 

 

 —

 

 

 —

 

Commercial & industrial

 

 

 —

 

 

 —

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 

 —

 

 

 

Home equity

 

 

 —

 

 

 —

 

 —

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 —

 

$

 —

 

 6

 

$

2,819

 

 

 

 

Foreclosures

 

The following table presents the carrying amount of foreclosed properties held at March 31, 2017 and December 31, 2016 as a result of the Bank obtaining physical possession of such properties:

 

 

 

 

 

 

 

 

 

(in thousands)

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

1,362

 

$

1,391

 

 

 

 

 

 

 

 

 

Total other real estate owned

 

$

1,362

 

$

1,391

 

 

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 as of March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure

 

$

1,152

 

$

1,677

 

 

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Easy Advances

The Company’s RPG segment offered its EA product through the TRS division during the first quarters of 2017 and 2016.  The Company based its provision for loss for EAs primarily on prior year IRS funding patterns.    

Additional information regarding EAs follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

(dollars in thousands)

2017

 

2016

 

 

 

 

 

 

 

 

 

 

Easy Advances originated

$

328,523

 

$

123,230

 

 

Provision for Easy Advances

 

8,601

 

 

3,574

 

 

Provision to total Easy Advances originated

 

2.62

%  

 

2.90

%  

 

Easy Advances net charge-offs

$

860

 

$

405

 

 

Easy Advances net charge-offs to total Easy Advances originated

 

0.26

%  

 

0.33

%  

 

 

 

 

 

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6. DEPOSITS

 

Ending deposit balances at March 31, 2017 and December 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

Demand

 

$

935,245

 

$

872,709

 

Money market accounts

 

 

562,827

 

 

541,622

 

Brokered money market accounts

 

 

350,862

 

 

360,597

 

Savings

 

 

174,995

 

 

164,410

 

Individual retirement accounts*

 

 

43,250

 

 

42,642

 

Time deposits, $250 and over*

 

 

38,691

 

 

37,200

 

Other certificates of deposit*

 

 

143,838

 

 

140,894

 

Brokered certificates of deposit*

 

 

27,814

 

 

28,666

 

Total Core Bank interest-bearing deposits

 

 

2,277,522

 

 

2,188,740

 

Total Core Bank noninterest-bearing deposits

 

 

934,787

 

 

943,459

 

Total Core Bank deposits

 

 

3,212,309

 

 

3,132,199

 

 

 

 

 

 

 

 

 

Republic Processing Group ("RPG"):

 

 

 

 

 

 

 

Money market accounts

 

 

1,025

 

 

 —

 

Total RPG interest-bearing deposits

 

 

1,025

 

 

 —

 

 

 

 

 

 

 

 

 

Brokered prepaid card deposits

 

 

4,568

 

 

15

 

Other noninterest-bearing deposits

 

 

130,882

 

 

28,478

 

Total RPG noninterest-bearing deposits

 

 

135,450

 

 

28,493

 

Total RPG deposits

 

 

136,475

 

 

28,493

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,348,784

 

$

3,160,692

 


*Represents a time deposit.

 

The following table summarizes deposits acquired in the Company’s May 17, 2016 Cornerstone acquisition, finalized as of October 1, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

May 17, 2016

(in thousands)

    

Contractual Principal

    

Fair Value Adjustment

 

Acquisition-Day Fair Value

 

 

 

 

 

 

 

 

 

 

Demand

 

$

59,507

 

$

 —

 

$

59,507

Money market accounts

 

 

53,773

 

 

 —

 

 

53,773

Savings

 

 

12,352

 

 

 —

 

 

12,352

Individual retirement accounts*

 

 

3,897

 

 

13

 

 

3,910

Time deposits, $250 and over*

 

 

3,385

 

 

12

 

 

3,397

Other certificates of deposit*

 

 

19,343

 

 

67

 

 

19,410

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

 

152,257

 

 

92

 

 

152,349

Total noninterest-bearing deposits

 

 

52,908

 

 

 —

 

 

52,908

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

205,165

 

$

92

 

$

205,257


*Represents a time deposit.

 

 

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7. 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 March 31, 2017 and December 31, 2016, all securities sold under agreements to repurchase had overnight maturities. Information regarding securities sold under agreements to repurchase follows:

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

March 31, 2017

    

 

December 31, 2016

    

 

 

 

 

 

 

 

 

 

Outstanding balance at end of period

 

$

144,375

 

 

$

173,473

 

Weighted average interest rate at end of period

 

 

0.10

%  

 

 

0.05

%  

 

 

 

 

 

 

 

 

 

Fair value of securities pledged:

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

115,726

 

 

$

116,025

 

Mortgage backed securities - residential

 

 

35,996

 

 

 

45,894

 

Collateralized mortgage obligations

 

 

46,018

 

 

 

41,155

 

Total securities pledged

 

$

197,740

 

 

$

203,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

(dollars in thousands)

        

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Average outstanding balance during the period

 

 

$

218,412

 

 

$

407,698

 

Average interest rate during the period

 

 

 

0.05

%  

 

 

0.02

%  

Maximum outstanding at any month end during the period

 

 

$

183,709

 

 

$

367,373

 

 

 

8. FEDERAL HOME LOAN BANK ADVANCES

 

At March 31, 2017 and December 31, 2016, FHLB advances were as follows:

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Overnight advances

 

$

75,000

 

$

285,000

 

Variable interest rate advance indexed to 3-Month LIBOR plus 0.14% due on December 20, 2017

 

 

10,000

 

 

10,000

 

Fixed interest rate advances

 

 

382,500

 

 

457,500

 

Putable fixed interest rate advances

 

 

 —

 

 

50,000

 

Total FHLB advances

 

$

467,500

 

$

802,500

 

 

 

 

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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 March 31, 2017 and December 31, 2016, Republic had available borrowing capacity of $683 million and $378 million, respectively, from the FHLB. In addition to its borrowing capacity with the FHLB, Republic also had unsecured lines of credit totaling $125 million and $150 million available through various other financial institutions as of March 31, 2017 and December 31, 2016.

 

Aggregate future principal payments on FHLB advances based on contractual maturity and the weighted average cost of such advances are detailed below:

 

 

 

 

 

 

 

 

 

    

    

 

    

Weighted

 

 

 

 

 

 

Average

 

Year (dollars in thousands)

 

Principal

 

Rate

 

 

 

 

 

 

 

 

2017 (Overnight)

 

$

75,000

 

0.90

%  

2017 (Term)

 

 

55,000

 

1.32

 

2018

 

 

117,500

 

1.53

 

2019

 

 

100,000

 

1.80

 

2020

 

 

90,000

 

1.81

 

2021

 

 

20,000

 

1.86

 

2022

 

 

 —

 

 —

 

Thereafter

 

 

10,000

 

2.14

 

Total

 

$

467,500

 

1.54

 

 

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 short-term overnight FHLB advances follows:

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

March 31, 2017

    

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Outstanding balance at end of period

 

$

75,000

 

 

$

285,000

 

Weighted average interest rate at end of period

 

 

0.90

%

 

 

0.64

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

(dollars in thousands)

    

2017

    

 

2016

    

 

 

 

 

 

 

 

 

 

 

 

Average outstanding balance during the period

 

$

109,333

 

 

$

7,857

 

 

Average interest rate during the period

 

 

0.69

%

 

 

0.36

%

 

Maximum outstanding at any month end during the period

 

$

320,000

 

 

$

50,000

 

 

 

The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

First lien, single family residential real estate

 

$

1,147,090

 

$

1,172,161

 

Home equity lines of credit

 

 

304,603

 

 

300,681

 

Multi-family commercial real estate

 

 

 —

 

 

14,913

 

 

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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.  Additionally, the Company makes binding purchase commitments to third-party loan correspondent originators.  These commitments assure that the Company will purchase a loan from such correspondent originators at a specific price for a specific period of time.  The risk to the Company under such loan commitments is limited by the terms of the contracts.  For example, the Company may not be obligated to advance funds if the client’s financial condition deteriorates or if the client fails to meet specific covenants.

 

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:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Unused warehouse lines of credit

 

$

499,100

 

$

453,110

 

Unused home equity lines of credit

 

 

353,974

 

 

341,434

 

Unused loan commitments - other

 

 

635,659

 

 

560,629

 

Commitments to purchase loans*

 

 

 —

 

 

3,176

 

Standby letters of credit

 

 

5,679

 

 

15,568

 

Total commitments

 

$

1,494,412

 

$

1,373,917

 


*Commitments made through the Bank's Correspondent Lending channel.

 

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.

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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 fair value:

 

Securities available for sale: Quoted market prices in an active market are available for the Bank’s Community Reinvestment Act (“CRA”) mutual fund investment and fall within Level 1 of the fair value hierarchy.

 

Except for the Bank’s CRA mutual fund investment, its private label mortgage backed security and its TRUP investment, the fair value of securities available for sale is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

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 Measurements and Disclosures. 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 3 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage backed security.

 

The Company acquired its TRUP investment in November 2015 and considered the most recent bid price for the same instrument to approximate market value at March 31, 2017. The Company’s TRUP investment is considered highly illiquid and also valued using Level 3 inputs, as the most recent bid price for this instrument is not always considered generally observable.

 

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: During 2016, RCS initiated an installment loan program and elected to carry all loans originated through this program at fair value. Such loans are generally sold within 21 days of origination, with their fair value based on contractual terms, Level 3 inputs.

 

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 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.

 

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Impaired loans: Collateral-dependent impaired loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or broker price opinions (“BPOs”). These appraisals or BPOs may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Other real estate owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Appraisals for collateral-dependent impaired loans, impaired premises and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Once the appraisal is received, a member of the Bank’s Credit Administration Department reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such collateral. Back tests are performed for each collateral class, e.g., residential real estate or commercial real estate, and may lead to additional adjustments to the value of unliquidated collateral of similar class.

 

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). There were no MSR tranches carried at fair value at March 31, 2017 and December 31, 2016.

 

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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 below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at 

 

 

 

 

 

 

March 31, 2017 Using:

 

 

 

 

 

    

Quoted Prices in

    

Significant

    

    

 

    

    

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

 

$

319,525

 

$

 

$

319,525

 

Private label mortgage backed security

 

 

 

 

 

 

4,682

 

 

4,682

 

Mortgage backed securities - residential

 

 

 

 

97,822

 

 

 

 

97,822

 

Collateralized mortgage obligations

 

 

 

 

82,931

 

 

 

 

82,931

 

Freddie Mac preferred stock

 

 

 

 

394

 

 

 

 

394

 

Community Reinvestment Act mutual fund

 

 

2,458

 

 

 —

 

 

 —

 

 

2,458

 

Corporate bonds

 

 

 

 

15,258

 

 

 —

 

 

15,258

 

Trust preferred security

 

 

 

 

 —

 

 

3,200

 

 

3,200

 

Total securities available for sale

 

$

2,458

 

$

515,930

 

$

7,882

 

$

526,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

 

$

5,193

 

$

 

$

5,193

 

Consumer loans held for sale

 

 

 —

 

 

 —

 

 

3,679

 

 

3,679

 

Rate lock loan commitments

 

 

 

 

618

 

 

 

 

618

 

Interest rate swap agreements

 

 

 

 

137

 

 

 

 

137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

$

 

$

71

 

$

 

$

71

 

Interest rate swap agreements

 

 

 

 

436

 

 

 

 

436

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

December 31, 2016 Using:

 

 

 

 

 

    

Quoted Prices in

    

Significant

    

    

 

    

    

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agencies

 

$

 

$

294,544

 

$

 

$

294,544

 

Private label mortgage backed security

 

 

 

 

 

 

4,777

 

 

4,777

 

Mortgage backed securities - residential

 

 

 

 

73,004

 

 

 

 

73,004

 

Collateralized mortgage obligations

 

 

 

 

87,654

 

 

 

 

87,654

 

Freddie Mac preferred stock

 

 

 

 

483

 

 

 

 

483

 

Community Reinvestment Act mutual fund

 

 

2,455

 

 

 —

 

 

 

 

2,455

 

Corporate bonds

 

 

 —

 

 

15,158

 

 

 —

 

 

15,158

 

Trust preferred security

 

 

 —

 

 

 

 

3,200

 

 

3,200

 

Total securities available for sale

 

$

2,455

 

$

470,843

 

$

7,977

 

$

481,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

 

$

11,662

 

$

 

$

11,662

 

Consumer loans held for sale

 

 

 —

 

 

 —

 

 

2,198

 

 

2,198

 

Rate lock loan commitments

 

 

 

 

299

 

 

 

 

299

 

Mandatory forward contracts

 

 

 —

 

 

204

 

 

 —

 

 

204

 

Interest rate swap agreements

 

 

 

 

305

 

 

 

 

305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

 

$

597

 

$

 

 

597

 

 

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 months ended March 31, 2017 and 2016.

 

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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) for the periods ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

    

    

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

$

4,777

 

$

5,132

 

Total gains or losses included in earnings:

 

 

 

 

 

 

 

 

Net change in unrealized gain

 

 

 

53

 

 

(149)

 

Principal paydowns

 

 

 

(148)

 

 

 —

 

Balance, end of period

 

 

$

4,682

 

$

4,983

 

 

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 Fair Isaac Corporation (“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 lower/higher fair value measurement.

 

The following tables present quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage backed security at March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair

    

Valuation

    

    

    

 

 

March 31, 2017 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Range

 

 

 

 

 

 

 

 

 

 

 

 

Private label mortgage backed security

 

$

4,682

 

Discounted cash flow

 

(1) Constant prepayment rate

 

2.0% - 6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Probability of default

 

3.0% - 9.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3) Loss severity

 

60% - 90%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair

    

Valuation

    

    

    

 

 

December 31, 2016 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Range

 

 

 

 

 

 

 

 

 

 

 

 

Private label mortgage backed security

 

$

4,777

 

Discounted cash flow

 

(1) Constant prepayment rate

 

2.0% - 6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Probability of default

 

3.0% - 9.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3) Loss severity

 

60% - 90%

 

 

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Table of Contents

Trust Preferred Security

 

The Company invested in its TRUP in November 2015. 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) for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

(in thousands)

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

3,200

 

$

3,405

 

Total gains or losses included in earnings:

 

 

 

 

 

 

 

Net change in unrealized loss

 

 

 —

 

 

(5)

 

Balance, end of period

 

$

3,200

 

$

3,400

 

 

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 March 31, 2017 and December 31, 2016. 

 

As of March 31, 2017 and December 31, 2016, the aggregate fair value, contractual balance, and unrealized gain was as follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Aggregate fair value

 

$

5,193

 

$

11,662

 

Contractual balance

 

 

5,106

 

 

11,568

 

Unrealized gain

 

 

87

 

 

94

 

 

The total amount of gains and losses from changes in fair value included in earnings for the three months ended March 31, 2017 and 2016 for mortgage loans held for sale are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Interest income

 

$

67

 

$

32

 

Change in fair value

 

 

(7)

 

 

59

 

Total included in earnings

 

$

60

 

$

91

 

 

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Table of Contents

Consumer Loans Held for Sale

 

During 2016, RCS initiated an installment loan program and elected to carry all loans originated through this program at fair value. Such loans are generally sold within 21 days of origination, with their fair value based on contractual terms. 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 March 31, 2017 and 2016. 

 

A reconciliation of the Company’s consumer loans held for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2017 and 2016 is included in Footnote 4 of this section of the filing.

 

The significant unobservable inputs in the fair value measurement of the Bank’s installment loans are the net contractual premiums and level of loans sold at a discount price. Significant fluctuations in any of those inputs in isolation would result in a significantly lower/higher fair value measurement.

 

The following table presents quantitative information about recurring Level 3 fair value measurement inputs for installment loans as of March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair

    

Valuation

    

    

    

 

March 31, 2017 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Rate

 

 

 

 

 

 

 

 

 

 

Consumer loans held for sale

 

$

3,679

 

Contractual Terms

 

(1) Net Premium

 

0.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Discounted Sales

 

5.0%

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair

    

Valuation

    

    

    

 

December 31, 2016 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Rate

 

 

 

 

 

 

 

 

 

 

Consumer loans held for sale

 

$

2,198

 

Contractual Terms

 

(1) Net Premium

 

0.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Discounted Sales

 

5.0%

 

As of March 31, 2017 and December 31, 2016 the aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, was as follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Aggregate fair value

 

$

3,679

 

$

2,198

 

Contractual balance

 

 

3,597

 

 

2,084

 

Unrealized gain

 

 

82

 

 

114

 

 

The total amount of net gains from changes in fair value included in earnings for the three months ended March 31, 2017 and 2016 for consumer loans held for sale, at fair value, are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Interest income

 

$

186

 

$

 —

 

Change in fair value

 

 

82

 

 

 —

 

Total included in earnings

 

$

268

 

$

 —

 

 

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Table of Contents

Assets measured at fair value on a non-recurring basis are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

March 31, 2017 Using:

 

 

 

 

 

    

Quoted Prices in

    

Significant

    

    

 

    

    

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

 

$

4,151

 

$

4,151

 

Nonowner occupied

 

 

 

 

 

 

38

 

 

38

 

Commercial real estate

 

 

 

 

 

 

2,496

 

 

2,496

 

Home equity

 

 

 

 

 

 

535

 

 

535

 

Total impaired loans*

 

$

 —

 

$

 —

 

$

7,220

 

$

7,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

 

$

 

$

630

 

$

630

 

Total other real estate owned

 

$

 —

 

$

 —

 

$

630

 

$

630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

December 31, 2016 Using:

 

 

 

 

 

    

Quoted Prices in

    

Significant

    

    

 

    

    

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

 

$

4,787

 

$

4,787

 

Nonowner occupied

 

 

 

 

 

 

 8

 

 

 8

 

Commercial real estate

 

 

 

 

 

 

2,643

 

 

2,643

 

Home equity

 

 

 

 

 

 

426

 

 

426

 

Total impaired loans*

 

$

 —

 

$

 —

 

$

7,864

 

$

7,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

 

$

 

$

400

 

$

400

 

Total other real estate owned

 

$

 —

 

$

 —

 

$

400

 

$

400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


* The difference between the carrying value and the fair value of impaired loans measured at fair value is reconciled in a subsequent table of this Footnote.

 

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The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

    

    

    

Range

 

 

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

 

March 31, 2017 (dollars in thousands)

 

Value

 

Technique

 

Inputs

 

Average)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate owner occupied

 

$

4,151

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 53%  (6%)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate nonowner occupied

 

$

38

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 45%  (18%)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

1,089

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 49%  (6%)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

1,407

 

Income approach

 

Adjustments for differences between net operating income expectations

 

17%  (17%)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - home equity

 

$

535

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 29%  (13%)

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned - residential real estate

 

$

630

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

24% - 27%  (25%)

 

 

 

 

 

 

 

 

 

 

 

 

 

46


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

    

    

    

Range

 

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

December 31, 2016 (dollars in thousands)

 

Value

 

Technique

 

Inputs

 

Average)

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate owner occupied

 

$

4,787

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 53% (6%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate nonowner occupied

 

$

 8

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% (0%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

1,214

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

3% - 49% (30%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

1,429

 

Income approach

 

Adjustments for differences between net operating income expectations

 

17% (17%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - home equity

 

$

426

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 29% (16%)

 

 

 

 

 

 

 

 

 

 

Other real estate owned - residential real estate

 

$

400

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

17% (17%)

47


 

Table of Contents

Impaired Loans

 

Collateral-dependent impaired loans are generally measured for impairment using the fair value for reasonable disposition of the underlying collateral. The Bank’s practice is to obtain new or updated appraisals or BPOs on the loans subject to the initial impairment review and then to evaluate the need for an update to this value on an as necessary or possibly annual basis thereafter (depending on the market conditions impacting the value of the collateral). The Bank may discount the valuation amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal or BPO is not available at the time of a loan’s impairment review, the Bank may apply a discount to the existing value of an old valuation to reflect the property’s current estimated value if it is believed to have deteriorated in either: (i) the physical or economic aspects of the subject property or (ii) material changes in market conditions. The impairment review generally results in a partial charge-off of the loan if fair value less selling costs are below the loan’s carrying value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

 

Impaired collateral-dependent loans are as follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

    

 

 

 

 

 

 

 

 

Carrying amount of loans measured at fair value

 

$

6,435

 

$

6,963

 

Estimated selling costs considered in carrying amount

 

 

813

 

 

936

 

Valuation allowance

 

 

(28)

 

 

(35)

 

Total fair value

 

$

7,220

 

$

7,864

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(in thousands)

    

2017

    

2016

 

 

 

 

 

 

 

Provisions for loss on collateral-dependent, impaired loans

 

$

 8

 

$

215

 

Other Real Estate Owned

 

Other real estate owned, which is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is determined from external appraisals or BPOs using judgments and estimates of external professionals. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3.

 

Details of other real estate owned carrying value and write downs follow:

 

 

 

 

 

 

 

 

 

 

    

 

 

 

(in thousands)

 

March 31, 2017

    

December 31, 2016

    

 

 

 

 

 

 

 

 

Other real estate owned carried at fair value

 

$

630

 

$

400

 

Other real estate owned carried at cost

 

 

732

 

 

991

 

Total carrying value of other real estate owned

 

$

1,362

 

$

1,391

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Other real estate owned write-downs during the period

 

$

70

 

$

 —

 

 

 

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The carrying amounts and estimated fair values of all financial instruments at March 31, 2017 and December 31, 2016 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

March 31, 2017:

 

 

    

 

 

    

    

 

    

    

 

    

    

 

    

Total

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

Fair

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

206,187

 

$

206,187

 

$

 —

 

$

 —

 

$

206,187

 

Securities available for sale

 

 

526,270

 

 

2,458

 

 

515,930

 

 

7,882

 

 

526,270

 

Securities held to maturity

 

 

51,860

 

 

 

 

52,479

 

 

 

 

52,479

 

Mortgage loans held for sale, at fair value

 

 

5,193

 

 

 

 

5,193

 

 

 

 

5,193

 

Consumer loans held for sale, at fair value

 

 

3,679

 

 

 

 

 —

 

 

3,679

 

 

3,679

 

Consumer loans held for sale, at the lower of cost or fair value

 

 

1,420

 

 

 —

 

 

1,420

 

 

 —

 

 

1,420

 

Loans, net

 

 

3,668,014

 

 

 

 

 —

 

 

3,648,482

 

 

3,648,482

 

Federal Home Loan Bank stock

 

 

28,208

 

 

 

 

 

 

 

 

NA

 

Accrued interest receivable

 

 

10,147

 

 

 

 

10,147

 

 

 

 

10,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

1,070,237

 

 

 

$

1,070,237

 

 

 

$

1,070,237

 

Transaction deposits

 

 

2,024,954

 

 

 

 

2,024,954

 

 

 

 

2,024,954

 

Time deposits

 

 

253,593

 

 

 

 

252,543

 

 

 

 

252,543

 

Securities sold under agreements to repurchase and other short-term borrowings

 

 

144,375

 

 

 

 

144,375

 

 

 

 

144,375

 

Federal Home Loan Bank advances

 

 

467,500

 

 

 

 

463,357

 

 

 

 

463,357

 

Subordinated note

 

 

41,240

 

 

 

 

32,174

 

 

 

 

32,174

 

Accrued interest payable

 

 

858

 

 

 

 

858

 

 

 

 

858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

December 31, 2016:

 

 

    

    

 

    

    

 

    

    

 

    

    

 

    

Total

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

Fair

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

289,309

 

$

289,309

 

$

 

$

 

$

289,309

 

Securities available for sale

 

 

481,275

 

 

2,455

 

 

470,843

 

 

7,977

 

 

481,275

 

Securities held to maturity

 

 

52,864

 

 

 

 

53,249

 

 

 

 

53,249

 

Mortgage loans held for sale, at fair value

 

 

11,662

 

 

 

 

11,662

 

 

 

 

11,662

 

Consumer loans held for sale, at fair value

 

 

2,198

 

 

 

 

 —

 

 

2,198

 

 

2,198

 

Consumer loans held for sale, at the lower of cost or fair value

 

 

1,310

 

 

 

 

1,310

 

 

 

 

1,310

 

Loans, net

 

 

3,777,858

 

 

 

 

 

 

3,757,698

 

 

3,757,698

 

Federal Home Loan Bank stock

 

 

28,208

 

 

 

 

 

 

 

 

NA

 

Accrued interest receivable

 

 

10,356

 

 

 

 

10,356

 

 

 

 

10,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

971,952

 

 

 

$

971,952

 

 

 

$

971,952

 

Transaction deposits

 

 

1,939,338

 

 

 

 

1,939,338

 

 

 

 

1,939,338

 

Time deposits

 

 

249,417

 

 

 

 

248,684

 

 

 

 

248,684

 

Securities sold under agreements to repurchase and other short-term borrowings

 

 

173,473

 

 

 

 

173,473

 

 

 

 

173,473

 

Federal Home Loan Bank advances

 

 

802,500

 

 

 

 

798,594

 

 

 

 

798,594

 

Subordinated note

 

 

41,240

 

 

 

 

30,821

 

 

 

 

30,821

 

Accrued interest payable

 

 

948

 

 

 

 

948

 

 

 

 

948

 


NA - Not applicable

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Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the Bank’s estimates.

 

The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by the Company.

 

In addition to those previously disclosed, the following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

 

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

 

Consumer loans held for sale, at lower of cost or fair value – Consumer loans held for sale at the lower of cost or fair value constitute consumer loans generally sold within two business days of origination. The carrying amounts of these loans, due to their nature, approximate fair value and result in a Level 2 classification.

 

Loans, net of Allowance — The fair value of loans is calculated using discounted cash flows by loan type resulting in a Level 3 classification. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the credit and interest rate risk inherent in the loan portfolio without considering widening credit spreads due to market illiquidity. The estimated maturity is based on the Bank’s historical experience with repayments adjusted to estimate the effect of current market conditions. The Allowance is considered a reasonable discount for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

Federal Home Loan Bank stock — It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

Accrued interest receivable/payable — The carrying amounts of accrued interest, due to their short-term nature, approximate fair value and result in a Level 2 classification.

 

Deposits — Fair values for time deposits have been determined using discounted cash flows. The discount rate used is based on estimated market rates for deposits of similar remaining maturities and are classified as Level 2. The carrying amounts of all other deposits, due to their short-term nature, approximate their fair values and are also classified as Level 2.

 

Securities sold under agreements to repurchase and other short-term borrowings — The carrying amount for securities sold under agreements to repurchase and other short-term borrowings generally maturing within ninety days approximates its fair value resulting in a Level 2 classification.

 

Federal Home Loan Bank advances — The fair value of the FHLB advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the Company for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

 

Subordinated note — The fair value for the subordinated note is calculated using discounted cash flows based upon current market spreads to LIBOR for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

 

The fair value estimates presented herein are based on pertinent information available to management as of the respective period ends. Although management is not aware of any factors that would dramatically affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, estimates of fair value may differ significantly from the amounts presented.

 

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11. MORTGAGE BANKING ACTIVITIES

 

Activity for mortgage loans held for sale, at fair value, was as follows:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

 

 

March 31, 

 

(in thousands)

 

2017

    

2016

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

11,662

 

$

4,083

 

Origination of mortgage loans held for sale

 

 

33,245

 

 

36,992

 

Proceeds from the sale of mortgage loans held for sale

 

 

(40,691)

 

 

(35,022)

 

Net gain on sale of mortgage loans held for sale

 

 

977

 

 

1,095

 

Balance, end of period

 

$

5,193

 

$

7,148

 

 

The following table presents the components of Mortgage Banking income:

 

 

 

 

 

 

 

 

 

 

 

    

    

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

 

2017

    

2016

 

 

 

 

 

 

 

 

 

 

Net gain realized on sale of mortgage loans held for sale

 

 

$

788

 

$

841

 

Net change in fair value recognized on loans held for sale

 

 

 

(7)

 

 

59

 

Net change in fair value recognized on rate lock loan commitments

 

 

 

319

 

 

275

 

Net change in fair value recognized on forward contracts

 

 

 

(123)

 

 

(80)

 

Net gain recognized

 

 

 

977

 

 

1,095

 

 

 

 

 

 

 

 

 

 

Loan servicing income

 

 

 

536

 

 

471

 

Amortization of mortgage servicing rights

 

 

 

(353)

 

 

(305)

 

Net servicing income recognized

 

 

 

183

 

 

166

 

Total Mortgage Banking income

 

 

$

1,160

 

$

1,261

 

 

Activity for capitalized mortgage servicing rights was as follows:

 

 

 

 

 

 

 

 

 

 

 

    

 

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

$

5,180

 

$

4,912

 

Additions

 

 

 

331

 

 

284

 

Amortized to expense

 

 

 

(353)

 

 

(305)

 

Balance, end of period

 

 

$

5,158

 

$

4,891

 

 

There was no balance or activity in the valuation allowance for capitalized mortgage servicing rights for the three months ended March 31, 2017 and 2016.

 

 

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Other information relating to mortgage servicing rights follows:

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of mortgage servicing rights portfolio

$

7,857

 

 

$

7,478

 

 

 

Monthly weighted average prepayment rate of unpaid principal balance*

 

196%

 

 

 

158%

 

 

 

Discount rate

 

10%

 

 

 

13%

 

 

 

Weighted average default rate

 

2.94%

 

 

 

1.50%

 

 

 

Weighted average life in years

 

5.51

 

 

 

6.75

 

 

 


* 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-loan lock commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.

 

The following table includes the notional amounts and fair values of mortgage loans held for sale at fair value and mortgage banking derivatives as of the period ends presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

    

December 31, 2016

 

 

 

Notional

 

 

 

 

Notional

 

 

 

 

(in thousands)

 

Amount

    

Fair Value

 

Amount

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in Mortgage loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale, at fair value

 

$

5,106

 

$

5,193

 

$

11,568

 

$

11,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate lock loan commitments

 

$

32,630

 

$

618

 

$

19,521

 

$

299

 

Mandatory forward contracts

 

 

 —

 

 

 —

 

 

25,618

 

 

204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

$

30,367

 

$

71

 

$

 —

 

$

 —

 

 

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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 other comprehensive income (“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 as of March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

Unrealized

 

 

 

Notional

 

Pay

 

 

Receive 

 

 

 

 

Assets /

 

 

Gain (Loss)

 

 

Assets /

 

 

Gain (Loss)

(dollars in thousands)

  

 

Amount

  

Rate

 

  

Rate

  

Term

  

 

(Liabilities)

  

 

AOCI

  

 

(Liabilities)

  

 

in AOCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap on money market deposits

 

$

10,000

 

2.17

%

 

1M LIBOR

 

12/2013 - 12/2020

 

$

(135)

 

$

(88)

 

$

(186)

 

$

(121)

Interest rate swap on FHLB advance

 

 

10,000

 

2.33

%

 

3M LIBOR

 

12/2013 - 12/2020

 

 

(164)

 

 

(107)

 

 

(207)

 

 

(135)

 

 

$

20,000

 

 

 

 

 

 

 

 

$

(299)

 

$

(195)

 

$

(393)

 

$

(256)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Interest rate swap on money market deposits

 

$

34

 

$

43

 

Interest rate swap on FHLB advance

 

 

32

 

 

44

 

Total interest expense on swap transactions

 

$

66

 

$

87

 

 

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 for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31, 

 

 

(in thousands)

    

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) recognized in OCI on derivative (effective portion)

 

 

$

28

 

$

(571)

 

 

 

 

 

 

 

 

 

 

 

 

Losses reclassified from OCI on derivative (effective portion)

 

 

 

(66)

 

 

(87)

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) recognized in income on derivative (ineffective portion)

 

 

 

 —

 

 

 —

 

 

 

 

The estimated net amount of the existing losses reported in AOCI at March 31, 2017 expected to be reclassified into earnings within the next 12 months is $198,000.  

 

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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 counter party 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 as of March 31, 2017 and December 31, 2016 is included in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2017

 

December 31, 2016

 

 

 

 

 

 

Notional

 

 

 

 

Notional

 

 

 

 

 

(in thousands)

    

Bank Position

 

Amount

    

Fair Value

    

Amount

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps with Bank clients

 

Pay variable/receive fixed

 

$

31,553

 

$

49

 

$

31,553

 

$

156

 

 

Offsetting interest rate swaps with institutional swap dealer

 

Pay fixed/receive variable

 

 

31,553

 

 

(49)

 

 

31,553

 

 

(55)

 

 

Total

 

 

 

$

63,106

 

$

 —

 

$

63,106

 

$

101

 

 

 

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 $800,000  and $1.8 million at March 31, 2017 and December 31, 2016.

 

 

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13. EARNINGS PER SHARE

 

Class A and Class B Shares participate equally in undistributed earnings. The difference in earnings per share between the two classes of common stock results solely 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:

 

 

 

 

 

 

 

 

 

 

 

    

 

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands, except per share data)

    

    

2017

    

2016

    

 

 

 

 

 

 

 

 

 

Net income

 

 

$

20,017

 

$

17,735

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

20,915

 

 

20,904

 

Effect of dilutive securities

 

 

 

81

 

 

105

 

Average shares outstanding including dilutive securities

 

 

 

20,996

 

 

21,009

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

$

0.97

 

$

0.86

 

Class B Common Stock

 

 

 

0.88

 

 

0.78

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

$

0.96

 

$

0.85

 

Class B Common Stock

 

 

 

0.88

 

 

0.77

 

 

Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:

 

 

 

 

 

 

 

 

 

 

    

 

Three Months Ended

 

 

 

 

March 31, 

 

 

    

    

2017

    

2016

 

 

 

 

 

 

 

 

Antidilutive stock options

 

 

 —

 

10,500

 

Average antidilutive stock options

 

 

 —

 

10,500

 

 

 

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14. STOCK PLANS AND STOCK BASED COMPENSATION

 

In January 2015, the Company’s Board of Directors adopted the Republic Bancorp, Inc. 2015 Stock Incentive Plan (the “2015 Plan”), which became effective April 2015 when the Company’s shareholders approved the 2015 Plan. The 2015 Plan replaced the Company’s 2005 Stock Incentive Plan, which expired March 2015.

 

The number of authorized shares under the 2015 Plan is fixed at 3,000,000, with such number subject to adjustment in the event of certain events, such as stock dividends, stock splits or the like. There is a minimum three-year vesting period for awards granted to employees under the 2015 Plan that vest based solely on the completion of a specified period of service, with options generally exercisable five to six years after the issue date. Stock options generally must be exercised within one year from the date the options become exercisable and have an exercise price that is at least equal to the fair market value of the Company’s stock on their grant date.  Forfeitures of stock-based awards are accounted for when incurred in lieu of using forfeiture estimates.  

 

All shares issued under the above-mentioned plans were from authorized and reserved unissued shares. The Company has a sufficient number of authorized and reserved unissued shares to satisfy all anticipated option exercises. There are no Class B stock options outstanding or available for exercise under the Company’s plans.

 

Stock Options

 

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of Republic’s stock and other factors. Expected dividends are based on dividend trends and the market price of Republic’s stock price at grant. Republic uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant.

 

All share-based payments to employees, including grants of employee stock options, are recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values.

 

The following table summarizes stock option activity from January 1, 2016 through March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Weighted

    

    

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

Options

 

Average

 

Remaining

 

Aggregate

 

 

 

Class A

 

Exercise

 

Contractual

 

Intrinsic

 

 

    

Shares

    

Price

    

Term

    

Value

  

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 1, 2016

 

323,400

 

$

24.40

 

 

 

 

 

 

Granted

 

5,000

 

 

26.43

 

 

 

 

 

 

Exercised

 

(4,000)

 

 

20.12

 

 

 

 

 

 

Forfeited or expired

 

(11,800)

 

 

24.47

 

 

 

 

 

 

Outstanding, December 31, 2016

 

312,600

 

$

24.49

 

3.77

 

$

4,705,807

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 1, 2017

 

312,600

 

$

24.49

 

 

 

 

 

 

Granted

 

 —

 

 

 —

 

 

 

 

 

 

Exercised

 

(2,000)

 

 

16.61

 

 

 

 

 

 

Forfeited or expired

 

 —

 

 

 —

 

 

 

 

 

 

Outstanding, March 31, 2017

 

310,600

 

$

24.54

 

3.55

 

$

3,060,357

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully vested and unvested

 

310,600

 

$

24.54

 

3.55

 

$

3,060,357

 

Exercisable (vested) at March 31, 2017

 

2,000

 

$

24.93

 

0.11

 

$

18,920

 

 

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Information related to stock options for each period follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(in thousands, except per share data)

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Intrinsic value of options exercised

 

$

44

 

$

16

 

Cash received from options exercised, net of shares redeemed

 

 

33

 

 

55

 

Weighted-average fair value per share of options granted

 

 

NA

 

 

NA

 


NA - Not applicable

 

Restricted Stock Awards

 

Restricted stock awards generally vest five to six years after issue, with accelerated vesting due to “change in control” or “death or disability of a participant” as defined and outlined in the 2015 Plan.

 

The following table summarizes restricted stock awards activity from January 1, 2016 through March 31, 2017:

 

 

 

 

 

 

 

 

    

Restricted

    

 

 

 

Stock Awards

 

Weighted-Average

 

 

Class A Shares

 

Grant Date Fair Value

Outstanding, January 1, 2016

 

79,000

 

$

20.02

Granted

 

 —

 

 

 —

Forfeited

 

(2,000)

 

 

19.85

Earned and issued

 

 

 

Outstanding, December 31, 2016

 

77,000

 

$

20.02

 

 

 

 

 

 

Outstanding, January 1, 2017

 

77,000

 

$

20.02

Granted

 

4,803

 

 

35.12

Forfeited

 

 —

 

 

 —

Earned and issued

 

(3,702)

 

 

37.54

Outstanding, March 31, 2017

 

78,101

 

$

20.27

 

 

 

 

 

 

Fully vested and unvested

 

78,101

 

$

20.27

Vested at March 31, 2017

 

 —

 

$

 —

 

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Performance Stock Units

 

The Company first granted performance stock units (“PSUs”) under the 2015 Plan in January 2016. Shares of stock underlying the PSUs may be earned over a four-year performance period commencing on January 1, 2017 and ending on December 31, 2020 as follows:

 

·

If the Company achieves a Return on Average Assets (“ROAA”), as defined in the award agreement, of 1.25% for a calendar year in the performance period, then between March 1 and March 15 of the following year, provided that the recipient is still employed in good standing on the payment date, the Company will issue shares of fully-vested stock to the participant equal to 50% of the number of the PSUs initially granted to the participant; and 

 

·

If the ROAA of 1.25% is met again at the end of another calendar year during the remaining term of the performance period, the Company will similarly issue fully vested stock in an amount equal to the remaining 50% of the initial PSUs granted to the participant.

 

The following table summarizes PSU activity from January 1, 2016 through March 31, 2017:

 

 

 

 

 

 

 

 

 

Performance

 

 

 

 

 

Stock Units

 

Weighted-Average

 

 

Class A Shares

 

Grant Date Fair Value

Outstanding, January 1, 2016

 

 —

 

$

 —

Granted

 

55,000

 

 

23.13

Forfeited

 

 —

 

 

 —

Earned and issued

 

 

 

Outstanding, December 31, 2016

 

55,000

 

$

23.13

 

 

 

 

 

 

Outstanding, January 1, 2017

 

55,000

 

$

23.13

Granted

 

 —

 

 

 —

Forfeited

 

 —

 

 

 —

Earned and issued

 

 

 

Outstanding, March 31, 2017

 

55,000

 

$

23.13

 

 

 

 

 

 

Fully vested and unvested

 

55,000

 

$

23.13

Vested at March 31, 2017

 

 —

 

$

 —

 

Expense Related to the 2015 Stock Incentive Plan

 

The Company recorded expense related to the 2015 Plan for the three months ended March 31, 2017 and 2016 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

    

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

Stock option expense

 

 

$

63

 

$

62

 

Restricted stock award expense

 

 

 

215

 

 

72

 

Performance stock unit expense

 

 

 

132

 

 

127

 

Total expense

 

 

$

410

 

$

261

 

 

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Unrecognized expenses related to unvested awards (net of estimated forfeitures) under the 2015 Plan are estimated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Stock 

    

 

Restricted

Performance

    

 

 

 

Year Ended (in thousands)

 

Options

 

 

Stock Awards

Stock Units

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

191

 

$

187

 

$

396

 

$

774

 

2018

 

 

251

 

 

12

 

 

220

 

 

483

 

2019

 

 

143

 

 

12

 

 

 —

 

 

155

 

2020

 

 

32

 

 

 8

 

 

 —

 

 

40

 

2021

 

 

 1

 

 

 2

 

 

 —

 

 

 3

 

2022

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

618

 

$

221

 

$

616

 

$

1,455

 

 

 

 

15. OTHER COMPREHENSIVE INCOME

 

OCI components and related tax effects were as follows:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Available for Sale Securities:

 

 

 

 

 

 

 

Change in unrealized gain (loss) on securities available for sale

 

$

706

 

$

2,292

 

Change in unrealized gain on security available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings

 

 

53

 

 

(149)

 

Net unrealized gains

 

 

759

 

 

2,143

 

Tax effect

 

 

(266)

 

 

(750)

 

Net of tax

 

 

493

 

 

1,393

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

 

28

 

 

(571)

 

Reclassification amount for derivative losses realized in income

 

 

66

 

 

87

 

Net unrealized gains (losses)

 

 

94

 

 

(484)

 

Tax effect

 

 

(33)

 

 

170

 

Net of tax

 

 

61

 

 

(314)

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss) components, net of tax

 

$

554

 

$

1,079

 

 

Significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts Reclassified From Accumulated

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 

 

 

 

Three Months Ended

 

 

 

Affected Line Items in the Consolidated

 

 

March 31, 

 

(in thousands)

  

Statements of Income

  

  

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

 

Interest rate swap on money market deposits

 

Interest expense on deposits

 

 

$

(34)

 

$

(43)

 

Interest rate swap on FHLB advance

 

Interest expense on FHLB advances

 

 

 

(32)

 

 

(44)

 

Total derivative losses on cash flow hedges

 

Total interest expense

 

 

 

(66)

 

 

(87)

 

Tax effect

 

Income tax expense

 

 

 

23

 

 

30

 

Net of tax

 

Net income

 

 

$

(43)

 

$

(57)

 

 

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The following is a summary of the AOCI balances, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

2017

    

 

 

 

(in thousands)

 

December 31, 2016

 

Change

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on securities available for sale

 

$

237

 

$

459

 

$

696

 

Unrealized gain on security available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings

 

 

706

 

 

34

 

 

740

 

Unrealized loss on cash flow hedge

 

 

(256)

 

 

61

 

 

(195)

 

Total unrealized gain

 

$

687

 

$

554

 

$

1,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

2016

    

 

 

 

(in thousands)

 

December 31, 2015

 

Change

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on securities available for sale

 

$

1,727

 

$

1,490

 

$

3,217

 

Unrealized gain on security available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings

 

 

712

 

 

(97)

 

 

615

 

Unrealized loss on cash flow hedge

 

 

(390)

 

 

(314)

 

 

(704)

 

Total unrealized gain

 

$

2,049

 

$

1,079

 

$

3,128

 

 

 

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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 March 31, 2017, the Company was divided into four distinct operating segments: Traditional Banking, Warehouse Lending (“Warehouse”), Mortgage Banking and Republic Processing Group (“RPG”). Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” activities. Correspondent Lending operations are considered part of Traditional Banking. The RPG segment includes the following divisions: Tax Refund Solutions (“TRS”), Republic Credit Solutions (“RCS”) and Republic Payment Solutions (“RPS”). TRS generates the majority of RPG’s income, with the relatively smaller divisions of RPG, RPS and RCS, considered immaterial for separate and independent segment reporting. All divisions of the RPG segment operate through the Bank.

 

The nature of segment operations and the primary drivers of net revenues by reportable segment are provided below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment:

 

Nature of Operations:

 

Primary Drivers of Net Revenues:

 

 

    

    

 

    

 

    

 

 

 

 

 

Traditional Banking

 

Provides traditional banking products to clients primarily in its market footprint via its network of banking centers and to clients outside of its market footprint primarily via its digital and Correspondent Lending delivery channels.

 

Loans, investments and deposits

 

Core Banking

 

 

Warehouse Lending

 

Provides short-term, revolving credit facilities to mortgage bankers across the Nation.

 

Mortgage warehouse lines of credit

 

 

 

 

Mortgage Banking

 

Primarily originates, sells and services long-term, single family, first lien residential real estate loans primarily to clients in its market footprint.

 

Loan sales and servicing

 

 

 

 

Republic Processing Group

 

The TRS division facilitates the receipt and payment of federal and state tax refund products.  The RPS division offers general-purpose reloadable cards.  The RCS division offers credit products. RPG products are primarily provided to clients outside of the Bank’s market footprint.

 

Refund transfers and unsecured, small-dollar

consumer loans

 

 

The accounting policies used for Republic’s reportable segments are the same as those described in the summary of significant accounting policies in the Company’s 2016 Annual Report on Form 10-K.  Segment performance is evaluated using operating income. Goodwill is allocated to the Traditional Banking segment. Income taxes are generally allocated based on income before income tax expense unless specific segment allocations can be reasonably made. Transactions among reportable segments are made at carrying value.

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Segment information for the three months ended March 31, 2017 and 2016 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

 

 

Core Banking

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

    

Total

    

    

Republic

    

 

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

 

Core

 

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

 

Banking

 

 

Group

 

Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

32,661

 

$

3,900

 

$

67

 

 

$

36,628

 

 

$

19,810

 

$

56,438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

467

 

 

(226)

 

 

 —

 

 

 

241

 

 

 

12,110

 

 

12,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

15,382

 

 

15,382

 

Mortgage banking income

 

 

 —

 

 

 —

 

 

1,160

 

 

 

1,160

 

 

 

 

 

1,160

 

Program fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

1,091

 

 

1,091

 

Other noninterest income

 

 

6,521

 

 

 6

 

 

13

 

 

 

6,540

 

 

 

750

 

 

7,290

 

Total noninterest income

 

 

6,521

 

 

 6

 

 

1,173

 

 

 

7,700

 

 

 

17,223

 

 

24,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expenses

 

 

30,090

 

 

777

 

 

1,215

 

 

 

32,082

 

 

 

6,857

 

 

38,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

8,625

 

 

3,355

 

 

25

 

 

 

12,005

 

 

 

18,066

 

 

30,071

 

Income tax expense

 

 

2,262

 

 

1,227

 

 

 9

 

 

 

3,498

 

 

 

6,556

 

 

10,054

 

Net income

 

$

6,363

 

$

2,128

 

$

16

 

 

$

8,507

 

 

$

11,510

 

$

20,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment end of period assets

 

$

4,017,173

 

$

493,127

 

$

15,080

 

 

$

4,525,380

 

 

$

139,412

 

$

4,664,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.30

%  

 

3.57

%  

 

NM

 

 

 

3.33

%  

 

 

NM

 

 

4.99

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

 

Core Banking

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

    

Total

    

    

Republic

    

 

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

 

Core

 

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

 

Banking

 

 

Group

 

Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

28,608

 

$

2,655

 

$

32

 

 

$

31,295

 

 

$

8,139

 

$

39,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

480

 

 

18

 

 

 —

 

 

 

498

 

 

 

4,688

 

 

5,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

17,078

 

 

17,078

 

Mortgage banking income

 

 

 —

 

 

 —

 

 

1,261

 

 

 

1,261

 

 

 

 —

 

 

1,261

 

Program fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

319

 

 

319

 

Other noninterest income

 

 

6,110

 

 

 5

 

 

92

 

 

 

6,207

 

 

 

56

 

 

6,263

 

Total noninterest income

 

 

6,110

 

 

 5

 

 

1,353

 

 

 

7,468

 

 

 

17,453

 

 

24,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expenses

 

 

24,875

 

 

695

 

 

1,240

 

 

 

26,810

 

 

 

5,731

 

 

32,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

9,363

 

 

1,947

 

 

145

 

 

 

11,455

 

 

 

15,173

 

 

26,628

 

Income tax expense

 

 

2,613

 

 

723

 

 

51

 

 

 

3,387

 

 

 

5,506

 

 

8,893

 

Net income

 

$

6,750

 

$

1,224

 

$

94

 

 

$

8,068

 

 

$

9,667

 

$

17,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment end of period assets

 

$

3,711,315

 

$

393,532

 

$

12,965

 

 

$

4,117,812

 

 

$

128,953

 

$

4,246,765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.08

%  

 

3.63

%  

 

NM

 

 

 

3.12

%  

 

 

NM

 

 

3.78

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets are reported as of the respective period ends while income and margin data are reported for the respective periods.

 

NM — Not Meaningful

 

 

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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 (“RB&T” or the “Bank”) and Republic Insurance Services, Inc. (the “Captive”). The Bank is a Kentucky-based, state chartered non-member financial institution that provides both traditional and non-traditional banking products through four distinct operating 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 10 other third-party insurance captives for which insurance may not be available or economically feasible. 

 

Republic Bancorp Capital Trust (“RBCT”) is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.

 

All companies are collectively referred to as (“Republic” or the “Company”). All significant intercompany balances and transactions are eliminated in consolidation.

 

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.”

 

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; and the term the “Bank” refers to the Company’s subsidiary bank, RB&T.

 

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,” “would,” ”potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management may not update them to reflect changes that occur subsequent to the date the statements are made.

 

Broadly speaking, forward-looking statements include:

 

·

projections of revenue, income, expenses, losses, earnings per share, capital expenditures, dividends, capital structure or other financial items;

·

descriptions of plans or objectives for future operations, products or services;

·

forecasts of future economic performance; and

·

descriptions of assumptions underlying or relating to any of the foregoing.

 

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:

 

·

changes in political and economic conditions;

·

the  magnitude and frequency of changes to the Federal Funds Target Rate (“FFTR”) implemented by the Federal Open Market Committee (“FOMC”) of the Federal Reserve Bank (“FRB”);

·

long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;

·

competitive product and pricing pressures in each of the Company’s business segments;

·

equity and fixed income market fluctuations;

·

client bankruptcies and loan defaults;

·

inflation;

·

recession;

·

future acquisitions;

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·

integrations of acquired businesses;

·

changes in technology;

·

changes in applicable laws and regulations or the interpretation and enforcement thereof;

·

changes in fiscal, monetary, regulatory and tax policies;

·

changes in accounting standards;

·

monetary fluctuations;

·

changes to the Company’s overall internal control environment;

·

success in gaining regulatory approvals when required;

·

information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party service providers;

·

as well as other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”),  including Part 1 Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

BUSINESS SEGMENT COMPOSITION

 

As of March 31, 2017, the Company was divided into four distinct operating segments: Traditional Banking, Warehouse Lending (“Warehouse”), Mortgage Banking and Republic Processing Group (“RPG”). Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” activities. Correspondent Lending operations and the Company’s national branchless banking platform, MemoryBank®, are considered part of Traditional Banking. The RPG segment includes the following divisions: Tax Refund Solutions (“TRS”), Republic Credit Solutions (“RCS”) and Republic Payment Solutions (“RPS”). TRS generates the majority of RPG’s income, with the relatively smaller divisions of RPG, RCS and RPS, considered immaterial for separate and independent segment reporting. All divisions of the RPG segment operate through the Bank.

 

Table 1 — Segment Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

 

Core Banking

 

 

 

 

 

 

 

 

 

    

 

 

    

    

 

    

    

 

    

Total

  

    

Republic

    

    

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

Core

 

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

Banking

 

 

Group

 

Company

 

Net income

 

$

6,363

 

$

2,128

 

$

16

 

$

8,507

 

 

$

11,510

 

$

20,017

 

Total assets

 

 

4,017,173

 

 

493,127

 

 

15,080

 

 

4,525,380

 

 

 

139,412

 

 

4,664,792

 

Net interest margin

 

 

3.30

%  

 

3.57

%  

 

NM

 

 

3.33

%  

 

 

NM

 

 

4.99

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

Core Banking

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

    

 

    

Total

  

    

Republic

    

    

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

Core

 

 

Processing

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

Banking

 

 

Group

 

Company

 

Net income

 

$

6,750

 

$

1,224

 

$

94

 

$

8,068

 

 

$

9,667

 

$

17,735

 

Total assets

 

 

3,711,315

 

 

393,532

 

 

12,965

 

 

4,117,812

 

 

 

128,953

 

 

4,246,765

 

Net interest margin

 

 

3.08

%  

 

3.63

%  

 

NM

 

 

3.12

%  

 

 

NM

 

 

3.78

%  

 


Segment assets are reported as of the respective period ends while income and margin data are reported for the respective periods.

 

NM — Not Meaningful

 

For expanded segment financial data see Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”

 

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(I)  Traditional Banking segment

 

The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of March 31, 2017, Republic had 45 full-service banking centers and one loan production office (“LPO”) with locations as follows:

 

Kentucky — 33

Metropolitan Louisville — 19

Central Kentucky — 9

Elizabethtown — 1

Frankfort — 1

Georgetown — 1

Lexington — 5

Shelbyville — 1

Western Kentucky — 2

Owensboro — 2

Northern Kentucky — 3

Covington — 1

Florence — 1

Independence — 1

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 6

Metropolitan Cincinnati, Ohio — 1

Metropolitan Nashville, Tennessee — 3*

 


*Includes one LPO

 

Republic’s headquarters are located in Louisville, which is the largest city in Kentucky based on population.

 

As of March  31, 2017 and through the date of this filing, generally all Traditional Banking products and services, except for the EarnMore deposit account, were offered through the Company’s traditional RB&T brand.  The EarnMore deposit account was offered through the Bank’s national branchless banking platform, MemoryBank.

 

The Bank’s principal lending activities consist of the following:

 

Retail Mortgage Lending — Through its retail banking centers, its Correspondent Lending channel and its Internet Banking channel, the Bank originates single family, residential real estate loans.  In addition, the Bank originates home equity amortizing loans (“HEALs”) and home equity lines of credit (“HELOCs”) through its retail banking centers. Such loans are generally collateralized by owner occupied property.

 

Commercial Lending — The Bank conducts commercial lending activities primarily through its Commercial and Corporate Banking (the “CCB Department”) and its Business Banking Department.

 

The CCB Department is composed of the following divisions: Corporate Banking; Commercial Finance; Municipal Lending; and Republic Realty. All credit approvals and processing for the CCB Department are prepared and underwritten through the Bank’s existing Credit Administration Department (“CAD”).  Clients are generally located within the Bank’s market footprint, including adjacent areas that are within approximately two-hour drive of a specific market.    

 

The Business Banking Department focuses on locally based small-to-medium sized businesses in the Bank’s market footprint with revenues of $1 million to $20 million. The needs of Business Banking clients range from expansion or acquisition, equipment financing, owner-occupied real estate financing, and operating lines of credit.  Business Banking utilizes all appropriate programs of the Small Business Administration (“SBA”) to reduce credit risk exposure.  Additionally, Business Banking includes making loans to real estate investors for various types of investment properties, including rental homes and apartments, shopping centers,

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and office buildings.  Business Banking also makes loans to various not-for-profit agencies located within the Bank’s market footprint.  The targeted credit size for a relationship in this segment is between $500,000 and $5 million.

 

Construction and Land Development Lending — The Bank originates business loans for the construction of both single family residential properties and commercial properties (apartment complexes, shopping centers, office buildings).  On a much smaller scale, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots.

 

Internet Lending — The Bank accepts online loan applications for its RB&T brand through its website at www.republicbank.com.  Historically, the majority of loans originated through the internet have been within the Bank’s traditional markets of Kentucky and Indiana.  Other states where loans are marketed include California, Colorado, Florida, Georgia, Illinois, Michigan, Minnesota, North Carolina, Ohio, Tennessee and Virginia, as well as, the District of Columbia.

 

Correspondent Lending — Primarily from its Warehouse clients, the Core Bank acquires for investment single family, first lien mortgage loans that meet the Core Bank’s specifications through its Correspondent Lending channel. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium. 

   

Consumer Lending — Traditional consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. With the exception of home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other traditional consumer loan products, while available, are not and have not been actively promoted in the Bank’s markets.

 

The Bank has, from time to time, acquired unsecured consumer installment loans for investment from a third-party originator. Such consumer loans were purchased at par and were selected by the Bank based on certain underwriting characteristics.

 

Indirect Lending – In 2015, the Bank began to grow its presence in the consumer automobile loan market. The program involves establishing relationships with automobile dealers in the Bank’s market footprint and obtaining consumer automobile loans in a low-cost delivery method. As a result of its success in Indirect Auto Lending, the Bank entered Dealer Floor Plan Lending during the fourth quarter of 2016.

 

The Bank’s other Traditional Banking activities generally consists of the following:

 

MemoryBank —  In October 2016, the Bank opened the “digital doors” of MemoryBank, a national branchless banking platform.  MemoryBank is a separately branded division of the Bank, which from a marketing perspective, focuses on technologically savvy customers that prefer to carry larger balances in highly-liquid bank accounts. The Bank promotes the EarnMore account solely through its MemoryBank brand.

 

Private Banking — The Bank provides financial products and services to high net worth individuals through its Private Banking Department. The Bank’s Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele.

 

Treasury Management Services — The Bank provides various deposit products designed for commercial business clients located throughout its market areas. Lockbox processing, business on-site deposit, business on-line banking, Internet bill pay, payroll processing, virtual vault, courier service, controlled disbursement accounts, corporate purchasing credit cards, account reconciliation and Automated Clearing House (“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. 

 

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. 

 

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See additional detail regarding the Traditional Banking segment under Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”

 

(II)  Warehouse Lending segment

 

The 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 or purchased by the Bank through its Correspondent Lending channel. 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 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.

 

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 single family, first lien residential real estate loans that are sold into the secondary market, primarily to the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and the Federal National Mortgage Association (“FNMA” or “Fannie Mae”). 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. A fee is received by the Bank for performing these standard servicing functions.

 

See additional detail regarding Mortgage Banking under Footnote 11 “Mortgage Banking Activities” and Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”

 

(IV)  Republic Processing Group segment

Tax Refund Solutions (“TRS”) division — Through its TRS division, 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 United States, as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS division occurs in the first half of the year. The TRS division traditionally operates at a loss during the second half of the year, during which time the division incurs costs preparing for the upcoming year’s first quarter tax season.

Refund Transfers (“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 refund directly from the governmental paying authority.

“Easy Advance” Product

The Easy Advance (“EA”) tax credit product is a loan that allows a taxpayer to receive an advance of a portion of their refund, with the taxpayer’s Tax Provider paying all fees to RB&T for the advance. 

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TRS first offered its EA tax credit product during the first two months of 2016 and for a second successive year during the first two months of 2017.  For the first quarter 2017 tax season, the Company modified the EA product offering to allow more than one advance amount and a different price structure to the Tax Providers based on the amount borrowed by the taxpayer.  All other features of the product remained substantially the same as those from the first quarter 2016 tax season, including the following:   

·

No EA fee charged to the taxpayer customer;

·

All fees for the product were paid by the Tax Providers with a restriction prohibiting the Tax Providers from passing along the fees to the taxpayer customer;

·

No requirement that the taxpayer customer pay for another bank product, such as an RT;

·

Multiple funds disbursement methods, including direct deposit, prepaid card, check or Walmart Direct2Cash®  product, based on the taxpayer customer’s election;

·

Repayment of the EA to the Bank was deducted from the taxpayer customer’s tax refund proceeds; and

·

If an insufficient refund to repay the EA occurred:

o

there was no recourse to the taxpayer customer, 

o

no negative credit reporting on the taxpayer customer, and

o

no collection efforts against the taxpayer customer.

Fees paid by the Tax Providers to the Company for the EA product are reported as interest income on loans.  EAs during 2017 and 2016 were generally repaid within three weeks after the taxpayer customer’s tax return was submitted to the applicable taxing authority.  EAs do not have a contractual due date but are eligible for delinquency consideration three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with all expected loss provisions made in the first quarter of each year. Unpaid EAs are generally charged-off within 81 days after the taxpayer customer’s tax return is submitted to the applicable taxing authority, with the majority of charge-offs typically recorded during the second quarter of the year.

 

Related to the overall credit losses on EAs, the Bank’s ability to control those 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 funding patterns. Because much of the loan volume occurs each year before that year’s tax refund funding 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 funding patterns change materially between years.   

 

See additional detail regarding the Easy Advance (“EA”) product under Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements.”

 

Republic Credit Solutions (“RCS”) division — RCS is managed and operated within the RPG business segment.  Through the RCS division, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans with maturities of 30 days or more, and are dependent on various factors including the consumer’s ability to repay.

 

RCS originates, primarily for sale, both a line-of-credit product and a credit card product. The Bank sells 90% of the balances maintained through these two products within two days of loan origination and retains a 10% interest. The Company carries such loans at the lower of cost or fair value. The line-of-credit product represented the substantial majority of RCS activity during the first quarters of 2017 and 2016, as RCS expanded in June 2015 beyond its pilot phase. In December 2015, RCS began piloting its credit card product.  Any gains or losses on the sale of RCS products are reported as a component of “Program fees.”

 

During the first quarter of 2016, RCS initiated an installment loan product, in which the Company sells 100% of these loans approximately 21 days after origination.  The Company classifies these loans as held for sale and carries them at fair value, with this portfolio marked to market on a monthly basis with changes in its fair value reported as a component of Program fees.

 

During the first quarter of 2016, RCS initiated a healthcare receivables product. RCS works with healthcare providers to finance the healthcare services for their patients. RCS retains 100% of these loans.  

 

The operating results of the RCS division were immaterial to the Company’s overall results of operations for the quarters ended March 31, 2017 and 2016 and were reported as part of the RPG segment. The RCS division will not be reported as a separate segment until such time, if any, that it meets reporting thresholds.

 

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Republic Payment Solutions (“RPS”) division —  RPS is managed and operated within the RPG business segment.  The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party program managers. 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 RPG segment. The RPS division will not be reported as a separate segment until such time, if any, that it meets reporting thresholds.

 

OVERVIEW (Three Months Ended March  31, 2017 Compared to Three Months Ended March  31, 2016)

 

Total Company net income for the first quarter of 2017 was $20.0 million, a $2.3 million, or 13%, increase from the same period in 2016. Diluted earnings per Class A Common Share increased to $0.96 for the quarter ended March 31, 2017 compared from $0.85 for the same period in 2016.

 

The Company’s Core Banking noninterest expenses, which include the noninterest expenses of the Traditional Banking segment, the Warehouse Lending segment, and the Mortgage Banking segment, were impacted by several initiatives during the first quarter of 2017 as compared to the first quarter of 2016.  The long-term goal of these initiatives is to geographically expand and grow the Company’s loan and deposit client base, enhance client service through expanded hours and delivery channels, diversify the Company’s product mix, and to create greater operating efficiencies.  Significant costs for some of the Company’s more notable strategic investments made over the previous 12 months include the following:

 

·

Expansion of the Company’s footprint into St. Petersburg, Florida through its May 2016 acquisition of Cornerstone Bancorp, Inc. (“Cornerstone”).

 

·

The October 2016 launch of MemoryBank, a separately-branded, nationwide digital banking platform, which has raised $28 million in deposits during the first three months of 2017.

 

·

The October 2016 introduction of Dealer Floor Plan Lending, which had  $8 million of loans outstanding at March 31, 2017.

 

·

The opening of the Company’s new Vine Street location in downtown Lexington, Kentucky.

 

·

The opening of a new loan production office in Brentwood (Nashville), Tennessee.

 

·

Expanded contact center hours to 7 a.m. to midnight, seven days a week.

 

·

The pilot introduction of six interactive teller machines (“ITMs”) into four of the Company’s banking centers, with an expected expansion into additional banking centers upon the completion of a successful pilot phase.

 

In addition to the launched initiatives above, the Company also has plans for the following during the second half of 2017:

 

·

Implementation of a new client relationship management system.

 

·

Additional investment in mortgage-related personnel, processes and systems in order to expand market share.    

 

Other general highlights by business segment for the quarter ended March 31, 2017 consisted of the following:

 

Traditional Banking segment

 

·

Net income decreased $387,000, or 6%, for the first quarter of 2017 compared to the same period in 2016.  

 

·

Net interest income increased $4.1 million, or 14%, for the first quarter of 2017 compared to the same period in 2016.

 

·

The Traditional Banking Provisions for Loan and Lease Losses (“Provision”) was $467,000 for the first quarter of 2017 compared to $480,000 for the same period in 2016.

 

·

Total noninterest income increased $411,000, or 7%, for the first quarter of 2017 compared to the same period in 2016.

 

·

Total noninterest expense increased $5.2 million, or 21%, during the first quarter of 2017 compared to the first quarter of 2016.

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Warehouse Lending segment

 

·

Net income increased $904,000, or 74%, for the first quarter of 2017 compared to the same period in 2016.

 

·

Net interest income increased $1.2 million, or 47%, for the first quarter of 2017 compared to the same period in 2016.

 

·

The Warehouse Provision was a credit of $226,000 for the first quarter of 2017 compared to a charge of $18,000 for the same period in 2016.

 

Mortgage Banking segment

 

·

Within the Mortgage Banking segment, mortgage banking income decreased $101,000, or 8%, during the first quarter of 2017 compared to the same period in 2016.

 

·

Overall, Republic’s originations of secondary market loans totaled $33 million during the first quarter of 2017 compared to $37 million during the same period in 2016.

 

Republic Processing Group segment

 

·

Net income increased $1.8 million, or 19%, for the first quarter of 2017 compared to the same period in 2016. 

 

·

Net interest income increased $11.7 million for the first quarter of 2017 compared to the same period in 2016.  

 

·

Overall, RPG recorded a net charge to the Provision of $12.1 million during the first quarter of 2017, compared to a net charge of $4.7 million for the same period in 2016.  

 

·

Noninterest income decreased $230,000 for the first quarter of 2017 compared to the same period in 2016.

 

·

Noninterest expenses were $6.9 million for the first quarter of 2017 compared to $5.7 million for the same period in 2016.

 

RESULTS OF OPERATIONS (Three Months Ended March 31, 2017 Compared to Three Months Ended March 31,  2016)

 

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 Federal Home Loan Bank (“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.

 

Total Company net interest income increased $17.0 million, or 43%, during the first quarter of 2017 compared to the same period in 2016.  Growth in RPG loans, in particular the EA product, and growth in average Core Bank loans were the primary contributors to the Company’s growth in net interest income. The total Company net interest margin increased to 4.99% during the first quarter of 2017 compared to 3.78% for the same period in 2016, with additional fee income from the EA product primarily driving the increase.

 

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The most significant components affecting the total Company’s net interest income by business segment follow:

 

Traditional Banking segment

 

Net interest income within the Traditional Banking segment increased $4.1 million, or 14%, for the quarter of 2017 compared to the same period in 2016.  The Traditional Banking net interest margin was 3.30% for the first quarter of 2017, an increase of 22 basis points from the same period in 2016. 

 

The increases in the Traditional Bank’s net interest income and net interest margin during the first quarter of 2017 were primarily attributable to the following factors:

 

·

Average Traditional Bank loans outstanding, excluding loans from the Company’s 2012 FDIC-assisted transactions, were $3.2 billion with a weighted average yield of 4.18% during the first quarter of 2017 compared to $2.9 billion with a weighted average yield of 4.02% during the first quarter of 2016. The overall effect of these changes in rate and volume was an increase of $3.8 million, or 13%, in interest income. This increase in average loans for the first quarter of 2017 over the first quarter of 2016 was driven primarily by growth in the Bank’s Commercial Real Estate (“CRE”),  Commercial and Industrial (“C&I”),  Home Equity Lines of Credit (“HELOC”) and Indirect Auto portfolios over the previous 12 months.  Additionally, the acquisition of Cornerstone in May 2016 contributed approximately $200 million to the overall increase in average loan balances comparing the first quarter of 2017 to the first quarter of 2016.

 

·

Net interest income related to loans from the Company’s 2012 FDIC-assisted transactions was lower during the first quarter of 2017 compared to the same period in 2016 primarily due to a lower rate of favorable payoffs and paydowns on the portfolio. When loans from these transactions are paid off, all unearned discount on such loans is immediately accreted into income. Accretion income during the first quarter of 2017 from this portfolio was $101,000 compared to $759,000 for the same period in 2016. Overall, the average balance of the portfolio was $14 million with a yield of 12.22% during the first quarter of 2017 compared to $24 million with a yield of 18.94% for 2016. The overall effect of these changes in rate and volume was a decrease of $683,000 in interest income.

 

·

The weighted average cost of FHLB advances during the first quarter of 2017 compared to the same period in 2016 declined to 1.53% from 2.14%, while the average outstanding FHLB advances increased $6 million when comparing the two periods. The net effect of these changes in rate and volume was an  increase in net interest income of $661,000.     

 

The FFTR, the index that many of the Bank’s short-term deposit rates track, increased for the second time in a three-month period during March 2017.  Additionally, the FOMC of the FRB has provided further guidance that additional FFTR increases are possible during the remainder of 2017. While an increase in short-term interest rates is generally believed by management to be favorable to the Bank’s net interest income and net interest margin in the near-term, such increases in short-term interest rates could have a negative impact to net interest income and net interest margin if the Bank is unable to maintain its overall funding costs at those levels assumed in its interest rate risk model or the yield curve flattens causing the spread between long-term interest rates and short-term interest rates to decrease.  Unknown variables, which may impact the Bank’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.

 

Warehouse Lending segment

 

Net interest income within the Warehouse Lending segment increased $1.2 million, or 47%, for the first quarter of 2017 compared to the same period in 2016. The increase in net interest income was partially attributable to higher average outstanding balances and partially to higher weighted average loan yield for the current period as compared to the same period in 2016. Total Warehouse line commitments increased to $983 million at March 31, 2017 from $615 million at March 31,  2016, with the Company continuing to grow its Warehouse client base over the previous 12 months. Average line usage on Warehouse commitments was 44% during the first quarter of 2017 compared to 47% during the first quarter of 2016, as usage rates during both quarters benefitted from continued low, long-term mortgage rates during the periods. For the remainder of 2017, management expects usage rates for Warehouse lines to be lower than comparable periods in 2016 due primarily to currently projected mortgage interest rates. The yield for Warehouse lines of credit during the first quarter of 2017 increased 19 basis points from the same period in 2016, as the Warehouse yield was positively impacted by an increase in short-term interest rates.

 

Overall, average outstanding Warehouse lines of credit during the first quarter of 2017 increased $144 million, or 49%, compared to the same period in 2016.  Average outstanding warehouse balances were $436 million during the first quarter of 2017 with a weighted

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average yield of 4.20%, compared to average outstanding balances of $293 million with a weighted average yield of 4.01% for the same period in 2016. The overall yield on warehouse lines generally improved from the first quarter of 2016 to the first quarter of 2017, because the rates paid to the Bank by its Warehouse clients are generally tied to the London Interbank Offered Rate (“LIBOR), which is a short-term market-rate index that generally tracks with the FFTR.

 

Republic Processing Group segment

 

Net interest income within the RPG segment increased $11.7 million for the first quarter of 2017 compared to the same period in 2016.  The increase in RPG’s net interest income was primarily attributed to the following factors:

 

·

The TRS division’s EA product earned $14.2 million in interest income during the first quarter of 2017, a $9.0 million, or 173%, increase from the same period in 2016.  The higher EA income was driven by an increase in EA origination volume as the Company originated $329 million in EAs during the first quarter of 2017 compared to $123 million during the first quarter of 2016.  Additional demand for EAs during 2017 was partially driven by the previously announced delays in certain taxpayer refunds from the U.S. Treasury due to additional fraud prevention measures taken by the Federal government. In addition, the Company’s increase in EA dollar volume during 2017 was driven by a higher weighted average advance amount as compared to 2016.

 

See additional detail regarding the EA product under Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements.”

 

·

Partially offsetting growth in EA-related interest income, the TRS division did not renew a short-term commercial loan from which it earned $1.1 million in loan fees during the first quarter of 2016. However, TRS did earn $635,000 in loan fees during the first quarter of 2017 from other commercial loan relationships.

 

·

Consumer credit products through the RCS division of RPG earned $4.8 million in net interest income during the first quarter of 2017 compared to $1.7 million for the same period in 2016. The increase was driven by the previously discussed product expansion at RCS over the previous 12 months, particularly within the division’s line-of-credit product.

 

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Table 2 — Total Company Average Balance Sheets and Interest Rates for the Three Months Ended March 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

 

Three Months Ended March 31, 2016

 

 

 

    

Average

    

 

 

    

Average

    

 

Average

    

 

 

    

Average

 

 

(dollars in thousands)

    

Balance

 

Interest

 

Rate

 

 

Balance

 

Interest

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities, including FHLB stock(1)

 

$

586,621

 

$

2,485

 

1.69

%  

 

$

581,869

 

$

2,157

 

1.48

%  

 

Federal funds sold and other interest-earning deposits

 

 

184,007

 

 

394

 

0.86

 

 

 

298,250

 

 

429

 

0.58

 

 

RPG Easy Advance loans and fees(2)

 

 

76,502

 

 

14,216

 

74.33

 

 

 

20,044

 

 

5,209

 

103.95

 

 

Other RPG loans and fees(3)(6)

 

 

43,946

 

 

5,529

 

50.33

 

 

 

29,526

 

 

2,757

 

37.35

 

 

Outstanding Warehouse lines of credit and fees(4)(6)

 

 

436,459

 

 

4,586

 

4.20

 

 

 

292,574

 

 

2,932

 

4.01

 

 

All other Traditional Bank loans and fees(5)(6)

 

 

3,192,831

 

 

33,673

 

4.22

 

 

 

2,950,545

 

 

30,531

 

4.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

4,520,366

 

 

60,883

 

5.39

 

 

 

4,172,808

 

 

44,015

 

4.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

 

(38,345)

 

 

 

 

 

 

 

 

(29,260)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning cash and cash equivalents

 

 

198,791

 

 

 

 

 

 

 

 

159,357

 

 

 

 

 

 

 

Premises and equipment, net

 

 

43,835

 

 

 

 

 

 

 

 

30,811

 

 

 

 

 

 

 

Bank owned life insurance

 

 

61,986

 

 

 

 

 

 

 

 

53,032

 

 

 

 

 

 

 

Other assets(1)

 

 

61,067

 

 

 

 

 

 

 

 

50,095

 

 

 

 

 

 

 

Total assets

 

$

4,847,700

 

 

 

 

 

 

 

$

4,436,843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

1,045,420

 

$

381

 

0.15

%  

 

$

878,863

 

$

180

 

0.08

%  

 

Money market accounts

 

 

555,023

 

 

312

 

0.22

 

 

 

524,379

 

 

229

 

0.17

 

 

Time deposits

 

 

227,318

 

 

572

 

1.01

 

 

 

209,078

 

 

553

 

1.06

 

 

Brokered money market and brokered certificates of deposit

 

 

384,458

 

 

614

 

0.64

 

 

 

291,401

 

 

430

 

0.59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

 

2,212,219

 

 

1,879

 

0.34

 

 

 

1,903,721

 

 

1,392

 

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase and other short-term borrowings

 

 

218,412

 

 

25

 

0.05

 

 

 

407,698

 

 

25

 

0.02

 

 

Federal Home Loan Bank advances

 

 

598,167

 

 

2,292

 

1.53

 

 

 

552,082

 

 

2,953

 

2.14

 

 

Subordinated note

 

 

41,240

 

 

249

 

2.42

 

 

 

41,240

 

 

211

 

2.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

3,070,038

 

 

4,445

 

0.58

 

 

 

2,904,741

 

 

4,581

 

0.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities and Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,132,591

 

 

 

 

 

 

 

 

916,691

 

 

 

 

 

 

 

Other liabilities

 

 

34,642

 

 

 

 

 

 

 

 

27,818

 

 

 

 

 

 

 

Stockholders’ equity

 

 

610,429

 

 

 

 

 

 

 

 

587,593

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

4,847,700

 

 

 

 

 

 

 

$

4,436,843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

56,438

 

 

 

 

 

 

 

$

39,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

4.81

%  

 

 

 

 

 

 

 

3.59

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

4.99

%  

 

 

 

 

 

 

 

3.78

%  

 


(1)

For the purpose of this calculation, the fair market value adjustment on investment securities resulting from ASC Topic 320, Investments — Debt and Equity 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 $5.1 million and $2.7 million for the three months ended March 31, 2017 and 2016.

(4)

Interest income includes loan fees of $769,000 and $491,000 for the three months ended March 31, 2017 and 2016.

(5)

Interest income includes loan fees of $1.1 million and $1.4 million for the three months ended March 31, 2017 and 2016.

(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.

 

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Table 3 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 3 — Total Company Volume/Rate Variance Analysis for the Three Months Ended March 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

 

 

 

 

Compared to

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

 

 

Total Net

 

Increase / (Decrease) Due to

 

 

(in thousands)

    

Change

    

Volume

    

Rate

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities, including FHLB stock

 

$

328

 

$

18

 

$

310

 

 

Federal funds sold and other interest-earning deposits

 

 

(35)

 

 

(200)

 

 

165

 

 

RPG Easy Advance loans and fees

 

 

9,007

 

 

10,875

 

 

(1,868)

 

 

Other RPG loans and fees

 

 

2,772

 

 

1,620

 

 

1,152

 

 

Outstanding Warehouse lines of credit and fees

 

 

1,654

 

 

1,506

 

 

148

 

 

All other Traditional Bank loans and fees

 

 

3,142

 

 

2,546

 

 

596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in interest income

 

 

16,868

 

 

16,365

 

 

503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

 

201

 

 

39

 

 

162

 

 

Money market accounts

 

 

83

 

 

14

 

 

69

 

 

Time deposits

 

 

19

 

 

47

 

 

(28)

 

 

Brokered money market and brokered certificates of deposit

 

 

184

 

 

146

 

 

38

 

 

Securities sold under agreements to repurchase and other short-term borrowings

 

 

 —

 

 

(15)

 

 

15

 

 

Federal Home Loan Bank advances

 

 

(661)

 

 

231

 

 

(892)

 

 

Subordinated note

 

 

38

 

 

 —

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in interest expense

 

 

(136)

 

 

462

 

 

(598)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net interest income

 

$

17,004

 

$

15,903

 

$

1,101

 

 

 

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Provision for Loan and Lease Losses

 

The Company recorded a Provision of $12.4 million for the first quarter of 2017, compared to $5.2 million for the same period in 2016.  The significant components comprising the Company’s Provision by business segment were as follows:

 

Traditional Banking segment

 

The Traditional Banking Provision during the first quarter of 2017 was $467,000, compared to $480,000 for the first quarter of 2016. An analysis of the Provision for the first quarter of 2017 compared to the same period in 2016 follows:

 

·

Related to the Bank’s pass-rated and non-rated credits, the Bank recorded net charges of $491,000 and $527,000 to the Provision for the first quarters of 2017 and 2016.  Loan growth primarily drove the net charges to the Provision in both periods.

 

·

Related to the Bank’s loans rated Substandard and Special Mention, the Bank recorded a net credit to the Provision of $8,000 for the first quarter of 2017 compared to a net charge of $67,000 to the Provision during the first quarter 2016. 

 

·

Related to purchased-credit-impaired (“PCI”) loans, the Bank recorded net credits of $16,000 and $114,000 to the Provision during the first quarters of 2017 and 2016.  For PCI loans, charges generally reflect projected shortfalls in cash flows below initial acquisition-day estimates,  while credits are primarily attributable to generally positive dispositions.

 

As a percentage of total loans, the Traditional Banking Allowance for Loan and Lease Losses (“Allowance”) was 0.84% at March 31, 2017 compared to 0.83% at December 31, 2016 and 0.85% at March 31,  2016.  The Company believes, based on information presently available, that it has adequately provided for its loan portfolio within its Allowance at March 31, 2017.

 

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

 

The Warehouse Provision was a credit of $226,000 for the first quarter of 2017, a $244,000 decrease from the same period in 2016. Provision expense for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances decreased $90 million during the first quarter of 2017 compared to an increase of $7 million during the first quarter of 2016.

 

As a percentage of total Warehouse outstanding balances, the Warehouse Allowance was 0.25% at March 31, 2017, December 31, 2016 and March 31,  2016.  The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at March 31, 2017.

 

Republic Processing Group segment

 

RPG recorded a net charge to the Provision of $12.1 million during the first quarter of 2017, an increase of $7.4 million compared to same period in 2016.  The increase in Provision at RPG was primarily attributable to an increase in estimated losses for EA loans within the TRS division, as EA volume increased 167% for the first quarter of 2017 compared to the first quarter of 2016.   As a result of the increased EA volume, the TRS division recorded a Provision of $8.6 million during the first quarter of 2017 compared to $3.6 million for the same period in 2016.  As of March 31, 2017 and 2016, the Company had Provisions of 2.62%  and 2.90%  of total EAs originated. The Company finished 2016 with an actual net loss rate of 2.47% of total EAs originated during 2016.  

 

See additional detail regarding the Easy Advance (“EA”) product under Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements.”

 

In addition to the higher Provision associated with EA loans at TRS, the Bank also recorded charges of $3.8 million and $1.4 million to the Provision during the first quarters of 2017 and 2016 associated with the RCS division’s consumer loans.  Provision expense was higher at RCS due to an increase in general loss reserves for growth in RCS loans, as well as an increase in the historical loss factors for the general reserves for RCS loans resulting from a rise in charge-offs from the prior year.   

 

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While RPG loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products.  As a percentage of total RPG loans, the RPG Allowance was 33.65% at March 31, 2017 compared to 12.82% at December 31, 2016 and 40.78% at March 31, 2016.  The Company believes, based on information presently available, that it has adequately provided for RPG loan losses at March 31, 2017.

 

Table 4 — Summary of Loan and Lease Loss Experience for the Three Months Ended March 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

(dollars in thousands)

 

2017

    

2016

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

32,920

 

$

27,491

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

Residential real estate

 

 

(14)

 

 

(188)

 

Commercial real estate

 

 

 —

 

 

(41)

 

Construction & land development

 

 

 —

 

 

(44)

 

Commercial & industrial

 

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

Home equity

 

 

(4)

 

 

(35)

 

Consumer

 

 

(441)

 

 

(304)

 

Total Core Bank

 

 

(459)

 

 

(612)

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Commercial & industrial

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

Easy Advances

 

 

(860)

 

 

(405)

 

Republic Credit Solutions

 

 

(2,285)

 

 

(846)

 

Total Republic Processing Group

 

 

(3,145)

 

 

(1,251)

 

 

 

 

 

 

 

 

 

Total charge-offs

 

 

(3,604)

 

 

(1,863)

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

Residential real estate

 

 

59

 

 

74

 

Commercial real estate

 

 

17

 

 

27

 

Construction & land development

 

 

 —

 

 

20

 

Commercial & industrial

 

 

21

 

 

 4

 

Lease financing receivables

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

Home equity

 

 

 9

 

 

26

 

Consumer:

 

 

174

 

 

177

 

Total Core Bank

 

 

280

 

 

328

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Commercial & industrial

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

Refund Anticipation Loans

 

 

235

 

 

247

 

Republic Credit Solutions

 

 

180

 

 

86

 

Total Republic Processing Group

 

 

415

 

 

333

 

 

 

 

 

 

 

 

 

Total recoveries

 

 

695

 

 

661

 

 

 

 

 

 

 

 

 

Net loan charge-offs

 

 

(2,909)

 

 

(1,202)

 

 

 

 

 

 

 

 

 

Provision - Core Bank

 

 

241

 

 

498

 

Provision - RPG

 

 

12,110

 

 

4,688

 

Total Provision

 

 

12,351

 

 

5,186

 

Allowance at end of period

 

$

42,362

 

$

31,475

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to total loans

 

 

1.14

%  

 

0.94

%  

Allowance to nonperforming loans

 

 

249

 

 

158

 

Net loan charge-offs to average loans

 

 

0.31

 

 

0.15

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to total loans

 

 

0.76

%  

 

0.78

%  

Allowance to nonperforming loans

 

 

166

 

 

131

 

Net loan charge-offs to average loans

 

 

0.02

 

 

0.04

 

 

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Noninterest Income

 

Total Company noninterest income increased $2,000  during the first quarter of 2017 compared to the same period in 2016. The most significant components comprising the total Company’s noninterest income by business segment were as follows:

 

Traditional Banking segment

 

Traditional Banking segment noninterest income increased $411,000, or 7%, for the first quarter of 2017 compared to the same period in 2016.  The most significant categories affecting the change in noninterest income for the quarter were as follows:

 

·

Service charges on deposit accounts increased  $144,000, or 5%, to $3.3 million for the first quarter of 2017 compared the same period in 2016.  The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the quarters ended March 31, 2017 and 2016 were $1.9 million and $1.8 million. The total daily overdraft charges, net of refunds, included in interest income for the quarters ended March 31, 2017 and 2016 were $411,000 and $380,000. 

 

·

Interchange fees increased $163,000,  or 8%, primarily due to an increase in debit card interchange revenue. The higher revenue for debit card transactions was consistent with and driven by growth in the Company’s retail checking accounts  from period to period.

 

 

Mortgage Banking segment

 

Within the Mortgage Banking segment, mortgage banking income decreased  $101,000, or 8%, during the first quarter of 2017 compared to the same period in 2016, as a result of a slowdown in consumer refinance volume.  Overall, Republic’s origination of secondary market loans totaled $33 million during the first quarter of 2017 compared to $37 million during the same period in 2016.  The ratio of net gain on sale of mortgage loans originated for sale was 2.94% and 2.96% during the first quarters of 2017 and 2016. 

 

Republic Processing Group segment

 

Within the RPG segment, noninterest income decreased $230,000,  or 1%, during the first quarter of 2017 compared to the same period in 2016.  The overall decrease was primarily attributable to a 10% decrease in net RT revenue at TRS from the first quarter of 2016 to first quarter of 2017, consistent with the 9% decrease in RT volume for the same periods.  The decline in RT volume was directionally consistent with a reported decline in e-filings at the Internal Revenue Service over the same periods.

 

Partially offsetting the decrease in net RT revenue was an increase of $772,000 in RCS program fees, which represents gains from the sale of consumer loans originated and sold through the RCS division of RPG.  The increase in RPG program fees resulted from the previously reported increase in volume from RCS’ small-dollar consumer loan programs.  During the first quarter of 2017, the Company sold approximately $126 million of loans from these programs compared to $44 million during the first quarter of 2016. In addition, RCS benefitted during the first quarter of 2017 from the final revenue payment of $427,000 from a program sponsor related to a first-year volume guarantee for its credit product.

 

 

 

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Noninterest Expenses

 

Total Company noninterest expenses increased $6.4 million, or 20%, during the first quarter of 2017 compared to the same period in 2016. The most significant components comprising the increase in noninterest expense by business segment were as follows:

 

See section titled “OVERVIEW (Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016)” for a brief description of some of the Company’s strategic initiatives impacting the noninterest categories below.

 

Traditional Banking segment

 

For the first quarter of 2017 compared to the same period in 2016, Traditional Banking noninterest expenses increased $5.2 million, or 21%. The most significant categories affecting the change in noninterest expense for the quarter were as follows:

 

·

Salaries and benefits expense increased $3.3 million, primarily due to an increase of 145 full-time-equivalent (“FTE”) employees from March 31,  2016 to March 31, 2017. The increase in FTEs was driven by additional staffing needed to implement the Company’s strategic initiatives, with an increase of 36 FTEs resulting from the Company’s 2016 Cornerstone acquisition.

 

·

Occupancy expense increased $552,000, or 11%, primarily driven by an 11% increase in rent expense and a 23% increase in depreciation expense resulting from new locations, existing banking center renovations and the cost of technology to support the Core Bank’s strategic initiatives.  In addition, $151,000 of the $552,000 increase in Occupancy expense was driven by the Company’s 2016 Cornerstone acquisition.

 

·

Marketing expenses increased $422,000, or 87%, with $304,000 of the increase related to promotion of the Core Bank’s MemoryBank digital banking platform.

 

Republic Processing Group segment

 

Within the RPG segment, noninterest expenses increased $1.1 million, or 20%, during the first quarter of 2017 compared to the same period in 2016.  The increase is primarily due to a $627,000 increase in salaries and benefits expense, driven by additional staff added during the previous 12 months to support growth in the TRS and RCS divisions.

 

 

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COMPARISON OF FINANCIAL CONDITION AT March 31, 2017 AND December 31, 2016

 

Loan Portfolio

 

Table 8 — Loan Portfolio Composition

 

 

 

 

 

 

 

 

(in thousands)

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

Owner occupied

$

969,705

 

$

1,000,148

 

Owner occupied - correspondent*

 

141,375

 

 

149,028

 

Nonowner occupied

 

164,742

 

 

156,605

 

Commercial real estate

 

1,049,193

 

 

1,060,496

 

Construction & land development

 

130,766

 

 

119,650

 

Commercial & industrial

 

270,652

 

 

259,026

 

Lease financing receivables

 

13,853

 

 

13,614

 

Warehouse lines of credit*

 

495,165

 

 

585,439

 

Home equity

 

341,611

 

 

341,285

 

Consumer:

 

 

 

 

 

 

Credit cards

 

14,644

 

 

13,414

 

Overdrafts

 

786

 

 

803

 

Automobile loans

 

55,962

 

 

52,579

 

Other consumer

 

19,215

 

 

19,744

 

Total Core Bank

 

3,667,669

 

 

3,771,831

 

 

 

 

 

 

 

 

Republic Processing Group*:

 

 

 

 

 

 

Commercial & industrial

 

14

 

 

6,695

 

Consumer:

 

 

 

 

 

 

Easy Advances

 

10,672

 

 

 —

 

Republic Credit Solutions

 

32,021

 

 

32,252

 

Total Republic Processing Group

 

42,707

 

 

38,947

 

 

 

 

 

 

 

 

Total loans**

 

3,710,376

 

 

3,810,778

 

Allowance for loan and lease losses

 

(42,362)

 

 

(32,920)

 

 

 

 

 

 

 

 

Total loans, net

$

3,668,014

 

$

3,777,858

 


* 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 decreased by $100 million, or 3%, during 2017 to $3.7 billion at March 31, 2017 primarily driven by seasonal declines in outstanding warehouse lines of credit and owner occupied residential real estate loans.

 

Warehouse Lines of Credit

 

As of March 31, 2017, the Bank had $495 million outstanding on total committed Warehouse credit lines of $983 million.  As of December 31, 2016, the Bank had $585 million outstanding on total committed Warehouse credit lines of $1.0 billion.  The $90 million decrease in outstanding balances reflects a general seasonal decline in the use of the Company’s Warehouse lines.   

 

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 segment 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 second 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. 

 

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Other Core Bank Loans

 

In addition to the decrease in outstanding warehouse lines of credit, other Core Bank loans also experienced an overall decline of $14 million during the first quarter of 2017, consistent with loan growth data released by the Federal Reserve for all commercial banks.  Within the Core Bank’s portfolio,  owner occupied residential real estate loans experienced the largest decrease of  $30 million, while CRE loans decreased $11 million. Partially offsetting these decreases, Commercial and Industrial loans grew $12 million, with $6 million of that growth driven by the Bank’s Dealer Floor Plan Lending product.

 

Allowance for Loan and Lease Losses (“Allowance”)

 

The Bank maintains an Allowance for probable incurred credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit Committee and the Board of Directors on a quarterly basis.

 

The Allowance consists of both specific and general components. The specific component relates to loans that are individually classified as impaired. The general component relates to pooled loans collectively evaluated on historical loss experience adjusted for qualitative factors.

 

Specific Component – Loans Individually Classified as Impaired

 

The Bank defines impaired loans as follows:

 

·

All loans internally rated as “Substandard,” “Doubtful” or “Loss”

·

All loans on nonaccrual status;

·

All Troubled Debt Restructurings (“TDRs”);  

·

All loans internally rated in a purchased credit impaired (“PCI”) category with cash flows that have deteriorated from management’s initial acquisition day estimate; and

·

Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the definition of impaired.

 

Generally, loans are designated as “Classified” or “Special Mention” to ensure more frequent monitoring. These loans are reviewed to ensure proper accrual status and management strategy. If it is determined that there is serious doubt as to performance in accordance with original or modified contractual terms, then the loan is generally downgraded and may be charged down to its estimated value and placed on nonaccrual status.

 

Under GAAP, the Bank uses the following methods to measure specific loan impairment, including:

 

·

Cash Flow Method — The recorded investment in the loan is measured against the present value of expected future cash flows discounted at the loan’s effective interest rate. The Bank employs this method for a significant portion of its TDRs. Impairment amounts under this method are reflected in the Bank’s Allowance as specific reserves on the respective impaired loan. These specific reserves are adjusted quarterly based upon reevaluation of the expected future cash flows and changes in the recorded investment.

 

·

Collateral Method — The recorded investment in the loan is measured against the fair value of the collateral less applicable selling costs. The Bank employs the fair value of collateral method for its impaired loans when repayment is based solely on the sale or operations of the underlying collateral. Collateral fair value is typically based on the most recent real estate valuation on file.  Measured impairment under this method is generally charged off unless the loan is a smaller-balance, homogeneous loan. The Bank’s selling costs for its collateral-dependent loans typically range from 10-13% of the fair value of the underlying collateral, depending on the asset class. Selling costs are not applicable for collateral-dependent loans whose repayment is based solely on the operations of the underlying collateral.

 

In addition to obtaining appraisals at the time of origination, the Bank typically updates appraisals and/or broker price opinions (“BPOs”) for loans with potential impairment. Updated valuations for commercial-related credits exhibiting an increased risk of loss are typically obtained within one year of the previous valuation. Collateral values for delinquent residential mortgage loans and home equity loans are generally updated prior to a loan becoming 90 days delinquent, but no more than 180 days past due. When measuring impairment, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons, the Bank discounts such stale valuations primarily based on age of valuation and market conditions of the underlying collateral.

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General Component – Pooled Loans Collectively Evaluated

 

The general component of the Allowance covers loans collectively evaluated for impairment by loan class and is based on historical loss experience, with potential adjustments for current relevant qualitative factors. Historical loss experience is determined by loan performance and class and is based on the actual loss history experienced by the Bank. Large groups of smaller-balance, homogeneous loans are typically included in the general component but may be individually evaluated if classified as a TDRs, on nonaccrual, or a case where the full collection of the total amount due for a such loan is improbable or otherwise meets the definition of impaired.

 

As this analysis, or any similar analysis, is an imprecise measure of loss, the Allowance is subject to ongoing adjustments. Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.

 

The Company’s Allowance increased $9 million, or 29%, from December 31, 2016 to  $42 million at March 31, 2017, primarily driven by reserves for EAs, growth in RCS small-dollar credit products and general growth in a few Core Bank portfolios. 

 

As a percent of total loans, the total Company’s Allowance increased to 1.14% at March 31, 2017 compared to 0.86% at December 31, 2016. The increase in ratio of Allowance to total loans was primarily driven by reserves for the EA product and growth in RCS small-dollar consumer products.  An analysis of the Allowance by business segment follows:

 

Traditional Banking segment

 

The Allowance at the Traditional Banking segment, remained at  $27 million at March 31, 2017 compared to December 31, 2016.  The Allowance to total Traditional Bank loans increased to 0.84% at March 31, 2017 from 0.83% at December 31, 2016.  

 

Warehouse Lending segment

 

The Allowance on loans originated through the Company’s Warehouse segment remained at approximately $1 million  from March 31, 2017 to December 31, 2016.

 

Republic Processing Group segment

 

The Allowance on loans originated through the Company’s RPG segment increased to $14 million at March 31, 2017 from $5 million at December 31, 2016,  driven primarily by $8 million of estimated reserves for loss on TRS’s EA product. The Allowance to total RPG loans increased to 33.65% at March 31, 2017 from 12.82% at December 31, 2016 and 40.78% at March 31, 2016.   

 

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 generally in the second quarter of each year.    Based on the timing of EA reserves versus charge-offs, the Allowance for EAs to total remaining outstanding EAs is relatively substantial at the end of the first quarter, or 72.44% and 72.90% at March 31, 2017 and 2016; however, these ratios are consistent with the Company’s estimated losses of 2.62% and 2.90% of total EAs originated during the first two months of 2017 and 2016. 

 

See additional detail regarding the Easy Advance (“EA”) product under Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements.”

 

Along with the EA offered through the TRS division, RPG maintained an Allowance for three loan products offered through its RCS division at March 31, 2017, including its line-of-credit product, its credit card product and its healthcare-receivables product.  At March 31, 2017, the Allowance to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables portfolio to as high as 30.77% for its line-of-credit portfolio.  A lower reserve percentage was provided for RCS’s healthcare receivables at March 31, 2017, as such receivables are generally repurchased by the Bank’s healthcare partner if they become 90-days-or-more delinquent.

 

 

 

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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-Substandard (“PCI-Sub”) are considered “Classified.” Loans rated “Special Mention” or PCI Group 1 (“PCI-1”) are considered Special Mention. The Bank’s Classified and Special Mention loans decreased $2 million during the first three months of 2017, primarily due to the payoffs and paydowns of Special Mention loans during the period.

 

See Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special mention loans.

 

Table 9 — Classified and Special Mention Loans

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Loss

 

$

 

$

 

Doubtful

 

 

 

 

 

Substandard

 

 

21,460

 

 

21,412

 

Purchased Credit Impaired - Substandard

 

 

1,896

 

 

2,366

 

Total Classified Loans

 

 

23,356

 

 

23,778

 

 

 

 

 

 

 

 

 

Special Mention

 

 

28,586

 

 

30,702

 

Purchased Credit Impaired - Group 1

 

 

7,815

 

 

7,908

 

Total Special Mention Loans

 

 

36,401

 

 

38,610

 

 

 

 

 

 

 

 

 

Total Classified and Special Mention Loans

 

$

59,757

 

$

62,388

 

 

 

 

 

 

 

 

 

 

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 $9 million and $10 million at March 31, 2017 and December 31, 2016.  Generally, all nonperforming loans are considered impaired.

 

Nonperforming loans to total loans increased to 0.46% at March 31, 2017 from 0.42% at December 31, 2016, as the total balance of nonperforming loans increased by $937,000, or 6%, while total loans decreased $100 million, or 3% during the first quarter of 2017.  

 

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Table 10 — Nonperforming Loans and Nonperforming Assets Summary

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

March 31, 2017

    

December 31, 2016

    

 

 

 

 

 

 

 

 

 

 

Loans on nonaccrual status*

 

$

16,793

 

$

15,892

 

 

Loans past due 90-days-or-more and still on accrual**

 

 

203

 

 

167

 

 

Total nonperforming loans

 

 

16,996

 

 

16,059

 

 

Other real estate owned

 

 

1,362

 

 

1,391

 

 

Total nonperforming assets

 

$

18,358

 

$

17,450

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.46

%  

 

0.42

%  

 

Nonperforming assets to total loans (including OREO)

 

 

0.49

 

 

0.46

 

 

Nonperforming assets to total assets

 

 

0.39

 

 

0.36

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Bank:

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.46

%  

 

0.42

%  

 

Nonperforming assets to total loans (including OREO)

 

 

0.50

 

 

0.46

 

 

Nonperforming assets to total assets

 

 

0.40

 

 

0.36

 

 


*Loans on nonaccrual status include impaired loans. See Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding impaired loans.

** Loans past due 90-days-or-more and still accruing consist of PCI loans or smaller balance consumer loans.

 

Approximately $14 million, or 81%, of the Bank’s total nonperforming loans at March 31, 2017 were concentrated in the residential real estate category, with the underlying collateral predominantly located in the Bank’s primary market area of Kentucky. The Bank’s nonperforming residential real estate concentration was $13 million, or 80%, as of December 31, 2016.

 

Approximately $3 million, or 16%, of the Bank’s total nonperforming loans were concentrated in the CRE and construction and land development portfolios as of March 31, 2017, compared to $3 million, or 17%, at December 31, 2016. While CRE is the primarily collateral for such loans, the Bank also obtains in many cases, at the time of origination, personal guarantees from the principal borrowers and secured liens on the guarantors’ primary residences.

 

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Table 11 — Nonperforming Loan Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

December 31, 2016

 

 

 

 

 

 

Percent of

 

 

 

 

Percent of

 

 

   

 

 

 

Total

 

 

 

 

Total

(dollars in thousands)

 

Balance

 

Loan Class

Balance

 

Loan Class

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

   

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

   

$

11,731

 

1.21

%  

  

$

10,955

 

1.10

%  

Owner occupied - correspondent

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

Nonowner occupied

 

   

 

818

 

0.50

 

 

 

852

 

0.54

 

Commercial real estate

 

   

 

2,674

 

0.25

 

 

 

2,725

 

0.26

 

Construction & land development

 

   

 

74

 

0.06

 

 

 

77

 

0.06

 

Commercial & industrial

 

   

 

151

 

0.06

 

 

 

154

 

0.06

 

Lease financing receivables

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

Warehouse lines of credit

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

Home equity

 

   

 

1,268

 

0.37

 

  

 

1,069

 

0.31

 

Consumer:

 

   

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

Overdrafts

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

Automobile loans

 

 

 

24

 

0.04

 

 

 

 —

 

 —

 

Other consumer

 

 

 

134

 

0.70

 

 

 

145

 

0.73

 

Total Core Bank

 

 

 

16,874

 

0.46

 

 

 

15,977

 

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

Consumer:

 

   

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

Republic Credit Solutions

 

   

 

122

 

0.38

 

 

 

82

 

0.25

 

Total Republic Processing Group

 

   

 

122

 

0.29

 

 

 

82

 

0.21

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans

 

   

$

16,996

 

0.46

 

 

$

16,059

 

0.42

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

Table 12 — Stratification of Nonperforming Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Nonperforming Loans and Recorded Investment

 

 

    

 

    

 

 

    

 

 

    

Balance

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2017

 

 

 

Balance

 

 

 

 

> $100 &

 

 

 

 

Balance 

 

 

 

 

Total

 

(dollars in thousands)

 

No.

 

<= $100

 

 

No.

 

<= $500

 

 

No.

 

> $500

 

 

No.

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

120

 

$

5,577

 

 

24

 

$

4,446

 

 

 1

 

$

1,708

 

 

145

 

$

11,731

 

Owner occupied - correspondent

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Nonowner occupied

 

 5

 

 

62

 

 

 —

 

 

 —

 

 

 1

 

 

756

 

 

 6

 

 

818

 

Commercial real estate

 

 2

 

 

101

 

 

 5

 

 

1,165

 

 

 1

 

 

1,408

 

 

 8

 

 

2,674

 

Construction & land development

 

 1

 

 

74

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

74

 

Commercial & industrial

 

 —

 

 

 —

 

 

 1

 

 

151

 

 

 —

 

 

 —

 

 

 1

 

 

151

 

Lease financing receivables

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

24

 

 

589

 

 

 4

 

 

679

 

 

 —

 

 

 —

 

 

28

 

 

1,268

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Overdrafts

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Automobile loans

 

 1

 

 

24

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

24

 

Other consumer

 

35

 

 

134

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

35

 

 

134

 

Total Core Bank

 

188

 

 

6,561

 

 

34

 

 

6,441

 

 

 3

 

 

3,872

 

 

225

 

 

16,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Republic Credit Solutions

 

1,667

 

 

122

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,667

 

 

122

 

Total Republic Processing Group

 

1,667

 

 

122

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,667

 

 

122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,855

 

$

6,683

 

 

34

 

$

6,441

 

 

 3

 

$

3,872

 

 

1,892

 

$

16,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Nonperforming Loans and Recorded Investment

 

 

    

 

    

 

 

    

 

 

    

Balance

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

 

 

 

Balance

 

 

 

 

> $100 &

 

 

 

 

Balance 

 

 

 

 

Total

 

(dollars in thousands)

 

No.

 

<= $100

 

 

No.

 

<= $500

 

 

No.

 

> $500

 

 

No.

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

120

 

$

5,417

 

 

30

 

$

5,538

 

 

 —

 

$

 —

 

 

150

 

$

10,955

 

Owner occupied - correspondent

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Nonowner occupied

 

 5

 

 

77

 

 

 —

 

 

 —

 

 

 1

 

 

775

 

 

 6

 

 

852

 

Commercial real estate

 

 2

 

 

106

 

 

 5

 

 

1,190

 

 

 1

 

 

1,429

 

 

 8

 

 

2,725

 

Construction & land development

 

 1

 

 

77

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

77

 

Commercial & industrial

 

 —

 

 

 —

 

 

 1

 

 

154

 

 

 —

 

 

 —

 

 

 1

 

 

154

 

Lease financing receivables

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

25

 

 

589

 

 

 3

 

 

480

 

 

 —

 

 

 —

 

 

28

 

 

1,069

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Overdrafts

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Automobile loans

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other consumer

 

39

 

 

145

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

39

 

 

145

 

Total Core Bank

 

192

 

 

6,411

 

 

39

 

 

7,362

 

 

 2

 

 

2,204

 

 

233

 

 

15,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Republic Credit Solutions

 

1,163

 

 

82

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,163

 

 

82

 

Total Republic Processing Group

 

1,163

 

 

82

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,163

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,355

 

$

6,493

 

 

39

 

$

7,362

 

 

 2

 

$

2,204

 

 

1,396

 

$

16,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Approximately $1 million in nonperforming loans at December 31, 2016, were removed from the nonperforming loan classification during the first three months of 2017. Approximately $330,000 in loan balances were transferred to OREO, with $1 million refinanced at other financial institutions.

 

Based on the Bank’s review at March 31, 2017, management believes that its reserves are adequate to absorb probable losses on all nonperforming loans.

 

Table 13 — Rollforward of Nonperforming Loan Activity

 

 

 

 

 

 

 

 

 

 

 

    

    

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

Nonperforming loans at beginning of period

 

 

$

16,059

 

$

21,936

 

Loans added to nonperforming status

 

 

 

2,659

 

 

1,869

 

Loans removed from nonperforming status (see table below)

 

 

 

(1,411)

 

 

(3,542)

 

Principal paydowns

 

 

 

(311)

 

 

(356)

 

 

 

 

 

 

 

 

 

 

Nonperforming loans at end of period

 

 

$

16,996

 

$

19,907

 

 

Table 14 — Detail of Loans Removed from Nonperforming Status

 

 

 

 

 

 

 

 

 

 

 

    

    

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

    

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

Loans charged-off

 

 

$

 —

 

$

(47)

 

Loans transferred to OREO

 

 

 

(330)

 

 

(472)

 

Loans refinanced at other institutions

 

 

 

(1,081)

 

 

(3,023)

 

Loans returned to accrual status

 

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans removed from nonperforming status

 

 

$

(1,411)

 

$

(3,542)

 

 

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Table of Contents

Delinquent Loans

 

Delinquent loans to total loans increased to 0.44% at March 31, 2017, from 0.24% at December 31, 2016,  due to delinquent EAs as of March 31, 2017. Generally, all remaining unpaid EAs will be charged off in the second quarter of 2017.   Core Bank delinquent loans to total Core Bank loans decreased to 0.16% at March 31, 2017 from 0.18% at December 31, 2016. With the exception of PCI loans and small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of March 31, 2017 and December 31, 2016 were on nonaccrual status.

 

Table 15 — Delinquent Loan Composition(*) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

December 31, 2016

 

 

 

 

 

 

Percent of

 

 

 

 

Percent of

March 31, 

 

 

 

 

 

Total

 

 

 

 

Total

(dollars in thousands)

    

Balance

 

Loan Class

Balance

 

Loan Class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

   

$

3,888

 

0.40

%  

   

$

4,554

 

0.46

%  

Owner occupied - correspondent

 

   

 

 —

 

 —

 

   

 

 —

 

 —

 

Nonowner occupied

 

   

 

40

 

0.02

 

   

 

46

 

0.03

 

Commercial real estate

 

   

 

641

 

0.06

 

   

 

425

 

0.04

 

Construction & land development

 

   

 

 —

 

 —

 

   

 

 —

 

 —

 

Commercial & industrial

 

   

 

 —

 

 —

 

   

 

342

 

0.13

 

Lease financing receivables

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

Warehouse lines of credit

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

Home equity

 

 

 

907

 

0.27

 

 

 

970

 

0.28

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

30

 

0.20

 

 

 

18

 

0.13

 

Overdrafts

 

 

 

145

 

18.45

 

 

 

161

 

20.05

 

Automobile loans

 

 

 

22

 

0.04

 

 

 

 —

 

 —

 

Other consumer

 

 

 

279

 

1.45

 

 

 

305

 

1.54

 

Total Core Bank

 

 

 

5,952

 

0.16

 

 

 

6,821

 

0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

   

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

   

 

 —

 

 —

 

   

 

 —

 

 —

 

Consumer:

 

   

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

   

 

8,350

 

78.24

 

   

 

 —

 

 —

 

Republic Credit Solutions

 

   

 

1,861

 

5.81

 

   

 

2,137

 

6.63

 

Total Republic Processing Group

 

   

 

10,211

 

23.91

 

   

 

2,137

 

5.49

 

 

 

   

 

 

 

 

 

   

 

 

 

 

 

Total delinquent loans

 

   

$

16,163

 

0.44

 

   

$

8,958

 

0.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


*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. Easy Advances do not have a contractual due date but are eligible for delinquency consideration three weeks after the taxpayer customer’s tax return is submitted to the applicable tax authority.

 

 

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Approximately $3 million in delinquent loans at December 31, 2016, were removed from delinquent status as of March 31, 2017.    Approximately $300,000 in loan balances were transferred to OREO, with $1 million refinanced at other financial institutions and the remaining $2 million in delinquent loans were paid current in 2017.

 

Table 16 — Rollforward of Delinquent Loan Activity

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Delinquent loans at beginning of period

 

$

8,958

 

$

11,731

 

Loans that became delinquent during the period - Easy Advances*

 

 

8,350

 

 

3,880

 

Loans that became delinquent during the period - other

 

 

2,650

 

 

3,195

 

Delinquent loans removed from delinquent status (see table below)

 

 

(3,486)

 

 

(6,237)

 

Change in principal balance of loans delinquent in both periods**

 

 

(309)

 

 

(32)

 

 

 

 

 

 

 

 

 

Delinquent loans at end of period

 

$

16,163

 

$

12,537

 


*Easy Advances do not have a contractual due date but are eligible for delinquency consideration three weeks after the taxpayer customer’s tax return is submitted to the applicable tax authority.

**Includes relatively-small consumer portfolios, e.g., credit cards.  

 

Table 17 — Detail of Delinquent Loans Removed From Delinquent Status

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

 

 

 

 

    

 

 

 

Loans charged-off

 

$

 —

 

$

(47)

 

Loans transferred to OREO

 

 

(300)

 

 

(472)

 

Loans refinanced at other institutions

 

 

(1,344)

 

 

(2,690)

 

Loans paid current

 

 

(1,842)

 

 

(3,028)

 

 

 

 

 

 

 

 

 

Total delinquent loans removed from delinquent status

 

$

(3,486)

 

$

(6,237)

 

 

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Table of Contents

Impaired Loans and Troubled Debt Restructurings

 

The Bank’s policy is to charge-off all or that portion of its recorded investment in a collateral-dependent impaired credit upon a determination that it is probable the full amount of contractual principal and interest will not be collected. Impaired loans totaled $49 million at March 31, 2017 compared to $53 million at December 31, 2016, a decrease of $4 million during the first three months of 2017.

 

A TDR is the 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 March 31, 2017, the Bank had $39 million in TDRs, of which $9 million were also on nonaccrual status. As of December 31, 2016, the Bank had $42 million in TDRs, of which $10 million were also on nonaccrual status.

 

Table 18 — Impaired Loan Composition

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

    

 

 

 

 

 

 

 

 

Troubled debt restructurings

 

$

38,762

 

$

41,586

 

Impaired loans (which are not TDRs)

 

 

10,208

 

 

11,098

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$

48,970

 

$

52,684

 

 

See Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding impaired loans and TDRs.

 

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Other Real Estate Owned

 

Table 19 — Stratification of Other Real Estate Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of OREO Properties and Carrying Value Range

 

    

 

    

 

 

    

 

    

Carrying 

    

 

    

 

 

    

 

    

 

 

 

 

 

 

Carrying 

 

 

 

Value  

 

 

 

Carrying 

 

 

 

Total 

March 31, 2017

 

 

 

Value

 

 

 

> $100 &

 

 

 

Value

 

 

 

Carrying 

(dollars in thousands)

 

No.

 

< = $100

 

No.

 

< = $500

 

No.

 

> $500

 

No.

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 1

 

$

30

 

 3

 

$

788

 

 1

 

$

544

 

 5

 

$

1,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 1

 

$

30

 

 3

 

$

788

 

 1

 

$

544

 

 5

 

$

1,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of OREO Properties and Carrying Value Range

 

    

 

    

 

 

    

 

    

Carrying 

    

 

    

 

 

    

 

    

 

 

 

 

 

 

Carrying 

 

 

 

Value  

 

 

 

Carrying 

 

 

 

Total 

December 31, 2016

 

 

 

Value

 

 

 

> $100 &

 

 

 

Value

 

 

 

Carrying 

(dollars in thousands)

 

No.

 

< = $100

 

No.

 

< = $500

 

No.

 

> $500

 

No.

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 3

 

$

848

 

 1

 

$

543

 

 —

 

$

 —

 

 4

 

$

1,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 3

 

$

848

 

 1

 

$

543

 

 —

 

$

 —

 

 4

 

$

1,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 20 — Rollforward of Other Real Estate Owned Activity

 

 

 

 

 

 

 

 

 

 

 

    

 

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

OREO at beginning of period

 

 

$

1,391

 

$

1,220

 

Transfer from loans to OREO

 

 

 

330

 

 

656

 

Proceeds from sale*

 

 

 

(501)

 

 

(844)

 

Net gain on sale

 

 

 

212

 

 

248

 

Writedowns

 

 

 

(70)

 

 

 —

 

 

 

 

 

 

 

 

 

 

OREO at end of period

 

 

$

1,362

 

$

1,280

 


* Inclusive of non-cash proceeds where the Bank financed the sale of the property.

 

The fair value of OREO represents the estimated value that management expects to receive when the property is sold, net of related costs to sell. These estimates are based on the most recently available real estate appraisals, with certain adjustments made based on the type of property, age of appraisal, current status of the property and other relevant factors to estimate the current value of the property.

 

Bank Owned Life Insurance (“BOLI”)

 

BOLI offers tax advantaged noninterest income to help the Bank offset employee benefits expenses.  The Company carried $62 million of BOLI on its consolidated balance sheet at both March 31, 2017 and December 31, 2016. 

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Deposits

 

Table 21 — Deposit Composition

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

Demand

 

$

935,245

 

$

872,709

 

Money market accounts

 

 

562,827

 

 

541,622

 

Brokered money market accounts

 

 

350,862

 

 

360,597

 

Savings

 

 

174,995

 

 

164,410

 

Individual retirement accounts*

 

 

43,250

 

 

42,642

 

Time deposits, $250 and over*

 

 

38,691

 

 

37,200

 

Other certificates of deposit*

 

 

143,838

 

 

140,894

 

Brokered certificates of deposit*

 

 

27,814

 

 

28,666

 

Total Core Bank interest-bearing deposits

 

 

2,277,522

 

 

2,188,740

 

Total Core Bank noninterest-bearing deposits

 

 

934,787

 

 

943,459

 

Total Core Bank deposits

 

 

3,212,309

 

 

3,132,199

 

 

 

 

 

 

 

 

 

Republic Processing Group ("RPG"):

 

 

 

 

 

 

 

Money market accounts

 

 

1,025

 

 

 —

 

Total RPG interest-bearing deposits

 

 

1,025

 

 

 —

 

 

 

 

 

 

 

 

 

Brokered prepaid card deposits

 

 

4,568

 

 

15

 

Other noninterest-bearing deposits

 

 

130,882

 

 

28,478

 

Total RPG noninterest-bearing deposits

 

 

135,450

 

 

28,493

 

Total RPG deposits

 

 

136,475

 

 

28,493

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,348,784

 

$

3,160,692

 


* Represents a time deposit.

 

Total Company deposits increased $188 million, or 6%, from December 31, 2016 to $3.3 billion at March 31, 2017. Total Company interest-bearing deposits increased $90 million, or 4%, while total Company noninterest bearing deposits increased  $98 million, or 10%.

 

Noninterest bearing deposits at RPG increased $107 million from December 31, 2016 to $135 million at March 31, 2017.  The increase was driven by short-term RT deposits at TRS, the majority of which will flow out of the Company during April 2017. 

 

Related to the increase in interest-bearing deposits, money market deposits originated through MemoryBank’s EarnMore product increased to $28 million during the first quarter of 2017.  In addition, growth in balances for several large corporate clients drove the additional increase in Core Bank interest-bearing deposits for the first three months of 2017.

 

Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings

 

Securities Sold under Agreements to Repurchase (“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 decreased approximately $29 million, or 17%, during the first three months of 2017.  The substantial majority of SSUARs are indexed to immediately repricing indices such as the Fed Funds Target Rate.

 

Federal Home Loan Bank Advances

 

FHLB advances decreased $335 million, or 42%, from December 31, 2016 to $468 million at March 31, 2017. The Bank held $75 million in overnight advances at a rate of 0.90% as of March 31, 2017, compared to $285 million in overnight advances at a rate of 0.64% at December 31, 2016.    

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During the first quarter of 2017, the Bank obtained $25 million in additional fixed-rate term advances with a weighted average rate of 1.88% and a weighted average term of 3.0 years, while $150 million of fixed-rate term advances with a weighted average rate of 1.96% matured during the period.

 

The Company’s usage of FHLB advances declined during the quarter due to excess short-term cash the Company had available from its TRS division’s RT product. Management anticipates its usage of FHLB advances to increase during the next quarter as this short-term cash exits the Company. 

 

Overall use 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. If a meaningful amount of the Bank’s loan originations in the future have repricing terms longer than five years, management will likely elect to borrow additional funds 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 125% at March 31, 2017 and  138% at December 31, 2016. At March 31, 2017 and December 31, 2016, the Company had cash and cash equivalents on-hand of $206 million and $289 million. In addition, the Bank had available borrowing capacity of $683     million and  $378 million from the FHLB at March 31, 2017 and December 31, 2016. In addition to its borrowing capacity with the FHLB, the Bank’s liquidity resources included unencumbered securities of $342 million and $291 million as of March  31, 2017 and December 31, 2016 and unsecured lines of credit totaling $125 million and $150 million available through various other financial institutions as of March  31, 2017 and December 31, 2016. 

 

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 securities available for sale, principal paydowns on loans and MBSs 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 March 31, 2017 and December 31, 2016, these pledged investment securities had a fair value of $225 million and $232 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.

 

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At March 31, 2017, the Bank had approximately $615 million in deposits from 95 large non-sweep deposit relationships where the individual relationship individually exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $369 million, or 11%, of the Company’s total deposit balances at March 31, 2017. 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 brokered deposits to replace withdrawn balances. Based on past experience utilizing brokered deposits, the Bank believes it can quickly obtain brokered deposits if needed. The overall cost of gathering brokered deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.

 

Due to the its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached, and in some cases fallen short of, its minimum internal policy limits for liquidity management, as set forth by the Bank’s Board of Directors.  As of March 31, 2017, the Bank was in compliance with all Board-approved liquidity policies.    

 

Capital

 

Total stockholders’ equity increased from $604 million at December 31, 2016 to $621 million at March 31, 2017. The increase in stockholders’ equity was primarily attributable to net income earned during 2017 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 March 31, 2017, RB&T could, without prior approval, declare dividends of approximately $63 million.

 

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 about 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 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 composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements. The capital conservation buffer began phasing in during 2016 and continues to phase in through 2019 on the following schedule: a capital conservation buffer of 0.625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875% effective January 1, 2018; and a fully phased in capital conservation buffer of 2.5% on January 1, 2019.

 

Republic continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based, 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 12.59% at March 31, 2017 compared to 13.32% at December 31, 2016. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.

 

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In 2005, Republic Bancorp Capital Trust (“RBCT”), an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in Trust Preferred Securities (“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 April 1, 2017, and is currently carrying the note at a cost of LIBOR plus 1.42%.

 

Table 22 — Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2017

 

As of December 31, 2016

 

 

 

 

Actual

 

Actual

 

 

(dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

681,176

 

17.09

%  

$

655,908

 

16.37

%  

 

Republic Bank & Trust Company

 

 

579,176

 

14.56

 

 

553,905

 

13.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

599,571

 

15.04

%  

$

584,530

 

14.59

%  

 

Republic Bank & Trust Company

 

 

536,814

 

13.49

 

 

520,985

 

13.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (core) capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

638,814

 

16.03

%  

$

622,988

 

15.55

%  

 

Republic Bank & Trust Company

 

 

536,814

 

13.49

 

 

520,985

 

13.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

638,814

 

13.23

%  

$

622,988

 

13.54

%  

 

Republic Bank & Trust Company

 

 

536,814

 

11.12

 

 

520,985

 

11.34

 

 

 

 

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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 a 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 to 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 March 31, 2017, a dynamic simulation model was run for increases in interest rates from “Up 100” basis points to “Up 400” basis points.  A simulation for declining interest rates as of March 31, 2017 was not considered meaningful and is not presented by the Bank because decreases in the Fed Funds Target Rate were considered unlikely as of March 31, 2017. The Federal Open Market Committee raised the FFTR for the second time in a  three-month period during March 2017, with further guidance suggesting that increases to the FFTR were more likely than not during 2017.

 

The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning April 1, 2017 and ending March  31, 2018 based on instantaneous movements in interest rates from Up 100 to Up 400 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model excludes all loan fees.

 

Table 23 — Bank Interest Rate Sensitivity as of March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase in Rates

 

 

100

    

200

    

300

    

400

 

 

Basis Points

 

Basis Points

 

Basis Points

 

Basis Points

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change from base net interest income

 

3.10

%  

 

2.80

%  

 

2.00

%  

 

0.30

%  

Board policy limit on % change from base

 

(4.00)

 

 

(8.00)

 

 

(12.00)

 

 

(16.00)

 

 

The Board of Directors of the Bank has established separate and distinct policy limits for acceptable percent changes in the Bank’s net interest income based on modeled changes in market interest rates. Historically, if model projections of the percent change in net interest income fall outside Board approved limits at a given point in time or are projected to fall outside such limits based on certain trends, the Bank has taken certain actions intended either to bring model projections back within Board approved limits or explain how future anticipated events will correct the current situation. These actions have included, but are not limited to, restructuring of interest earning assets and interest bearing liabilities, seeking additional fixed rate term FHLB advances, executing interest rate swaps and modifying the pricing or terms of loans, leases and deposits. These actions have historically had a negative impact on current earnings.

 

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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 Operation.”

 

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.

 

PART II — OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

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.

 

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

Details of Republic’s Class A Common Stock purchases during the first quarter of 2017 are included in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Number

 

 

 

 

 

 

 

 

Shares Purchased

 

of Shares that May

 

 

 

 

 

 

 

 

as Part of Publicly

 

Yet Be Purchased

 

 

 

Total Number of

 

Average Price

 

Announced Plans

 

Under the Plan

 

Period

    

Shares Purchased

    

Paid Per Share

    

or Programs

    

or Programs

  

 

 

 

 

 

 

 

 

 

 

 

January 1 - January 31

 

13,964

 

$

39.03

 

13,964

 

 

 

February 1 - February 28

 

 —

 

 

 —

 

 —

 

 

 

March 1 - March 31

 

 —

 

 

 —

 

 —

 

 

 

Total

 

13,964

 

$

39.03

 

13,964

 

236,361

 

 

The Company repurchased 13,964 of its shares during the first quarter of 2017. There were no shares exchanged for stock option exercises during the first quarter of 2017. 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 March 31, 2017, the Company had 236,361 shares that could be repurchased under its current share repurchase programs.

 

During the first quarter of 2017, there were 2,000 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 provision 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.

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Item 6.Exhibits.

 

The following exhibits are filed or furnished as a part of this report:

 

 

 

 

Exhibit Number

 

Description of Exhibit

 

 

 

10.1

 

Fifth Amendment dated as of March 15, 2017 to lease dated August 1, 1999, as amended, between Republic Bank & Trust Company and Jaytee Properties, now known as Jaytee-Springhurst, LLC

 

 

 

10.2

 

Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC dated March 15, 2017, relating to 200 South Seventh Street, Louisville, KY

 

 

 

31.1

 

Certification of Principal Executive Officer pursuant to the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002

 

 

 

32*

 

Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

Interactive data files: (i) Consolidated Balance Sheets at March 31, 2017 and December 31, 2016, (ii) Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2017 and 2016, (iii) Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2017, (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 and (v) Notes to Consolidated Financial Statements


* 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.

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SIGNATURES

 

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.

 

 

 

 

 

REPUBLIC BANCORP, INC.

 

(Registrant)

 

 

 

Principal Executive Officer:

 

 

 

 

May 10, 2017

/s/ Steven E. Trager

 

By:

Steven E. Trager

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

Principal Financial Officer:

 

 

 

 

May 10, 2017

/s/ Kevin Sipes

 

By:

Kevin Sipes

 

 

Executive Vice President, Chief Financial

 

 

Officer and Chief Accounting Officer

 

 

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