REPUBLIC BANCORP INC /KY/ - Quarter Report: 2020 June (Form 10-Q)

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 June 30, 2020

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

Commission File Number: 0-24649

REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)


Kentucky		61-0862051
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

601 West Market Street, Louisville, Kentucky		40202
(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common	RBCAA	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ⌧ Yes ◻ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ◻ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


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 July 31, 2020, was 18,708,244 and 2,199,804.

Table of Contents

TABLE OF CONTENTS



PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements.	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	73

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	121

Item 4.	Controls and Procedures.	121

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings.	121

Item 1A.	Risk Factors.	122

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	124

Item 6.	Exhibits.	125

	SIGNATURES	126

Table of Contents

GLOSSARY OF TERMS

The terms identified in alphabetical order below are used throughout this Form 10-Q. You may find it helpful to refer to this page as you read this report.


Term		Definition

ACH		Automated Clearing House
ACL		Allowance for Credit Losses
ACLC		Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
ACLL		Allowance for Credit Losses on Loans
ACLS		Allowance for Credit Losses on Securities
AFS		Available for Sale
AOCI		Accumulated Other Comprehensive Income
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
Basic EPS		Basic earnings per Class A Common Share
BOLI		Bank Owned Life Insurance
BPO		Brokered Price Opinion
C&D		Construction and Development
C&I		Commercial and Industrial
CECL		Current Expected Credit Loss
CMO		Collateralized Mortgage Obligation
Core Bank		The Traditional Banking, Warehouse Lending, and Mortgage Banking reportable segments
COVID-19		Coronavirus Disease of 2019
CRE		Commercial Real Estate
Diluted EPS		Diluted earnings per Class A Common Share
EA		Easy Advance
ESPP		Employee Stock Purchase Plan
EVP		Executive Vice President
FASB		Financial Accounting Standards Board
FDIC		Federal Deposit Insurance Corporation
FFTR		Federal Funds Target Rate
FHLB		Federal Home Loan Bank
FHLMC		Federal Home Loan Mortgage Corporation
FICO		Fair Isaac Corporation
FNMA		Federal National Mortgage Association
FOMC		Federal Open Market Committee
FRB		Federal Reserve Bank
FTE		Full Time Equivalent
FTP		Funds Transfer Pricing
GAAP		Generally Accepted Accounting Principles in the United States
HEAL		Home Equity Amortizing Loan
HELOC		Home Equity Line of Credit
HTM		Held to Maturity
IRS		Internal Revenue Service
ITM		Interactive Teller Machine
LGD		Loss Given Default
LIBOR		London Interbank Offered Rate
LPO		Loan Production Office
LTV		Loan to Value
MBS		Mortgage Backed Securities
MSRs		Mortgage Servicing Rights
NA		Not Applicable
NM		Not Meaningful
OBS		Off-Balance Sheet
OCI		Other Comprehensive Income
OREO		Other Real Estate Owned
OTTI		Other than Temporary Impairment
PCD		Purchased with Credit Deterioration
PCI		Purchased Credit Impaired
PD		Probability of Default
PPP		SBA's Paycheck Protection Program
PPPLF		The FRB's Paycheck Protection Program Liquidity Facility
Prime		The Wall Street Journal Prime Interest Rate
Provision		Provision for Expected Credit Loss Expense
PSU		Performance Stock Unit
R&D		Research and Development
RB&T / the Bank		Republic Bank & Trust Company
RBCT		Republic Bancorp Capital Trust
RCS		Republic Credit Solutions segment
Republic / the Company		Republic Bancorp, Inc.
RPG		Republic Processing Group
RPS		Republic Payment Solutions
RT		Refund Transfer
SBA		U.S. Small Business Administration
SEC		Securities and Exchange Commission
SSUAR		Securities Sold Under Agreements to Repurchase
SVP		Senior Vice President
TCJA		2017 Tax Cuts and Jobs Act
TDR		Troubled Debt Restructuring
The Captive		Republic Insurance Services, Inc.
TPS		Trust Preferred Securities
TRS		Tax Refund Solutions segment
TRUP		TPS Investment
Warehouse		Warehouse Lending segment

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)


	June 30,		December 31,
	2020		2019
ASSETS

Cash and cash equivalents	$	560,195	$	385,303
Available-for-sale debt securities, at fair value (amortized cost of $473,971 in 2020 and $467,122 in 2019, allowance for credit losses of $126 in 2020 and $0 in 2019)		486,847		471,355
Held-to-maturity debt securities (fair value of $56,266 in 2020 and $63,156 in 2019, allowance for credit losses of $147 in 2020 and $0 in 2019)		55,745		62,531
Equity securities with readily determinable fair value		3,015		3,188
Mortgage loans held for sale, at fair value		40,028		19,224
Consumer loans held for sale, at fair value		164		598
Consumer loans held for sale, at the lower of cost or fair value		12,800		11,646
Loans (loans carried at fair value of $667 in 2020 and $998 in 2019)		5,065,092		4,433,151
Allowance for credit losses		(55,097)		(43,351)
Loans, net		5,009,995		4,389,800
Federal Home Loan Bank stock, at cost		25,629		30,831
Premises and equipment, net		42,753		46,196
Right-of-use assets		34,450		35,206
Goodwill		16,300		16,300
Other real estate owned		2,194		113
Bank owned life insurance		67,217		66,433
Other assets and accrued interest receivable		103,243		81,595

TOTAL ASSETS	$	6,460,575	$	5,620,319

LIABILITIES

Deposits:
Noninterest-bearing	$	1,821,400	$	1,033,379
Interest-bearing		3,196,685		2,752,629
Total deposits		5,018,085		3,786,008

Securities sold under agreements to repurchase and other short-term borrowings		177,397		167,617
Operating lease liabilities		35,571		36,530
Federal Reserve Paycheck Protection Program Liquidity Facility		169,209		—
Federal Home Loan Bank advances		137,500		750,000
Subordinated note		41,240		41,240
Other liabilities and accrued interest payable		85,954		74,680

Total liabilities		5,664,956		4,856,075

Commitments and contingent liabilities (Footnote 9)		—		—

STOCKHOLDERS’ EQUITY

Preferred stock, no par value		—		—
Class A Common Stock and Class B Common Stock, no par value		4,898		4,907
Additional paid in capital		142,813		142,068
Retained earnings		638,282		614,171
Accumulated other comprehensive income		9,626		3,098

Total stockholders’ equity		795,619		764,244

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,460,575	$	5,620,319

See accompanying footnotes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
INTEREST INCOME:
Loans, including fees	$	54,185	$	60,211	$	131,698	$	137,039
Taxable investment securities		2,712		3,284		5,495		6,875
Federal Home Loan Bank stock and other		194		2,169		1,057		4,383
Total interest income		57,091		65,664		138,250		148,297

INTEREST EXPENSE:
Deposits		3,647		6,903		9,949		13,651
Securities sold under agreements to repurchase and other short-term borrowings		17		330		136		751
Federal Reserve Payment Protection Plan Liquidity Facility		105		—		105		—
Federal Home Loan Bank advances		822		4,062		2,470		6,792
Subordinated note		295		423		647		858
Total interest expense		4,886		11,718		13,307		22,052

NET INTEREST INCOME		52,205		53,946		124,943		126,245
Provision for expected credit loss expense		6,534		4,460		29,294		21,691
NET INTEREST INCOME AFTER PROVISION		45,671		49,486		95,649		104,554

NONINTEREST INCOME:
Service charges on deposit accounts		2,451		3,598		5,587		6,901
Net refund transfer fees		2,913		3,629		18,736		20,729
Mortgage banking income		8,398		2,416		13,193		3,955
Interchange fee income		2,808		3,257		5,360		6,014
Program fees		1,138		1,037		3,762		2,111
Increase in cash surrender value of bank owned life insurance		395		377		784		759
Net gains on other real estate owned		1		90		4		220
Other		647		721		1,894		1,853
Total noninterest income		18,751		15,125		49,320		42,542

NONINTEREST EXPENSE:
Salaries and employee benefits		26,324		25,286		52,946		50,362
Occupancy and equipment, net		6,715		6,472		13,561		13,056
Communication and transportation		1,353		1,071		2,642		2,232
Marketing and development		1,018		1,278		1,851		2,380
FDIC insurance expense		299		295		299		743
Bank franchise tax expense		914		935		3,420		3,431
Data processing		2,753		2,217		5,292		4,313
Interchange related expense		1,173		1,302		2,249		2,617
Supplies		539		582		991		1,066
Other real estate owned and other repossession expense		21		148		39		194
Legal and professional fees		1,025		844		2,262		1,730
Other		2,691		2,998		6,242		6,813
Total noninterest expense		44,825		43,428		91,794		88,937

INCOME BEFORE INCOME TAX EXPENSE		19,597		21,183		53,175		58,159
INCOME TAX EXPENSE		3,793		3,176		10,674		10,636
NET INCOME	$	15,804	$	18,007	$	42,501	$	47,523

BASIC EARNINGS PER SHARE:
Class A Common Stock	$	0.77	$	0.86	$	2.04	$	2.29
Class B Common Stock		0.69		0.79		1.86		2.08

DILUTED EARNINGS PER SHARE:
Class A Common Stock	$	0.76	$	0.86	$	2.04	$	2.28
Class B Common Stock		0.69		0.78		1.85		2.07

See accompanying footnotes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019

Net income	$	15,804	$	18,007	$	42,501	$	47,523

OTHER COMPREHENSIVE INCOME

Change in fair value of derivatives used for cash flow hedges		(10)		(146)		(171)		(215)
Reclassification amount for net derivative losses (gains) realized in income		79		(13)		108		(32)
Change in unrealized gain on AFS debt securities		1,099		2,014		8,876		5,673
Change in unrealized gain of AFS debt security for which a portion of OTTI has been recognized in earnings		(108)		(1)		(107)		(34)
Total other comprehensive income before income tax		1,060		1,854		8,706		5,392
Tax effect		(265)		(389)		(2,178)		(1,133)
Total other comprehensive income, net of tax		795		1,465		6,528		4,259

COMPREHENSIVE INCOME	$	16,599	$	19,472	$	49,029	$	51,782

See accompanying footnotes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)


	Three Months Ended June 30, 2020

	Common Stock								Accumulated
	Class A	Class B			Additional				Other		Total
	Shares	Shares			Paid In		Retained		Comprehensive		Stockholders’
(in thousands, except per share data)	Outstanding	Outstanding	Amount		Capital		Earnings		Income (Loss)		Equity

Balance, April 1, 2020	18,687	2,200	$	4,890	$	141,928	$	628,397	$	8,831	$	784,046

Net income	—	—		—		—		15,804		—		15,804
Net change in accumulated other comprehensive income	—	—		—		—		—		795		795
Dividends declared on Common Stock:
Class A Shares ($0.286 per share)	—	—		—		—		(5,347)		—		(5,347)
Class B Shares ($0.260 per share)	—	—		—		—		(572)		—		(572)
Stock options exercised, net of shares withheld	17	—		7		291		—		—		298
Net change in notes receivable on Class A Common Stock	—	—		—		84		—		—		84
Deferred compensation - Class A Common Stock:
Directors	—	—		—		71		—		—		71
Designated key employees	—	—		—		134		—		—		134
Employee stock purchase plan - Class A Common Stock	4	—		1		135		—		—		136
Stock-based awards - Class A Common Stock:
Performance stock units	—	—		—		—		—		—		—
Restricted stock	—	—		—		60		—		—		60
Stock options	—	—		—		110		—		—		110

Balance, June 30, 2020	18,708	2,200	$	4,898	$	142,813	$	638,282	$	9,626	$	795,619


	Three Months Ended June 30, 2019

	Common Stock								Accumulated
	Class A	Class B			Additional				Other		Total
	Shares	Shares			Paid In		Retained		Comprehensive		Stockholders’
(in thousands, except per share data)	Outstanding	Outstanding	Amount		Capital		Earnings		Income		Equity

Balance, April 1, 2019	18,698	2,213	$	4,899	$	141,206	$	569,189	$	1,797	$	717,091

Net income	—	—		—		—		18,007		—		18,007
Net change in accumulated other comprehensive income	—	—		—		—		—		1,465		1,465
Dividends declared on Common Stock:
Class A Shares ($0.264 per share)	—	—		—		—		(4,932)		—		(4,932)
Class B Shares ($0.240 per share)	—	—		—		—		(530)		—		(530)
Stock options exercised, net of shares withheld	34	—		8		(110)		—		—		(102)
Repurchase of Class A Common Stock	5	(5)		—		—		—		—		—
Net change in notes receivable on Class A Common Stock	—	—		—		(158)		—		—		(158)
Deferred compensation - Class A Common Stock:
Directors	—	—		—		41		—		—		41
Designated key employees	—	—		—		58		—		—		58
Employee stock purchase plan - Class A Common Stock	2	—		—		114		—		—		114
Stock-based awards - Class A Common Stock:
Performance stock units	—	—		—		—		—		—		—
Restricted stock	1	—		—		295		—		—		295
Stock options	—	—		—		79		—		—		79

Balance, June 30, 2019	18,740	2,208	$	4,907	$	141,525	$	581,734	$	3,262	$	731,428

Table of Contents


	Six Months Ended June 30, 2020
	Common Stock								Accumulated
	Class A	Class B			Additional				Other		Total
	Shares	Shares			Paid In		Retained		Comprehensive		Stockholders’
(in thousands, except per share data)	Outstanding	Outstanding	Amount		Capital		Earnings		Income (Loss)		Equity

Balance, January 1, 2020	18,737	2,206	$	4,907	$	142,068	$	614,171	$	3,098	$	764,244

Adjustment for adoption of ASU 2016-13	—	—		—		—		(4,291)		—		(4,291)
Net income	—	—		—		—		42,501		—		42,501
Net change in accumulated other comprehensive income	—	—		—		—		—		6,528		6,528
Dividends declared on Common Stock:
Class A Shares ($0.572 per share)	—	—		—		—		(10,705)		—		(10,705)
Class B Shares ($0.520 per share)	—	—		—		—		(1,144)		—		(1,144)
Stock options exercised, net of shares withheld	19	—		8		248		—		—		256
Conversion of Class B to Class A Common Shares	6	(6)		—		—		—		—		—
Repurchase of Class A Common Stock	(86)	—		(20)		(582)		(2,250)		—		(2,852)
Net change in notes receivable on Class A Common Stock	—	—		—		114		—		—		114
Deferred compensation - Class A Common Stock:
Directors	4	—		—		150		—		—		150
Designated key employees	—	—		—		277		—		—		277
Employee stock purchase plan - Class A Common Stock	9	—		2		289		—		—		291
Stock-based awards - Class A Common Stock:
Performance stock units	18	—		—		(200)		—		—		(200)
Restricted stock	1	—		1		247		—		—		248
Stock options	—	—		—		202		—		—		202

Balance, June 30, 2020	18,708	2,200	$	4,898	$	142,813	$	638,282	$	9,626	$	795,619


	Six Months Ended June 30, 2019
	Common Stock								Accumulated
	Class A	Class B			Additional				Other		Total
	Shares	Shares			Paid In		Retained		Comprehensive		Stockholders’
(in thousands, except per share data)	Outstanding	Outstanding	Amount		Capital		Earnings		Income		Equity

Balance, January 1, 2019	18,675	2,213	$	4,900	$	141,018	$	545,013	$	(997)	$	689,934

Adjustment for adoption of ASU 2016-02	—	—		—		—		126		—		126
Net income	—	—		—		—		47,523		—		47,523
Net change in accumulated other comprehensive income	—	—		—		—		—		4,259		4,259
Dividends declared on Common Stock:
Class A Shares ($0.528 per share)	—	—		—		—		(9,865)		—		(9,865)
Class B Shares ($0.480 per share)	—	—		—		—		(1,061)		—		(1,061)
Stock options exercised, net of shares withheld	34	—		8		(110)		—		—		(102)
Repurchase of Class A Common Stock	5	(5)		—		—		—		—		—
Conversion of Class B to Class A Common Shares	(8)	—		(1)		(376)		(2)		—		(379)
Net change in notes receivable on Class A Common Stock	—	—		—		(192)		—		—		(192)
Deferred compensation - Class A Common Stock:
Directors	5	—		—		106		—		—		106
Designated key employees	—	—		—		226		—		—		226
Employee stock purchase plan - Class A Common Stock	5	—		—		235		—		—		235
Stock-based awards - Class A Common Stock:
Performance stock units	23	—		—		(57)		—		—		(57)
Restricted stock	1	—		—		475		—		—		475
Stock options	—	—		—		200		—		—		200

Balance, June 30, 2019	18,740	2,208	$	4,907	$	141,525	$	581,734	$	3,262	$	731,428

See accompanying footnotes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Six Months Ended
	June 30,
	2020		2019
OPERATING ACTIVITIES:
Net income	$	42,501	$	47,523
Adjustments to reconcile net income to net cash provided by operating activities:
Net (accretion) amortization on investment securities		732		(21)
Net accretion on loans and amortization of core deposit intangible and operating lease components		(2,383)		(1,833)
Unrealized (gains) losses on equity securities with readily determinable fair value		173		(448)
Depreciation of premises and equipment		5,041		4,572
Amortization of mortgage servicing rights		1,593		733
Impairment of mortgage servicing rights		100		—
Provision for on-balance sheet exposures		29,294		21,691
Provision for off-balance sheet exposures		180		—
Net gain on sale of mortgage loans held for sale		(13,504)		(3,478)
Origination of mortgage loans held for sale		(343,941)		(122,696)
Proceeds from sale of mortgage loans held for sale		336,641		121,262
Net gain on sale of consumer loans held for sale		(3,006)		(2,618)
Origination of consumer loans held for sale		(282,612)		(346,413)
Proceeds from sale of consumer loans held for sale		284,898		324,260
Net gain realized on sale of other real estate owned		(4)		(220)
Impairment of premises held for sale		—		132
Deferred compensation expense - Class A Common Stock		427		332
Stock-based awards expense- Class A Common Stock		250		618
Net gain on sale of bank premises and equipment		(353)		—
Increase in cash surrender value of bank owned life insurance		(784)		(759)
Net change in other assets and liabilities:
Accrued interest receivable		1,765		(774)
Accrued interest payable		(1,685)		491
Other assets		(4,465)		581
Other liabilities		(9,486)		(7,775)
Net cash provided by operating activities		41,372		35,160

INVESTING ACTIVITIES:
Purchases of available-for-sale debt securities		(138,894)		—
Proceeds from calls, maturities and paydowns of available-for-sale debt securities		131,323		101,051
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities		6,628		1,315
Net change in outstanding warehouse lines of credit		(312,321)		(269,099)
Net change in other loans		(342,083)		(137,490)
Proceeds from redemption of Federal Home Loan Bank stock		14,202		2,102
Purchase of Federal Home Loan Bank stock		(9,000)		(2,277)
Proceeds from sales of other real estate owned		32		580
Proceeds from sale of bank premises and equipment		894		—
Net purchases of premises and equipment		(2,139)		(4,083)
Net cash used in investing activities		(651,358)		(307,901)

FINANCING ACTIVITIES:
Net change in deposits		1,232,077		257,729
Net change in securities sold under agreements to repurchase and other short-term borrowings		9,780		43,012
Net change in Federal Reserve Payment Protection Plan Lending Facility borrowings		169,209		—
Payments of Federal Home Loan Bank advances		(1,037,500)		(565,000)
Proceeds from Federal Home Loan Bank advances		425,000		670,000
Repurchase of Class A Common Stock		(2,852)		(379)
Net proceeds from Class A Common Stock purchased through employee stock purchase plan		291		235
Net proceeds from Class A Common Stock options exercised and PSUs awarded		256		(102)
Cash dividends paid		(11,383)		(10,449)
Net cash provided by financing activities		784,878		395,046

NET CHANGE IN CASH AND CASH EQUIVALENTS		174,892		122,305
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		385,303		351,474
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	560,195	$	473,779

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for:
Interest	$	14,992	$	21,561
Income taxes		10,008		6,726

SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to real estate acquired in settlement of loans	$	2,109	$	1,295
Transfers from loans held for investment to held for sale		—		124,202
Unfunded commitments in low-income-housing investments		10,000		—
Right-of-use assets recorded		2,151		40,202
Allowance for credit losses recorded upon adoption of ASC 326		7,241		—

See accompanying footnotes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –JUNE 30, 2020 and 2019 AND DECEMBER 31, 2019 (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.

Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank, as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in Republic’s Form 10-K for the year ended December 31, 2019.

As of June 30, 2020, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company’s national branchless banking platform, is part of the Traditional Banking segment.

The Company’s financial condition at June 30, 2020 and results of operation for the three and six months ended June 30, 2020 were impacted by the COVID-19 pandemic and the public’s response to it.

For additional discussion regarding the COVID-19 pandemic and its impact to the Company, see the following Footnotes in this section of the filing:

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Footnote 2 “Investment Securities”

●

Footnote 4 “Loans and Allowance for Credit Losses”

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Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities”

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Core Bank

Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2020, Republic had 42 full-service banking centers and two LPOs with locations as follows:

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Kentucky — 28

●

Metropolitan Louisville — 18

●

Central Kentucky — 7

●

Georgetown — 1

●

Lexington — 5

●

Shelbyville — 1

●

Northern Kentucky — 3

●

Covington — 1

●

Crestview Hills — 1

●

Florence — 1

●

Southern Indiana — 3

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Floyds Knobs — 1

●

Jeffersonville — 1

●

New Albany — 1

●

Metropolitan Tampa, Florida — 8*

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Metropolitan Cincinnati, Ohio — 2

●

Metropolitan Nashville, Tennessee — 3*

*Includes one LPO

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

Traditional Banking results of operations are primarily dependent upon net interest income, which represents the difference between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning Traditional Banking assets represent investment securities and commercial and consumer loans primarily secured by real estate and/or personal property. Interest-bearing liabilities primarily consist of interest-bearing deposit accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources. FHLB advances have traditionally been a significant borrowing source for the Bank.

Other sources of Traditional Banking income include service charges on deposit accounts, debit and credit card interchange fee income, title insurance commissions, fees charged to clients for trust services, and increases in the cash surrender value of BOLI.

Traditional Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, data processing, interchange related expenses, marketing and development expenses, FDIC insurance expense, franchise tax expense and various other general and administrative costs. Traditional Banking results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory agencies.

Warehouse Lending segment — Through its Warehouse segment, the Core Bank provides short-term, revolving credit facilities to mortgage bankers across the U.S. through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.

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Mortgage Banking segment — Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.

Republic Processing Group

Tax Refund Solutions segment — Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.

RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”

The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. The EA product had the following features during 2019 and 2020:

●

Offered only during the first two months of each year;

●

The taxpayer was given the option to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $6,250;

●

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

●

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

●

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

●

If an insufficient refund to repay the EA occurs:

there is no recourse to the taxpayer,

no negative credit reporting on the taxpayer, and

no collection efforts against the taxpayer.

The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. Provision on EAs are estimated when advances are made, with Provision for all expected EA losses made in the first quarter of each year. Unpaid EAs are charged off by June 30^th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged off loans.

Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is based primarily on the prior-year’s tax refund payment patterns. Because the substantial majority of the EA volume occurs each year before that year’s tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund payment patterns change materially between years.

In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EAs product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA product offering and therefore on the Company’s financial condition and results of operations.

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Republic Payment Solutions — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.

The Company reports fees related to RPS programs under Program fees. Additionally, the Company’s portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under “Interchange fee income.”

Republic Credit Solutions segment — Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:

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RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers in multiple states. Elevate Credit, Inc., a third-party service provider subject to the Bank’s oversight and supervision, provides the Bank with certain marketing, servicing, technology, and support services for the RCS line-of-credit program, while a separate third-party also provides customer support, servicing, and other services for the RCS line-of-credit product on the Bank’s behalf. The Bank is the lender for the RCS line-of-credit product and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of the RCS line-of-credit product.

The Bank sells participation interests in the RCS line-of-credit product. These participation interests are a 90% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying RCS line-of-credit account with each borrower. The RCS line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale through this program are carried at the lower of cost or fair value.

●

RCS installment loan products – From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment loan product across the U.S. using a third-party service provider. As part of the program, the Bank sold 100% of the balances generated through the program back to its third-party service provider approximately 21 days after origination. During the second quarter of 2018, the Bank and its third-party service provider suspended the origination of new loans and the sale of unsold loans through this program. Since program suspension in 2018, the Bank has carried all unsold loans under this program as “held for investment” on its balance sheet and has continued to wind down those balances. Additionally, loans under this program are carried at fair value under a fair value option on the Bank’s balance sheet with the portfolio marked to market monthly. Approximately $667,000 of balances remained held for investment under this program as of June 30, 2020.

Through a new program launched in December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. A third-party service provider subject to the Bank’s oversight and supervision provides the Bank with marketing services and loan servicing for these RCS installment loans. The Bank is the lender for these RCS installment loans, and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this RCS installment loan product. Currently, all loan balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intention to sell these loans to its third-party service provider generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.

●

RCS healthcare receivables products – The Bank originates healthcare-receivables products across the U.S. through two different third-party service providers. In one program, the Bank retains 100% of the receivables originated. In the other program, the Bank retains 100% of the receivables originated in some instances, and in other instances, sells 100% of the receivables within one month of origination. Loan balances held for sale through this program are carried at the lower of cost or fair value.

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The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”

Recently Adopted Accounting Standards

Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaces the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and HTM securities. CECL also applies to certain off-balance sheet credit exposures. In addition to CECL, ASC 326 made changes to the accounting for AFS debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on AFS debt securities that the Company does not intend or will likely not be compelled to sell.

The Company adopted ASC 326 primarily using the modified retrospective method for its financial instruments and off-balance sheet credit exposures. Results for periods beginning after December 31, 2019 will be presented under CECL while prior-period amounts will continue to be reported under previously applicable GAAP.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which OTTI had been recognized prior to January 1, 2020. As a result, the amortized cost basis will remain the same before and after the effective date of CECL. The effective interest rate on these debt securities was not changed. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.

The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as PCI assets under ASC 310-30. As allowed by ASC 326, the Company did not reassess whether PCI assets met the PCD criteria as of the date of adoption. On January 1, 2020, the amortized cost basis of PCD assets was adjusted to reflect the addition of $1.4 million of ACLL formerly classified under previous GAAP as a non-accretable credit discount within gross loans. The remaining noncredit discount on PCD assets will be accreted into interest income at the effective interest rate as of January 1, 2020.

The Company elected the fair value option for its RCS installment loan product in 2016. This product will continue to be accounted for at fair value under CECL.

In accordance with the adoption of ASC 326 and CECL, the Company recorded on January 1, 2020 a $6.7 million, or 16%, increase in the ACLL for its loans, a $51,000 ACLS for its investment debt securities, and a $456,000 ACLC for its off-balance sheet credit exposures. Of the $6.7 million increase in ACLL, approximately $1.4 million was a gross-up reclassification of non-accretable discount on previously-PCI, now-PCD, loans as mentioned above, and the remaining $5.3 million was a difference in ACL between CECL and the probable-incurred method. The Company also made a cumulative effect entry of $4.3 million to reduce its opening balance of retained earnings upon adoption of ASC 326, with no impact on 2020 earnings for these adoption entries. The adoption date increase in ACLL for the Company’s loans primarily reflects additional ACLL for longer duration loan portfolios, such as the Company's residential real estate and consumer loan portfolios. No additional segmentation of the Bank's loan portfolios was deemed necessary upon adoption.

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The following table illustrates the impact of ASC 326 adoption:


	Allowance for Credit Losses as of January 1, 2020
	As Reported				Impact
	Under		Pre-ASC 326		of ASC 326
(in thousands)	ASC 326		Adoption		Adoption

Assets:
Allowance for credit losses on debt securities:
AFS debt securities - Corporate bonds	$	—	$	—	$	—
HTM debt securities - Corporate bond		51		—		51
Allowance for credit losses on debt securities	$	51	$	—	$	51

Allowance for credit losses on loans:
Traditional Banking:
Residential real estate:
Owner occupied	$	8,928	$	4,729	$	4,199
Nonowner occupied		1,885		1,737		148
Commercial real estate		10,759		10,486		273
Construction & land development		3,599		2,152		1,447
Commercial & industrial		1,564		2,882		(1,318)
Lease financing receivables		147		147		—
Home equity		4,373		2,721		1,652
Consumer:
Credit cards		1,053		1,020		33
Overdrafts		1,169		1,169		—
Automobile loans		605		612		(7)
Other consumer		857		550		307
Total Traditional Banking		34,939		28,205		6,734
Warehouse lines of credit		1,794		1,794		—
Total Core Banking		36,733		29,999		6,734

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—
Other TRS loans		234		234		—
Republic Credit Solutions		13,118		13,118		—
Total Republic Processing Group		13,352		13,352		—

Allowance for credit losses on loans	$	50,085	$	43,351	$	6,734

Liabilities:
Allowance for credit losses on OBS credit exposures	$	456	$	—	$	456

The following ASUs were also adopted by the Company during the six months ended June 30, 2020:


ASU. No.	Topic	Nature of Update	Date Adopted	Method of Adoption	Financial Statement Impact
2017-04	Intangibles - Goodwill and Other (Topic 350)	This ASU simplifies goodwill impairment testing by eliminating Step 2 from the goodwill impairment test. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the 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	Immaterial

2020-04	Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help during the global market-wide reference rate transition period; therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020	Prospectively	This ASU is expected to assist in the Company's transition away from LIBOR as a reference rate.

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Debt Securities —Debt securities are classified as AFS when they might be sold before maturity. AFS debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Debt securities are classified as HTM and carried at amortized cost when management has the positive intent and ability to hold them to maturity.

Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are amortized to the earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.

Allowance for Credit Losses on Available-for-Sale Securities — For the Company’s AFS corporate bond, the Company uses third-party PD and LGD data to estimate an ACLS, which is limited by the amount that the bond’s fair value is less than its amortized cost basis.

For all other AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written-down to fair value through income. For other AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACLS is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACLS is recognized in other comprehensive income.

Changes in ACLS are recorded as a charge or credit to the Provision. Losses are charged against the ACLS when management believes the lack of collectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest on AFS debt securities totaled $1 million at June 30, 2020 and is excluded from the ACLS. Accrued interest on AFS debt securities is presented as a component of other assets on the Company’s balance sheet.

Allowance for Credit Losses on Held-to-Maturity Securities — The Company measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $167,000 at June 30, 2020 and is excluded from the ACLS. Accrued interest on HTM debt securities is presented as a component of other assets on the Company’s balance sheet.

The estimate of ACLS on HTM debt securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

The Company classifies its HTM portfolio into the following major security types: MBS, corporate bonds, and municipal bonds. MBS securities include CMOs. Nearly all of the MBS portfolio is issued by U.S. government entities or government sponsored entities. These securities are highly rated by major rating agencies and have a long history of no credit losses. The MBS portfolio also carries ratings no lower than investment grade. The Company uses PD and LGD estimates provided by a third-party to estimate an ACLS for its corporate and municipal bond portfolios. These PD and LGD estimates are updated at least quarterly by the Company, with these estimates incorporating the most recent market expectations and forecasted information.

Loans — The Bank’s financing receivables consist primarily of loans and lease financing receivables (together referred to as “loans”). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the ACLL. Amortized cost is the principal balance outstanding, net of premiums and discounts, and deferred loan fees and costs. Accrued interest on loans, which is excluded from the ACLL, totaled $9 million at June 30, 2020 and was reported as a component of other assets on the Company’s balance sheet.

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Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method. Premiums on loans held for investment are amortized into interest income on the level-yield method over the expected life of the loan.

Lease financing receivables, all of which are direct financing leases, are reported at their principal balance outstanding net of any unearned income, deferred loan fees and costs, and applicable ACLL. Leasing income is recognized on a basis that achieves a constant periodic rate of return on the outstanding lease financing balances over the lease terms.

Interest income on mortgage and commercial loans is typically discontinued at the time the loan is 80 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan, which may define past due status by the number of days or the number of payments past due. In most cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 80 days still on accrual include smaller balance, homogeneous loans that are evaluated collectively or individually for loss.

Interest accrued but not received for all classes of loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, typically a minimum of six months of performance. Consumer and credit card loans are not placed on nonaccrual status but are reviewed periodically and charged off when the loan is deemed uncollectible, generally no more than 120 days.

Purchased Credit Deteriorated Loans — The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. The Company will generally classify a loan acquired in a business acquisition as PCD if it meets any of the following criteria:

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Non-accretable discount assigned by the Bank

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Classified by either the acquired bank or the Bank as Special Mention or Substandard

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Nonaccrual status when purchased

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Past due 30 days or more when purchased

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Loans that have been at least one time over 30 days past due

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Past maturity date when purchased

●

Select loans that are cross collateralized with any loans identified above

PCD loans are recorded at the amount paid. An ACLL is determined using the same methodology as other loans held for investment. The initial ACLL determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and ACLL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACLL are recorded through the Provision.

Allowance for Credit Losses on Loans — The ACLL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACLL when management believes the lack of collectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The ACLL is measured on a collective or pooled basis when similar risk characteristics exist. The first table of Footnote 4 illustrates the Company’s loan portfolio by ACLL risk pool. This pooling method is primarily based on the pool’s collateral type or the pool’s purpose and generally follows the Bank’s loan segmentation for regulatory reporting. For each of its loan pools, the Company uses a “static-pool” method, which analyzes historical closed pools of similar loans over their expected lives to attain a loss rate. This loss rate is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on a forecast of the U.S. national unemployment rate, which has shown a relatively strong historical correlation to the Bank’s loan losses. Subsequent to the one-year forecast, loss rates are assumed to immediately revert back to the historical loss rate calculated under a static pool analysis plus adjustments for current conditions.

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Loans that do not share risk characteristics are evaluated on an individual basis, with the Company choosing to individually evaluate all TDRs. Loans evaluated individually are not also included in the pooled evaluation. When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate.

Determining Expected Loan Lives: Expected credit losses are estimated over the contractual loan term, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower, or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Troubled Debt Restructurings — A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The Company measures the ACLL for TDRs individually using either a discounted cash flow method or the collateral method, if the TDR is collateral dependent. TDRs whose ACLL is measured using a discounted cash flow method use the original pre-modification interest rate on the loan for discounting.

Performing loans modified due to COVID-19 are not classified as TDRs.

●

For additional discussion regarding loans modified due to COVID-19, see Footnote 4 “Loans and Allowance for Credit Losses” in this section of the filing.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures — The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The likelihood that funding will occur is based on the historical usage rate of such commitments. A listing of off-balance sheet credit exposures the Company generally considers for an ACLC is illustrated in Footnote 9 in this section of the filing.

The ACLC is recorded as a component of other liabilities on the Company’s balance sheet. Any provision for the ACLC is recorded on the Company’s income statement as a component of other noninterest expense.

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2. INVESTMENT SECURITIES

Available-for-Sale Debt Securities

The following tables summarize the amortized cost, fair value, and ACLS of AFS debt securities and the corresponding amounts of related gross unrealized gains and losses recognized in AOCI:


			Gross		Gross		Allowance
	Amortized		Unrealized		Unrealized		for		Fair
June 30, 2020 (in thousands)	Cost		Gains		Losses		Credit Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	137,739	$	2,057	$	—	$	—	$	139,796
Private label mortgage backed security		1,845		1,178		—		—		3,023
Mortgage backed securities - residential		263,760		9,521		—		—		273,281
Collateralized mortgage obligations		57,030		678		(110)		—		57,598
Corporate bonds		10,000		—		(225)		(126)		9,649
Trust preferred security		3,597		—		(97)		—		3,500
Total available-for-sale debt securities	$	473,971	$	13,434	$	(432)	$	(126)	$	486,847


			Gross		Gross		Allowance
	Amortized		Unrealized		Unrealized		for		Fair
December 31, 2019 (in thousands)	Cost		Gains		Losses		Credit Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	134,765	$	59	$	(184)		NA	$	134,640
Private label mortgage backed security		2,210		1,285		—		NA		3,495
Mortgage backed securities - residential		253,288		2,916		(357)		NA		255,847
Collateralized mortgage obligations		63,284		258		(171)		NA		63,371
Corporate bonds		10,000		2		—		NA		10,002
Trust preferred security		3,575		425		—		NA		4,000
Total available-for-sale debt securities	$	467,122	$	4,945	$	(712)		NA	$	471,355

Held-to-Maturity Debt Securities

The following tables summarize the amortized cost, fair value, and ACLS of HTM debt securities and the corresponding amounts of related gross unrecognized gains and losses:


			Gross		Gross				Allowance
	Carrying		Unrecognized		Unrecognized		Fair		for
June 30, 2020 (in thousands)	Value		Gains		Losses		Value		Credit Losses

Mortgage backed securities - residential	$	102	$	5	$	—	$	107	$	—
Collateralized mortgage obligations		15,338		132		(1)		15,469		—
Corporate bonds		39,991		250		(21)		40,220		(147)
Obligations of state and political subdivisions		461		9		—		470		—
Total held-to-maturity debt securities	$	55,892	$	396	$	(22)	$	56,266	$	(147)


			Gross		Gross				Allowance
	Carrying		Unrecognized		Unrecognized		Fair		for
December 31, 2019 (in thousands)	Value		Gains		Losses		Value		Credit Losses

Mortgage backed securities - residential	$	104	$	6	$	—	$	110		NA
Collateralized mortgage obligations		16,970		94		(21)		17,043		NA
Corporate bonds		44,995		544		—		45,539		NA
Obligations of state and political subdivisions		462		2		—		464		NA
Total held-to-maturity debt securities	$	62,531	$	646	$	(21)	$	63,156		NA

Sales of Available-for-Sale Debt Securities

During the three and six months ended June 30, 2020 and 2019, there were no gains or losses on sales or calls of AFS debt securities.

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Debt Securities by Contractual Maturity

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2020 follow. 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.


	Available-for-Sale				Held-to-Maturity
	Debt Securities				Debt Securities
	Amortized		Fair		Carrying		Fair
June 30, 2020 (in thousands)	Cost		Value		Value		Value

Due in one year or less	$	—	$	—	$	105	$	105
Due from one year to five years		147,739		149,445		35,395		35,654
Due from five years to ten years		—		—		4,952		4,931
Due beyond ten years		3,597		3,500		—		—
Private label mortgage backed security		1,845		3,023		—		—
Mortgage backed securities - residential		263,760		273,281		102		107
Collateralized mortgage obligations		57,030		57,598		15,338		15,469
Total debt securities	$	473,971	$	486,847	$	55,892	$	56,266

Unrealized-Loss Analysis on Debt Securities

The following table summarizes AFS debt securities in an unrealized loss position for which an ACLS had not been recorded at June 30, 2020, aggregated by investment category and length of time in a continuous unrealized loss position:


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
June 30, 2020 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Available-for-sale debt securities:
Collateralized mortgage obligations	$	8,258	$	(101)	$	2,971	$	(9)	$	11,229		(110)
Trust preferred security		3,500		(97)		—		—		3,500		(97)
Total available-for-sale debt securities	$	11,758	$	(198)	$	2,971	$	(9)	$	14,729	$	(207)

Debt securities with unrealized losses at December 31, 2019, aggregated by investment category and length of time in a continuous unrealized loss position, were as follows:


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2019 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	40,165	$	(176)	$	14,992	$	(8)	$	55,157	$	(184)
Mortgage backed securities - residential		65,630		(269)		16,633		(88)		82,263		(357)
Collateralized mortgage obligations		12,444		(36)		10,738		(135)		23,182		(171)
Total available-for-sale debt securities	$	118,239	$	(481)	$	42,363	$	(231)	$	160,602	$	(712)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2019 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Held-to-maturity debt securities:
Collateralized mortgage obligations	$	4	$	(2)	$	4,827	$	(19)	$	4,831	$	(21)
Total held-to-maturity debt securities:	$	4	$	(2)	$	4,827	$	(19)	$	4,831	$	(21)

At June 30, 2020, the Bank’s security portfolio consisted of 171 securities, 14 of which were in an unrealized loss position.

At December 31, 2019, the Bank’s security portfolio consisted of 173 securities, 34 of which were in an unrealized loss position.

At June 30, 2020 and December 31, 2019, there were no holdings of debt 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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Mortgage Backed Securities and Collateralized Mortgage Obligations

At June 30, 2020, with the exception of the $3.0 million private label mortgage backed security, all other mortgage backed securities and CMOs held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily the FHLMC and FNMA. At June 30, 2020 and December 31, 2019, there were gross unrealized losses of $110,000 and $528,000 related to AFS 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.

Trust Preferred Security

During 2015, the Parent Company purchased a $3 million floating rate TRUP at a price of 68% of par. The coupon on this security is based on the 3-month LIBOR rate plus 159 basis points. The Company performed an initial analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.

Private Label Mortgage Backed Security

The Bank owns one private label mortgage backed security with a total carrying value of $3.0 million as of June 30, 2020. 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 ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of 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.

Rollforward of the Allowance for Credit Losses on Debt Securities

The tables below present a rollforward for the three and six months ended June 30, 2020 of the ACLS on AFS and HTM debt securities:


	ACLS Rollforward
	Three Months Ended June 30, 2020
	Beginning		ASC 326				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance

Available-for-Sale Securities:
Corporate Bonds	$	126	$	—	$	—	$	—	$	—	$	126
Held-to-Maturity Securities:
Corporate Bonds		171		—		(24)		—		—		147

Total	$	297	$	—	$	(24)	$	—	$	—	$	273

The Company reduced the ACLS on its HTM corporate bonds during the three months ended June 30, 2020 due to the maturity of one $5 million bond.


	ACLS Rollforward
	Six Months Ended June 30, 2020
	Beginning		ASC 326				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance

Available-for-Sale Securities:
Corporate Bonds	$	—	$	—	$	126	$	—	$	—	$	126
Held-to-Maturity Securities:
Corporate Bonds		—		51		96		—		—		147

Total	$	—	$	51	$	222	$	—	$	—	$	273

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The Company increased the ACLS on its AFS and HTM corporate bonds during the six months ended June 30, 2020 based on higher PD and LGD estimates on these bonds resulting from economic concerns from the COVID-19 pandemic.

There were no HTM debt securities on nonaccrual or past due over 89 days as of June 30, 2020. All of the Company’s HTM corporate bonds were rated investment grade as of June 30, 2020.

There were no HTM debt securities considered collateral dependent as of June 30, 2020.

Pledged Debt Securities

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


(in thousands)	June 30, 2020		December 31, 2019

Carrying amount	$	259,808	$	229,700
Fair value		259,812		229,706

Equity Securities

The carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2020 (in thousands)	Cost		Gains		Losses		Value

Freddie Mac preferred stock	$	—	$	485	$	—	$	485
Community Reinvestment Act mutual fund		2,500		30		—		2,530
Total equity securities with readily determinable fair values	$	2,500	$	515	$	—	$	3,015


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019 (in thousands)	Cost		Gains		Losses		Value

Freddie Mac preferred stock	$	—	$	714	$	—	$	714
Community Reinvestment Act mutual fund		2,500		—		(26)		2,474
Total equity securities with readily determinable fair values	$	2,500	$	714	$	(26)	$	3,188

For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of income were as follows:


	Gains (Losses) Recognized on Equity Securities
	Three Months Ended June 30, 2020						Three Months Ended June 30, 2019
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total

Freddie Mac preferred stock	$	—	$	191	$	191	$	—	$	126	$	126
Community Reinvestment Act mutual fund		—		16		16		—		33		33
Total equity securities with readily determinable fair value	$	—	$	207	$	207	$	—	$	159	$	159


	Gains (Losses) Recognized on Equity Securities
	Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total

Freddie Mac preferred stock	$	—	$	(229)	$	(229)	$	—	$	378	$	378
Community Reinvestment Act mutual fund		—		56		56		—		70		70
Total equity securities with readily determinable fair value	$	—	$	(173)	$	(173)	$	—	$	448	$	448

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3. LOANS HELD FOR SALE

In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans originated for sale are originated and sold through the RCS segment.

Mortgage Loans Held for Sale, at Fair Value

See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 11 “Mortgage Banking Activities” of this section of the filing.

Consumer Loans Held for Sale, at Fair Value

In December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Balance, beginning of period	$	3,431	$	—	$	598	$	—
Origination of consumer loans held for sale		555		—		47,741		—
Proceeds from the sale of consumer loans held for sale		(3,963)		—		(49,691)		—
Net gain (loss) recognized on consumer loans held for sale		141		—		1,516		—
Balance, end of period	$	164	$	—	$	164	$	—

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

RCS originates for sale 90% of the balances from its line-of-credit product and a portion of its hospital receivables product. Ordinary gains or losses on the sale of these 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				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Balance, beginning of period	$	12,089	$	12,864	$	11,646	$	12,838
Origination of consumer loans held for sale		86,936		200,327		234,871		346,413
Proceeds from the sale of consumer loans held for sale		(86,796)		(176,759)		(235,207)		(324,260)
Net gain on sale of consumer loans held for sale		571		1,177		1,490		2,618
Balance, end of period	$	12,800	$	37,609	$	12,800	$	37,609

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4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The composition of the loan portfolio follows:


(in thousands)	June 30, 2020		December 31, 2019

Traditional Banking:
Residential real estate:
Owner occupied	$	885,325	$	949,568
Nonowner occupied		254,700		258,803
Commercial real estate		1,322,290		1,303,000
Construction & land development		157,254		159,702
Commercial & industrial*		904,727		477,236
Lease financing receivables		11,864		14,040
Home equity		265,266		293,186
Consumer:
Credit cards		14,265		17,836
Overdrafts		488		1,522
Automobile loans		41,059		52,923
Other consumer		78,585		68,115
Total Traditional Banking		3,935,823		3,595,931
Warehouse lines of credit**		1,029,779		717,458
Total Core Banking		4,965,602		4,313,389

Republic Processing Group:**
Tax Refund Solutions:
Easy Advances		—		—
Other TRS loans		289		14,365
Republic Credit Solutions		99,201		105,397
Total Republic Processing Group		99,490		119,762

Total loans***		5,065,092		4,433,151
Allowance for credit losses		(55,097)		(43,351)

Total loans, net	$	5,009,995	$	4,389,800

*Includes $511 million of PPP loans at June 30, 2020.

**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:


(in thousands)	June 30, 2020		December 31, 2019

Contractually receivable	$	5,063,496	$	4,432,351
Unearned income		(944)		(1,139)
Unamortized premiums		279		366
Unaccreted discounts		(1,157)		(2,534)
Net unamortized deferred origination fees and costs		3,418		4,107
Carrying value of loans	$	5,065,092	$	4,433,151

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Credit Quality Indicators

The Company’s loan segments as of June 30, 2020 remain unchanged from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The following tables include loans by segment and risk category. Risk categories, which are based on the Bank’s internal analyses, are defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. As of June 30, 2020, for non-revolving loans originated after 2016, loans are also classified by origination year. Loan extensions and renewals are generally considered originated in the year extended or renewed unless the loan is classified as a TDR. Loan extensions and renewals classified as TDRs generally receive no change in origination date upon extension or renewal.


											Revolving Loans		Revolving Loans
(in thousands)	Term Loans Amortized Cost Basis by Origination Year										Amortized		Converted
As of June 30, 2020	2020		2019		2018		2017		Prior		Cost Basis		to Term		Total

Residential real estate owner occupied:
Risk Rating
Pass or not rated	$	90,354	$	166,133	$	108,759	$	87,604	$	404,104	$	—	$	—	$	856,954
Special Mention		—		—		46		1,627		9,826		—		—		11,499
Substandard		—		1,543		822		691		13,816		—		—		16,872
Doubtful		—		—		—		—		—		—		—		—
Total	$	90,354	$	167,676	$	109,627	$	89,922	$	427,746	$	—	$	—	$	885,325

Residential real estate nonowner occupied:
Risk Rating
Pass or not rated	$	23,599	$	74,957	$	52,683	$	50,441	$	51,297	$	—	$	—	$	252,977
Special Mention		300		—		—		—		158		—		—		458
Substandard		—		539		—		—		726		—		—		1,265
Doubtful		—		—		—		—		—		—		—		—
Total	$	23,899	$	75,496	$	52,683	$	50,441	$	52,181	$	—	$	—	$	254,700

Commercial real estate:
Risk Rating
Pass or not rated	$	116,710	$	328,746	$	209,251	$	217,425	$	398,039	$	—	$	36,887	$	1,307,058
Special Mention		878		—		—		—		2,883		—		2,846		6,607
Substandard		2,964		—		—		1,222		4,439		—		—		8,625
Doubtful		—		—		—		—		—		—		—		—
Total	$	120,552	$	328,746	$	209,251	$	218,647	$	405,361	$	—	$	39,733	$	1,322,290

Construction and land development:
Risk Rating
Pass or not rated	$	55,961	$	55,460	$	16,050	$	11,719	$	15,455	$	—	$	—	$	154,645
Special Mention		—		2,421		—		—		—		—		—		2,421
Substandard		—		188		—		—		—		—		—		188
Doubtful		—		—		—		—		—		—		—		—
Total	$	55,961	$	58,069	$	16,050	$	11,719	$	15,455	$	—	$	—	$	157,254

Commercial and industrial:
Risk Rating
Pass or not rated	$	594,084	$	149,970	$	50,438	$	49,358	$	56,571	$	2,087	$	—	$	902,508
Special Mention		450		—		150		—		35		—		—		635
Substandard		21		490		118		—		201		754		—		1,584
Doubtful		—		—		—		—		—		—		—		—
Total	$	594,555	$	150,460	$	50,706	$	49,358	$	56,807	$	2,841	$	—	$	904,727

Lease financing receivables:
Risk Rating
Pass or not rated	$	711	$	4,602	$	2,510	$	3,232	$	809	$	—	$	—	$	11,864
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total	$	711	$	4,602	$	2,510	$	3,232	$	809	$	—	$	—	$	11,864

Home equity:
Risk Rating
Pass or not rated	$	—	$	—	$	—	$	—	$	—	$	262,318	$	—	$	262,318
Special Mention		—		—		—		—		—		128		—		128
Substandard		—		—		—		—		—		2,820		—		2,820
Doubtful		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	265,266	$	—	$	265,266

Consumer:
Risk Rating
Pass or not rated	$	17,151	$	48,923	$	29,201	$	11,644	$	12,524	$	14,402	$	—	$	133,845
Special Mention		—		—		—		—		—		11		—		11
Substandard		—		38		64		199		240		—		—		541
Doubtful		—		—		—		—		—		—		—		—
Total	$	17,151	$	48,961	$	29,265	$	11,843	$	12,764	$	14,413	$	—	$	134,397

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											Revolving Loans		Revolving Loans
(in thousands)	Term Loans Amortized Cost Basis by Origination Year (Continued)										Amortized		Converted
As of June 30, 2020	2020		2019		2018		2017		Prior		Cost Basis		to Term		Total

Warehouse:
Risk Rating
Pass or not rated	$	—	$	—	$	—	$	—	$	—	$	1,029,779	$	—	$	1,029,779
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	1,029,779	$	—	$	1,029,779

TRS:
Risk Rating
Pass or not rated	$	—	$	—	$	—	$	—	$	—	$	77	$	—	$	77
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		212		—		212
Doubtful		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	289	$	—	$	289

RCS:
Risk Rating
Pass or not rated	$	7,098	$	8,596	$	3,622	$	1,677	$	2,779	$	74,734	$	—	$	98,506
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		695		—		695
Doubtful		—		—		—		—		—		—		—		—
Total	$	7,098	$	8,596	$	3,622	$	1,677	$	2,779	$	75,429	$	—	$	99,201

Grand Total:
Risk Rating
Pass or not rated	$	905,668	$	837,387	$	472,514	$	433,100	$	941,578	$	1,383,397	$	36,887	$	5,010,531
Special Mention		1,628		2,421		196		1,627		12,902		139		2,846		21,759
Substandard		2,985		2,798		1,004		2,112		19,422		4,481		—		32,802
Doubtful		—		—		—		—		—		—		—		—
Grand Total	$	910,281	$	842,606	$	473,714	$	436,839	$	973,902	$	1,388,017	$	39,733	$	5,065,092


December 31, 2019			Special				Doubtful /		PCI Loans -		PCI Loans -		Total Rated
(in thousands)	Pass		Mention		Substandard		Loss		Group 1		Substandard		Loans*

Traditional Banking:
Residential real estate:
Owner occupied	$	—	$	12,153	$	14,441	$	—	$	140	$	1,281	$	28,015
Nonowner occupied		—		487		1,285		—		—		—		1,772
Commercial real estate		1,286,623		4,623		11,123		—		631		—		1,303,000
Construction & land development		157,165		2,339		198		—		—		—		159,702
Commercial & industrial		473,094		2,152		1,968		—		22		—		477,236
Lease financing receivables		14,040		—		—		—		—		—		14,040
Home equity		—		—		3,276		—		4		6		3,286
Consumer:
Credit cards		—		—		—		—		—		—		—
Overdrafts		—		—		—		—		—		—		—
Automobile loans		—		—		247		—		—		—		247
Other consumer		—		—		351		—		—		2		353
Total Traditional Banking		1,930,922		21,754		32,889		—		797		1,289		1,987,651
Warehouse lines of credit		717,458		—		—		—		—		—		717,458
Total Core Banking		2,648,380		21,754		32,889		—		797		1,289		2,705,109

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—		—		—		—		—
Other TRS loans		—		—		53		—		—		—		53
Republic Credit Solutions		—		—		355		—		—		—		355
Total Republic Processing Group		—		—		408		—		—		—		408

Total rated loans	$	2,648,380	$	21,754	$	33,297	$	—	$	797	$	1,289	$	2,705,517

*The above table excludes all non-classified residential real estate, home equity and consumer loans.

Table of Contents

Allowance for Credit Losses on Loans

The following table presents the activity in the ACLL by portfolio class:


	ACLL Rollforward
	Three Months Ended June 30,
	2020										2019
	Beginning				Charge-				Ending			Beginning			Charge-				Ending
(in thousands)	Balance		Provision		offs		Recoveries		Balance			Balance	Provision		offs		Recoveries		Balance

Traditional Banking:
Residential real estate:
Owner occupied	$	9,387	$	(127)	$	—	$	43	$	9,303	$	5,801	$	(442)	$	(367)	$	221	$	5,213
Nonowner occupied		2,165		107		—		2		2,274		1,720		48		(1)		8		1,775
Commercial real estate		13,381		3,187		(270)		2		16,300		10,235		329		—		2		10,566
Construction & land development		4,536		404		—		—		4,940		2,443		467		—		—		2,910
Commercial & industrial		2,541		15		(192)		41		2,405		3,235		983		—		3		4,221
Lease financing receivables		133		(8)		—		—		125		150		31		—		—		181
Home equity		5,290		(178)		—		12		5,124		3,337		(221)		—		8		3,124
Consumer:
Credit cards		978		16		(71)		5		928		1,079		14		(76)		11		1,028
Overdrafts		758		(189)		(159)		78		488		892		250		(299)		51		894
Automobile loans		546		(74)		—		1		473		768		(61)		—		1		708
Other consumer		839		(49)		(8)		35		817		512		29		(48)		56		549
Total Traditional Banking		40,554		3,104		(700)		219		43,177		30,172		1,427		(791)		361		31,169
Warehouse lines of credit		2,126		449		—		—		2,575		1,397		417		—		—		1,814
Total Core Banking		42,680		3,553		(700)		219		45,752		31,569		1,844		(791)		361		32,983

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		15,270		4,305		(19,575)		—		—		13,381		39		(13,425)		5		—
Other TRS loans		95		143		(28)		1		211		149		353		(264)		(6)		232
Republic Credit Solutions		12,386		(1,443)		(2,008)		199		9,134		12,862		2,224		(2,683)		365		12,768
Total Republic Processing Group		27,751		3,005		(21,611)		200		9,345		26,392		2,616		(16,372)		364		13,000

Total	$	70,431	$	6,558	$	(22,311)	$	419	$	55,097	$	57,961	$	4,460	$	(17,163)	$	725	$	45,983

Table of Contents


	ACLL Rollforward
	Six Months Ended June 30,
	2020												2019
	Beginning		ASC 326				Charge-				Ending		Beginning				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance		Balance		Provision		offs		Recoveries		Balance

Traditional Banking:
Residential real estate:
Owner occupied	$	4,729	$	4,199	$	320	$	(27)	$	82	$	9,303	$	6,035	$	(697)	$	(384)	$	259	$	5,213
Nonowner occupied		1,737		148		385		—		4		2,274		1,662		178		(73)		8		1,775
Commercial real estate		10,486		273		5,338		(270)		473		16,300		10,030		532		—		4		10,566
Construction & land development		2,152		1,447		1,341		—		—		4,940		2,555		355		—		—		2,910
Commercial & industrial		2,882		(1,318)		989		(192)		44		2,405		2,873		1,343		—		5		4,221
Lease financing receivables		147		—		(22)		—		—		125		158		23		—		—		181
Home equity		2,721		1,652		664		—		87		5,124		3,477		(378)		(13)		38		3,124
Consumer:
Credit cards		1,020		33		38		(177)		14		928		1,140		79		(226)		35		1,028
Overdrafts		1,169		—		(311)		(503)		133		488		1,102		269		(593)		116		894
Automobile loans		612		(7)		(153)		(8)		29		473		724		(23)		—		7		708
Other consumer		550		307		(142)		(45)		147		817		591		(65)		(114)		137		549
Total Traditional Banking		28,205		6,734		8,447		(1,222)		1,013		43,177		30,347		1,616		(1,403)		609		31,169
Warehouse lines of credit		1,794		—		781		—		—		2,575		1,172		642		—		—		1,814
Total Core Banking		29,999		6,734		9,228		(1,222)		1,013		45,752		31,519		2,258		(1,403)		609		32,983

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		19,533		(19,575)		42		—		—		13,420		(13,425)		5		—
Other TRS loans		234		—		48		(72)		1		211		107		406		(281)		—		232
Republic Credit Solutions		13,118		—		263		(4,717)		470		9,134		13,049		5,607		(6,507)		619		12,768
Total Republic Processing Group		13,352		—		19,844		(24,364)		513		9,345		13,156		19,433		(20,213)		624		13,000

Total	$	43,351	$	6,734	$	29,072	$	(25,586)	$	1,526	$	55,097	$	44,675	$	21,691	$	(21,616)	$	1,233	$	45,983

The cumulative loss rate used as the basis for the estimate of ACLL at June 30, 2020 was primarily based on a static pool analysis of each of the Company’s loan pools using the Company’s loss experience from 2013 through 2019, adjusted for current and forecasted conditions that consider the economic impact of the COVID-19 pandemic and the public’s response to it. The U.S. unemployment rate rose from 4.4% in March 2020 to 11.1% in June 2020. As of June 30, 2020 the Company forecasted for the upcoming year that the U.S. unemployment rate would remain above 8%, and the Company’s loan losses would rise to levels consistent with this continued elevated level of U.S. unemployment. Furthermore, it is management’s expectation that the Company’s loss rates will immediately revert back after this one-year forecast to long-term historical averages, which include periods of economic expansion and contraction.

Table of Contents

Nonperforming Loans and Nonperforming Assets

Detail of nonperforming loans, nonperforming assets and select credit quality ratios follows:


(dollars in thousands)	June 30, 2020			December 31, 2019

Loans on nonaccrual status*	$	19,884		$	23,332
Loans past due 90-days-or-more and still on accrual**		535			157
Total nonperforming loans		20,419			23,489
Other real estate owned		2,194			113
Total nonperforming assets	$	22,613		$	23,602

Credit Quality Ratios - Total Company:

Nonperforming loans to total loans		0.40	%		0.53	%
Nonperforming assets to total loans (including OREO)		0.45			0.53
Nonperforming assets to total assets		0.35			0.42

Credit Quality Ratios - Core Bank:

Nonperforming loans to total loans		0.40	%		0.54	%
Nonperforming assets to total loans (including OREO)		0.44			0.54
Nonperforming assets to total assets		0.36			0.43

*	Loans on nonaccrual status include collateral-dependent loans.

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

Table of Contents

The following tables present 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)	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019

Traditional Banking:
Residential real estate:
Owner occupied	$	14,106	$	12,220	$	—	$	—
Nonowner occupied		952		623		—		—
Commercial real estate		881		6,865		—		—
Construction & land development		—		143		—		—
Commercial & industrial		1,563		1,424		—		—
Lease financing receivables		—		—		—		—
Home equity		2,209		1,865		—		—
Consumer:
Credit cards		—		—		—		—
Overdrafts		—		—		—		—
Automobile loans		152		179		—		—
Other consumer		21		13		—		—
Total Traditional Banking		19,884		23,332		—		—
Warehouse lines of credit		—		—		—		—
Total Core Banking		19,884		23,332		—		—

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—		—
Other TRS loans		—		—		182		53
Republic Credit Solutions		—		—		353		104
Total Republic Processing Group		—		—		535		157

Total	$	19,884	$	23,332	$	535	$	157

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


							Three Months Ended		Six Months Ended
	As of June 30, 2020						June 30, 2020		June 30, 2020

	Nonaccrual		Nonaccrual		Total		Interest Income		Interest Income
	Loans with		Loans without		Nonaccrual		Recognized		Recognized
(in thousands)	ACLL		ACLL		Loans		on Nonaccrual Loans*		on Nonaccrual Loans*

Residential real estate:
Owner occupied	$	2,999	$	11,107	$	14,106	$	169	$	380
Nonowner occupied		—		952		952		2		4
Commercial real estate		611		270		881		13		686
Construction & land development		—		—		—		—		—
Commercial & industrial		—		1,563		1,563		3		9
Lease financing receivables		—		—		—		—		—
Home equity		133		2,076		2,209		14		14
Consumer		107		66		173		2		2
Total	$	3,850	$	16,034	$	19,884	$	203	$	1,095

* Includes interest income for loans on nonaccrual loans as of the beginning of the period that were paid off during the period.

Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous 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. 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.

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
June 30, 2020	Days			Days			Days			Total			Total
(dollars in thousands)	Delinquent			Delinquent			Delinquent*			Delinquent**			Current		Total

Traditional Banking:
Residential real estate:
Owner occupied	$	1,527		$	576		$	2,111		$	4,214		$	881,111	$	885,325
Nonowner occupied		—			—			539			539			254,161		254,700
Commercial real estate		—			—			543			543			1,321,747		1,322,290
Construction & land development		—			—			—			—			157,254		157,254
Commercial & industrial		—			490			872			1,362			903,365		904,727
Lease financing receivables		—			—			—			—			11,864		11,864
Home equity		397			23			633			1,053			264,213		265,266
Consumer:
Credit cards		2			5			—			7			14,258		14,265
Overdrafts		91			3			—			94			394		488
Automobile loans		—			12			15			27			41,032		41,059
Other consumer		3			19			—			22			78,563		78,585
Total Traditional Banking		2,020			1,128			4,713			7,861			3,927,962		3,935,823
Warehouse lines of credit		—			—			—			—			1,029,779		1,029,779
Total Core Banking		2,020			1,128			4,713			7,861			4,957,741		4,965,602

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—			—			—			—			—		—
Other TRS loans		—			77			182			259			30		289
Republic Credit Solutions		4,371			1,202			353			5,926			93,275		99,201
Total Republic Processing Group		4,371			1,279			535			6,185			93,305		99,490

Total	$	6,391		$	2,407		$	5,248		$	14,046		$	5,051,046	$	5,065,092
Delinquency ratio***		0.13	%		0.05	%		0.10	%		0.28	%

* All loans past due 90-days-or-more, excluding small balance consumer loans, were on nonaccrual status.

** Delinquent status may be determined by either the number of days past due or number of payments past due.

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

Table of Contents


	30 - 59			60 - 89			90 or More
December 31, 2019	Days			Days			Days			Total			Total
(dollars in thousands)	Delinquent			Delinquent			Delinquent*			Delinquent**			Current		Total

Traditional Banking:
Residential real estate:
Owner occupied	$	1,460		$	1,153		$	1,821		$	4,434		$	945,134	$	949,568
Nonowner occupied		—			—			539			539			258,264		258,803
Commercial real estate		155			—			3,145			3,300			1,299,700		1,303,000
Construction & land development		—			—			—			—			159,702		159,702
Commercial & industrial		200			128			1,027			1,355			475,881		477,236
Lease financing receivables		—			—			—			—			14,040		14,040
Home equity		1,810			166			942			2,918			290,268		293,186
Consumer:
Credit cards		80			75			—			155			17,681		17,836
Overdrafts		278			4			1			283			1,239		1,522
Automobile loans		16			15			18			49			52,874		52,923
Other consumer		2			6			1			9			68,106		68,115
Total Traditional Banking		4,001			1,547			7,494			13,042			3,582,889		3,595,931
Warehouse lines of credit		—			—			—			—			717,458		717,458
Total Core Banking		4,001			1,547			7,494			13,042			4,300,347		4,313,389

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—			—			—			—			—		—
Other TRS loans		35			31			53			119			14,246		14,365
Republic Credit Solutions		6,054			1,485			104			7,643			97,754		105,397
Total Republic Processing Group		6,089			1,516			157			7,762			112,000		119,762

Total	$	10,090		$	3,063		$	7,651		$	20,804		$	4,412,347	$	4,433,151
Delinquency ratio***		0.23	%		0.07	%		0.17	%		0.47	%

* All loans past due 90-days-or-more, excluding smaller balance consumer loans, were on nonaccrual status.

** Delinquent status may be determined by either the number of days past due or number of payments past due.

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

Table of Contents

Collateral-Dependent Loans

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2020:


	Secured		Secured
June 30, 2020	by Real		by Personal
(dollars in thousands)	Estate		Property

Traditional Banking:
Residential real estate:
Owner occupied	$	17,044	$	—
Nonowner occupied		1,423		—
Commercial real estate		8,571		—
Construction & land development		138		—
Commercial & industrial		—		1,601
Lease financing receivables		—		—
Home equity		2,841		—
Consumer		—		523
Total Traditional Banking	$	30,017	$	2,124

Collateral-dependent loans are generally secured by real estate or personal property. If there is insufficient collateral value to secure the Company’s recorded investment in these loans, they are charged down to collateral value less estimated selling cost, when selling costs are applicable. Selling costs range from 10%-13%, with those percentages based on annual studies performed by the Company.

Impaired Loans

Information regarding the Bank’s impaired loans follows:


(in thousands)	December 31, 2019

Loans with no allocated ACLL	$	33,061
Loans with allocated ACLL		17,289
Total recorded investment in impaired loans	$	50,350

Amount of ACLL allocated	$	2,512

Table of Contents

The following table presents the balance in the ACLL and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2019:


	Allowance for Credit Losses on Loans								Loans
	Individually				PCI with				Individually				PCI with		PCI without
December 31, 2019	Evaluated		Collectively		Post-Acquisition		Total		Evaluated		Collectively		Post-Acquisition		Post-Acquisition		Total		Allowance to
(dollars in thousands)	Excluding PCI		Evaluated		Impairment		Allowance		Excluding PCI		Evaluated		Impairment		Impairment		Loans		Total Loans

Traditional Banking:
Residential real estate:
Owner occupied	$	1,207	$	3,337	$	185	$	4,729	$	25,384	$	922,764	$	1,420	$	—	$	949,568		0.50	%
Nonowner occupied		—		1,737		—		1,737		1,448		257,355		—		—		258,803		0.67
Commercial real estate		426		10,054		6		10,486		15,144		1,287,225		631		—		1,303,000		0.80
Construction & land development		—		2,152		—		2,152		198		159,504		—		—		159,702		1.35
Commercial & industrial		22		2,860		—		2,882		1,989		475,225		—		22		477,236		0.60
Lease financing receivables		—		147		—		147		—		14,040		—		—		14,040		1.05
Home equity		174		2,547		—		2,721		3,276		289,900		10		—		293,186		0.93
Consumer:
Credit cards		—		1,020		—		1,020		—		17,836		—		—		17,836		5.72
Overdrafts		—		1,169		—		1,169		—		1,522		—		—		1,522		76.81
Automobile loans		43		569		—		612		247		52,676		—		—		52,923		1.16
Other consumer		333		217		—		550		350		67,762		2		1		68,115		0.81
Total Traditional Banking		2,205		25,809		191		28,205		48,036		3,545,809		2,063		23		3,595,931		0.78
Warehouse lines of credit		—		1,794		—		1,794		—		717,458		—		—		717,458		0.25
Total Core Banking		2,205		27,603		191		29,999		48,036		4,263,267		2,063		23		4,313,389		0.70

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—		—		—		—		—		—		—		—
Other TRS loans		—		234		—		234		—		14,365		—		—		14,365		1.63
Republic Credit Solutions		116		13,002		—		13,118		251		105,146		—		—		105,397		12.45
Total Republic Processing Group		116		13,236		—		13,352		251		119,511		—		—		119,762		11.15
Total	$	2,321	$	40,839	$	191	$	43,351	$	48,287	$	4,382,778	$	2,063	$	23	$	4,433,151		0.98	%

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019 and for the three and six months ended June 30, 2019. 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						Six Months Ended
	December 31, 2019						June 30, 2019						June 30, 2019
											Cash Basis						Cash Basis
	Unpaid						Average		Interest		Interest		Average		Interest		Interest
	Principal		Recorded		Allocated		Recorded		Income		Income		Recorded		Income		Income
(in thousands)	Balance		Investment		ACLL		Investment		Recognized		Recognized		Investment		Recognized		Recognized

Impaired loans with no allocated ACLL:
Residential real estate:
Owner occupied	$	14,768	$	13,893	$	—	$	11,768	$	70	$	—	$	11,540	$	139	$	—
Nonowner occupied		1,515		1,448		—		1,424		17		—		1,733		34		—
Commercial real estate		15,028		12,547		—		3,573		23		—		3,917		47		—
Construction & land development		198		198		—		30		1		—		20		1		—
Commercial & industrial		3,308		1,792		—		622		—		—		616		—		—
Lease financing receivables		—		—		—		—		—		—		—		—		—
Home equity		3,107		3,023		—		1,591		12		—		1,352		23		—
Consumer		206		160		—		27		1		—		28		1		—
Impaired loans with allocated ACLL:
Residential real estate:
Owner occupied		12,954		12,911		1,392		14,464		121		—		14,910		240		—
Nonowner occupied		—		—		—		216		41		—		162		—		—
Commercial real estate		3,228		3,228		432		3,951		—		—		4,106		83		—
Construction & land development		—		—		—		32		—		—		43		—		—
Commercial & industrial		197		197		22		2,662		7		—		1,913		15		—
Lease financing receivables		—		—		—		—		—		—		—		—		—
Home equity		263		263		174		480		2		—		510		4		—
Consumer		701		690		492		505		4		—		520		10		—
Total impaired loans	$	55,473	$	50,350	$	2,512	$	41,345	$	299	$	—	$	41,370	$	597	$	—

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.

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 June 30, 2020 and December 31, 2019, $5 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
June 30, 2020 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate	60	$	4,684	130	$	12,901	190	$	17,585
Commercial real estate	2		271	6		6,788	8		7,059
Construction & land development	—		—	1		50	1		50
Commercial & industrial	2		319	5		807	7		1,126
Consumer	1		9	2,132		650	2,133		659
Total troubled debt restructurings	65	$	5,283	2,274	$	21,196	2,339	$	26,479


	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, 2019 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate	53	$	4,402	141	$	15,368	194	$	19,770
Commercial real estate	4		4,040	9		4,885	13		8,925
Construction & land development	—		—	1		54	1		54
Commercial & industrial	4		1,424	3		22	7		1,446
Consumer	—		—	1,613		586	1,613		586
Total troubled debt restructurings	61	$	9,866	1,767	$	20,915	1,828	$	30,781

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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 June 30, 2020 and December 31, 2019 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
June 30, 2020 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment

Residential real estate loans (including home equity loans):
Interest only payments	1	$	862	—	$	—	1	$	862
Rate reduction	109		11,660	6		389	115		12,049
Principal deferral	8		835	1		163	9		998
Legal modification	56		3,111	9		565	65		3,676
Total residential TDRs	174		16,468	16		1,117	190		17,585

Commercial related and construction/land development loans:
Interest only payments	2		1,393	—		—	2		1,393
Rate reduction	3		1,110	1		45	4		1,155
Principal deferral	6		4,589	1		225	7		4,814
Legal modification	—		—	3		873	3		873
Total commercial TDRs	11		7,092	5		1,143	16		8,235

Consumer loans:
Principal deferral	2,130		301	1		341	2,131		642
Legal modification	2		17	—		—	2		17
Total consumer TDRs	2,132		318	1		341	2,133		659

Total troubled debt restructurings	2,317	$	23,878	22	$	2,601	2,339	$	26,479


	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, 2019 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment

Residential real estate loans (including home equity loans):
Interest only payments	1	$	904	—	$	—	1	$	904
Rate reduction	118		13,847	5		352	123		14,199
Principal deferral	8		845	2		179	10		1,024
Legal modification	54		3,200	6		443	60		3,643
Total residential TDRs	181		18,796	13		974	194		19,770

Commercial related and construction/land development loans:
Interest only payments	3		1,568	—		—	3		1,568
Rate reduction	3		1,207	1		45	4		1,252
Principal deferral	11		5,981	1		597	12		6,578
Legal modification	—		—	2		1,027	2		1,027
Total commercial TDRs	17		8,756	4		1,669	21		10,425

Consumer loans:
Principal deferral	1,612		577	—		—	1,612		577
Legal modification	1		9	—		—	1		9
Total consumer TDRs	1,613		586	—		—	1,613		586

Total troubled debt restructurings	1,811	$	28,138	17	$	2,643	1,828	$	30,781

As of June 30, 2020 and December 31, 2019, 90% and 91% of the Bank’s TDRs were performing according to their modified terms. The Bank had provided $2 million and $2 million of specific ACLL allocations to clients whose loan terms have been modified in TDRs as of June 30, 2020 and December 31, 2019. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships at June 30, 2020 or December 31, 2019.

Table of Contents

A summary of the categories of TDR loan modifications by respective performance as of June 30, 2020 and 2019 that were modified during the three months ended June 30, 2020 and 2019 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
June 30, 2020 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment

Residential real estate loans (including home equity loans):
Legal modification	5	$	161	1	$	109	6	$	270
Total residential TDRs	5		161	1		109	6		270

Consumer loans:
Principal deferral	884		141	—		—	884		141
Legal modification	—		—	1		118	1		118
Total consumer TDRs	884		141	1		118	885		259

Total troubled debt restructurings	889	$	302	2	$	227	891	$	529


	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
June 30, 2019 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment

Residential real estate loans (including home equity loans):
Principal deferral	—	$	—	—	$	—	—	$	—
Legal modification	7		804	2		161	9		965
Total residential TDRs	7		804	2		161	9		965

Commercial related and construction/land development loans:
Principal deferral	—		—	2		4,426	2		4,426
Total commercial TDRs	—		—	2		4,426	2		4,426

Total troubled debt restructurings	7	$	804	4	$	4,587	11	$	5,391

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 June 30, 2020 and 2019, 57% and 15% of the Bank’s TDRs that occurred during the second quarters of 2020 and 2019 were performing according to their modified terms. The Bank provided approximately $0 and $980,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during the second quarters of 2020 and 2019.

There was no significant change between the pre and post modification loan balances for the three months ending June 30, 2020 and 2019.

Table of Contents

A summary of the categories of TDR loan modifications by respective performance as of June 30, 2020 and 2019 that were modified during the six months ended June 30, 2020 and 2019 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
June 30, 2020 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment

Residential real estate loans (including home equity loans):
Legal modification	8	$	283	2	$	113	10	$	396
Total residential TDRs	8		283	2		113	10		396

Commercial related and construction/land development loans:
Principal deferral	1		21	—		—	1		21
Legal modification	—		—	1		118	1		118
Total commercial TDRs	1		21	1		118	2		139

Consumer loans:
Principal deferral	884		141	—		—	884		141
Legal modification	1		9	—		—	1		9
Total consumer TDRs	885		150	—		—	885		150

Total troubled debt restructurings	894	$	454	3	$	231	897	$	685


	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
June 30, 2019 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment

Residential real estate loans (including home equity loans):
Principal deferral	1	$	6	—	$	—	1	$	6
Legal modification	11		901	3		211	14		1,112
Total residential TDRs	12		907	3		211	15		1,118
Commercial related and construction/land development loans:
Interest only payments	1		566	—		—	1		566
Principal deferral	2		26	—		—	2		26
Legal modification	—		—	2		4,426	2		4,426
Total commercial TDRs	3		592	2		4,426	5		5,018

Total troubled debt restructurings	15	$	1,499	5	$	4,637	20	$	6,136

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 June 30, 2020 and 2019, 66% and 24% of the Bank’s TDRs that occurred during the first six months of 2020 and 2019 were performing according to their modified terms. The Bank provided approximately $28,000 and $1.0 million in specific ACLL allocations to clients whose loan terms were modified in TDRs during the first six months of 2020 and 2019.

There was no significant change between the pre and post modification loan balances for the six months ending June 30, 2020 and 2019.

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The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of June 30, 2020 and 2019 and for which there was a payment default during the three and/or months ended June 30, 2020 and 2019.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
		Recorded		Number of	Recorded		Number of	Recorded		Number of	Recorded
(dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment		Loans	Investment

Residential real estate:
Owner occupied	1	$	109	3	$	211	3	$	218	3	$	211
Commercial real estate	—		—	—		—	—		—	1		566
Commercial & industrial	1		118	2		4,426	1		118	2		4,426
Home equity	—		—	—		—	1		13	1		6
Consumer	—		—	—		—	1		9	—		—

Total	2	$	227	5	$	4,637	6	$	358	7	$	5,209

CARES Act, COVID-19 Loan Accommodations, and the Paycheck Protection Program

On March 27, 2020, the U.S. Congress passed the CARES Act, which provided several forms of economic relief designed to defray the impact of COVID-19. In April 2020, through its own independent relief efforts and CARES Act provisions, the Company began offering loan accommodations through deferrals and forbearances. These accommodations were generally under three-month terms for commercial clients, with residential and consumer accommodations in line with prevailing regulatory and legal parameters. Loans modified as a result of the pandemic are generally not considered TDRs by the Company if, prior to the pandemic, the borrower was performing in accordance with loan terms.

The CARES Act also provided for the SBA PPP. The PPP allows the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the pandemic. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. To provide liquidity to banks administering the SBA’s PPP, the FRB created the PPPLF, a lending facility secured by the PPP loans of the participating banks. As of June 30, 2020, the Bank had borrowed $169 million from the FRB under its PPPLF at a rate of 0.35%. PPPLF borrowings mature as the underlying PPP loans mature, generally within two to five years.

The following table presents the balances of loans in COVID-19 accommodations, the balance of PPP loans, and the remainder of the Traditional Bank’s loan portfolio by loan class as of June 30, 2020:


	COVID-19									Total
June 30, 2020 (dollars in thousands)	Accommodations			PPP Loans			Other Loans			Traditional Banking

Traditional Banking:
Residential real estate:
Owner occupied	$	51,570		$	—		$	833,755		$	885,325
Nonowner occupied		58,754			—			195,946			254,700
Commercial real estate		491,314			—			830,976			1,322,290
Commercial & industrial		141,720			511,065			251,942			904,727
Construction & land development		28,927			—			128,327			157,254
Lease financing receivables		2,443			—			9,421			11,864
Home equity		13,776			—			251,490			265,266
Consumer		4,678			—			129,719			134,397
Total Traditional Banking	$	793,182		$	511,065		$	2,631,576		$	3,935,823
Percent of Total Traditional Banking		20	%		13	%		67	%		100	%

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Foreclosures

The following table presents the carrying amount of foreclosed properties held as a result of the Bank obtaining physical possession of such properties:


(in thousands)	June 30, 2020		December 31, 2019

Residential real estate	$	2,194	$	113

Total other real estate owned	$	2,194	$	113

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:


(in thousands)	June 30, 2020		December 31, 2019

Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure	$	3,595	$	2,201

Easy Advances

The Company’s TRS segment offered its EA product during the first two months of 2020 and 2019. The Company based its estimated Provision for EAs on the current year’s EA delinquency information and the prior year’s tax refund payment patterns subsequent to the first quarter. Each year, all unpaid EAs are charged off by June 30th.

Information regarding EAs follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollars in thousands)	2020		2019		2020			2019

Easy Advances originated	$	—	$	—	$	387,762		$	388,970
Net charge to the Provision for Easy Advances		4,305		39		19,533			13,420
Provision to total Easy Advances originated		NA		NA		5.04	%		3.45	%
Easy Advances net charge-offs	$	19,575	$	13,420	$	19,533		$	13,420
Easy Advances net charge-offs to total Easy Advances originated		NA		NA		5.04	%		3.45	%

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5. DEPOSITS

The composition of the deposit portfolio follows:


(in thousands)	June 30, 2020		December 31, 2019

Core Bank:
Demand	$	1,124,321	$	922,972
Money market accounts		748,832		793,950
Savings		207,729		175,588
Individual retirement accounts (1)		51,715		51,548
Time deposits, $250 and over (1)		111,725		104,412
Other certificates of deposit (1)		258,884		248,161
Reciprocal money market and time deposits (1)		290,441		189,774
Brokered deposits (1)		400,000		200,072
Total Core Bank interest-bearing deposits		3,193,647		2,686,477
Total Core Bank noninterest-bearing deposits		1,431,866		981,164
Total Core Bank deposits		4,625,513		3,667,641

Republic Processing Group:
Money market accounts		3,038		66,152
Total RPG interest-bearing deposits		3,038		66,152

Brokered prepaid card deposits		256,703		9,128
Other noninterest-bearing deposits		132,831		43,087
Total RPG noninterest-bearing deposits		389,534		52,215
Total RPG deposits		392,572		118,367

Total deposits	$	5,018,085	$	3,786,008

(1)	Includes time deposits.

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6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS

Securities sold under agreements to repurchase consist of short-term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit clients arising from the Bank’s treasury management program. While comparable to deposits in their transactional nature, these overnight liabilities to clients are in the form of repurchase agreements. Repurchase agreements collateralized by securities are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. Should the fair value of currently pledged securities fall below the associated repurchase agreements, the Bank would be required to pledge additional securities. To mitigate the risk of under collateralization, the Bank typically pledges at least two percent more in securities than the associated repurchase agreements. All such securities are under the Bank’s control.

At June 30, 2020 and December 31, 2019, all securities sold under agreements to repurchase had overnight maturities. Additional information regarding securities sold under agreements to repurchase follows:


(dollars in thousands)	June 30, 2020			December 31, 2019

Outstanding balance at end of period	$	177,397		$	167,617
Weighted average interest rate at end of period		0.04	%		0.32	%

Fair value of securities pledged:
U.S. Treasury securities and U.S. Government agencies	$	7,515		$	70,015
Mortgage backed securities - residential		167,945			134,265
Collateralized mortgage obligations		12,915			17,030
Total securities pledged	$	188,375		$	221,310


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2020			2019			2020			2019

Average outstanding balance during the period	$	176,541		$	220,189		$	192,755		$	225,864
Average interest rate during the period		0.04	%		0.60	%		0.14	%		0.67	%
Maximum outstanding at any month end during the period	$	177,397		$	226,002		$	177,397		$	226,002

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7. RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES

The Company records as operating lease liabilities the present value of its required minimum lease payments plus any amounts probable of being owed under a residual value guarantee. Offsetting these operating lease liabilities, the Company records right-of-use assets for the underlying leased property.

At June 30, 2020, the Company was under 49 separate and distinct operating lease contracts to lease the land and/or buildings for 38 of its offices, with 15 such operating leases contracted with a related party of the Company. As of June 30, 2020, payments on 26 of the Company’s operating leases were considered variable because such payments were adjustable based on periodic changes in the Consumer Price Index.

Prior to the release of these financial statements, the Company executed a new operating lease for its Corporate Center location that commences in August 2020. The estimated right-of-use asset and lease liability to be recorded for this lease is approximately $19 million.

The following table presents information concerning the Company’s operating lease expense recorded as a noninterest expense within the category “Occupancy and equipment, net” for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Operating lease expense:
Related Party:
Variable lease expense	$	1,183	$	1,156	$	2,371	$	2,314
Fixed lease expense		23		10		47		18
Third Party:
Variable lease expense		180		211		361		435
Fixed lease expense		368		384		738		745
Short-term lease expense		—		12		4		26
Total operating lease expense	$	1,754	$	1,773	$	3,521	$	3,538

Other information concerning operating leases:
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,793	$	1,794	$	3,630		3,577
Short-term lease payments not included in the measurement of lease liabilities		—		12		4		26

The following table presents the weighted average remaining term and weighted average discount rate for the Company’s non-short-term operating leases as of June 30, 2020 and December 31, 2019:


	June 30, 2020			December 31, 2019

Weighted average remaining term in years		7.99			8.02
Weighted average discount rate		3.55	%		3.46	%

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The following table presents a maturity schedule of the Company’s operating lease liabilities based on undiscounted cash flows, and a reconciliation of those undiscounted cash flows to the operating lease liabilities recognized on the Company’s balance sheet as of June 30, 2020:


Year (in thousands)	Related Party		Third Party		Total

2020	$	2,283	$	1,345	$	3,628
2021		4,194		2,525		6,719
2022		3,332		2,120		5,452
2023		3,332		1,600		4,932
2024		3,205		1,173		4,378
Thereafter		12,718		3,376		16,094
Total undiscounted cash flows	$	29,064	$	12,139	$	41,203
Discount applied to cash flows		(4,103)		(1,529)		(5,632)
Total discounted cash flows reported as operating lease liabilities	$	24,961	$	10,610	$	35,571

8. FEDERAL HOME LOAN BANK ADVANCES

FHLB advances were as follows:


(in thousands)	June 30, 2020		December 31, 2019

Overnight advances	$	—	$	200,000
Variable interest rate advance indexed to 3-Month LIBOR plus 0.14%		10,000		10,000
Fixed interest rate advances		127,500		540,000
Total FHLB advances	$	137,500	$	750,000

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 June 30, 2020 and December 31, 2019, Republic had available borrowing capacity of $814 million and $259 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 $125 million available through various other financial institutions as of June 30, 2020 and December 31, 2019.

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

2020 (Overnight)	$	—	—	%
2020 (Term)		67,500	1.58
2021		30,000	1.93
2022		20,000	2.12
2023		20,000	2.56
2024		—	—
Thereafter		—	—
Total	$	137,500	1.87	%

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Due to their nature, the Bank considers average balance information more meaningful than period-end balances for its overnight borrowings from the FHLB. Information regarding overnight FHLB advances follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2020			2019			2020			2019

Average outstanding balance during the period	$	42,198		$	448,077		$	43,681		$	331,768
Average interest rate during the period		0.22	%		2.50	%		0.92	%		2.49	%
Maximum outstanding at any month end during the period	$	165,000		$	785,000		$	250,000		$	785,000

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


(in thousands)	June 30, 2020		December 31, 2019

First lien, single family residential real estate	$	1,031,671	$	1,099,941
Home equity lines of credit		250,257		274,990

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9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

COVID-19 Pandemic

COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. Since March 2020, to slow the spread of COVID-19, jurisdictions within the U.S. have imposed economic and social restrictions on the population in general and non-essential businesses in particular. These restrictions in combination with the public’s response to them effectively suspended or curtailed economic activity for many industries across the U.S., with industries in the Company’s market footprint impacted.

The potential financial impact of the COVID-19 pandemic is unknown at this time; however, this pandemic and the public’s response to it could cause the Company to experience a material adverse impact on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, MSRs, deferred tax assets, or counterparty risk derivatives.

Commitments to Extend Credit

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. 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)	June 30, 2020		December 31, 2019

Unused warehouse lines of credit	$	174,220	$	436,541
Unused home equity lines of credit		362,177		363,195
Unused loan commitments - other		803,204		757,657
Standby letters of credit		10,791		11,252
FHLB letter of credit		643		2,485
Total commitments	$	1,351,035	$	1,571,130

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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The following tables present a rollforward of the ACLC for the three and six months ended June 30, 2020:


	ACLC Rollforward
	Three Months Ended June 30, 2020
	Beginning		ASC 326				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance

Loan Commitments
Unused warehouse lines of credit	$	55	$	—	$	3	$	—	$	—	$	58
Unused home equity lines of credit		112		—		12		—		—		124
Unused loan commitments - other		391		—		63		—		—		454

Total	$	558	$	—	$	78	$	—	$	—	$	636

The Company increased its ACLC during the three months ended June 30, 2020 based on higher loss expectations on expected usage of unused commitments. Current and forecasted economic concerns driven by the COVID-19 pandemic drove the Company’s higher loss expectations.


	ACLC Rollforward
	Six Months Ended June 30, 2020
	Beginning		ASC 326				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance

Loan Commitments
Unused warehouse lines of credit	$	—	$	55	$	3	$	—	$	—	$	58
Unused home equity lines of credit		—		89		35		—		—		124
Unused loan commitments - other		—		312		142		—		—		454

Total	$	—	$	456	$	180	$	—	$	—	$	636

The Company increased its ACLC during the six months ended June 30, 2020 based on higher loss expectations on expected usage of unused commitments. Current and forecasted economic concerns driven by the COVID-19 pandemic drove the Company’s higher loss expectations.

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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 the fair value of each type of financial instrument:

Available-for-sale debt securities: Except for the Bank’s private label mortgage backed security and its TRUP investment, the fair value of AFS debt securities 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 Measurement. Based on this determination, the Bank utilized an income valuation model (present value model) approach in determining the fair value of this security.

See in this section of the filing under Footnote 2 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage backed security.

The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate market value at June 30, 2020. 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.

Equity securities with readily determinable fair value: Quoted market prices in an active market are available for the Bank’s Community Reinvestment Act mutual fund investment and fall within Level 1 of the fair value hierarchy.

The fair value of the Company’s Freddie Mac preferred stock is determined by matrix pricing, as described above (Level 2 inputs).

Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.

Consumer loans held for sale, at fair value: In December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. Fair value for these loans is based on contractual sales terms, Level 3 inputs.

Consumer loans held for investment, at fair value: The Bank held an immaterial amount of consumer loans at fair value through a consumer loan program the Company is currently unwinding. The fair value of these loans was based on the discounted cash flows of the underlying loans, Level 3 inputs. Further disclosure of these loans is omitted due to materiality.

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Mortgage Banking derivatives: Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and interest rate lock loan commitments. The fair value of the Bank’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. Forward contracts and rate lock loan commitments are classified as Level 2 in the fair value hierarchy.

Interest rate swap agreements: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant dealer counterparty and validated against the Company’s calculations. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

Collateral-dependent loans: Collateral-dependent loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or 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.

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).

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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. Information as of June 30, 2020 is presented net of any applicable ACL.


	Fair Value Measurements at
	June 30, 2020 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:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	—	$	139,796	$	—	$	139,796
Private label mortgage backed security		—		—		3,023		3,023
Mortgage backed securities - residential		—		273,281		—		273,281
Collateralized mortgage obligations		—		57,598		—		57,598
Corporate bonds		—		9,649		—		9,649
Trust preferred security		—		—		3,500		3,500
Total available-for-sale debt securities	$	—	$	480,324	$	6,523	$	486,847

Equity securities with readily determinable fair value:
Freddie Mac preferred stock	$	—	$	485	$	—	$	485
Community Reinvestment Act mutual fund		2,530		—		—		2,530
Total equity securities with readily determinable fair value	$	2,530	$	485	$	—	$	3,015

Mortgage loans held for sale	$	—	$	40,028	$	—	$	40,028
Consumer loans held for sale		—		—		164		164
Consumer loans held for investment		—		—		667		667
Rate lock loan commitments		—		4,436		—		4,436
Interest rate swap agreements		—		15,324		—		15,324

Financial liabilities:
Mandatory forward contracts	$	—	$	659	$	—	$	659
Interest rate swap agreements		—		15,491		—		15,491

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	Fair Value Measurements at
	December 31, 2019 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:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	—	$	134,640	$	—	$	134,640
Private label mortgage backed security		—		—		3,495		3,495
Mortgage backed securities - residential		—		255,847		—		255,847
Collateralized mortgage obligations		—		63,371		—		63,371
Corporate bonds		—		10,002		—		10,002
Trust preferred security		—		—		4,000		4,000
Total available-for-sale debt securities	$	—	$	463,860	$	7,495	$	471,355

Equity securities with readily determinable fair value:
Freddie Mac preferred stock	$	—	$	714	$	—	$	714
Community Reinvestment Act mutual fund		2,474		—		—		2,474
Total equity securities with readily determinable fair value	$	2,474	$	714	$	—	$	3,188

Mortgage loans held for sale	$	—	$	19,224	$	—	$	19,224
Consumer loans held for sale				—		598		598
Consumer loans held for investment		—		—		998		998
Rate lock loan commitments		—		789		—		789
Interest rate swap agreements		—		5,062		—		5,062

Financial liabilities:
Mandatory forward contracts	$	—	$	131	$	—	$	131
Interest rate swap agreements		—		5,166		—		5,166

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 and six months ended June 30, 2020 and 2019.

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):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Balance, beginning of period	$	3,249	$	3,660	$	3,495	$	3,712
Total gains or losses included in earnings:
Net change in unrealized gain		(107)		(2)		(107)		(34)
Recovery of actual losses previously recorded		—		38		—		75
Principal paydowns		(119)		(81)		(365)		(138)
Balance, end of period	$	3,023	$	3,615	$	3,023	$	3,615

The fair value of the Bank’s single private label mortgage backed security is supported by analysis prepared by an independent third party. The third party’s approach to determining fair value involved several steps: 1) detailed collateral analysis of the underlying mortgages, including consideration of geographic location, original loan-to-value and the weighted average FICO score of the borrowers; 2) collateral performance projections for each pool of mortgages underlying the security (probability of default, severity of default, and prepayment probabilities) and 3) discounted cash flow modeling.

The significant unobservable inputs in the fair value measurement of the Bank’s single private label mortgage backed security are prepayment rates, probability of default and loss severity in the event of default. Significant fluctuations in any of those inputs in isolation would result in a significantly different fair value measurement.

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Quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage backed security follows:


	Fair		Valuation
June 30, 2020 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Private label mortgage backed security	$	3,023	Discounted cash flow	(1) Constant prepayment rate	3.0% - 4.5%

				(2) Probability of default	1.8% - 6.9%

				(3) Loss severity	50% - 75%


	Fair		Valuation
December 31, 2019 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Private label mortgage backed security	$	3,495	Discounted cash flow	(1) Constant prepayment rate	2.3% - 5.0%

				(2) Probability of default	1.8% - 6.3%

				(3) Loss severity	50% - 75%

Trust Preferred Security

The following table presents a reconciliation of the Company’s TRUP measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Balance, beginning of period	$	4,100	$	4,100	$	4,000	$	4,075
Total gains or losses included in earnings:
Discount accretion		11		11		22		21
Net change in unrealized gain		(611)		(111)		(522)		(96)
Balance, end of period	$	3,500	$	4,000	$	3,500	$	4,000

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.

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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 June 30, 2020 and December 31, 2019.

The aggregate fair value, contractual balance, and unrealized gain were as follows:


(in thousands)	June 30, 2020		December 31, 2019

Aggregate fair value	$	40,028	$	19,224
Contractual balance		38,238		18,690
Unrealized gain		1,790		534

The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2020 and 2019 for mortgage loans held for sale are presented in the following table:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Interest income	$	419	$	170	$	632	$	272
Change in fair value		614		128		1,256		46
Total included in earnings	$	1,033	$	298	$	1,888	$	318

Consumer Loans Held for Sale

RCS carries loans originated through its installment loan program at fair value. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of June 30, 2020 and December 31, 2019.

The significant unobservable inputs in the fair value measurement of the Bank’s short-term 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:


	Fair		Valuation
June 30, 2020 (dollars in thousands)	Value		Technique	Unobservable Inputs	Rate

Consumer loans held for sale	$	164	Contract Terms	(1) Net Premium	1.4%

				(2) Discounted Sales	5.00%


	Fair		Valuation
December 31, 2019 (dollars in thousands)	Value		Technique	Unobservable Inputs	Rate

Consumer loans held for sale	$	598	Contract Terms	(1) Net Premium	1.4%

				(2) Discounted Sales	5.00%

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The aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, were as follows:


(in thousands)	June 30, 2020		December 31, 2019

Aggregate fair value	$	164	$	598
Contractual balance		163		593
Unrealized (loss) gain		1		5

The total amount of net gains from changes in fair value included in earnings for consumer loans held for sale, at fair value, are presented in the following table:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Interest income	$	45	$	—	$	1,521	$	—
Change in fair value		(22)		—		(4)		—
Total included in earnings	$	23	$	—	$	1,517	$	—

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


	Fair Value Measurements at
	June 30, 2020 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

Collateral-dependent loans:
Residential real estate:
Owner occupied	$	—	$	—	$	3,655	$	3,655
Commercial real estate		—		—		98		98
Commercial & industrial		—		—		1,055		1,055
Home equity		—		—		323		323
Total collateral-dependent loans*	$	—	$	—	$	5,131	$	5,131

Mortgage servicing rights	$	—	$	4,062	$	—	$	4,062


	Fair Value Measurements at
	December 31, 2019 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	$	—	$	—	$	3,598	$	3,598
Nonowner occupied		—		—		14		14
Commercial real estate		—		—		3,276		3,276
Commercial & industrial		—		—		1,562		1,562
Home equity		—		—		470		470
Total impaired loans*	$	—	$	—	$	8,920	$	8,920

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

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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
June 30, 2020 (dollars in thousands)	Value		Technique	Inputs	Average)

Collateral-dependent loans - residential real estate owner occupied	$	3,655	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 51% (11%)

Collateral-dependent loans - commercial real estate	$	98	Sales comparison approach	Adjustments determined for differences between comparable sales	7% (7%)

Collateral-dependent loans - commercial & industrial	$	1,055	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 29% (6%)

Collateral-dependent loans - home equity	$	323	Sales comparison approach	Adjustments determined for differences between comparable sales	2% (2%)


					Range
	Fair		Valuation	Unobservable	(Weighted
December 31, 2019 (dollars in thousands)	Value		Technique	Inputs	Average)

Impaired loans - residential real estate owner occupied	$	3,598	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 58% (12%)

Impaired loans - residential real estate nonowner occupied	$	14	Sales comparison approach	Adjustments determined for differences between comparable sales	5% (5%)

Impaired loans - commercial real estate	$	3,276	Sales comparison approach	Adjustments determined for differences between comparable sales	1% - 10% (4%)

Impaired loans - commercial & industrial	$	1,562	Income approach	Adjustments for differences between net operating income expectations	3% - 50% (37%)

Impaired loans - home equity	$	470	Sales comparison approach	Adjustments determined for differences between comparable sales	2% (2%)

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Collateral Dependent/Impaired Loans

Collateral-dependent impaired loans are generally measured for loss 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 loss 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. Collateral-dependent loans are valued within Level 3 of the fair value hierarchy.

Collateral-dependent/impaired loans are as follows:


(in thousands)	June 30, 2020		December 31, 2019

Carrying amount of loans measured at fair value	$	4,331	$	7,729
Estimated selling costs considered in carrying amount		802		1,193
Valuation allowance		(2)		(2)
Total fair value	$	5,131	$	8,920


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Provision on collateral-dependent, impaired loans	$	98	$	5	$	128	$	27

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The carrying amounts and estimated exit price fair values of all financial instruments follow:


			Fair Value Measurements at
			June 30, 2020:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	560,195	$	560,195	$	—	$	—	$	560,195
Available-for-sale debt securities		486,847		—		480,324		6,523		486,847
Held-to-maturity debt securities		55,745		—		56,266		—		56,266
Equity securities with readily determinable fair values		3,015		2,530		485		—		3,015
Mortgage loans held for sale, at fair value		40,028		—		40,028		—		40,028
Consumer loans held for sale, at fair value		164		—		—		164		164
Consumer loans held for sale, at the lower of cost or fair value		12,800		—		—		12,800		12,800
Loans, net		5,009,995		—		—		4,979,895		4,979,895
Federal Home Loan Bank stock		25,629		—		—		—		NA
Accrued interest receivable		11,146		—		11,146		—		11,146
Rate lock loan commitments		4,436		—		4,436		—		4,436
Interest rate swap agreements		15,324		—		15,324		—		15,324

Liabilities:
Noninterest-bearing deposits	$	1,821,400		—	$	1,821,400		—	$	1,821,400
Transaction deposits		2,305,085		—		2,305,085		—		2,305,085
Time deposits		891,600		—		901,588		—		901,588
Securities sold under agreements to repurchase and other short-term borrowings		177,397		—		177,397		—		177,397
Federal Home Loan Bank advances		137,500		—		139,831		—		139,831
Subordinated note		41,240		—		31,805		—		31,805
Accrued interest payable		1,117		—		1,117		—		1,117
Mandatory forward contracts		659		—		659		—		659
Interest rate swap agreements		15,491		—		15,491		—		15,491

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			Fair Value Measurements at
			December 31, 2019:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	385,303	$	385,303	$	—	$	—	$	385,303
Available-for-sale debt securities		471,355		—		463,860		7,495		471,355
Held-to-maturity debt securities		62,531		—		63,156		—		63,156
Equity securities with readily determinable fair values		3,188		2,474		714		—		3,188
Mortgage loans held for sale, at fair value		19,224		—		19,224		—		19,224
Consumer loans held for sale, at fair value		598		—		—		598		598
Consumer loans held for sale, at the lower of cost or fair value		11,646		—		—		11,646		11,646
Loans, net		4,389,800		—		—		4,381,396		4,381,396
Federal Home Loan Bank stock		30,831		—		—		—		NA
Accrued interest receivable		12,937		—		12,937		—		12,937
Rate lock loan commitments		789		—		789		—		789
Interest rate swap agreements		5,062		—		5,062		—		5,062

Liabilities:
Noninterest-bearing deposits	$	1,033,379		—	$	1,033,379		—	$	1,033,379
Transaction deposits		2,018,687		—		2,018,687		—		2,018,687
Time deposits		733,942		—		737,733		—		737,733
Securities sold under agreements to repurchase and other short-term borrowings		167,617		—		167,617		—		167,617
Federal Home Loan Bank advances		750,000		—		749,667		—		749,667
Subordinated note		41,240		—		32,587		—		32,587
Accrued interest payable		2,802		—		2,802		—		2,802
Mandatory forward contracts		131		—		131		—		131
Interest rate swap agreements		5,166		—		5,166		—		5,166

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11. MORTGAGE BANKING ACTIVITIES

Mortgage Banking activities primarily include residential mortgage originations and servicing.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Balance, beginning of period	$	39,384	$	11,313	$	19,224	$	8,971
Origination of mortgage loans held for sale		218,668		81,982		343,941		122,696
Proceeds from the sale of mortgage loans held for sale		(226,723)		(81,630)		(336,641)		(121,262)
Net gain on sale of mortgage loans held for sale		8,699		2,218		13,504		3,478
Balance, end of period	$	40,028	$	13,883	$	40,028	$	13,883

The following table presents the components of Mortgage Banking income:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Net gain realized on sale of mortgage loans held for sale	$	6,050	$	1,896	$	9,128	$	2,771
Net change in fair value recognized on loans held for sale		614		128		1,256		46
Net change in fair value recognized on rate lock loan commitments		(132)		379		3,647		866
Net change in fair value recognized on forward contracts		2,167		(185)		(527)		(205)
Net gain recognized		8,699		2,218		13,504		3,478

Loan servicing income		707		609		1,382		1,210
Amortization of mortgage servicing rights		(1,008)		(411)		(1,593)		(733)
Change in mortgage servicing rights valuation allowance		—		—		(100)		—
Net servicing income recognized		(301)		198		(311)		477
Total Mortgage Banking income	$	8,398	$	2,416	$	13,193	$	3,955

Activity for capitalized mortgage servicing rights was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Balance, beginning of period	$	5,994	$	4,935	$	5,888	$	4,919
Additions		1,725		634		2,516		972
Amortized to expense		(1,008)		(411)		(1,593)		(733)
Change in valuation allowance		—		—		(100)		—
Balance, end of period	$	6,711	$	5,158	$	6,711	$	5,158

Activity in the valuation allowance for capitalized mortgage servicing rights follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Beginning valuation allowance	$	—	$	—	$	—	$	—
Charge (credit) during the period		—		—		100		—
Ending valuation allowance	$	—	$	—	$	100	$	—

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Other information relating to mortgage servicing rights follows:


(in thousands)	June 30, 2020			December 31, 2019

Fair value of mortgage servicing rights portfolio	$	6,892		$	9,068
Monthly weighted average prepayment rate of unpaid principal balance*		330	%		202	%
Discount rate		10.00	%		10.00	%
Weighted average foreclosure rate		0.13	%		0.14	%
Weighted average life in years		4.12			5.76

*	Rates are applied to individual tranches with similar characteristics.

Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid.

Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management and the Board of Directors. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.

The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate lock loan 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 and mortgage banking derivatives as of the period ends presented:


	June 30, 2020				December 31, 2019
	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	$	38,238	$	40,028	$	18,690	$	19,224

Included in other assets:
Rate lock loan commitments	$	110,176	$	4,436	$	32,776	$	789

Included in other liabilities:
Mandatory forward contracts	$	128,040	$	659	$	44,919	$	131

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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 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:


								June 30, 2020				December 31, 2019
										Unrealized				Unrealized
	Notional		Pay		Receive			Assets /		Gain (Loss)		Assets /		Gain (Loss)
(dollars in thousands)	Amount		Rate		Rate		Term	(Liabilities)		in AOCI		(Liabilities)		in AOCI

Interest rate swap on money market deposits	$	10,000	2.17	%		1M LIBOR	12/2013 - 12/2020	$	(68)	$	(51)	$	(46)	$	(34)
Interest rate swap on FHLB advance		10,000	2.33	%		3M LIBOR	12/2013 - 12/2020		(99)		(74)		(58)		(43)
Total	$	20,000						$	(167)	$	(125)	$	(104)	$	(77)

The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Interest rate swap on money market deposits	$	38	$	(8)	$	55	$	(16)
Interest rate swap on FHLB advance		41		(5)		53		(16)
Total interest (benefit) expense on swap transactions	$	79	$	(13)	$	108	$	(32)

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:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Gains (losses) recognized in OCI on derivative (effective portion)	$	(10)	$	(146)	$	(171)	$	(215)

Gains (losses) reclassified from OCI on derivative (effective portion)		(79)		13		(108)		32

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

The estimated net amount of the existing losses reported in AOCI at June 30, 2020 expected to be reclassified into earnings within the next 12 months is considered immaterial.

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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 counterparty or client owes the Bank, and results in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty, and therefore, has no credit risk.

A summary of the Bank’s interest rate swaps related to clients is included in the following table:


		June 30, 2020				December 31, 2019
		Notional				Notional
(in thousands)	Bank Position	Amount		Fair Value		Amount		Fair Value

Interest rate swaps with Bank clients - Assets	Pay variable/receive fixed	$	141,474	$	15,324	$	95,411	$	5,062
Interest rate swaps with Bank clients - Liabilities	Pay variable/receive fixed		—		—		6,640		(55)
Interest rate swaps with Bank clients - Total	Pay variable/receive fixed	$	141,474	$	15,324	$	102,051	$	5,007

Offsetting interest rate swaps with institutional swap dealer	Pay fixed/receive variable		141,474		(15,324)		102,051		(5,007)
Total		$	282,948	$	—	$	204,102	$	—

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 $15.7 million and $7.5 million at June 30, 2020 and December 31, 2019.

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13. EARNINGS PER SHARE

The Company calculates earnings per share under the two-class method. Under the two-class method, earnings available to common shareholders for the period are allocated between Class A Common Stock and Class B Common Stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. The difference in earnings per share between the two classes of common stock results from the 10% per share cash dividend premium paid on Class A Common Stock over that paid on Class B Common Stock.

A reconciliation of the combined Class A and Class B Common Stock numerators and denominators of the earnings per share and diluted earnings per share computations is presented below:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands, except per share data)	2020		2019		2020		2019

Net income	$	15,804	$	18,007	$	42,501	$	47,523
Dividends declared on Common Stock:
Class A Shares		(5,347)		(4,932)		(10,705)		(9,865)
Class B Shares		(572)		(530)		(1,144)		(1,061)
Undistributed net income for basic earnings per share		9,885		12,545		30,652		36,597
Weighted average potential dividends on Class A shares upon exercise of dilutive options		(7)		(32)		(24)		(68)
Undistributed net income for diluted earnings per share	$	9,878	$	12,513	$	30,628	$	36,529

Weighted average shares outstanding:
Class A Shares		18,804		18,804		18,821		18,785
Class B Shares		2,200		2,212		2,202		2,212
Effect of dilutive securities on Class A Shares outstanding		25		122		42		128
Weighted average shares outstanding including dilutive securities		21,029		21,138		21,065		21,125

Basic earnings per share:
Class A Common Stock:
Per share dividends distributed	$	0.29	$	0.26	$	0.57	$	0.53
Undistributed earnings per share*		0.48		0.60		1.47		1.76
Total basic earnings per share - Class A Common Stock	$	0.77	$	0.86	$	2.04	$	2.29

Class B Common Stock:
Per share dividends distributed	$	0.26	$	0.24	$	0.52	$	0.48
Undistributed earnings per share*		0.43		0.55		1.34		1.60
Total basic earnings per share - Class B Common Stock	$	0.69	$	0.79	$	1.86	$	2.08

Diluted earnings per share:
Class A Common Stock:
Per share dividends distributed	$	0.29	$	0.26	$	0.57	$	0.53
Undistributed earnings per share*		0.47		0.60		1.47		1.75
Total diluted earnings per share - Class A Common Stock	$	0.76	$	0.86	$	2.04	$	2.28

Class B Common Stock:
Per share dividends distributed	$	0.26	$	0.24	$	0.52	$	0.48
Undistributed earnings per share*		0.43		0.54		1.33		1.59
Total diluted earnings per share - Class B Common Stock	$	0.69	$	0.78	$	1.85	$	2.07

*To arrive at undistributed earnings per share, undistributed net income is first prorated between Class A and Class B Common Shares, with Class A Common Shares receiving a 10% premium. The resulting pro-rated, undistributed net income for each class is then divided by the weighted average shares for each class.

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


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2020	2019	2020	2019

Antidilutive stock options	427,000	160,000	247,000	165,000
Average antidilutive stock options	365,000	156,000	172,000	159,000

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14. OTHER COMPREHENSIVE INCOME

OCI components and related tax effects were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Available-for-Sale Debt Securities:
Change in unrealized gain on AFS debt securities	$	1,099	$	2,014	$	8,876	$	5,673
Change in unrealized gain of AFS debt security for which a portion of OTTI has been recognized in earnings		(108)		(1)		(107)		(34)
Net unrealized (losses) gains		991		2,013		8,769		5,639
Tax effect		(248)		(422)		(2,193)		(1,186)
Net of tax		743		1,591		6,576		4,453

Cash Flow Hedges:
Change in fair value of derivatives used for cash flow hedges		(10)		(146)		(171)		(215)
Reclassification amount for net derivative losses (gains) realized in income		79		(13)		108		(32)
Net unrealized gains		69		(159)		(63)		(247)
Tax effect		(17)		33		15		53
Net of tax		52		(126)		(48)		(194)

Total other comprehensive (loss) income components, net of tax	$	795	$	1,465	$	6,528	$	4,259

The table below presents the significant amounts reclassified out of each component of AOCI:



		Amounts Reclassified from AOCI
	Affected Line Items	Three Months Ended				Six Months Ended
	in the Consolidated	June 30,				June 30,
(in thousands)	Statements of Income	2020		2019		2020		2019

Cash Flow Hedges:
Interest rate swap on money market deposits	Interest benefit (expense) on deposits	$	(38)	$	8	$	(55)	$	16
Interest rate swap on FHLB advance	Interest benefit (expense) on FHLB advances		(41)		5		(53)		16
Total derivative gains (losses) on cash flow hedges	Total interest benefit (expense)		(79)		13		(108)		32
Tax effect	Income tax (benefit) expense		20		(3)		27		(7)
Net of tax	Net income	$	(59)	$	10	$	(81)	$	25

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


			2020
(in thousands)	December 31, 2019		Change		June 30, 2020

Unrealized gain on AFS debt securities	$	2,211	$	6,657	$	8,868
Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings		964		(81)		883
Unrealized loss on cash flow hedges		(77)		(48)		(125)
Total unrealized gain	$	3,098	$	6,528	$	9,626


			2019
(in thousands)	December 31, 2018		Change		June 30, 2019

Unrealized loss on AFS debt securities	$	(2,165)	$	4,480	$	2,315
Unrealized gain (loss) on AFS debt security for which a portion of OTTI has been recognized in earnings		1,078		(27)		1,051
Unrealized gain (loss) on cash flow hedges		90		(194)		(104)
Total unrealized gain (loss)	$	(997)	$	4,259	$	3,262

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15. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following tables present the Company’s net revenue by reportable segment:


	Three Months Ended June 30, 2020
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income(1)	$	39,035		$	6,063		$	419		$	45,517		$	1,081		$	5,607		$	6,688		$	52,205

Noninterest income:
Service charges on deposit accounts		2,438			17			—			2,455			(4)			—			(4)			2,451
Net refund transfer fees		—			—			—			—			2,913			—			2,913			2,913
Mortgage banking income(1)		—			—			8,398			8,398			—			—			—			8,398
Interchange fee income		2,724			—			—			2,724			84			—			84			2,808
Program fees(1)		—			—			—			—			618			520			1,138			1,138
Increase in cash surrender value of BOLI(1)		395			—			—			395			—			—			—			395
Net gains (losses) on OREO		1			—			—			1			—			—			—			1
Other		568			—			8			576			71			—			71			647
Total noninterest income		6,126			17			8,406			14,549			3,682			520			4,202			18,751

Total net revenue	$	45,161		$	6,080		$	8,825		$	60,066		$	4,763		$	6,127		$	10,890		$	70,956

Net-revenue concentration(2)		63	%		9	%		12	%		84	%		7	%		9	%		16	%		100	%


	Three Months Ended June 30, 2019
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income(1)	$	41,877		$	3,957		$	170		$	46,004		$	710		$	7,232		$	7,942		$	53,946

Noninterest income:
Service charges on deposit accounts		3,585			13			—			3,598			—			—			—			3,598
Net refund transfer fees		—			—			—			—			3,629			—			3,629			3,629
Mortgage banking income(1)		—			—			2,416			2,416			—			—			—			2,416
Interchange fee income		3,168			—			—			3,168			89			—			89			3,257
Program fees(1)		—			—			—			—			50			987			1,037			1,037
Increase in cash surrender value of BOLI(1)		377			—			—			377			—			—			—			377
Net gains (losses) on OREO		90			—			—			90			—			—			—			90
Other		633			—			56			689			—			32			32			721
Total noninterest income		7,853			13			2,472			10,338			3,768			1,019			4,787			15,125

Total net revenue	$	49,730		$	3,970		$	2,642		$	56,342		$	4,478		$	8,251		$	12,729		$	69,071

Net-revenue concentration(2)		72	%		6	%		4	%		82	%		6	%		12	%		18	%		100	%

(1)	This revenue is not subject to ASC 606.

(2)	Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.

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	Six Months Ended June 30, 2020
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income(1)	$	79,656		$	10,370		$	632		$	90,658		$	21,606		$	12,679		$	34,285		$	124,943

Noninterest income:
Service charges on deposit accounts		5,576			28			—			5,604			(17)			—			(17)			5,587
Net refund transfer fees		—			—			—			—			18,736			—			18,736			18,736
Mortgage banking income(1)		—			—			13,193			13,193			—			—			—			13,193
Interchange fee income		5,217			—			—			5,217			143			—			143			5,360
Program fees(1)		—			—			—			—			930			2,832			3,762			3,762
Increase in cash surrender value of BOLI(1)		784			—			—			784			—			—			—			784
Net gains (losses) on OREO		4			—			—			4			—			—			—			4
Other		1,780			—			32			1,812			82			—			82			1,894
Total noninterest income		13,361			28			13,225			26,614			19,874			2,832			22,706			49,320

Total net revenue	$	93,017		$	10,398		$	13,857		$	117,272		$	41,480		$	15,511		$	56,991		$	174,263

Net-revenue concentration(2)		53	%		6	%		8	%		67	%		24	%		9	%		33	%		100	%


	Six Months Ended June 30, 2019
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income(1)	$	83,224		$	6,852		$	272		$	90,348		$	21,148		$	14,749		$	35,897		$	126,245

Noninterest income:
Service charges on deposit accounts		6,878			23			—			6,901			—			—			—			6,901
Net refund transfer fees		—			—			—			—			20,729			—			20,729			20,729
Mortgage banking income(1)		—			—			3,955			3,955			—			—			—			3,955
Interchange fee income		5,794			—			—			5,794			220			—			220			6,014
Program fees(1)		—			—			—			—			196			1,915			2,111			2,111
Increase in cash surrender value of BOLI(1)		759			—			—			759			—			—			—			759
Net gains (losses) on OREO		220			—			—			220			—			—			—			220
Other		1,098			—			96			1,194			—			659			659			1,853
Total noninterest income		14,749			23			4,051			18,823			21,145			2,574			23,719			42,542

Total net revenue	$	97,973		$	6,875		$	4,323		$	109,171		$	42,293		$	17,323		$	59,616		$	168,787

Net-revenue concentration(2)		58	%		4	%		3	%		65	%		25	%		10	%		35	%		100	%

(1)	This revenue is not subject to ASC 606.

(2)	Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.

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The following represents information for significant revenue streams subject to ASC 606:

Service charges on deposits – The Company earns revenue for account-based and event-driven services on its retail and commercial deposit accounts. Contracts for these services are generally in the form of deposit agreements, which disclose fees for deposit services. Revenue for event-driven services is recognized in close proximity or simultaneously with service performance. Revenue for certain account-based services may be recognized at a point in time or over the period the service is rendered, typically no longer than a month. Examples of account-based and event-driven service charges on deposits include per item fees, paper-statement fees, check-cashing fees, and analysis fees.

Net refund transfer fees – An RT is a fee-based product offered by the Bank through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”), with the Bank acting as an independent contractor of the Tax Providers. An RT allows a taxpayer to pay any applicable tax preparation and filing related fees directly from his federal or state government tax refund, with the remainder of the tax refund disbursed directly to the taxpayer. RT fees and all applicable tax preparation, transmitter, audit, and any other taxpayer authorized amounts are deducted from the tax refund by either the Bank or the Bank’s service provider and automatically forwarded to the appropriate party as authorized by the taxpayer. RT fees generally receive first priority when applying fees against the taxpayer’s refund, with the Bank’s share of RT fees generally superior to the claims of other third-party service providers, including the Tax Providers. The remainder of the refund is disbursed to the taxpayer by a Bank check printed at a tax office, direct deposited to the taxpayer’s personal bank account, loaded to a Prepaid Card or Walmart Direct2Cash^®.

The Company executes contracts with individual Tax Providers to offer RTs to their taxpayers. RT revenue is recognized by the Bank immediately after the taxpayer’s refund is disbursed in accordance with the RT contract with the taxpayer. The fee paid by the taxpayer for the RT is shared between the Bank and the Tax Providers based on contracts executed between the parties.

The Company presents RT revenue net of any amounts shared with the Tax Providers. The Bank’s share of RT revenue is generally based on the obligations undertaken by the Tax Provider for each individual RT program with more obligations generally corresponding to higher RT revenue share. The significant majority of net RT revenue is recognized and obligations under RT contracts fulfilled by the Bank during the first half of each year. Incremental expenses associated with the fulfillment of RT contracts are generally expensed during the first half of the year.

Interchange fee income – As an “issuing bank” for card transactions, the Company earns interchange fee income on transactions executed by its cardholders with various third-party merchants. Through third-party intermediaries, merchants compensate the Company for each transaction for the ability to efficiently settle the transaction and for the Company’s willingness to accept certain risks inherent in the transaction. There is no written contract between the merchant and the Company, but a contract is implied between the two parties by customary business practices. Interchange fee income is recognized almost simultaneously by the Company upon the completion of a related card transaction.

The Company compensates its cardholders by way of cash or other “rewards” for generating card transactions. These rewards are disclosed in cardholder agreements between the Company and its cardholders. Reward costs are accrued over time based on card transactions generated by the cardholder. Interchange fee income is presented net of reward costs within noninterest income.

Net gains/(losses) on other real estate – The Company routinely sells OREO it has acquired through loan foreclosure. Net gains/(losses) on OREO reflect both 1) the gain or loss recognized upon an executed deed and 2) mark-to-market writedowns the Company takes on its OREO inventory.

The Company generally recognizes gains or losses on OREO at the time of an executed deed, although gains may be recognized over a financing period if the Company finances the sale. For financed OREO sales, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.

Mark-to-market writedowns taken by the Company during the property’s holding period are generally at least 10% per year, but may be higher based on updated real estate appraisals or BPOs. Incremental expenditures to bring OREO to salable condition are generally expensed as-incurred.

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16. SEGMENT INFORMATION

Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.

As of June 30, 2020, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company’s national branchless banking platform, is part of the Traditional Banking segment.

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


Reportable Segment:	Nature of Operations:	Primary Drivers of Net Revenue:

Core Banking:

Traditional Banking	Provides traditional banking products to clients in its market footprint primarily via its network of banking centers and to clients outside of its market footprint primarily via its digital delivery channels.	Loans, investments, and deposits.

Warehouse Lending	Provides short-term, revolving credit facilities to mortgage bankers across the United States.	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 the Bank's market footprint.	Loan sales and servicing.

Republic Processing Group:

Tax Refund Solutions	TRS offers tax-related credit products and facilitates the receipt and payment of federal and state tax refunds through Refund Transfer products. The RPS division of TRS offers general-purpose reloadable cards. TRS and RPS products are primarily provided to clients outside of the Bank’s market footprint.	Loans, refund transfers, and prepaid cards.

Republic Credit Solutions	Offers consumer credit products. RCS products are primarily provided to clients outside of the Bank’s market footprint, with a substantial portion of RCS clients considered subprime or near-prime borrowers.	Unsecured, consumer loans.

The accounting policies used for Republic’s reportable segments are generally the same as those described in the summary of significant accounting policies in the Company’s 2019 Annual Report on Form 10-K. The Company did update its accounting policies during the first quarter of 2020 upon adoption of the CECL standard. Republic evaluates segment performance using operating income. The Company allocates goodwill to the Traditional Banking segment. Republic generally allocates income taxes based on income before income tax expense unless reasonable and specific segment allocations can be made. The Company makes transactions among reportable segments at carrying value.

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Segment information follows:


	Three Months Ended June 30, 2020
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income	$	39,035		$	6,063		$	419		$	45,517		$	1,081		$	5,607		$	6,688		$	52,205

Provision for expected credit loss expense		3,080			449			—			3,529			4,448			(1,443)			3,005			6,534

Net refund transfer fees		—			—			—			—			2,913			—			2,913			2,913
Mortgage banking income		—			—			8,398			8,398			—			—			—			8,398
Program fees		—			—			—			—			618			520			1,138			1,138
Other noninterest income		6,126			17			8			6,151			151			—			151			6,302
Total noninterest income		6,126			17			8,406			14,549			3,682			520			4,202			18,751

Total noninterest expense		36,688			811			2,689			40,188			3,734			903			4,637			44,825

Income (loss) before income tax expense		5,393			4,820			6,136			16,349			(3,419)			6,667			3,248			19,597
Income tax expense (benefit)		729			1,085			1,288			3,102			(853)			1,544			691			3,793
Net income (loss)	$	4,664		$	3,735		$	4,848		$	13,247		$	(2,566)		$	5,123		$	2,557		$	15,804

Period-end assets	$	4,967,759		$	1,028,400		$	54,518		$	6,050,677		$	306,583		$	103,315		$	409,898		$	6,460,575

Net interest margin		3.26	%		3.01	%		NM			3.23	%		NM			NM			NM			3.62	%

Net-revenue concentration*		63	%		9	%		12	%		84	%		7	%		9	%		16	%		100	%


	Three Months Ended June 30, 2019
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income	$	41,877		$	3,957		$	170		$	46,004		$	710		$	7,232		$	7,942		$	53,946

Provision for expected credit loss expense		1,427			417			—			1,844			392			2,224			2,616			4,460

Net refund transfer fees		—			—			—			—			3,629			—			3,629			3,629
Mortgage banking income		—			—			2,416			2,416			—			—			—			2,416
Program fees		—			—			—			—			50			987			1,037			1,037
Other noninterest income		7,853			13			56			7,922			89			32			121			8,043
Total noninterest income		7,853			13			2,472			10,338			3,768			1,019			4,787			15,125

Total noninterest expense		37,764			792			1,354			39,910			2,849			669			3,518			43,428

Income before income tax expense		10,539			2,761			1,288			14,588			1,237			5,358			6,595			21,183
Income tax expense		744			621			270			1,635			288			1,253			1,541			3,176
Net income	$	9,795		$	2,140		$	1,018		$	12,953		$	949		$	4,105		$	5,054		$	18,007

Period-end assets	$	4,805,449		$	738,300		$	20,568		$	5,564,317		$	36,834		$	121,983		$	158,817		$	5,723,134

Net interest margin		3.75	%		2.49	%		NM			3.62	%		NM			NM			NM			4.12	%

Net-revenue concentration*		72	%		6	%		4	%		82	%		6	%		12	%		18	%		100	%

* Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.

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	Six Months Ended June 30, 2020
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income	$	79,656		$	10,370		$	632		$	90,658		$	21,606		$	12,679		$	34,285		$	124,943

Provision for expected credit loss expense		8,669			781			—			9,450			19,581			263			19,844			29,294

Net refund transfer fees		—			—			—			—			18,736			—			18,736			18,736
Mortgage banking income		—			—			13,193			13,193			—			—			—			13,193
Program fees		—			—			—			—			930			2,832			3,762			3,762
Net gain on branch divestiture		—			—			—			—			—			—			—			—
Other noninterest income		13,361			28			32			13,421			208			—			208			13,629
Total noninterest income		13,361			28			13,225			26,614			19,874			2,832			22,706			49,320

Total noninterest expense		73,335			1,614			4,685			79,634			10,363			1,797			12,160			91,794

Income before income tax expense		11,013			8,003			9,172			28,188			11,536			13,451			24,987			53,175
Income tax expense		1,189			1,801			1,926			4,916			2,644			3,114			5,758			10,674
Net income	$	9,824		$	6,202		$	7,246		$	23,272		$	8,892		$	10,337		$	19,229		$	42,501

Period-end assets	$	4,967,759		$	1,028,400		$	54,518		$	6,050,677		$	306,583		$	103,315		$	409,898		$	6,460,575

Net interest margin		3.52	%		2.86	%		NM			3.43	%		NM			NM			NM			4.55	%

Net-revenue concentration*		53	%		6	%		8	%		67	%		24	%		9	%		33	%		100	%


	Six Months Ended June 30, 2019
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income	$	83,224		$	6,852		$	272		$	90,348		$	21,148		$	14,749		$	35,897		$	126,245

Provision for expected credit loss expense		1,616			642			—			2,258			13,826			5,607			19,433			21,691

Net refund transfer fees		—			—			—			—			20,729			—			20,729			20,729
Mortgage banking income		—			—			3,955			3,955			—			—			—			3,955
Program fees		—			—			—			—			196			1,915			2,111			2,111
Other noninterest income		14,749			23			96			14,868			220			659			879			15,747
Total noninterest income		14,749			23			4,051			18,823			21,145			2,574			23,719			42,542

Total noninterest expense		73,314			1,550			2,674			77,538			9,963			1,436			11,399			88,937

Income before income tax expense		23,043			4,683			1,649			29,375			18,504			10,280			28,784			58,159
Income tax expense		2,509			1,054			346			3,909			4,318			2,409			6,727			10,636
Net income	$	20,534		$	3,629		$	1,303		$	25,466		$	14,186		$	7,871		$	22,057		$	47,523

Period-end assets	$	4,805,449		$	738,300		$	20,568		$	5,564,317		$	36,834		$	121,983		$	158,817		$	5,723,134

Net interest margin		3.81	%		2.63	%		NM			3.69	%		NM			NM			NM			4.88	%

Net-revenue concentration*		58	%		4	%		3	%		65	%		25	%		10	%		35	%		100	%

* Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.

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17. INCOME TAXES

The following table illustrates the difference between the Company’s effective tax rate and the federal rates for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019

Federal corporate tax rate		21.00	%		21.00	%		21.00	%		21.00	%
Effect of:
State taxes, net of federal benefit		1.66			(2.47)			1.61			(0.51)
General business tax credits		(1.61)			(0.55)			(1.47)			(0.68)
Nontaxable income		(0.71)			(1.27)			(0.71)			(0.89)
Other, net		(0.98)			(1.72)			(0.36)			(0.63)
Effective tax rate		19.36	%		14.99	%		20.07	%		18.29	%

The following matters positively impacted the Company’s effective tax rate for the three and six months ended June 30, 2019:

●

As a financial institution doing business in Kentucky, the Bank is subject to a capital-based Kentucky bank franchise tax and exempt from Kentucky corporate income tax. In March 2019, however, Kentucky enacted HB354, which will transition the Bank from the bank franchise tax to a corporate income tax beginning January 1, 2021. The current Kentucky corporate income tax rate is 5%. As of March 31, 2019, the Company recorded a deferred tax asset, net of the federal benefit, of $350,000 due to the enactment of HB354, with the majority of this benefit attributed to the Traditional Bank.

●

In April 2019, Kentucky enacted HB458, which allows for combined filing for Republic Bancorp and the Bank. Republic Bancorp had previously filed a separate company income tax return for Kentucky and generated net operating losses, for which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. Republic Bancorp expects to file a combined return beginning in 2021 and to utilize these previously generated net operating losses. The tax benefit to reverse the valuation allowance on the deferred tax asset for these losses was approximately $815,000 as of June 30, 2019. This benefit was recorded in the second quarter of 2019, with 100% of this benefit attributed to the Traditional Bank.

●

In addition to the tax benefit recognized during the second quarter associated with passage of HB458, the Company also received $388,000 in income tax benefit during the second quarter of 2019 associated with equity compensation. Substantially all of this benefit was attributed to the Traditional Bank.

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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 and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.

Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank as well, as a group of third-party insurance captives for which insurance may not be available or economically feasible.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part I Item 1 “Financial Statements.”

Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “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 undertakes no obligation to update forward-looking statements, except as required by applicable law.

Broadly speaking, forward-looking statements include:

●

the potential impact of the COVID-19 pandemic on Company operations;

●

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:

●

the impact of the COVID-19 pandemic on Company operations and credit losses;

●

the ability of borrowers who received COVID-19 loan accommodations to resume repaying their loans upon maturity of such accommodations;

●

natural disasters impacting Company operations;

●

changes in political and economic conditions;

●

the magnitude and frequency of changes to the FFTR implemented by the FOMC of the FRB;

●

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

●

competitive product and pricing pressures in each of the Company’s five reportable 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;

●

the Company’s ability to qualify for future R&D federal tax credits;

●

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

●

other risks and uncertainties reported from time to time in the Company’s filings with the SEC, including Part 1 Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and Part II Item 1A “Risk Factors” of the current filing.

Recently Adopted Accounting Standards

For disclosure regarding the impact to the Company’s financial statements of recently adopted ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods.

A summary of the Company's significant accounting policies is set forth in Part II “Item 8. Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.

Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.

Republic believes its critical accounting policies and estimates relate to the following:

●

ACLL and Provision

●

Goodwill and Other Intangible Assets

●

Mortgage Servicing Rights

●

Income Tax Accounting

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ACLL and Provision — At June 30, 2020, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly, and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly.

When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower “expected” threshold for loss recognition versus a higher “probable” threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts. The Company’s CECL method is a “static-pool” method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use the U.S. national unemployment rate as its primary forecasting tool.

Management’s evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast.

Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on a forecast of the U.S. national unemployment rate, which has shown a relatively strong historical correlation to the Bank’s loan losses. Subsequent to the one-year forecast, loss rates are assumed to immediately revert back to the historical loss rate calculated under a static pool analysis plus adjustments for current conditions.

Prospectively, the impact of utilizing the CECL approach to calculate the ACLL will be significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors may result in greater volatility to the ACLL, and therefore, greater volatility to the Company’s reported earnings.

See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” and Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Goodwill and Other Intangible Assets — The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely goodwill impairment has occurred. The Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is likely that goodwill impairment has occurred. If, after assessing the totality of events or circumstances, the Company determines it is likely that goodwill impairment has not occurred, then performing a quantitative impairment test is unnecessary. If the Company concludes otherwise, then it is required to perform an impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit.

The Company typically performs its impairment test annually as of September 30, however, the Company performed an interim qualitative assessment of its goodwill at June 30, 2020 due to the economic turmoil and market volatility resulting from the COVID-19 pandemic. Under its qualitative analysis, management concluded there was insufficient evidence of impairment of the Company’s $16 million of goodwill at June 30, 2020.

All goodwill is attributable to the Company’s Traditional Banking segment and is not expected to be deductible for tax purposes.

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Mortgage Servicing Rights — Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value, with the income statement effect recorded as a component of net servicing income within Mortgage Banking income. Fair value is based on market prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into Mortgage Banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and subsequently adjusted on a quarterly basis based on the weighted average remaining life of the underlying loans.

MSRs are evaluated for impairment quarterly based upon the fair value of the MSRs as compared to carrying amount. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Bank later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance is recorded as an increase to income. Changes in valuation allowances are reported within Mortgage Banking income on the income statement. The fair value of the MSR portfolio is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates.

A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs is expected to increase, as prepayment speeds on the underlying loans would be anticipated to decline. Based on the estimated fair value at June 30, 2020, management determined there was $100,000 of impairment within the Company’s $7 million MSR portfolio.

Income Tax Accounting — Income tax liabilities or assets are established for the amount of taxes payable or refundable for the current year. Deferred tax liabilities and assets are also established for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. A deferred tax liability or deferred tax asset is recognized for the estimated future tax effects attributable to temporary differences and deductions that can be carried forward (used) in future years. The valuation of current and deferred income tax liabilities and assets is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax liabilities and assets involves the use of estimates, assumptions, interpretations and judgments concerning certain accounting pronouncements and federal and state tax codes.

There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, or additional information concerning the TCJA’s impact on the Company’s net deferred tax asset, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. The Company believes its tax assets and liabilities are adequate and are properly recorded in the consolidated financial statements at June 30, 2020 and December 31, 2019.

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BUSINESS SEGMENT COMPOSITION

(I) Traditional Banking segment

The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2020, Republic had 42 full-service banking centers and two LPOs with locations as follows:

●

Kentucky — 28

●

Metropolitan Louisville — 18

●

Central Kentucky — 7

●

Georgetown — 1

●

Lexington — 5

●

Shelbyville — 1

●

Northern Kentucky — 3

●

Covington — 1

●

Crestview Hills — 1

●

Florence — 1

●

Southern Indiana — 3

●

Floyds Knobs — 1

●

Jeffersonville — 1

●

New Albany — 1

●

Metropolitan Tampa, Florida — 8*

●

Metropolitan Cincinnati, Ohio — 2

●

Metropolitan Nashville, Tennessee — 3*

*Includes one LPO

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

As of June 30, 2020 and through the date of this filing, generally all Traditional Banking products and services, except for a selection of deposit products offered through the Bank’s separately branded national branchless banking platform, MemoryBank, were offered through the Company’s traditional RB&T brand.

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

Retail Mortgage Lending — Through its retail banking centers and its Consumer Direct channel, the Bank originates single family, residential real estate loans. In addition, the Bank originates HEALs and HELOCs through its retail banking centers. Such loans are generally collateralized by owner occupied property.

Consumer Direct Lending — Through its Consumer Direct channel, formerly named its Internet Lending channel, the Bank accepts online loan applications for its RB&T branded products through its website at www.republicbank.com. Historically, the majority of loans originated through its Consumer Direct channel have been within the Bank’s traditional markets of Kentucky, Florida, Indiana, and Tennessee. Other states where loans are marketed include Alabama, Arizona, California, Colorado, Connecticut, Georgia, Illinois, Louisiana, Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia, Washington, and Wisconsin, as well as, the District of Columbia.

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Commercial Lending — The Bank conducts commercial lending activities primarily through Corporate Banking, Commercial Banking, Business Banking, and Retail Banking channels.

In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department. Clients are generally located within the Bank’s market footprint, or in adjacent, nearby areas to the market footprint.

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). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots.

Consumer Lending — Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank’s markets.

Aircraft Lending — In October 2017, the Bank created an Aircraft Lending division. At the beginning, the initial loan size was offered up to $500,000. In 2019, the Bank increased the opportunity to finance up to $1.0 million. All aircraft loans typically range in amounts from $55,000 to $1,000,000, with terms up to 20 years, to purchase or refinance personal aircraft, along with engine overhauls and avionic upgrades. The aircraft loan program is open to all states, except for Alaska and Hawaii.

The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.

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

MemoryBank — MemoryBank, a national branchless banking platform, is a separately branded division of the Bank, which from a marketing perspective, focuses on technologically savvy clients that prefer to carry larger balances in highly liquid interest-bearing bank accounts. MemoryBank products are offered through its website, www.mymemorybank.com.

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 footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank’s Treasury Management department.

Internet Banking — The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.

Mobile Banking — The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.

Other Banking Services — The Bank also provides title insurance and other financial institution-related products and services.

Bank Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.

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

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(II) Warehouse Lending segment

Through its Warehouse segment, the Core Bank provides short-term, revolving credit facilities to mortgage bankers across the U.S. through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.

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 originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.

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

(IV) Tax Refund Solutions segment

Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.

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The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. The EA product had the following features during 2019 and 2020:

●

Offered only during the first two months of each year;

●

The taxpayer was given the option to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $6,250;

●

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

●

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

●

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

●

If an insufficient refund to repay the EA occurs:

there is no recourse to the taxpayer,

no negative credit reporting on the taxpayer, and

no collection efforts against the taxpayer.

See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Republic Payment Solutions division — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.

(V) Republic Credit Solutions segment

Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:

●

RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers in multiple states. Elevate Credit, Inc., a third-party service provider subject to the Bank’s oversight and supervision, provides the Bank with certain marketing, servicing, technology, and support services for the RCS line-of-credit program, while a separate third party also provides customer support, servicing, and other services for the RCS line-of-credit product on the Bank’s behalf. The Bank is the lender for the RCS line-of-credit product and is marketed as such. Further, the Bank controls the loan

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terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of the RCS line-of-credit product.

●

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OVERVIEW (Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019)

Total Company net income for the second quarter of 2020 was $15.8 million, a $2.2 million, or 12%, decrease from the same period in 2019. Diluted EPS decreased to $0.76 for the three months ended June 30, 2020 compared to $0.86 for the same period in 2019. Net income was down from the second quarter of 2019, as it was negatively impacted by Provision expense directly related to the on-going COVID-19 pandemic.

The following are general highlights by reportable segment:

Traditional Banking segment

●

Net income decreased $5.1 million, or 52%, for the second quarter of 2020 compared to the same period in 2019.

●

Net interest income decreased $2.8 million, or 7%, for the second quarter of 2020 compared to the same period in 2019.

●

Driven primarily by COVID-19 related concerns, Provision increased $1.7 million to $3.1 million for the second quarter of 2020 compared to $1.4 million for the same period in 2019.

●

Driven primarily by a change in client savings and spending patterns during the pandemic, total noninterest income decreased $1.7 million, or 22%, for the second quarter of 2020 compared to the same period in 2019.

●

Driven by pandemic-related influences on Marketing, Interchange, and Travel & Entertainment expenses, total noninterest expense decreased $1.1 million, or 3%, for the second quarter of 2020 compared to same period in 2019.

Warehouse Lending segment

●

Net income increased $1.6 million, or 75%, for the second quarter of 2020 compared to the same period in 2019.

●

Net interest income increased $2.1 million, or 53%, for the second quarter of 2020 compared to the same period in 2019.

●

The Warehouse Provision was a net charge of $449,000 for the second quarter of 2020 compared to a net charge of $417,000 for the same period in 2019.

●

Total committed Warehouse lines remained at $1.2 billion from December 31, 2019 to June 30, 2020.

●

Average line usage was 68% during the second quarter of 2020 compared to 57% during the same period in 2019.

Mortgage Banking segment

●

Within the Mortgage Banking segment, mortgage banking income increased $6.0 million, or 248%, during the second quarter of 2020 compared to the same period in 2019.

●

Overall, Republic’s originations of secondary market loans totaled $219 million during the second quarter of 2020 compared to $82 million during the same period in 2019, with the Company’s gain recognized as a percent of total originations increasing to 3.98% during the second quarter of 2020 from 2.71% during the same period in 2019.

Tax Refund Solutions segment

●

Net income decreased $3.5 million for the second quarter of 2020 compared to the same period in 2019.

●

Net interest income increased $371,000 for the second quarter of 2020 compared to the same period in 2019.

●

Overall, TRS recorded a net charge to the Provision of $4.4 million during the second quarter of 2020 compared to a net charge of $392,000 for the same period in 2019.

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●

Noninterest income decreased $86,000, or 2%, for the second quarter of 2020 compared to the same period in 2019.

●

Net RT revenue decreased $716,000, or 20%, for the second quarter of 2020 compared to the same period in 2019.

●

Noninterest expense was $3.7 million for the second quarter of 2020 compared to $2.8 million for the same period in 2019.

Republic Credit Solutions segment

●

Net income increased $1.0 million, or 25%, for the second quarter of 2020 compared to the same period in 2019.

●

Net interest income decreased $1.6 million, or 22%, for the second quarter of 2020 compared to the same period in 2019.

●

Overall, RCS recorded a net credit to the Provision of $1.4 million during the second quarter of 2020 compared to a net charge of $2.2 million for the same period in 2019.

●

Noninterest income decreased $499,000, or 49%, from the second quarter of 2019 to the second quarter of 2020.

●

Noninterest expense was $903,000 for the second quarter of 2020 compared to $669,000 for the same period in 2019.

RESULTS OF OPERATIONS (Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019)

Net Interest Income

Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.

See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.

Total Company net interest income decreased 3% during the second quarter of 2020 compared to the same period in 2019. Total Company net interest margin decreased to 3.62% during the second quarter of 2020 compared to 4.12% for the same period in 2019.

A large amount of the Company’s financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These market rates trended higher from December 2015 through December 2018 but began trending lower again during 2019 as the FOMC reduced the FFTR by 75 basis points during the year. The FOMC further lowered the FFTR 100 basis points during the first quarter of 2020 following market reactions to the COVID-19 pandemic. Consistent with decreases in market rates in the previous 12 months, the Total Company’s net interest spread and net interest margin compressed 30 basis points and 50 basis points, respectively, from the second quarter of 2019 to the same period in 2020. The Company’s net interest spread, the difference between the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities, compressed primarily because the Company’s interest-bearing liabilities had less room to reprice downward than its interest-earning assets. The Company’s net interest margin compressed 20 basis points more than its net interest spread due to the reduction in benefit the Bank receives from its noninterest-bearing funding in a falling rate environment. Management believes the Company’s net interest margin, as well as the net interest margin of its various operating segments will likely continue to decline in the near term as its earning asset yields continue to reprice lower.

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The following were the most significant components affecting the Company’s net interest income by reportable segment:

Traditional Banking segment

The Traditional Banking’s net interest income decreased $2.8 million, or 7%, for the second quarter of 2020 compared to the same period in 2019. Traditional Banking’s net interest margin was 3.26% for the second quarter of 2020, a decrease of 49 basis points from the same period in 2019.

The decrease in the Traditional Bank’s net interest income and net interest margin during the second quarter of 2020 was primarily attributable to the following factors:

●

The Traditional Bank’s net interest spread, the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities, compressed 45 basis points primarily because the Core Bank’s liabilities had less room to reprice downward than its interest earning asset counterparts.

●

The Traditional Bank’s net interest margin compressed 49 basis points, or four basis points more than its net interest spread, due to the decreased value from the Traditional Bank’s noninterest-bearing funding sources. The difference between the Traditional Banking segment’s net interest margin and net interest spread was 15 basis points during the second quarter of 2020 compared to 18 basis points during the second quarter of 2019, with the differential of three basis points representing the decreased value to the net interest margin of noninterest-bearing deposits and stockholders’ equity. The decrease in this value was driven by a 68 basis-point decline in the yield on the Traditional Banking segment’s interest-earning assets from period to period.

●

Partially offsetting the decline in net interest income driven by the decrease in the Traditional Bank’s net interest spread and net interest margin, net interest income increased partially due to a rise in second quarter 2020 average loans of $232 million, or 6%, over the second quarter of 2019. The Traditional Bank originated $526 million in PPP loans during the second quarter of 2020 following the passage of the CARES Act on March 27, 2020. The PPP portfolio contributed $387 million in average Traditional Bank loans for the second quarter of 2020 but was partially offset by a $155 million decrease in non-PPP portfolios, including the impact of the sale of $128 million of the Traditional Bank’s loans in November 2019 as part of the Company’s branch divestiture.

Warehouse Lending segment

Warehouse net interest income increased $2.1 million, or 53%, for the second quarter of 2020 compared to the same period in 2019.

Falling mortgage rates during 2020 drove a surge in consumer refinance volume for Warehouse clients resulting in a 27% increase in average Warehouse loans for the second quarter of 2020 over the same period in 2019. Overall usage rates on Warehouse lines of credit were 68% for the second quarter of 2020 compared to 57% for the second quarter of 2019.

Republic Credit Solutions segment

RCS’s net interest income decreased $1.6 million, or 22%, from the second quarter of 2019 to the second quarter of 2020. The decrease was driven primarily by a decrease in fee income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income decreased to $4.6 million during the second quarter of 2020 compared to $6.2 million during the same period in 2019 and accounted for 79% and 79% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in outstanding line-of-credit balances, as the Company reduced marketing for the product.

Future loan fee income from RCS’s higher-yielding line-of-credit product will likely continue to be negatively impacted by the on-going COVID-19 pandemic. As of June 30, 2020 the current on-balance-sheet Board-approved risk limit was $40 million for the Company. As of June 30, 2020, the total outstanding on-balance-sheet amount, including loans held for sale, related to this product was $20 million.

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Table 1 — Total Company Average Balance Sheets and Interest Rates



	Three Months Ended June 30, 2020						Three Months Ended June 30, 2019
	Average				Average		Average				Average
(dollars in thousands)	Balance		Interest		Rate		Balance		Interest		Rate

ASSETS

Interest-earning assets:
Federal funds sold and other interest-earning deposits	$	299,760	$	87	0.12	%	$	297,205	$	1,753	2.36	%
Investment securities, including FHLB stock (1)		605,776		2,819	1.86			514,366		3,700	2.88
TRS Easy Advance loans (2)		22,039		207	3.76			16,687		195	4.67
Other RPG loans (3) (6)		112,769		5,693	20.19			109,747		7,659	27.92
Outstanding Warehouse lines of credit (4) (6)		806,771		7,294	3.62			634,688		7,872	4.96
All other Traditional Bank loans (5) (6)		3,926,043		40,991	4.18			3,663,783		44,485	4.86

Total interest-earning assets		5,773,158		57,091	3.96			5,236,476		65,664	5.02

Allowance for credit loss		(70,496)						(58,825)

Noninterest-earning assets:
Noninterest-earning cash and cash equivalents		112,624						74,763
Premises and equipment, net		43,733						43,783
Bank owned life insurance		67,079						65,470
Other assets (1)		168,323						118,858
Total assets	$	6,094,421					$	5,480,525

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:
Transaction accounts	$	1,264,581	$	159	0.05	%	$	1,138,347	$	1,586	0.56	%
Money market accounts		727,516		248	0.14			754,207		2,024	1.07
Time deposits		424,190		2,188	2.06			413,530		2,058	1.99
Reciprocal money market and time deposits		289,804		435	0.60			192,486		685	1.42
Brokered deposits		174,897		617	1.41			90,266		550	2.44

Total interest-bearing deposits		2,880,988		3,647	0.51			2,588,836		6,903	1.07

Securities sold under agreements to repurchase and other short-term borrowings		176,541		17	0.04			220,189		330	0.60
Federal Reserve Paycheck Protection Program Liquidity Facility		122,769		105	0.34			—		—	—
Federal Home Loan Bank advances		263,296		822	1.25			710,879		4,062	2.29
Subordinated note		41,240		295	2.86			41,240		423	4.10

Total interest-bearing liabilities		3,484,834		4,886	0.56			3,561,144		11,718	1.32

Noninterest-bearing liabilities and Stockholders’ equity:
Noninterest-bearing deposits		1,697,603						1,098,817
Other liabilities		114,757						91,841
Stockholders’ equity		797,227						728,723
Total liabilities and stockholders’ equity	$	6,094,421					$	5,480,525

Net interest income			$	52,205					$	53,946

Net interest spread					3.40	%					3.70	%

Net interest margin					3.62	%					4.12	%

(1)	For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets.

(2)	Interest income for Easy Advances is composed entirely of loan fees.

(3)	Interest income includes loan fees of $4.6 million and $6.2 million for the three months ended June 30, 2020 and 2019.

(4)	Interest income includes loan fees of $791,000 and $786,000 for the three months ended June 30, 2020 and 2019.

(5)	Interest income includes loan fees of $2.1 million and $1.3 million for the three months ended June 30, 2020 and 2019.

(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 2 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 2 — Total Company Volume/Rate Variance Analysis


		Three Months Ended June 30, 2020
		Compared to
		Three Months Ended June 30, 2019
	Total Net		Increase / (Decrease) Due to
(in thousands)	Change		Volume		Rate

Interest income:

Federal funds sold and other interest-earning deposits	$	(1,666)	$	15	$	(1,681)
Investment securities, including FHLB stock		(881)		580		(1,461)
TRS Easy Advance loans*		12		(1)		13
Other RPG loans		(1,966)		206		(2,172)
Outstanding Warehouse lines of credit		(578)		1,845		(2,423)
All other Traditional Bank loans		(3,494)		3,034		(6,528)
Net change in interest income		(8,573)		5,679		(14,252)

Interest expense:

Transaction accounts		(1,427)		159		(1,586)
Money market accounts		(1,776)		(69)		(1,707)
Time deposits		130		54		76
Reciprocal money market and time deposits		(250)		253		(503)
Brokered deposits		67		366		(299)
Securities sold under agreements to repurchase and other short-term borrowings		(313)		(55)		(258)
Federal Reserve Paycheck Protection Program Liquidity Facility		105		105		—
Federal Home Loan Bank advances		(3,240)		(1,883)		(1,357)
Subordinated note		(128)		—		(128)
Net change in interest expense		(6,832)		(1,070)		(5,762)

Net change in net interest income	$	(1,741)	$	6,749	$	(8,490)

*	Volume for Easy Advances is based on total loans originated during the period presented.

Provision

See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”

Total Company Provision was $6.5 million for the second quarter of 2020 compared to $4.5 million for the same period in 2019.

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The following were the most significant components comprising the Company’s Provision by reportable segment:

Traditional Banking segment

The Traditional Banking Provision during the second quarter of 2020 was $3.1 million, compared to $1.4 million for the second quarter of 2019. An analysis of the Provision for the second quarter of 2020 compared to the same period in 2019 follows:

●

Related to the Bank’s pass-rated and non-rated loans, the Bank recorded net charges of $3.1 million and $890,000 to the Provision for the second quarters of 2020 and 2019. For the second quarter of 2020, the Traditional Bank recorded $4.6 million of additional Provision due to further analysis of the expected economic impact of the COVID-19 pandemic. Offsetting the increase in Provision due to the impact of the COVID-19 pandemic was a reduction in Provision of $1.2 million driven by a $112 million decrease in non-PPP Traditional Bank spot balances during the second quarter of 2020.

●

The Bank recorded a net reduction to the Provision of $17,000 for the second quarter of 2020 related to loans rated Substandard, Special Mention, and PCD compared to a net charge to the Provision of $537,000 for the same period in 2019. The charge during the second quarter of 2019 includes a $1.2 million Provision for one C&I relationship that defaulted during the quarter.

As a percentage of total loans, the Traditional Banking ACLL was 1.10% at June 30, 2020 compared to 0.78% at December 31, 2019 and 0.87% at June 30, 2019. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at June 30, 2020.

See the sections titled “Allowance for Credit 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.

See additional detail regarding the impact of COVID-19 under:

●

Part I Item 1 “Financial Statements”

Footnote 2 “Investment Securities”

Footnote 4 “Loans and Allowance for Credit Losses”

Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities”

●

Part II Item 1A “Risk Factors”

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Warehouse Lending segment

Warehouse recorded a net charge to the Provision of $449,000 for the second quarter of 2020 compared to a net charge of $417,000 for the same period in 2019. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $179 million during the second quarter of 2020 compared to an increase of $167 million during the second quarter of 2019.

As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% at June 30, 2020, December 31, 2019 and June 30, 2019. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at June 30, 2020.

Tax Refund Solutions segment

The TRS Provision increased from a net charge of $392,000 during the second quarter of 2019 to a net charge of $4.4 million during the second quarter of 2020. The higher net charges to the Provision during the second quarter of 2020 resulted from repayment rates on EA loans from the U.S. Treasury that significantly lagged those during the second quarter of 2019. Management believes the significant decline in repayment rates from the U.S. Treasury during the second quarter of 2020 was directly related to the impact of the current COVID-19 pandemic and the resulting delay in tax-return processing by the IRS for certain types of tax returns that require further taxpayer communication and verification. While EA loss rates for 2020 could still finish more in-line with those from the prior year, management is uncertain if or when this turnaround could occur. As a result, the Company completely charged-off all remaining unpaid EAs as of June 30, 2020, in-line with its customary June 30th charge-off policy for EA loans. Any EA payments received after June 30, 2020 will be credited as a direct recovery to the Provision in the period it is received.

See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Republic Credit Solutions segment

As illustrated in Table 3 below, RCS recorded a credit to the Provision of $1.4 million during the second quarter of 2020 compared to a charge to the Provision of $2.2 million for the same period in 2019. The decrease in the Provision was driven by a reduction in both net charge-offs and outstanding balances for RCS’s line-of-credit product, as the Company reduced marketing for RCS’s line-of-credit product in response to the COVID-19 pandemic.

While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 9.21% at June 30, 2020, 12.45% at December 31, 2019 and 13.19% at June 30, 2019. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at June 30, 2020.

The following table presents net charges (credits) to the RCS Provision by product:

Table 3 — RCS Provision by Product


	Three Months Ended Jun. 30,
(in thousands)	2020		2019		$ Change		% Change
Product:
Line of credit	$	(1,454)	$	2,213	$	(3,667)	(166)	%
Hospital receivables		11		11		—	—
Total	$	(1,443)	$	2,224	$	(3,667)	(165)	%

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Table 4 — Summary of Loan and Lease Loss Experience


	Three Months Ended
	June 30,
(dollars in thousands)	2020			2019

ACLL at beginning of period	$	70,431		$	57,961

Charge-offs:

Traditional Banking:
Residential real estate		—			(368)
Commercial real estate		(270)			—
Commercial & industrial		(192)			—
Consumer		(238)			(423)
Total Traditional Banking		(700)			(791)
Warehouse lines of credit		—			—
Total Core Banking		(700)			(791)

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		(19,575)			(13,425)
Other TRS loans		(28)			(264)
Republic Credit Solutions		(2,008)			(2,683)
Total Republic Processing Group		(21,611)			(16,372)
Total charge-offs		(22,311)			(17,163)

Recoveries:

Traditional Banking:
Residential real estate		45			229
Commercial real estate		2			2
Commercial & industrial		41			3
Home equity		12			8
Consumer		119			119
Total Traditional Banking		219			361
Warehouse lines of credit		—			—
Total Core Banking		219			361

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—			5
Other TRS loans		1			(6)
Republic Credit Solutions		199			365
Total Republic Processing Group		200			364

Total recoveries		419			725

Net loan charge-offs		(21,892)			(16,438)

Provision - Core Banking		3,553			1,844
Provision - RPG		3,005			2,616
Total Provision		6,558			4,460
ACLL at end of period	$	55,097		$	45,983

Credit Quality Ratios - Total Company:

ACLL to total loans		1.09	%		1.04	%
ACLL to nonperforming loans		270			237
Net loan charge-offs to average loans		1.80			1.49

Credit Quality Ratios - Core Banking:

ACLL to total loans		0.92	%		0.76	%
ACLL to nonperforming loans		230			171
Net loan charge-offs to average loans		0.04			0.04

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Noninterest Income

Total Company noninterest income increased $3.6 million, or 24%%, during the second quarter of 2020 compared to the same period in 2019. The following were the most significant components comprising the total Company’s noninterest income by reportable segment:

Traditional Banking segment

Traditional Banking’s noninterest income decreased $1.7 million for the second quarter of 2020 compared to the same period in 2019. Service charges on deposit accounts decreased $1.1 million and interchange income decreased $444,000 from the second quarter of 2019 to the same period in 2020. Both decreases largely reflect a change in client savings and spending patterns during the pandemic-driven economic restrictions. In general, during the second quarter of 2020, client spending decreased meaningfully from the second quarter of 2019, while client deposit balances increased, thus producing less overdraft activity and less interchange revenue for the Bank. Client spending patterns did return to more normalized levels in June 2020, however, management is uncertain at this time if this pattern will continue given the on-going spread of COVID-19 nationally.

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 three months ended June 30, 2020 and 2019 were $893,000 and $2.2 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended June 30, 2020 and 2019 were $0 and $566,000, with the Bank suspending its daily overdraft charges during the second quarter of 2020 to cushion the economic blow of the COVID-19 pandemic on its clients. The Bank expects to reinstitute the daily overdraft fee charge in the third quarter of 2020, with this expectation subject to changing pandemic-related circumstances.

Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income increased $6.0 million, or 248%, during the second quarter of 2020 compared to the same period in 2019. Falling mortgage rates during 2020 drove strong growth in the Company’s consumer refinance activity, particularly within the Company’s relatively new Consumer Direct channel. Overall, the Company originated $219 million of secondary market mortgage loans during the second quarter of 2020 compared to $82 million for the second quarter of 2019.

In addition to the strong mortgage banking origination volume during the second quarter of 2020, the Company’s gain recognized as a percent of total originations increased to 3.98% during the second quarter of 2020 from 2.71% during the same period in 2019. The stronger gain percentages resulted from favorable market conditions on pricing during the quarter. If and when consumer refinance volume begins to slow down in the future, management believes market conditions for pricing will become more competitive and return to a range of 2.0%-3.0%, which is more in-line with historical averages for gains-as-a-percentage-of-loans-sold.

Tax Refund Solutions segment

TRS’s noninterest income decreased $86,000 during the second quarter of 2020 compared to the same period in 2019 resulting from a $716,000, or 20%, decrease in net RT revenue partially offset by a $568,000 increase in prepaid card program fees as a result of the Company’s May 1, 2020 acquisition of $250 million in prepaid card balances. RTs processed decreased 8% and revenue per RT decreased 1% from 2019 to 2020. As with the lag in payments from the U.S. Treasury related to EAs, management believes the COVID-19 pandemic also negatively impacted 2020 RT volume, particularly within the second quarter of 2020.

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Republic Credit Solutions segment

RCS’s noninterest income decreased $499,000, or 49%, during the second quarter of 2020 compared to the same period in 2019. As illustrated in Table 5 below, RCS program fees decreased $467,000 resulting primarily from a decline in outstanding line-of-credit balances as the Company reduced marketing for its installment loan product and its line-of-credit product in response to the COVID-19 pandemic.

The following table presents RCS program fees by product:

Table 5 — RCS Program Fees by Product


	Three Months Ended Jun. 30,
(in thousands)	2020		2019		$ Change		% Change
Product:
Line of credit	$	529	$	1,121	$	(592)	(53)	%
Hospital receivables		(10)		58		(68)	(117)
Installment loans*		1		(192)		193	NM
Total	$	520	$	987	$	(467)	(47)	%

*	The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of program fees.

Noninterest Expense

Total Company noninterest expense increased $1.4 million, or 3%, during the second quarter of 2020 compared to the same period in 2019. The following were the most significant components comprising the increase in noninterest expense by reportable segment:

Traditional Banking segment

Driven by pandemic-related influences primarily on Marketing, Interchange, and Travel & Entertainment expenses, Traditional Banking noninterest expense decreased $1.1 million, or 3%, for the second quarter of 2020 compared to the same period in 2019.

Mortgage Banking segment

Noninterest expense at the Mortgage Banking segment increased, $1.3 million or 99%, during the second quarter of 2020 compared to the same period in 2019 primarily due to higher mortgage commissions recorded during 2020.

Income Tax Expense

The Total Company effective income tax rate was 19% for the second quarter of 2020 compared to 15% for the same period in 2019. The following drove the lower rate in 2019:

●

In April 2019, Kentucky enacted HB458, which allows for combined filing for Republic Bancorp and the Bank. Republic Bancorp had previously filed a separate company income tax return for Kentucky and generated net operating losses, for which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. Republic Bancorp expects to file a combined return beginning in 2021 and to utilize these previously generated net operating losses. The tax benefit to reverse the valuation allowance on the deferred tax asset for these losses was approximately $815,000 as of 6/30/2019. This benefit was recorded in the second quarter of 2019, with 100% of this benefit attributed to the Traditional Bank.

●

The Company received $388,000 in income tax benefit during the second quarter of 2019 associated with equity compensation. Substantially all of this benefit was attributed to the Traditional Bank.

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OVERVIEW (Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019)

Total Company net income for the first six months of 2020 was $42.5 million, a $5.0 million, or 11%, decrease from the same period in 2019. Diluted EPS decreased to $2.04 for the six months ended June 30, 2020 compared to $2.28 for the same period in 2019. Net income was down from the first six months of 2019, as it was significantly impacted by the increase in the Company’s estimated ACL in response to the potential impact of the COVID-19 pandemic.

The following are general highlights by reportable segment:

Traditional Banking segment

●

Net income decreased $10.7 million, or 52%, for the first six months of 2020 compared to the same period in 2019.

●

Net interest income decreased $3.6 million, or 4%, for the first six months of 2020 compared to the same period in 2019.

●

Driven by COVID-19 related concerns in combination with the new allowance methodology as required by the adoption of ASC 326, Provision increased $7.1 million to $8.7 million for the first six months of 2020 compared to $1.6 million for the same period in 2019.

●

Total noninterest income decreased $1.4 million, or 9%, for the first six months of 2020 compared to the same period in 2019.

●

Total noninterest expense increased $21,000 for the first six months of 2020 compared to same period in 2019.

●

Total nonperforming loans to total loans for the Traditional Banking segment was 0.51% at June 30, 2020 compared to 0.65% at December 31, 2019.

●

Delinquent loans to total loans for the Traditional Banking segment was 0.20% at June 30, 2020 compared to 0.36% at December 31, 2019.

●

At June 30, 2020, the Traditional Bank had accommodated clients through COVID-19 loan modifications for $793 million, or 20%, of the Traditional Bank’s loan portfolio.

Warehouse Lending segment

●

Net income increased $2.6 million, or 71%, for the first six months of 2020 compared to the same period in 2019.

●

Net interest income increased $3.5 million, or 51%, for the first six months of 2020 compared to the same period in 2019.

●

The Warehouse Provision was a net charge of $781,000 for the first six months of 2020 compared to a net charge of $642,000 for the same period in 2019.

●

Total committed Warehouse lines remained at $1.2 billion from December 31, 2019 to June 30, 2020.

●

Average line usage was 63% during the first six months of 2020 compared to 48% during the same period in 2019.

Mortgage Banking segment

●

Within the Mortgage Banking segment, mortgage banking income increased $9.2 million, or 234%, during the first six months of 2020 compared to the same period in 2019.

●

Overall, Republic’s originations of secondary market loans totaled $344 million during the first six months of 2020 compared to $123 million during the same period in 2019, with the Company’s gain recognized as a percent of total originations increasing to 3.93% during the first six months of 2020 from 2.83% during the same period in 2019.

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Tax Refund Solutions segment

●

Net income decreased $5.3 million, or 37%, for the first six months of 2020 compared to the same period in 2019.

●

Net interest income increased $458,000 for the first six months of 2020 compared to the same period in 2019.

●

Total EA originations were $388 million during the first six months of 2020 compared to $389 million for the first six months of 2019.

●

Overall, TRS recorded a net charge to the Provision of $19.6 million during the first six months of 2020 compared to a net charge to the Provision of $13.8 million for the same period in 2019.

●

Noninterest income decreased $1.3 million, or 6%, for the first six months of 2020 compared to the same period in 2019.

●

Net RT revenue decreased $2.0 million, or 10%, for the first six months of 2020 compared to the same period in 2019.

●

Noninterest expense was $10.4 million for the first six months of 2020 compared to $10.0 million for the same period in 2019.

Republic Credit Solutions segment

●

Net income increased $2.5 million, or 31%, for the first six months of 2020 compared to the same period in 2019.

●

Net interest income decreased $2.1 million, or 14%, for the first six months of 2020 compared to the same period in 2019.

●

Overall, RCS recorded a net charge to the Provision of $263,000 during the first six months of 2020 compared to a net charge of $5.6 million for the same period in 2019.

●

Noninterest income increased $258,000, or 10%, from the first six months of 2019 to the first six months of 2020.

●

Noninterest expense was $1.8 million for the first six months of 2020 compared to $1.4 million for the same period in 2019.

●

Total nonperforming loans to total loans for the RCS segment was 0.36% at June 30, 2020 compared to 0.10% at December 31, 2019.

●

Delinquent loans to total loans for the RCS segment was 5.97% at June 30, 2020 compared to 7.25% at December 31, 2019.

RESULTS OF OPERATIONS (Six months Ended June 30, 2020 Compared to Six months Ended June 30, 2019)

Net Interest Income

See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.

Total Company net interest income decreased 1% during the first six months of 2020 compared to the same period in 2019. Total Company net interest margin decreased to 4.55% during the first six months of 2020 compared to 4.88% for the same period in 2019.

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A large amount of the Company’s financial instruments track closely with or are primarily indexed to either the FFTR, Prime, or LIBOR. These market rates trended higher from December 2015 through December 2018 but began trending lower again during 2019 as the FOMC reduced the FFTR by 75 basis points during the year. The FOMC further lowered the FFTR 100 basis points during the first quarter of 2020 following market reactions to the COVID-19 pandemic. Consistent with decreases in market rates in the previous 12 month, the Total Company’s net interest spread and net interest margin compressed 20 basis points and 33 basis points, respectively, from the first six months of 2019 to the same period in 2020. The Company’s net interest spread, the difference between the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities, compressed primarily because the Company’s interest-bearing liabilities had less room to reprice downward than its interest-earning assets. The Company’s net interest margin compressed 13 basis points more than its net interest spread due to the reduction in benefit the Bank sees from noninterest-bearing funding in a falling rate environment. Management believes the Company’s net interest margin, as well as the net interest margin of its various operating segments will likely continue to decline in the near term as its earning asset yields continue to reprice lower.

The following were the most significant components affecting the Company’s net interest income by reportable segment:

Traditional Banking segment

The Traditional Banking’s net interest income decreased $3.6 million, or 4%, for the first six months of 2020 compared to the same period in 2019. Traditional Banking’s net interest margin was 3.52% for the first six months of 2020, a decrease of 29 basis points from the same period in 2019.

The decrease in the Traditional Bank’s net interest income and net interest margin during the first six months of 2020 was primarily attributable to the following factors:

●

The Traditional Bank’s net interest spread, the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities, compressed 24 basis points primarily because the Core Bank’s liabilities had less room to reprice downward than its interest-earning asset counterparts.

●

The Traditional Bank’s net interest margin compressed 29 basis points, or five basis points more than its net interest spread, due to the decreased value from the Traditional Bank’s noninterest-bearing funding sources. The difference between the Traditional Banking segment’s net interest margin and net interest spread was 14 basis points during the first six months of 2020 compared to 19 basis points during the first six months of 2019, with the differential of five basis points representing the decreased value to the net interest margin of noninterest-bearing deposits and stockholders’ equity. The decrease in this value was driven by a 38 basis-point decline in the yield on the Traditional Banking segment’s interest-earning assets from period to period.

●

Partially offsetting the decline in net interest income driven by the decrease in the Traditional Bank’s net interest spread and net interest margin, net interest income increased partially due to a rise in YTD 2020 average loans, which increased $95 million, or 3%, over the same period in 2019. The Traditional Bank originated $526 million in PPP loans during the second quarter of 2020 following the passage of the CARES Act on March 27, 2020. This PPP portfolio contributed $193 million in average Traditional Bank loans for the first six months of 2020 but was partially offset by a $98 million decrease in non-PPP portfolios, including the impact of the sale of $128 million of the Traditional Bank’s loans in November 2019 as part of the Company’s branch divestiture.

Warehouse Lending segment

Net interest income increased $3.5 million, or 51%, for the first six months of 2020 compared to the same period in 2019.

Falling mortgage rates during 2020 drove a surge in consumer refinance volume for Warehouse clients resulting in a 39% increase in average Warehouse loans for the first six months of 2020 over the same period in 2019. Overall usage rates on Warehouse lines of credit were 63% for the first six months of 2020 compared to 48% for the first six months of 2019.

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Tax Refund Solutions segment

TRS’s net interest income increased $458,000 for the first six months of 2020 compared to the same period in 2019. TRS’s EA product earned $19.5 million in interest income during the first six months of 2020, a $416,000 increase resulting primarily from modifications to the product’s pricing tiers. EA pricing includes a direct fee to the taxpayer, with the annual percentage rate to the taxpayer for his or her portion of the total fee being less than 36% for all offering tiers.

See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Republic Credit Solutions segment

RCS’s net interest income decreased $2.1 million, or 14%, from the first six months of 2019 to the first six months of 2020. The decrease was driven primarily by a decrease in fee income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income decreased to $10.7 million during the first six months of 2020 compared to $12.8 million during the same period in 2019 and accounted for 79% and 80% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in outstanding line-of-credit balances, as the Company reduced marketing for the product in response to the COVID-19 pandemic.

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Table 6 — Total Company Average Balance Sheets and Interest Rates


	Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
	Average				Average		Average				Average
(dollars in thousands)	Balance		Interest		Rate		Balance		Interest		Rate

ASSETS

Interest-earning assets:
Federal funds sold and other interest-earning deposits	$	253,548	$	724	0.57	%	$	293,587	$	3,477	2.37	%
Investment securities, including FHLB stock (1)		562,751		5,828	2.07			538,923		7,781	2.89
TRS Easy Advance loans (2)		78,673		19,468	49.49			68,667		19,052	55.49
Other RPG loans (3) (6)		129,281		14,455	22.36			119,632		16,930	28.30
Outstanding Warehouse lines of credit (4) (6)		724,977		14,339	3.96			521,643		13,314	5.10
All other Traditional Bank loans (5) (6)		3,747,449		83,436	4.45			3,631,312		87,743	4.83

Total interest-earning assets		5,496,679		138,250	5.03			5,173,764		148,297	5.73

Allowance for credit loss		(62,157)						(54,588)

Noninterest-earning assets:
Noninterest-earning cash and cash equivalents		156,068						132,931
Premises and equipment, net		44,680						44,051
Bank owned life insurance		66,866						65,283
Other assets (1)		158,547						117,168
Total assets	$	5,860,683					$	5,478,609

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:
Transaction accounts	$	1,196,681	$	841	0.14	%	$	1,129,824	$	3,104	0.55	%
Money market accounts		744,745		1,490	0.40			750,434		3,803	1.01
Time deposits		421,257		4,345	2.06			399,252		3,889	1.95
Reciprocal money market and time deposits		248,887		1,053	0.85			194,971		1,274	1.31
Brokered deposits		256,590		2,220	1.73			134,707		1,581	2.35

Total interest-bearing deposits		2,868,160		9,949	0.69			2,609,188		13,651	1.05

Securities sold under agreements to repurchase and other short-term borrowings		192,755		136	0.14			225,864		751	0.67
Federal Reserve Paycheck Protection Program Liquidity Facility		61,384		105	0.34			—		—	—
Federal Home Loan Bank advances		317,307		2,470	1.56			611,695		6,792	2.22
Subordinated note		41,240		647	3.14			41,240		858	4.16

Total interest-bearing liabilities		3,480,846		13,307	0.76			3,487,987		22,052	1.26

Noninterest-bearing liabilities and Stockholders’ equity:
Noninterest-bearing deposits		1,473,314						1,178,198
Other liabilities		118,459						94,586
Stockholders’ equity		788,064						717,838
Total liabilities and stock-holders’ equity	$	5,860,683					$	5,478,609

Net interest income			$	124,943					$	126,245

Net interest spread					4.27	%					4.47	%

Net interest margin					4.55	%					4.88	%

(1)	For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets.

(2)	Interest income for Easy Advances is composed entirely of loan fees.

(3)	Interest income includes loan fees of $12.0 million and $14.2 million for the six months ended June 30, 2020 and 2019.

(4)	Interest income includes loan fees of $1.4 million and $1.3 million for the six months ended June 30, 2020 and 2019.

(5)	Interest income includes loan fees of $3.3 million and $2.4 million for the six months ended June 30, 2020 and 2019.

(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 7 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

Table 7 — Total Company Volume/Rate Variance Analysis


		Six Months Ended June 30, 2020
		Compared to
		Six Months Ended June 30, 2019
	Total Net		Increase / (Decrease) Due to
(in thousands)	Change		Volume		Rate

Interest income:

Federal funds sold and other interest-earning deposits	$	(2,753)	$	(419)	$	(2,334)
Investment securities, including FHLB stock		(1,953)		331		(2,284)
TRS Easy Advance loans*		416		(1,927)		2,343
Other RPG loans		(2,475)		1,286		(3,761)
Outstanding Warehouse lines of credit		1,025		4,449		(3,424)
All other Traditional Bank loans		(4,307)		2,742		(7,049)
Net change in interest income		(10,047)		6,462		(16,509)

Interest expense:

Transaction accounts		(2,263)		174		(2,437)
Money market accounts		(2,313)		(29)		(2,284)
Time deposits		456		220		236
Reciprocal money market and time deposits		(221)		298		(519)
Brokered deposits		639		1,139		(500)
Securities sold under agreements to repurchase and other short-term borrowings		(615)		(96)		(519)
Federal Reserve Paycheck Protection Program Liquidity Facility		105		105		—
Federal Home Loan Bank advances		(4,322)		(2,666)		(1,656)
Subordinated note		(211)		—		(211)
Net change in interest expense		(8,745)		(855)		(7,890)

Net change in net interest income	$	(1,302)	$	7,317	$	(8,619)

*	Volume for Easy Advances is based on total loans originated during the period presented.

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Provision

Total Company Provision was $29.3 million for the first six months of 2020 compared to $21.7 million for the same period in 2019.

The following were the most significant components comprising the Company’s Provision by reportable segment:

Traditional Banking segment

The Traditional Banking Provision during the first six months of 2020 was $8.7 million, compared to $1.6 million for the first six months of 2019. An analysis of the Provision for the first six months of 2020 compared to the same period in 2019 follows:

●

Related to the Bank’s pass-rated and non-rated loans, the Bank recorded net charges of $8.9 million and $1.2 million to the Provision for the first six months of 2020 and 2019. For the first six months of 2020, the Traditional Bank recorded $10.9 million of additional Provision due to the expected economic impact of the COVID-19 pandemic, with the pandemic expected to increase the Traditional Bank’s losses in the near-term to loss levels consistent with unemployment levels above 8%. Offsetting the increase in the Provision due to the impact of the COVID-19 pandemic was a reduction in the Provision of $2.0 million driven by a $170 million decrease in Traditional Bank non-PPP spot balances from December 31, 2019 to June 30, 2020.

●

The Bank recorded a net reduction to the Provision of $467,000 for the first six months of 2020 compared to a net charge to the Provision of $442,000 during the same period in 2019 related to loans rated Substandard, Special Mention, or PCD. The net reduction during the first six months of 2020 was driven by a $470,000 recovery recorded upon the payoff of a large CRE relationship that had been partially charged-off in a prior period. The charge during the first six months of 2019 includes a $1.2 million Provision for one C&I relationship that defaulted during the period.

●

Related to the Bank’s corporate bonds held within its investment securities portfolio, the Bank recorded $222,000 of Provision during the first six months of 2020, driven by higher PD and LGD assumptions stemming from COVID-19 economic concerns. The Company began provisioning for credit loss for its investment securities in 2020 as part of its adoption of ASC 326; therefore, no similar Provision was recognized during the first six months of 2019.

See additional detail regarding the impact of COVID-19 under:

●

Part I Item 1 “Financial Statements”

Footnote 2 “Investment Securities”

Footnote 4 “Loans and Allowance for Credit Losses”

Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities”

●

Part II Item 1A “Risk Factors”

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Warehouse Lending segment

Warehouse recorded a net charge to the Provision of $781,000 for the first six months of 2020 compared to a net charge of $642,000 for the same period in 2019. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $312 million during the first six months of 2020 compared to an increase of $257 million during the first six months of 2019.

Tax Refund Solutions segment

TRS recorded a net charge to the Provision of $19.6 million during the first six months of 2020 compared to a net charge of $13.8 million for the same period in 2019. Substantially all TRS Provision in both periods was related to its EA product.

TRS’s Provision for EA loan losses was $19.5 million, or 5.04% of its $388 million in EAs originated during the first six months of 2020, compared to a Provision of $13.4 million, or 3.45% of its $389 million of EAs originated during the first six months of 2019. The higher net charges to the Provision during the first six months of 2020 resulted from EA repayment rates from the U.S. Treasury that significantly lagged those during the same period in 2019. Management believes the significant decline in repayment rates from the U.S. Treasury during 2020, particularly during the second quarter, was directly related to the impact of the current COVID-19 pandemic and the resulting delay in tax return processing by the IRS for certain types of tax returns that require further taxpayer communication and verification. While EA loss rates for 2020 could still finish more in-line with those from the prior year, management is uncertain if or when this turnaround could occur. As a result, the Company completely charged-off all remaining unpaid EAs as of June 30, 2020, in-line with its customary June 30th charge-off policy for EA loans. Any EA payments received after June 30, 2020 will be credited as a direct recovery to the Provision in the period it is received.

See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Republic Credit Solutions segment

As illustrated in Table 8 below, RCS recorded a charge to the Provision of $263,000 during the first six months of 2020 compared to a charge to the Provision of $5.6 million for the same period in 2019. The decrease in the Provision was driven by a reduction in both net charge-offs and outstanding balances for RCS’s line-of-credit product, as the Company reduced marketing for RCS’s line-of-credit product in response to the COVID-19 pandemic.

The following table presents net charges to the RCS Provision by product:

Table 8 — RCS Provision by Product


	Six Months Ended Jun. 30,
(in thousands)	2020			2019	$ Change		% Change
Product:
Line of credit	$	253	$	5,573	$	(5,320)	(95)	%
Hospital receivables		10		34		(24)	(71)
Total	$	263	$	5,607	$	(5,344)	(95)	%

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Table 9 — Summary of Loan and Lease Loss Experience


	Six Months Ended
	June 30,
(dollars in thousands)	2020			2019

ACLL at beginning of period	$	43,351		$	44,675

Adoption of ASC 326		6,734			—

Charge-offs:

Traditional Banking:
Residential real estate		(27)			(457)
Commercial real estate		(270)			—
Commercial & industrial		(192)			—
Home equity		—			(13)
Consumer		(733)			(933)
Total Traditional Banking		(1,222)			(1,403)
Warehouse lines of credit		—			—
Total Core Banking		(1,222)			(1,403)

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		(19,575)			(13,425)
Commercial & industrial		(72)			(281)
Republic Credit Solutions		(4,717)			(6,507)
Total Republic Processing Group		(24,364)			(20,213)
Total charge-offs		(25,586)			(21,616)

Recoveries:

Traditional Banking:
Residential real estate		86			267
Commercial real estate		473			4
Commercial & industrial		44			5
Home equity		87			38
Consumer		323			295
Total Traditional Banking		1,013			609
Warehouse lines of credit		—			—
Total Core Banking		1,013			609

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		42			5
Commercial & industrial		1			—
Republic Credit Solutions		470			619
Total Republic Processing Group		513			624
Total recoveries		1,526			1,233

Net loan charge-offs		(24,060)			(20,383)

Provision - Core Banking		9,228			2,258
Provision - RPG		19,844			19,433
Total Provision		29,072			21,691
ACLL at end of period	$	55,097		$	45,983

Credit Quality Ratios - Total Company:

ACLL to total loans		1.09	%		1.04	%
ACLL to nonperforming loans		270			237
Net loan charge-offs to average loans		1.03			0.94

Credit Quality Ratios - Core Banking:

ACLL to total loans		0.92	%		0.76	%
ACLL to nonperforming loans		230			171
Net loan charge-offs to average loans		0.01			0.04

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Noninterest Income

Total Company noninterest income increased $6.8 million, or 16%, during the first six months of 2020 compared to the same period in 2019. The following were the most significant components comprising the total Company’s noninterest income by reportable segment:

Traditional Banking segment

Traditional Banking’s noninterest income decreased $1.4 million, or 9%, for the first six months of 2020 compared to the same period in 2019. Service charges on deposit accounts decreased $1.3 million and interchange income decreased $577,000 from the first six months of 2019 to the same period in 2020. Both decreases largely reflect a change in client savings and spending patterns during the pandemic-driven economic restrictions. In general, during the second quarter of 2020, client spending decreased meaningfully from the second quarter of 2019, while client deposit balances increased, thus producing less overdraft activity and less interchange revenue for the Bank. Client spending patterns did return to more normalized levels in June 2020, however, management is uncertain at this time if this pattern will continue given the on-going spread of COVID-19 nationally.

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 six months ended June 30, 2020 and 2019 were $2.7 million and $4.2 million. The total daily overdraft charges, net of refunds, included in interest income for the six months ended June 30, 2020 and 2019 were $417,000 and $1.1 million, with the Bank suspending its daily overdraft charges during the second quarter of 2020 to cushion the economic blow of the COVID-19 pandemic on its clients. The Bank expects to reinstitute the daily overdraft fee charge in the third quarter of 2020, with this expectation subject to changing pandemic-related circumstances.

The Bank recognized a $353,000 net gain on sale of one of its former banking centers during the first six months of 2020. The now-sold property is located in Tampa, Florida.

Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income increased $9.2 million, or 234%, during the first six months of 2020 compared to the same period in 2019. Falling mortgage rates during 2020 drove strong growth in the Company’s consumer refinance activity, particularly within the Company’s relatively new Consumer Direct channel. Overall, the Company originated $344 million of secondary market mortgage loans during the first six months of 2020 compared to $123 million for the first six months of 2019.

In addition to the strong mortgage banking origination volume during the first six months of 2020, the Company’s gain recognized as a percent of total originations increased to 3.93% during the first six months of 2020 from 2.83% during the same period in 2019. The stronger gain percentages resulted from favorable market conditions on pricing during the first six months of 2020. If and when consumer refinance volume begins to slow down in the future, management believes market conditions for pricing will become more competitive and return to a range of 2.0%-3.0%, which is more in-line with historical averages for gains-as-a-percentage-of-loans-sold.

Tax Refund Solutions segment

TRS’s noninterest income decreased $1.3 million during the first six months of 2020 compared to the same period in 2019 resulting from a $2.0 million, or 10%, decrease in net RT revenue. RTs processed decreased 8% and revenue per RT decreased 1% from 2019 to 2020.

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Republic Credit Solutions segment

RCS’s noninterest income increased $258,000, or 10%, during the first six months of 2020 compared to the same period in 2019. As illustrated in Table 10 below, RCS program fees increased $917,000 resulting primarily from $1.4 million in fees from RCS’s new installment loan product launched in December 2019 partially offset by a $599,000 reduction in fees for RCS’s line-of-credit product. The Company reduced marketing for RCS’s installment loan product during 2020 in response to the COVID-19 pandemic.

The following table presents RCS program fees by product:

Table 10 — RCS Program Fees by Product


	Six Months Ended Jun. 30,
(in thousands)	2020		2019		$ Change		% Change
Product:
Line of credit	$	1,448	$	2,047	$	(599)	(29)	%
Hospital receivables		8		93		(85)	(91)
Installment loans*		1,376		(225)		1,601	NM
Total	$	2,832	$	1,915	$	917	48	%

*	The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of program fees.

Noninterest Expense

Total Company noninterest expense increased $2.9 million, or 3%, during the first six months of 2020 compared to the same period in 2019. The following were the most significant components comprising the increase in noninterest expense by reportable segment:

Traditional Banking segment

Traditional Banking noninterest expense increased $21,000 for the first six months of 2020 compared to the same period in 2019. The following primarily drove the change in noninterest expense:

●

Salaries and employee benefits expense increased $1.3 million, or 3%, driven primarily by annual merit increases.

●

Data Processing expense increased $748,000, or 19%, driven by the Company’s increased investment in Software-as-a-Service applications since June 30, 2019.

●

Offsetting the above were decreases in Marketing and Development, Interchange, and Travel and Entertainment expenses, with each of these expenses driven downward as a direct result of pandemic-related influences.

●

FDIC Insurance expense decreased $338,000, as the Bank used the remainder of its small-bank credits against its first quarter 2020 insurance premium.

Mortgage Banking segment

Noninterest expense at the Mortgage Banking segment increased $2.0 million, or 75%, during the first six months of 2020 compared to the same period in 2019 primarily due to higher mortgage commissions recorded during 2020.

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Income Tax Expense

The Total Company effective income tax rate was 20% for the first six months of 2020 compared to 18% for the same period in 2019. The following drove the lower rate in 2019:

●

In April 2019, Kentucky enacted HB458, which allows for combined filing for Republic Bancorp and the Bank. Republic Bancorp had previously filed a separate company income tax return for Kentucky and generated net operating losses, for which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. Republic Bancorp expects to file a combined return beginning in 2021 and to utilize these previously generated net operating losses. The tax benefit to reverse the valuation allowance on the deferred tax asset for these losses was approximately $815,000 as of 6/30/19. This benefit was recorded in the second quarter of 2019, with 100% of this benefit attributed to the Traditional Bank.

●

The Company received $388,000 in income tax benefit during the second quarter of 2019 associated with equity compensation. Substantially all of this benefit was attributed to the Traditional Bank.

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COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2020 AND DECEMBER 31, 2019

Table 11 — Loan Portfolio Composition


(in thousands)	June 30, 2020		December 31, 2019		$ Change		% Change

Traditional Banking:
Residential real estate:
Owner occupied	$	885,325	$	949,568	$	(64,243)	(7)	%
Nonowner occupied		254,700		258,803		(4,103)	(2)
Commercial real estate		1,322,290		1,303,000		19,290	1
Construction & land development		157,254		159,702		(2,448)	(2)
Commercial & industrial*		904,727		477,236		427,491	90
Lease financing receivables		11,864		14,040		(2,176)	(15)
Home equity		265,266		293,186		(27,920)	(10)
Consumer:
Credit cards		14,265		17,836		(3,571)	(20)
Overdrafts		488		1,522		(1,034)	(68)
Automobile loans		41,059		52,923		(11,864)	(22)
Other consumer		78,585		68,115		10,470	15
Total Traditional Banking		3,935,823		3,595,931		339,892	9
Warehouse lines of credit**		1,029,779		717,458		312,321	44
Total Core Banking		4,965,602		4,313,389		652,213	15

Republic Processing Group:**
Tax Refund Solutions:
Easy Advances		—		—		—	NM
Other TRS loans		289		14,365		(14,076)	(98)
Republic Credit Solutions		99,201		105,397		(6,196)	(6)
Total Republic Processing Group		99,490		119,762		(20,272)	(17)

Total loans***		5,065,092		4,433,151		631,941	14
Allowance for credit losses		(55,097)		(43,351)		(11,746)	27

Total loans, net	$	5,009,995	$	4,389,800	$	620,195	14	%

*Includes $511 million of PPP loans at June 30, 2020.

**Identifies loans to borrowers located primarily outside of the Bank’s market footprint.

***Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.

Gross loans increased by $632 million, or 14%, during the first six months of 2020 to $5.1 billion at June 30, 2020. The most significant components comprising the change in loans by reportable segment follow:

Traditional Banking segment

Period-end balances for Traditional Banking loans increased $340 million, or 9%, from December 31, 2019 to June 30, 2020. The following primarily drove the change in loan balances during the first six months of 2020:

●

Within the C&I category, the origination of $526 million in PPP loans during the second quarter of 2020 was partially offset by the payoff of approximately $84 million in C&I balances during the first six months of 2020. Included within C&I payoffs was $26 million in dealer floor plan loans, as the Company began strategically winding down this business line during 2019.

●

The owner-occupied residential real estate and home equity categories decreased $64 million and $28 million. These decreases largely reflect a sharp drop in long-term market interest rates during the first six months of 2020 that drove an increase in refinance volume for residential mortgages, with much of the refinance activity going into fixed rate products sold on the secondary market.

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Regarding the Company’s PPP loans, these loans have a stated maturity of two years, an annualized fixed coupon rate of 1.0% to the client, are 100% guaranteed by the SBA, and 100% forgivable to the client if certain program metrics are met. The Bank earns an origination fee of 1%, 3%, or 5% based on the size of the loan.

Republic carried $15 million in unaccreted PPP loan fees as of June 30, 2020, which it expects to accrete into income over the life of the loan. While no guarantee can be made as to the overall life of these loans, management believes the loans are likely to remain on the Company’s balance sheet less than one year, as it expects the substantial majority of its clients to request forgiveness for their loans at the earliest possible time, presuming these clients achieve the required program metrics.

Warehouse Lending segment

Outstanding Warehouse period end balances increased $312 million from December 31, 2019 to June 30, 2020. A sharp decline in long-term fixed mortgage rates during the first six months of 2020 drove the increase in Warehouse balances. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 71% during the fourth quarter of 2019. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 59% during 2019.

Tax Refund Solutions segment

Outstanding TRS loans decreased $14 million from December 31, 2019 to June 30, 2020 primarily reflecting a $14 million reduction in other TRS loans. Other TRS loans at December 31, 2019 were primarily commercial loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by the end of the first quarter of the following year.

Republic Credit Solutions segment

Outstanding RCS loans decreased $6 million from December 31, 2019 to June 30, 2020 primarily reflecting a $10 million decrease in outstanding balances for RCS’s line-of-credit product partially offset by a $4 million increase in hospital receivables. As previously mentioned, the decrease in balances for RCS’s line-of-credit product was the direct result of a reduction in marketing for the product in response to the COVID-19 pandemic.

See additional detail regarding the impact of COVID-19 under:

●

Part I Item 1 “Financial Statements”

Footnote 2 “Investment Securities”

Footnote 4 “Loans and Allowance for Credit Losses”

Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities”

●

Part II Item 1A “Risk Factors”

Allowance for Credit Losses

At June 30, 2020, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.

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In accordance with the adoption of ASC 326 and CECL, the Company recorded on January 1, 2020 a $6.7 million, or 16%, increase in the ACLL for its loans, a $51,000 ACLS for its investment debt securities, and a $456,000 ACLC for its off-balance sheet credit exposures. Of the $6.7 million increase in ACLL, approximately $1.4 million was a gross-up reclassification of non-accretable discount on previously-PCI, now-PCD loans, and the remaining $5.3 million was a difference in ACL between CECL and the probable-incurred method. The Company also made a cumulative effect entry of $4.3 million to reduce its opening balance of retained earnings upon adoption of ASC 326, with no impact on 2020 earnings for these adoption entries. The adoption date increase in ACLL for the Company’s loans primarily reflects additional ACLL for longer duration loan portfolios, such as the Company's residential real estate and consumer loan portfolios. No additional segmentation of the Bank's loan portfolios was deemed necessary upon adoption.

The Company’s ACLL increased $12 million from $43 million at December 31, 2019 to $55 million at June 30, 2020. As a percent of total loans, the total Company’s ACLL increased to 1.09% at June 30, 2020 compared to 0.98% at December 31, 2019. An analysis of the ACL by reportable segment follows:

Traditional Banking segment

The Traditional Banking ACLL increased $15 million to $43 million at June 30, 2020, driven partially by the Company’s January 1, 2020 CECL adoption entry of approximately $7 million and partially by approximately $11 million of reserves for the expected impact of the COVID-19 pandemic. The pandemic is projected to increase the Traditional Bank’s losses in the near-term to loss levels consistent with unemployment levels above 8%. Offsetting the increase in the ACLL due to the pandemic was a reduction in the ACLL of approximately $2 million driven by a $170 million decrease in non-PPP Traditional Bank spot balances from January 1, 2020 to June 30, 2020. The Traditional Bank ACLL to total Traditional Bank loans increased 32 basis points to 1.10% when comparing June 30, 2020 to December 31, 2019.

Following the Company’s $51,000 ASC 326 adoption entry on January 1, 2020 establishing an ACLS for its debt securities, the Company increased its ACLS $222,000 during the first six months of 2020 to $273,000 based on higher PD and LGD expectations on its corporate bond portfolios. These higher PD and LGD expectations generally reflect economic concerns from the COVID-19 pandemic.

Following the Company’s ASC 326 adoption entry on January 1, 2020 for an ACLC on its off-balance sheet credit exposures of $456,000, the Company increased its ACLC $180,000 during the first six months of 2020 to $636,000 at June 30, 2020. The higher ACLC at June 30, 2020 reflects higher assumed loss rates on these exposures as they convert to outstanding balances over their expected lives. The ACLC is recorded on the liability side of the balance sheet, with any provision for loss recorded within other noninterest expense.

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Warehouse Lending segment

The Warehouse ACLL increased to approximately $2.6 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing June 30, 2020 to December 31, 2019. As of June 30, 2020, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first six months of 2020. Warehouse lines are generally short-term, sound quality facilities secured by marketable collateral; therefore, the Company made no adjustment to the Warehouse ACLL upon adoption of CECL. Additionally, the Company made no ACLL adjustment for Warehouse lines for COVID-19 concerns at June 30, 2020, as its Warehouse clients are experiencing relatively high demand for refinance transactions as borrowers take advantage of the low interest rate environment.

Republic Credit Solutions segment

The RCS ACLL decreased $4 million to $9 million at June 30, 2020 from $13 million at December 31, 2019. The decrease in ACLL was driven by a $10 million decrease in outstanding balances for RCS’s line-of-credit product partially offset by a higher estimated loss rate on this product to account for COVID-19 economic concerns. As previously mentioned, the decrease in balances for RCS’s line-of-credit product was the direct result of a reduction in marketing for the product in response to the COVID-19 pandemic.

RCS maintained an ACLL for two distinct credit products offered at June 30, 2020, including its line-of-credit product and its healthcare-receivables product. At June 30, 2020, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables product to as high as 49% for its line-of-credit product. The lower reserve percentage of 0.25% was provided for RCS’s healthcare receivables, as such receivables have recourse back to the third-party providers.

See additional detail regarding the impact of COVID-19 under:

●

Part I Item 1 “Financial Statements”

Footnote 2 “Investment Securities”

Footnote 4 “Loans and Allowance for Credit Losses”

Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities”

●

Part II Item 1A “Risk Factors”

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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/PCD-Substandard are considered “Classified.” Loans rated “Special Mention” or PCI/PCD-Special Mention are considered Special Mention. The Bank’s Classified and Special Mention loans decreased $3 million during the first six months of 2020 resulting primarily from the transfer of one $2 million CRE classified loan to OREO.

See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special Mention loans.

Table 12 — Classified and Special Mention Loans


(in thousands)	June 30, 2020		December 31, 2019		$ Change		% Change

Loss	$	—	$	—	$	—	—	%
Doubtful		—		—		—	—
Substandard		30,804		33,297		(2,493)	(7)
PCI/PCD* - Substandard		1,998		1,289		709	55
Total Classified Loans		32,802		34,586		(1,784)	(5)

Special Mention		20,803		21,754		(951)	(4)
PCI/PCD* - Special Mention		956		797		159	20
Total Special Mention Loans		21,759		22,551		(792)	(4)

Total Classified and Special Mention Loans	$	54,561	$	57,137	$	(2,576)	(5)	%

The Bank’s PCI loans at December 31, 2019 were reclassified to PCD loans on January 1, 2020 in connection with the Company’s adoption of ASC 326. See Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements” for additional discussion regarding the Company’s adoption of ASC 326.

Nonperforming Loans

Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category includes TDRs totaling approximately $5 million and $10 million at June 30, 2020 and December 31, 2019.

Nonperforming loans to total loans decreased to 0.40% at June 30, 2020 from 0.53% at December 31, 2019, as the total balance of nonperforming loans decreased by $3 million, or 13%, while total loans increased $632 million, or 14%, during the first six months of 2020. The ultimate impact to the Company’s nonperforming loans related to the COVID-19 pandemic is currently unknown due to COVID-19-related loan accommodations the Bank made to businesses and consumers, including deferrals and forbearances. During the second quarter of 2020, the Bank entered into accommodations for loans totaling $793 million. These accommodations generally lasted for a term of three months.

Management expects a significant amount of these borrower accommodations to expire during the third quarter of 2020, at which time management expects the majority of these clients to continue repayment of their loans. When evaluating further borrower accommodations for borrowers needing additional relief, the Bank considers prudent accommodation options based on the borrower’s credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by the CARES Act and states and localities; and the Bank’s ability to ease cash flow pressures on the affected borrowers while improving the Bank’s likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s nonperforming loans would substantially increase and negatively impact the Company’s overall operating performance.

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Table 13 — Nonperforming Loans and Nonperforming Assets Summary


(in thousands)	June 30, 2020			December 31, 2019

Loans on nonaccrual status*	$	19,884		$	23,332
Loans past due 90-days-or-more and still on accrual**		535			157
Total nonperforming loans		20,419			23,489
Other real estate owned		2,194			113
Total nonperforming assets	$	22,613		$	23,602

Credit Quality Ratios - Total Company:
Nonperforming loans to total loans		0.40	%		0.53	%
Nonperforming assets to total loans (including OREO)		0.45			0.53
Nonperforming assets to total assets		0.35			0.42

Credit Quality Ratios - Core Bank:
Nonperforming loans to total loans		0.40	%		0.54	%
Nonperforming assets to total loans (including OREO)		0.44			0.54
Nonperforming assets to total assets		0.36			0.43

*	Loans on nonaccrual status include collateral-dependent loans. See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans.

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

Table 14 — Nonperforming Loan Composition


	June 30, 2020					December 31, 2019
				Percent of					Percent of
				Total					Total
(in thousands)	Balance			Loan Class		Balance			Loan Class

Traditional Banking:
Residential real estate:
Owner occupied		$	14,106	1.59	%		$	12,220	1.29	%
Nonowner occupied			952	0.37				623	0.24
Commercial real estate			881	0.07				6,865	0.53
Construction & land development			—	—				143	0.09
Commercial & industrial			1,563	0.17				1,424	0.30
Lease financing receivables			—	—				—	—
Home equity			2,209	0.83				1,865	0.64
Consumer:
Credit cards			—	—				—	—
Overdrafts			—	—				—	—
Automobile loans			152	0.37				179	0.34
Other consumer			21	0.03				13	0.02
Total Traditional Banking			19,884	0.51				23,332	0.65
Warehouse lines of credit			—	—				—	—
Total Core Banking			19,884	0.40				23,332	0.54

Republic Processing Group:
Tax Refund Solutions:
Easy Advances			—	—				—	—
Other TRS loans			182	62.98				53	0.37
Republic Credit Solutions			353	0.36				104	0.10
Total Republic Processing Group			535	0.54				157	0.13

Total nonperforming loans		$	20,419	0.40	%		$	23,489	0.53	%

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Table 15 — Stratification of Nonperforming Loans


	Number of Nonperforming Loans and Recorded Investment
					Balance
June 30, 2020		Balance			> $100 &			Balance			Total
(dollars in thousands)	No.	<= $100		No.	<= $500		No.	> $500		No.	Balance

Traditional Banking:
Residential real estate:
Owner occupied	150	$	5,482	25	$	4,717	4	$	3,907	179	$	14,106
Nonowner occupied	2		78	1		334	1		540	4		952
Commercial real estate	2		44	3		837	—		—	5		881
Construction & land development	—		—	—		—	—		—	—		—
Commercial & industrial	—		—	3		809	1		754	4		1,563
Lease financing receivables	—		—	—		—	—		—	—		—
Home equity	29		906	6		1,303	—		—	35		2,209
Consumer:
Credit cards	—		—	—		—	—		—	—		—
Overdrafts	—		—	—		—	—		—	—		—
Automobile loans	13		152	—		—	—		—	13		152
Other consumer	8		21	—		—	—		—	8		21
Total Traditional Banking	204		6,683	38		8,000	6		5,201	248		19,884
Warehouse lines of credit	—		—	—		—	—		—	—		—
Total Core Banking	204		6,683	38		8,000	6		5,201	248		19,884

Republic Processing Group:
Tax Refund Solutions:
Easy Advances	—		—	—		—	—		—	—		—
Other TRS loans	NM		182	—		—	—		—	NM		182
Republic Credit Solutions	NM		353	—		—	—		—	NM		353
Total Republic Processing Group	NM		535	—		—	—		—	NM		535

Total	204	$	7,218	38	$	8,000	6	$	5,201	248	$	20,419


	Number of Nonperforming Loans and Recorded Investment
					Balance
December 31, 2019		Balance			> $100 &			Balance			Total
(dollars in thousands)	No.	<= $100		No.	<= $500		No.	> $500		No.	Balance

Traditional Banking:
Residential real estate:
Owner occupied	137	$	5,005	24	$	4,525	3	$	2,690	164	$	12,220
Nonowner occupied	3		84	—		—	1		539	4		623
Commercial real estate	2		45	2		609	4		6,211	8		6,865
Construction & land development	—		—	1		143	—		—	1		143
Commercial & industrial	—		—	2		397	1		1,027	3		1,424
Lease financing receivables	—		—	—		—	—		—	—		—
Home equity	23		795	5		1,070	—		—	28		1,865
Consumer:
Credit cards	—		—	—		—	—		—	—		—
Overdrafts	—		—	—		—	—		—	—		—
Automobile loans	13		179	—		—	—		—	13		179
Other consumer	7		13	—		—	—		—	7		13
Total Traditional Banking	185		6,121	34		6,744	9		10,467	228		23,332
Warehouse lines of credit	—		—	—		—	—		—	—		—
Total Core Banking	185		6,121	34		6,744	9		10,467	228		23,332

Republic Processing Group:
Tax Refund Solutions:
Easy Advances	—		—	—		—	—		—	—		—
Other TRS loans	NM		53	—		—	—		—	NM		53
Republic Credit Solutions	NM		104	—		—	—		—	NM		104
Total Republic Processing Group	NM		157	—		—	—		—	NM		157

Total	185	$	6,278	34	$	6,744	9	$	10,467	228	$	23,489

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Table 16 — Rollforward of Nonperforming Loans


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Nonperforming loans at the beginning of the period	$	20,853	$	15,560	$	23,489	$	16,138
Loans added to nonperforming status during the period that remained nonperforming at the end of the period		3,069		6,575		4,658		7,680
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below)		(2,981)		(2,119)		(7,898)		(3,478)
Principal balance paydowns of loans nonperforming at both period ends		(561)		(578)		(208)		(956)
Net change in principal balance of other loans nonperforming at both period ends*		39		(34)		378		20

Nonperforming loans at the end of the period	$	20,419	$	19,404	$	20,419	$	19,404

*	Includes relatively small consumer portfolios, e.g., RCS loans.

Table 17 — Detail of Loans Removed from Nonperforming Status


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Loans charged off	$	(273)	$	(285)	$	(2)	$	(298)
Loans transferred to OREO		(2,109)		(980)		(2,109)		(1,036)
Loans refinanced at other institutions		(490)		(830)		(2,445)		(2,060)
Loans returned to accrual status		(109)		(24)		(3,342)		(84)

Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period	$	(2,981)	$	(2,119)	$	(7,898)	$	(3,478)

Based on the Bank’s review at June 30, 2020, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.

Delinquent Loans

Total Company delinquent loans to total loans decreased to 0.28% at June 30, 2020, from 0.47% at December 31, 2019, primarily due to a $7 million, or 32%, decrease in delinquent loans and a $632 million, or 14%, increase in total loans during the first six months of 2020. The ultimate impact to the Company’s delinquent loans related to the COVID-19 pandemic is currently unknown due to COVID-19-related loan accommodations the Bank made to businesses and consumers, including deferrals and forbearances. During the second quarter of 2020, the Bank entered into accommodations for loans totaling $793 million. These accommodations generally lasted for a term of three months.

Management expects a significant amount of these borrower accommodations to expire during the third quarter of 2020, at which time management expects the majority of these clients to continue repayment of their loans. When evaluating further borrower accommodations for borrowers needing additional relief, the Bank considers prudent accommodation options based on the borrower’s credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by the CARES Act and states and localities; and the Bank’s ability to ease cash flow pressures on the affected borrowers while improving the Bank’s likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s delinquent loans would substantially increase and negatively impact the Company’s overall operating performance.

Core Bank delinquent loans to total Core Bank loans decreased to 0.16% at June 30, 2020 from 0.30% at December 31, 2019. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of June 30, 2020 and December 31, 2019 were on nonaccrual status.

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Table 18 — Delinquent Loan Composition*


	June 30, 2020					December 31, 2019
				Percent of					Percent of
				Total					Total
(in thousands)	Balance			Loan Class		Balance			Loan Class

Traditional Banking:
Residential real estate:
Owner occupied		$	4,214	0.48	%		$	4,434	0.47	%
Nonowner occupied			539	0.21				539	0.21
Commercial real estate			543	0.04				3,300	0.25
Construction & land development			—	—				—	—
Commercial & industrial			1,362	0.15				1,355	0.28
Lease financing receivables			—	—				—	—
Home equity			1,053	0.40				2,918	1.00
Consumer:
Credit cards			7	0.05				155	0.87
Overdrafts			94	19.26				283	18.59
Automobile loans			27	0.07				49	0.09
Other consumer			22	0.03				9	0.01
Total Traditional Banking			7,861	0.20				13,042	0.36
Warehouse lines of credit			—	—				—	—
Total Core Banking			7,861	0.16				13,042	0.30

Republic Processing Group:
Tax Refund Solutions:
Easy Advances			—	—				—	—
Other TRS loans			259	89.62				119	0.83
Republic Credit Solutions			5,926	5.97				7,643	7.25
Total Republic Processing Group			6,185	6.22				7,762	6.48

Total delinquent loans		$	14,046	0.28	%		$	20,804	0.47	%

* Represents total loans 30-days-or-more past due. Delinquent status may be determined by either the number of days past due or number of payments past due.

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Table 19 — Rollforward of Delinquent Loans


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Delinquent loans at the beginning of the period	$	42,627	$	34,187	$	20,804	$	15,962
Loans added to delinquency status during the period and remained in delinquency status at the end of the period		2,823		8,685		3,080		8,519
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below)		(29,901)		(22,991)		(7,513)		(4,661)
Principal balance paydowns of loans delinquent at both period ends		(1,394)		(84)		(2,189)		(293)
Net change in principal balance of other loans delinquent at both period ends*		(109)		(471)		(136)		(201)
Delinquent loans at the end of period	$	14,046	$	19,326	$	14,046	$	19,326

*	Includes relatively-small consumer portfolios, e.g., RCS loans.

Table 20 — Detail of Loans Removed from Delinquent Status


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2020		2019		2020		2019

Loans charged off	$	(2)	$	(306)	$	(2)	$	(316)
Easy Advances paid-off or charged-off		(23,467)		(19,099)		—		—
Loans transferred to OREO		(2,109)		(1,062)		(2,109)		(1,119)
Loans refinanced at other institutions		(1,270)		(746)		(3,012)		(1,309)
Loans paid current		(3,053)		(1,778)		(2,390)		(1,917)

Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period	$	(29,901)	$	(22,991)	$	(7,513)	$	(4,661)

Collateral Dependent Loans and Troubled Debt Restructurings

When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate. The Bank’s policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected.

A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The 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.

Table 21 — Collateral-Dependent Loans and Troubled Debt Restructurings


(in thousands)	June 30, 2020		December 31, 2019

Cashflow-dependent TDRs	$	12,575	$	14,348
Collateral-dependent TDRs		13,904		16,433
Total TDRs		26,479		30,781
Collateral dependent loans (which are not TDRs)		18,237		19,569
Total recorded investment in TDRs and collateral-dependent loans	$	44,716	$	50,350

See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans and TDRs.

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COVID-19 Loan Accommodations

The ultimate impact to the Company’s nonperforming and delinquent loans related to the COVID-19 pandemic is currently unknown due to COVID-19-related loan accommodations the Bank made to businesses and consumers, including deferrals and forbearances. These accommodations generally lasted for a term of three months. During the second quarter of 2020, the Bank entered into COVID-19 loan accommodations for loans totaling $793 million.

Management expects a significant amount of these borrower accommodations to expire during the third quarter of 2020, at which time management expects the majority of these clients to continue repayment of their loans. When evaluating further borrower accommodations for borrowers needing additional relief, the Bank considers prudent accommodation options based on the borrower’s credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by the CARES Act and states and localities; and the Bank’s ability to ease cash flow pressures on the affected borrowers while improving the Bank’s likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s nonperforming and delinquent loans would substantially increase and negatively impact the Company’s overall operating performance. The following table presents the balances of loans in COVID-19 accommodations, the balance of PPP loans, and the remainder of the Traditional Bank’s loan portfolio by loan class as of June 30, 2020:

Table 22 — COVID-19 Accommodations, PPP Loans, and Other Traditional Bank Loans


	COVID-19									Total
June 30, 2020 (dollars in thousands)	Accommodations			PPP Loans			Other Loans			Traditional Banking

Traditional Banking:
Residential real estate:
Owner occupied	$	51,570		$	—		$	833,755		$	885,325
Nonowner occupied		58,754			—			195,946			254,700
Commercial real estate		491,314			—			830,976			1,322,290
Commercial & industrial		141,720			511,065			251,942			904,727
Construction & land development		28,927			—			128,327			157,254
Lease financing receivables		2,443			—			9,421			11,864
Home equity		13,776			—			251,490			265,266
Consumer		4,678			—			129,719			134,397
Total Traditional Banking	$	793,182		$	511,065		$	2,631,576		$	3,935,823
Percent of Total Traditional Banking		20	%		13	%		67	%		100	%

As of June 30, 2020, 80% of the Traditional Banking segment’s loans under COVID-19 accommodations were either within the CRE or C&I categories. Table 23 below presents CRE and C&I COVID-19 accommodations by industry as of June 30, 2020:

Table 23 — Traditional Bank Commercial Real Estate and Commercial & Industrial Loans under COVID-19 Accommodations by Industry



June 30, 2020 (dollars in thousands)	Total CRE & C&I		% Concentration

Industry:
Lessors of Nonresidential Buildings (except Miniwarehouses)	$	184,087	29	%
Hotels (except Casino Hotels) and Motels		66,969	11
Lessors of Residential Buildings and Dwellings		55,835	9
Limited-Service Restaurants		45,155	7
Full-Service Restaurants		38,947	6
Offices of Physicians (except Mental Health Specialists)		37,957	6
Fitness and Recreational Sports Centers		29,199	5
Offices of Dentists		14,122	2
Religious Organizations		11,909	2
Sports Teams and Clubs		11,644	2
Car Washes		9,951	2
General Freight Trucking, Long-Distance, Truckload		6,606	1
Golf Courses and Country Clubs		6,570	1
Public Relations Agencies		5,757	1
General Freight Trucking, Local		5,189	1
All other industries		103,137	15
Total CRE and C&I	$	633,034	100	%

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Deposits

Table 24 — Deposit Composition


(in thousands)	June 30, 2020		December 31, 2019		$ Change		% Change

Core Bank:
Demand	$	1,124,321	$	922,972	$	201,349	22	%
Money market accounts		748,832		793,950		(45,118)	(6)
Savings		207,729		175,588		32,141	18
Individual retirement accounts (1)		51,715		51,548		167	0
Time deposits, $250 and over (1)		111,725		104,412		7,313	7
Other certificates of deposit (1)		258,884		248,161		10,723	4
Reciprocal money market and time deposits (1)		290,441		189,774		100,667	53
Brokered deposits (1)		400,000		200,072		199,928	100
Total Core Bank interest-bearing deposits		3,193,647		2,686,477		507,170	19
Total Core Bank noninterest-bearing deposits		1,431,866		981,164		450,702	46
Total Core Bank deposits		4,625,513		3,667,641		957,872	26

Republic Processing Group:
Money market accounts		3,038		66,152		(63,114)	(95)
Total RPG interest-bearing deposits		3,038		66,152		(63,114)	(95)

Brokered prepaid card deposits		256,703		9,128		247,575	2,712
Other noninterest-bearing deposits		132,831		43,087		89,744	208
Total RPG noninterest-bearing deposits		389,534		52,215		337,319	646
Total RPG deposits		392,572		118,367		274,205	232

Total deposits	$	5,018,085	$	3,786,008	$	1,232,077	33	%

(1)	Includes time deposits.

Total Company deposits increased $1.2 billion, or 33%, from December 31, 2019 to $5.0 billion at June 30, 2020.

Total Company noninterest-bearing deposits increased $788 million, or 76%, with the following primarily driving growth:

●

The Traditional Bank originated $526 million in PPP loans during the second quarter of 2020, with a substantial portion of the funds loaned retained in the Bank’s deposit accounts at June 30, 2020.

●

Management believes much of the remaining growth in noninterest-bearing deposits at the Traditional Bank was a flight to safety brought about by the COVID-19 pandemic. At this time, management is unable to predict how long these funds might remain at the Bank due to the uncertain economic environment for many of the depositors, including the depositors’ short-term and long-term cash needs.

●

RPG noninterest-bearing deposits increased $337 million during the first six months of 2020, with growth driven by the Company’s May 1, 2020 acquisition of approximately $250 million of prepaid card balances from another financial institution.

Total Company interest-bearing deposits increased approximately $444 million for the first six months of 2020, with the following primarily driving growth:

●

The Traditional Bank acquired $200 million of additional brokered deposits during the first six months of 2020 for additional liquidity during the COVID-19 pandemic.

●

Similar to growth in noninterest-bearing deposits, management believes much of the remaining growth in interest-bearing deposits at the Traditional Bank was a flight to safety brought about by the COVID-19 pandemic.

●

Offsetting the positive drivers above was a $60 million decline in MemoryBank’s online money market accounts, as the Bank significantly lowered its pricing during the period due to the overall decrease in market interest rates.

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●

In addition to the decline in MemoryBank balances, the Bank also had a $37 million deposit outflow from one money-market client. At this time, management does not anticipate this large deposit will be replaced by this particular client in the foreseeable future.

●

RPG interest-bearing deposits decreased $63 million due to the exit of short-term seasonal funding used by the TRS segment during the first half of 2020.

Federal Reserve Paycheck Protection Program Lending Facility

The Bank began participating in the Federal Reserve’s PPPLF on April 24, 2020, with $169 million of borrowings outstanding through this program as of June 30, 2020. Under the PPPLF program, the Bank can fully fund its PPP loans on a dollar-for-dollar basis at a borrowing rate of 0.35%, with the Bank’s PPP loans serving as collateral for its PPPLF borrowings. PPPLF borrowings mature as the underlying PPP loans mature, generally within two to five years. Through June 30, 2020, the Bank chose not to fully fund its PPP loans through the PPPLF since a significant portion of the Bank’s PPP loan clients retained their PPP funds within their deposit accounts at the Bank. Management is currently uncertain of the Bank’s level of PPPLF usage for the remainder of the year.

Federal Home Loan Bank Advances

As the overall increase in deposits outpaced the overall increase in interest-earning assets for the first six months of 2020, FHLB advances declined by $613 million from December 31, 2019 to June 30, 2020. The Bank held no overnight advances at June 30, 2020, compared to $200 million in overnight advances at a rate of 1.63% at December 31, 2019. The usage of overnight FHLB advances is expected to continue to fluctuate based on the overall usage rates for the Bank’s warehouse lines of credit, which are also tied to short-term repricing indices, as well as current favorable deposit gathering trends.

The Bank currently borrows from the FHLB substantially on an overnight or short-term basis due to its current interest rate risk position. The overall use and types of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. Because of the Bank’s current interest rate position, management expects the Company will continue to predominately borrow on an overnight or short-term basis from the FHLB. If a meaningful amount of the Bank’s loan originations in the future have repricing terms longer than five years, management could elect to borrow additional longer-term funds from the FHLB to mitigate its risk of future increases in market interest rates. Whether the Bank ultimately does so, and how much in advances it extends out, will be dependent upon circumstances at that time.

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 110% at June 30, 2020 and 126% at December 31, 2019. At June 30, 2020 and December 31, 2019, the Company had cash and cash equivalents on-hand of $560 million and $385 million. The Bank also had available borrowing capacity of $814 million and $259 million from the FHLB at June 30, 2020 and December 31, 2019. In addition, the Bank’s liquidity resources included unencumbered debt securities of $283 million and $304 million as of June

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30, 2020 and December 31, 2019 and unsecured lines of credit of $125 million available through various other financial institutions as of the same period-ends.

The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of AFS debt securities, principal paydowns on loans and mortgage backed securities and proceeds realized from loans held for sale. The Bank’s liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. At June 30, 2020 and December 31, 2019, these pledged investment securities had a fair value of $260 million and $230 million. Republic’s banking centers and its websites, www.republicbank.com and www.mymemorybank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs.

At June 30, 2020, the Bank had approximately $1.4 billion in deposits from 226 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $631 million, or 13%, of the Company’s total deposit balances at June 30, 2020. These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.

Due to its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached and, periodically during each quarter, has fallen short of its Board-approved minimum internal policy limits for liquidity management. Most recently, the Bank has experienced a significant increase in its outstanding Warehouse line-of-credit balances. Because management deems this increase in Warehouse balances to not be long-term in nature and the Bank is asset sensitive for its interest rate risk position, it has elected to utilize overnight borrowings from the FHLB in order to fund these outstanding balances. While the Bank was in compliance with all Board-approved liquidity policies as of June 30, 2020, it was not always within policy parameters for each day of the quarter. The Bank will likely continue to maintain its liquidity levels near the Bank’s Board-approved minimums for the foreseeable future and will also likely utilize much of its FHLB borrowing capacity or short-term brokered deposits to fund the current spike in Warehouse balances.

In addition to its typical operations which impacts liquidity, the COVID-19 pandemic could create both substantially positive and negative impacts to the Bank’s liquidity over the short-term and long-term. The overall impact to Bank’s liquidity over the long-term will likely depend heavily on the length and breadth of the economy’s shut-down.

A near-term positive to the Bank’s liquidity is the apparent flight to safety by its clients and the increase in the Bank’s deposit balances. Management is uncertain as to how long these deposit balances might stay in the Bank, however, as a protracted shut-down of the economy could put a financial strain on the Banks’ clients requiring them to drawdown their deposit funds in order to meet their own liquidity demands.

See additional detail regarding the impact of COVID-19 under:

●

Part I Item 1 “Financial Statements”

Footnote 2 “Investment Securities”

Footnote 4 “Loans and Allowance for Credit Losses”

Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities”

●

Part II Item 1A “Risk Factors”

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Capital

Total stockholders’ equity increased from $764 million at December 31, 2019 to $796 million at June 30, 2020. The increase in stockholders’ equity was primarily attributable to net income earned during 2019 reduced by cash dividends declared.

See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” for additional detail regarding stock repurchases and stock buyback programs.

Common Stock — The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic’s capital stock.

Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. At June 30, 2020, RB&T could, without prior approval, declare dividends of approximately $155 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 regarding components, risk weightings and other factors.

Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 10.0% Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, the Company and Bank must hold a capital conservation buffer of 2.5% composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements.

Republic continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based Capital, Tier I Risk Based Capital and Tier I Leverage Capital. Republic and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the Capital Conservation Buffer. Republic’s average stockholders’ equity to average assets ratio was 13.45% at June 30, 2020 compared to 13.16% at December 31, 2019. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.

In 2005, RBCT, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. The sole asset of RBCT represents the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. The RBCT TPS are treated as part of Republic’s Tier I Capital.

The subordinated note and related interest expense are included in Republic’s consolidated financial statements. The subordinated note paid a fixed interest rate of 6.015% through September 30, 2015 and adjusted to 3-month LIBOR plus 1.42% on a quarterly basis thereafter. The subordinated note matures on December 31, 2035 and is redeemable at the Company’s option on a quarterly basis. The Company chose not to redeem the subordinated note on July 1, 2020 and is currently carrying the note at a cost of LIBOR plus 1.42%.

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Table 25 — Capital Ratios (1)


	As of June 30, 2020				As of December 31, 2019
(dollars in thousands)	Amount		Ratio		Amount		Ratio

Total capital to risk-weighted assets
Republic Bancorp, Inc.	$	864,422	17.37	%	$	825,987	17.01	%
Republic Bank & Trust Company		754,493	15.18			723,248	14.91

Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc.	$	777,068	15.62	%	$	742,636	15.29	%
Republic Bank & Trust Company		707,139	14.22			679,897	14.01

Tier 1 (core) capital to risk-weighted assets
Republic Bancorp, Inc.	$	817,068	16.42	%	$	782,636	16.11	%
Republic Bank & Trust Company		707,139	14.22			679,897	14.01

Tier 1 leverage capital to average assets
Republic Bancorp, Inc.	$	817,068	14.89	%	$	782,636	13.93	%
Republic Bank & Trust Company		707,139	11.90			679,897	12.11

(1)

The Company and the Bank elected to defer the impact of CECL on regulatory capital. The deferral period is five years, with the total estimated CECL impact 100% deferred for the first two years, then phased in over the next three years. If not for this election, the Company’s regulatory capital ratios would have been approximately 12 basis points lower than those presented in the table above as of June 30, 2020.

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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 its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a “Base” case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank’s deposit and loan rates and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.

As of June 30, 2020, a dynamic simulation model was run for interest rate changes from “Down 100” basis points to “Up 400” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning July 1, 2020 and ending June 30, 2021 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees and excludes Traditional Bank loan fees.

Table 26 — Bank Interest Rate Sensitivity


	Change in Rates
	(100)			+100			+200			+300			+400
	Basis Points			Basis Points			Basis Points			Basis Points			Basis Points

% Change from base net interest income at June 30, 2020		(0.1)	%		(4.9)	%		(8.0)	%		(9.5)	%		(7.8)	%
% Change from base net interest income at December 31, 2019		(4.3)	%		0.9	%		1.6	%		1.9	%		2.5	%

The Bank’s dynamic simulation model run for June 2020 projected a decrease in the Bank’s net interest income plus secondary market loan fees for all down-rate and Up-rate scenarios, while the projections as of December 2019 reflected a decrease in the Down-100 scenario and an increase in all Up-rate scenarios. As compared to December 2019, the deterioration in the Up-rate scenarios for June 2020 was generally due to the impact of an expected reduction in secondary market loan fees in a rising rate environment. The improvement in the Down-100 scenario primarily related to the number of loans that have reached or are expected to reach their interest rate floors, and therefore not subject to further rate reductions.

The Company’s interest rate risk projections generally assume parallel shifts in the yield curve across all points on the yield curve. A flattening or inverting of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease or invert, would likely have a further negative impact on the Company’s net interest income and net interest margin. Under any interest rate scenario, however, if the Core Bank is unable to reasonably maintain its deposit balances and the cost of those deposits at acceptable levels, it will likely have a negative impact to the Core Bank’s net interest income and net interest margin.

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For additional discussion regarding the Bank’s net interest income, see the sections titled “Net Interest Income” in this section of the filing under “RESULTS OF OPERATIONS (Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019)” and RESULTS OF OPERATIONS (Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019).”

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

Information required by this item is included under Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4.Controls and Procedures.

As of the end of the period covered by this report, an evaluation was carried out by Republic Bancorp, Inc.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 1A.Risk Factors.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Except for the additional risk factor information described below, there have been no material changes in the Company’s risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. You should carefully consider the risk factor discussed below and in Republic’s 2019 Form 10-K, which could materially affect its business, financial condition or future results.

The COVID-19 pandemic and the public’s response to this pandemic present unique risks to the Company’s operations and the markets it serves. The Company’s operations and the markets it serves have been and will continue to be significantly impacted by the COVID-19 pandemic and the public’s response to this pandemic. The following are relevant to the Company and its operations:

●

Adverse Economic Conditions – COVID-19 has led to a curtailment or suspension of social and economic activity in many areas of the U.S., including areas where the Bank operates. The length and breadth of these negative economic conditions is currently unknown. These conditions are expected to continue to have a significant negative impact on the Bank’s ability and willingness to offer its traditional loan products. Instead of the Bank’s traditional products, government-backed financial products, such as the SBA’s PPP, have been and may continue to be a strong focus of the Bank’s operations in the near term. Government-backed products may be substantially less profitable than the Bank’s traditional products. Additionally, these economic conditions may lead to the impairment of the Company’s intangible assets, including its goodwill and MSRs.

●

Loan and Credit Losses – COVID-19 has led to economic restrictions on businesses deemed non-essential by various jurisdictions, with many businesses ceasing or substantially reducing operations. Employees for many businesses have been and may continue to be furloughed or laid off. The Bank’s credit delinquencies and losses may rise steeply due to these events. Specifically, concentrations of credit in certain markets and in certain industries currently are and may continue to be more susceptible to delinquency and loss.

Geographic Concentrations – COVID-19 has impacted certain areas of the U.S. harder than others. The Company’s market footprint is primarily in Kentucky, Florida, Ohio, Tennessee, and Indiana. These areas may be more susceptible to economic hardship in the near term.

Industry Concentrations – The Bank lends to clients in industries that have been deemed “non-essential” or that have had their business models upended by the pandemic. Further economic damage to these clients may leave them unable to repay their debt with the Bank.

Warehouse Lending – Through its Warehouse Lending segment, the Bank maintains a significant concentration of loans in the form of short-term, revolving credit facilities to mortgage bankers across the U.S. The Bank’s Warehouse Lending clients may face increased stress on their liquidity and overall financial condition due to their mortgage-servicing obligations. Such increased stress may lead to default on their underlying credit facility with the Bank.

Borrower Accommodations – In response to the pandemic, the Bank had suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions. The Bank has also granted fee waivers, payment deferrals, and other expanded assistance for credit card, automobile, mortgage, small business, and personal loan clients. Future governmental actions may require these and other types of customer relief. Also, if enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s delinquent and nonperforming loans would substantially increase and negatively impact the Company’s overall operating performance.

●

Reliance on Forecasted Information – The Company’s model for estimating credit losses relies on forecasted economic projections. Such projections could be materially inaccurate, with different projections leading to a material adverse impact on the Company’s financial position and results of operations.

●

Capital and Liquidity – A prolonged period of economic stress leading to increased borrower defaults and corresponding servicing obligations could substantially weaken the Company’s capital and liquidity. As a result, the Company may lose access to capital markets and may need to suspend paying dividends.

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●

Interconnectedness of Financial Institutions – The Company depends on other financial institutions. Negative events or publicity for other financial institutions may flow to the Bank due the interconnectedness of the financial industry.

●

Governmental Restrictions on Operations – Certain loan collection efforts, such as loan foreclosures, have been and may continue to be prohibited by legal or regulatory bodies.

●

Real Estate Market and Real Estate Lending – The COVID-19 pandemic may lead to a drop in real estate values and reduced demand for commercial and residential real estate.

●

Ability of Key Personnel to Perform Their Duties – Key Company personnel may be personally and directly impacted by COVID-19 and may be unable to perform their duties.

●

Cybersecurity – The Company and its third-party service providers have been and may continue to be subject to a heightened risk of cyber attacks due to the number of employees working remotely.

●

Consumer Behavior – Consumers may behave differently in the aftermath of the pandemic, placing less value on face-to-face interaction. The Bank is a community bank that places high value on personal connection.

●

Reliance on Third Parties – The Company’s third-party service providers may be unable to meet their service level commitments to the Company.

●

Negative Interest Rates – There has been speculation regarding the COVID-19 conditions leading to negative interest rates in the U.S. The Bank has not traditionally modeled the impact of negative interest rates and this condition would be substantially negative to the Company’s financial performance.

●

Stock Price Fluctuations – The Company has and could continue to experience higher than historical volatility in its stock price as a direct result of COVID-19 driven economic conditions.

●

Business Interruption Insurance – Business interruption insurance may fail to cover material COVID-19 related costs of the Company.

●

Increased Litigation Risk – The Bank may experience an increase in litigation stemming from the COVID-19 pandemic.

●

Company Reputation – The Company and the Bank’s reputation could be negatively impacted by the public’s perception of how the Company and Bank have operated during the pandemic.

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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 second quarter of 2020 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

April 1 - April 30	—	$	—	—
May 1 - May 31	—		—	—
June 1 - June 30	—		—	—
Total	—	$	—	—	87,423

The Company repurchased no shares during the second quarter of 2020. In connection with employee stock awards, there were 272 shares withheld upon vesting of stock grants to cover withholding taxes and 1,432 shares withheld upon exercise of stock options to cover withholding taxes and the exercise price. During 2011, the Company’s Board of Directors amended its existing share repurchase program by approving the repurchase of 300,000 additional shares from time to time, as market conditions are deemed attractive to the Company. The repurchase program will remain effective until the total number of shares authorized is repurchased or until Republic’s Board of Directors terminates the program. As of June 30, 2020, the Company had 87,423 shares that could be repurchased under its current share repurchase programs.

During the second quarter of 2020, there were no 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 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		Master Office Lease between Republic Bank & Trust Company and Makbe LLC, dated August 1, 2020, relating to property at 601 West Market Street

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		The following financial statements from the Company’s quarterly report on form 10-Q were formatted in iXBRL(Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019, (iii) Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 and (v) Notes to Consolidated Financial Statements

104		Cover Page Interactive Data File formatted in iXBRL and contained in Exhibit 101.

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:


Date: August 7, 2020			/s/ Steven E. Trager
			By: Steven E. Trager
			Chairman and Chief Executive Officer


			Principal Financial Officer:


Date: August 7, 2020			/s/ Kevin Sipes
			By: Kevin Sipes
			Executive Vice President, Chief Financial
			Officer and Chief Accounting Officer

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